Property Yearbook Volume 2

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PROPERTY YEARBOOK VOLUME 2

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An update on developments in conveyancing throughout 2016 including: Summaries of case law, decisions of tribunals, and statutory provisions.

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Contents...

1

Foreword - .............................................................................................................................. 6 (1) Transfer of assets to avoid Care charges....................................................................... 6

9

June 2016 Pitfalls Arising from Break Rights........................................................................... 62

(2) Defective Forfeiture Provision in Residential Head Lease............................................ 6

Issue 1:

(3) Sinking Fund Contributions Due by Underlessee........................................................... 6

Did the Lease Allow Retrospective Validation of an Initially Invalid Break Notice?....... 62

(4) Misrepresentation.............................................................................................................. 8

Issue 2:

(5) Short-Term Sublettings by Long Residential Lessee....................................................... 8

Had the Tenant Tendered Vacant Possession by the Break Date?................................. 63

(6) Is the Deed of Variation a Deemed Surrender and Regrant?.................................... 8

Issue 3:

(7) Contract Signed without the Authority of One or More Seller or Buyer..................... 10

Had the Break Notice been given on behalf of the Tenant?........................................... 65

(8) Consumer Protection Regulations in Conveyancing, Law Society’s Practice Note.10

Issue 4:

(9) SDLT Penalties.................................................................................................................... 10

Had the Notice been given to All Relevant Parties?......................................................... 67

(10) SDLT Surcharge for ‘Second Homes’:

How Does the Law Determine a Person’s Only or Main Residence?............................... 12

(11) Bogus Vendor & Conveyancers’ liability...................................................................... 12

(12) Mortgage Credit Directive & Lenders’ Handbook..................................................... 14

10 July 2016 Advising Landlord and Tenant on Whether Consent

to Underletting Can be Reasonably Withheld.......................................... 68

(13) Was the Trust Deed a Sham?......................................................................................... 14

3.1 Homebase Ltd v Allied Dunbar Assurance plc [2002] EWCA Civ 666........................ 70

2

November 2015 - Some Perils of Underleases.......................................... 16

1. Clearly Defining the Contractual Term............................................................................ 16

2. Effect of Undertenant Holding Over – Better to be Forewarned.................................. 18

11 August 2016 Background Note on the Demised Premises,

Structure, Exterior, etc................................................................................................... 74

3. Covenant Not to Use or Not to Permit to be Used......................................................... 22

4. Undertenant – Direct Covenants with Freeholder Requested...................................... 24

2. The Structure and Exterior.................................................................................................. 75

3. The Model Commercial Lease: Key Definitions............................................................... 76

3

December 2015 Conditional Contracts: Key Issues to be Considered........................ 26

1. General Principles............................................................................................................... 74

1. Has Landlord Given Consent as Required by the Lease?............................................. 26

12 September 2016 Tenancy at Will or Periodic Tenancy?.............................................................. 80

2. Was Notice of Termination Reversible?............................................................................ 29

(1) Relevant Case Law........................................................................................................... 80

3. Had the Right to Rescind the Agreement Expired?....................................................... 31

(2) Relevant Statutes.............................................................................................................. 82

(3) Case Law on these two Statutes..................................................................................... 83

4

January 2016 Marks and Spencer plc v BNP Paribas Securities .......................

Services Trust Company (Jersey) Ltd [2015] UKSC 72......................... 32

1. The Provisions of the Lease................................................................................................ 32

13 October 2016 Rent Review Provisions that are Drafted by

Lawyers but Applied by Surveyors..................................................................... 84

2. Payment Made by the Tenant.......................................................................................... 32

1. The Hypothetical Lease..................................................................................................... 84

3. Background to the Supreme Court Decision.................................................................. 33

2. User....................................................................................................................................... 85

4. The Supreme Court Ruling (upholding the Court of Appeal’s decision,

3. The Hypothetical Term....................................................................................................... 86

albeit on different grounds).................................................................................................. 34

4. Tenant’s Improvements..................................................................................................... 87

4.3 Level Properties Ltd v Balls Brothers Ltd [2007] EWHC 744 (Ch)................................... 88

5

February 2016 Two Cases on Conditional Contracts............................................................... 38

1. Rentokil Initial 1927 PLC v Goodman Derrick LLP [2014] EWHC 2994 (Ch)................... 38

2. Cohen v Teseo Properties Limited [2014] EWHC 2442 (Ch)........................................... 41

6

14 November 2016 Rent Deposits –

Ensuring Security for Landlord and Clarity for Tenant......................... 90

March 2016 Delivery of a Deed & Alleged Estoppel Arising During Negotiations..................................... 44

1. Amount of Deposit............................................................................................................. 90

2. Ownership of Deposits....................................................................................................... 90

3. Withdrawals......................................................................................................................... 91

4. Determination of Rent Deposit Agreement.................................................................... 92

Background Note................................................................................................................... 44

5. Registration of a Rent Deposit Taken Before 6 April 2013.............................................. 92

(A). Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55...................................... 44

6. Changes Taking Effect on 6 April 2013............................................................................. 93

(B). Nazam v Manton Securities Ltd [2008] EWCA Civ 805................................................ 45

7. Landlord or Personal Covenants?.................................................................................... 93

(C). Lankester & Son Ltd v Rennie [2014] EWCA 1515........................................................ 45

8. Examples of Template Rent Deposit Deeds.................................................................... 94

(D). Active Estates v Parness [2002] 3 EGLR 13.................................................................... 48

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Background Note................................................................................................................... 50

1.3 London Diocesan Fund v Phithwa [2005] UKHL 70........................................................ 50

1.4 Tindall Cobham 1 Ltd v Adda Hotels [2014] EWCA Civ 1215...................................... 51

2.3 The Alternative Proposal.................................................................................................. 55

Concluding Thought.............................................................................................................. 55

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15 December 2016 Get Nominees Ltd: Option to Rescind............................................................. 96

April 2016 Sections 24 and 25 Landlord and Tenant (Covenants) Act 1995 Update................................................................................ 50

May 2016 Repair Covenants and Dilapidations Disputes......................................... 56

1. Gaps and Overlapping Obligations................................................................................. 56

2. Schedules of Condition...................................................................................................... 57

3. Uninsured Damage............................................................................................................ 58

4. The Model Commercial Lease – Office-02...................................................................... 59

4.1 The Tenant Repairing covenant under the MCL: A Few Selected Clauses.............. 59

4.2 The Landlord repairing covenant under the MCL........................................................ 60

4.3 Interrelationship with Other Key Definitions................................................................... 60

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A. Background Note.............................................................................................................. 96

B. Get Nominees Ltd v Trinity Welsh Homes Ltd [2014] EWHC 4737 (Ch)......................... 97

Relevance of the Alchemy Estates case............................................................................. 99

C. Concluding Comment...................................................................................................... 100

Section 1 Foreword

The 2017 yearbook covers a range of conveyancing issues, which include the following -

(1) Transfer of assets to avoid Care charges Section 70 Care Act 2014 and section 72 Social Services and Well-being (Wales) Act 2014 – as applicable – which have implications for transfers at undervalue undertaken with the intention of avoiding charges for having the transferor’s needs met (e.g. in a care home).

These provisions provide a disincentive to entering into such transactions because they now enable the local authority to charge the transferee(s) for some or all of those charges.

(2) Defective Forfeiture Provision in Residential Head Lease The case of LSREF III Wight Limited v Gateley LLP concerned a residential head lease that contained a provision for forfeiture on the insolvency of the tenant. The problem with the lease was one of valuation, rather than non-compliance with the Lenders’ Handbook.

(3) Sinking Fund Contributions Due by Underlessee Balkhi v Southern Land Securities Ltd This case concerned the liability of an underlessee of a flat. The long underlease contained a lessee covenant to contribute towards service charge expenditure incurred by the head lessee.

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The headlease obliged the head lessee to pay to the freeholder a contribution towards the maintenance of a sinking fund.

The key issue was whether the long underlessee was liable to make a payment of service charge which included sums payable into the freeholder’s sinking fund.

(4) Misrepresentation In Greenridge Luton One Ltd v Kempton Investments Ltd, the seller of three office buildings made misrepresentations concerning the absence of any disputes with its tenants, including service charge arrears.

Morrell v Stewart The High Court held that the sellers had fraudulently made misrepresentations in respect of the questions in the TA6 concerning -

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(5) Short-Term Sublettings by Long Residential Lessee Nemcova v Fairfield Rents Limited Where the lease obliges the lessee, not to use the Demised Premises “for any purpose whatsoever other than as a private residence; would a series of short-term lettings breach that covenant or any other tenant covenant in the lease?

(6) Is the Deed of Variation a Deemed Surrender and Regrant?

In Stevens v Ismail the key issue was whether a deed of variation to the lease of a flat was a surrender and re-grant or merely the grant of an additional parking right.

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(7) Contract Signed without the Authority of One or More Seller or Buyer In Laditi v Marlbray Ltd, the Court of Appeal had to consider the effect of a contract under which two purchasers ostensibly agreed to buy a flat off-plan for a 999-year term but it was signed only by the first respondent.

Moreover, the Court had to determine whether the signatory was bound by the contract, and whether the contract complied with s 2 Law of Property (Miscellaneous) Provisions Act 1989.

(8) Consumer Protection Regulations in Conveyancing’, Law Society’s Practice Note The Law Society 2016 Practice Note considers the potential application of the Consumer Protection from Unfair Trading Regulations 2008 to solicitors when dealing with a third-party consumer even when he is not acting for a trader.

The Regulations create offences of unfair commercial practices, including misleading actions under regulation 5 and misleading omissions under regulation 6.

There is a due diligence defence and provision for when an offence is due to the default of another person.

(9) SDLT Penalties The Marzouk/Hasoon and Oliver cases These are two cases in which the First-tier Tribunal (Tax Chamber) had to consider whether the purchaser under a lease extension had a reasonable excuse for late submission of a SDLT return, including in one case where the return was incomplete.

The Birchgrove UK Ltd Case This case considers the liability for payment of a flat rate penalty for late submission of form SDLT 1, where the form was submitted online and within 30 days but contained the reference for a different client and for a different property transaction. The corrected form was submitted late.

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(10) SDLT Surcharge for ‘Second Homes’: How Does the Law Determine a Person’s Only or Main Residence?

Conveyancers will be aware of the complications arising from the ‘SDLT surcharge’ that was introduced by the government in April 2016.

Subject to conditions, a purchaser can escape liability for the ‘surcharge’ if he or she can prove that the acquisition amounts to the replacement of the purchaser’s only or main residence.

This note considers briefly the HMRC guidance note that provides a non-exhaustive list of points to consider that “may be useful in establishing which residence is an individual’s main residence”.

The note also considers the relevant legal principles for determining the question of whether a property has been at any time a taxpayer’s residence.

(11) Bogus Vendor & Conveyancers’ liability Purrunsing v A’Court & Co (A Firm) The seller’s solicitor was instructed by a fraudster and the sale proceeds were never recovered.

The said solicitor’s AML checks on their client could have been more thorough The vendor’s solicitors responded ambiguously to the subsequent buyer’s conveyancer’s enquiry requesting that the former “confirm you are familiar with the sellers and … verify they are the sellers and check ID to support same”.

The Court had to consider whether the seller’s solicitor had acted in breached of trust. If so, the Court had to decide whether either solicitor could be excused for breach of trust and, if so, whether and how the liability should be apportioned between the solicitors.

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(12) Mortgage Credit Directive & Lenders’ Handbook This note considers the implications of the Order for consumer buy-to-let mortgages contracts, the EU’s Mortgage Credit Directive (including the reflection period and required ‘pre-contractual information’) as well as consequent changes to the Lenders’ Handbook.

(13) Was the Trust Deed a Sham?

Erlam v Rahman In this case, the Court had to decide whether a declaration of trust was evidence of a gift of a 74% interest in the property or whether it reflected a contribution to the purchase price (if any).

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November 2015 Some Perils of Underleases

1

Clearly Defining the Contractual Term

1.1

Keydon Estates Ltd v Eversheds LLP [2005] EWHC 972 (Ch)

Keydon instructed Solicitors in the purchase of the freehold reversion of an office building in Cardiff.

That reversion was at the time of acquisition subject to a 25-year lease whose term commenced from 27 March 1997 and an underlease granted for a term of 22 years from 27 March 2000. Therefore, the final date of the term was the same for both lease and sublease. The then head tenant was WPD and the sub-tenant Hyder was a subsidiary of WPD. The underlease operated at law as an assignment of the 1997 head lease, and that as a result, WPD was released from its covenants under the 1997 lease.

Within a few months of completion of the ‘underlease’, Hyder went into administration. WPD then justifiably refused to pay the head lease rent.

Keydon’s Solicitors admitted negligence and the purpose of the hearing was to establish the proper measure of damages.

1.2

See also Milmo v Carreras [1946] 1 All ER 288, CA, where the Court of Appeal

reached the same conclusion. Morton LJ further commented that – “I do not see how the relationship of landlord and tenant can possibly exist unless the so-called landlord has a reversion”

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2

Effect of Undertenant Holding Over – Better to be Forewarned

2.1

In order to claim a renewal of business tenancy protected by Part II Landlord

and Tenant Act 1954, the tenant has to occupy the whole or part of the premises demised by the tenancy “for the purposes of business carried on by him or for those and other purposes”: see s 23.

In this context, the word “occupied” points to some business activity by the tenant on the property in question: Graysim Holdings Ltd v P&O Property Holdings Ltd [1996] 1 EGLR 109, House of Lords.

2.2

Section 65(2) provides that where a sub-tenancy continues by virtue of

the Act after the expiry of the head lease term, then the parties to the statutory continuation tenancy and any subsequent lease renewal are the freeholder and former sub-tenant.

2.2.1 In Lyndendown Ltd v Vitamol Ltd [2007] EWCA Civ 826, the sublease of the whole of the premises demised by the head lease was not contracted out of the 1954 Act. The sublease term expired one day before determination of the head lease term. The sub-tenant in possession held over following the expiry of the sublease under on the terms of the sub-lease but as a direct tenant of the freeholder, in accordance with the provisions of s 65(2) of the 1954 Act. Therefore, the landlord became entitled to the benefit of the tenant covenants in the subtenancy.

2.2.2 Take the situation where the head lessee has a demise of a whole building and grants a permitted underlease of some but not all of the floors in the building, neither demise being contracted out of the 1954 Act. If both head lessee and sublessee remain in occupation at the end of their respective terms, they will then be entitled to hold over and seek a lease renewal in respect of the floors they occupy.

The headlessee’s right to hold over and seek a lease renewal would not extend to the sub-demised parts that are occupied by the sub-lessee.

2.3

If the underlease is contracted-out and expires, say, three days before the

final date of the term in the head lessee, then the head lessee would be entitled to resume occupation of the underlet parts immediately on expiry of the underlease, with intention to hold over and seek a new lease.

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2.3.1 An LTA-protected undertenant may move out at the end of its term.

The head lessee can exercise its rights under the Act by retaking occupation for the last few days of its own term.

2.3.2 In Pointon York Group plc v Poulton [2007] 3 EGLR 37, CA, the head tenant had a demise of three floors in a building, and had granted a sublease of one of those floors for a term which expired three days before its own contractual termination date. A month prior to determination of the underlease term, the underlessee informed the head lessee that it would be vacating the premises. In turn, the head lessee notified its own landlord of its intention to resume occupation of the first floor suite for the purposes of a business once the sub-tenant had vacated. The head lessee intended to install the computer and telephone equipment after which furniture and staff could move in, but there was no time to do the computer and cabling work during the final three days of the head lease term.

Nevertheless, the Court held that the tenant has resumed occupation in those last three days. It was therefore entitled to serve a s 26 request for a new business tenancy.

The Court applied the following legal principles set out by Simon Brown LJ in Bacchiocchi v Academic Agency Ltd [1998] 2 All ER 241: “…whenever business premises are empty for only a short period, whether mid-term or before or after trading at either end of the lease, I would be disinclined to find that the business occupancy has ceased (or not started) for that period provided always that during it there exists no rival for the role of business occupant and that the premises are not being used for some other, non-business purpose…It has nothing to do with the de minimis principle rather it is recognition that the tenant’s business interests will not invariably require permanent physical occupation throughout the whole term of the lease … If, of course, premises are left vacant for a matter of months, the court would be readier to conclude that the thread of continuity had been broken.”

The Court of Appeal in Pointon also confirmed that the decision in Bacchiocchi applies for the purposes of section 23 of the 1954 Act. This means that, in order to “occupy” premises for the purpose of section 23, a tenant need not be physically present in the premises if it is using them in some other way as an incident in the ordinary course or conduct of business life, provided that the premises are occupied by no other business occupier and are not used for any non-business purpose.

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Covenant Not to Use or Not to Permit to be Used

A head lessee has an interest in the subtenant covenanting to comply with the head lessee’s covenants and indemnifying him against any breach. This is especially the case where those covenants are not to use or permit to be used the premises for specified unauthorised purposes.

Roadside Group Ltd v Zara Commercial Ltd [2010] EWHC 1950 (Ch) The issue in this case was whether the undertenant of a petrol station and car showroom (Roadside) was liable for the activities of its sub-undertenant (Triple Eight). Triple Eight had for some time parked cars for sale in certain areas around the perimeter of the site forming part of the forecourt, and wanted to continue to do so.

Roadside was subject to a covenant in the underlease not to use the demised premises “for the parking of motor vehicles for sale on any forecourt” (the “parking user covenant”).

The Court relied heavily on the following statement of the law by Atkin LJ in Berton v Alliance Economic Investment Co [1922] 1 KB 742 at 759: “… a person under a covenant not to use premises in a particular way cannot commit a breach of the covenant except by his own act or that of his agent. The same is true of a covenant not to permit. The user in the one case and the permission in the other must be something which can be predicated of the defendant or the defendant’s agent. It is not sufficient to show that the premises have been used in a way which would constitute a breach of the covenant; it must further be shown that the user is by the defendant or his agent, or that it is permitted by the defendant or his agent.”

The Court also observed that while other tenant user covenants in the head lease contained an obligation not to do something or permit others to do the same; the parking user covenant merely said that the tenant would not use the demised premises “for the parking of motor vehicles for sale on any forecourt” (the “parking user covenant”). Therefore, Roadside was not liable for the acts of its sub-tenants.

However, Triple Eight as sub-undertenant, “or indeed any stranger to the land”, would be bound by the parking user covenant in equity, thus entitling the head tenant to seek an injunction against Triple Eight. (This particular point is beyond the scope of this briefing note.)

22

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4

Undertenant – Direct Covenants with Freeholder Requested

4.1

In the licence to sublet, the freeholder may require the subtenant as a

condition of the licence to covenant with the freeholder and his successors in title to pay the sublease rent, to observe the head lessee covenants (apart from rent), and to comply with covenants restricting assignment and sub-underletting (such as obtaining his consent to sub-underletting of assignment of the whole).

4.2

Superior landlords also may try to impose covenants on the sublessee not to

agree a new rent on review without his permission and to inform him of the outcome of any rent review determination.

4.3

The landlord may insist on such direct covenants from the new underlessee on

each assignment of the underlease.

4.4

Where the freeholder has the benefit of rights reserved to him, the head lessee

should consider including a covenant in the sublease not to interfere with those rights. See also Trustees Ltd v Papakyriacou and another [2009] EWCA Civ 1089, where the Court of Appeal found that the head lessee had the power to restrict the sub-tenant’s right to use a loading bay for the purpose of ensuring that it was used within the hours prescribed by the head lease.

4.5

The Law of Distress (Amendment) Act 1908 has been repealed by Tribunals,

Courts and Enforcement Act 2007, with effect from 6th April 2014. Consequently, under the new rules, where Commercial Rent Arrears Recovery (CRAR) is exercisable by a landlord to recover rent due and payable from a tenant (the immediate tenant); the landlord is entitled to serve notice on any sub-tenant, requiring payment to be made to the landlord of any rent payable under the sub-lease, until the unpaid amounts are paid or the notice is replaced or withdrawn. See further section 81 to 84 of the 2007 Act and the Taking Control of Goods Regulations 2013, SI 2013/1894.

CRAR is the procedure that a landlord under a lease of commercial premises may now use to take control of goods to recover from the tenant rent payable under the lease.

24

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December 2015 Conditional Contracts: Key Issues to be Considered

There have been a number of cases over the years that have arisen out of disputes concerning a contractual condition, the performance of which would make the parties’ obligation to complete the contract unconditional, but non-observance of which would entitle one or both parties to terminate the contract. This note considers a few examples of such cases.

1) Has Landlord Given Consent as Required by the Lease?

British Telecommunications Ltd v Rail Safety and Standards Board Ltd [2012] EWCA Civ 553 This case turned on the construction of a provision in an agreement between the claimant and defendant company, to grant an underlease of two floors of a London property to RSSB. The claimant company was the landlord of the property; the superior landlord was PAC Ltd (Prudential Assurance Company Ltd).

Under the agreement, the Landlord (BT) was obliged to use reasonable endeavours to obtain the Superior Landlord’s Consent as soon as reasonably practicable after the date of the Agreement.

The agreement defined – i)

‘the Superior Landlord’s Consent’ as:

‘ ... the consent of the Superior Landlord to the grant of the Leases by way of the Licence to Underlet and to the Tenant’s Works by way of the Licence for Alterations’.

26

ii)

‘Licence for Alterations’ as –

‘the licence for alterations to be entered into between (1) the Superior Landlord (2) the Landlord and (3) the Tenant which shall be in the form in Schedule 4 subject to any amendments that the Superior Landlord may require to be made as shall be approved by the Landlord and Tenant such approval not to be unreasonably withheld or delayed’. iii)

‘Licence to Underlet’ was defined as meaning ‘the licence to underlet to be

entered into between (1) the Superior Landlord (2) the Landlord and (3) the Tenant which shall be in the form in Schedule 3’.

The disagreement between the parties was whether by ‘Superior Landlord’s Consent’, the parties had meant – i)

completion of the licences to underlet and for alterations; or

ii)

the unilateral act of consent in principle from PAC.

The High Court originally ruled that, on the construction of the agreement, the term ‘Superior Landlord’s Consent’, bore the second of the two meanings. There were seven reasons given for this conclusion; the first two of which were - i)

that the definition of the term in the agreement centred on ‘the consent of

the Superior Landlord to the grant of the Leases ... and to the Tenant’s Works ...’; and ii)

there was nothing in the agreement that indicated that consent would not

exist until there were Licences.

However, the Court of Appeal overturned the High Court ruling, preferring the first of the two meanings on the basis – (1)

That the Agreement provided that the Superior Landlord’s Consent meant the

consent of the Landlord “by way of” the Licence to Underlet and “by way of” the Licence for Alterations.

(2)

That the ordinary and natural meaning of those words was that the Superior

Landlord’s Consent had to be in those specified forms of Licence and no other.

(3)

That the ordinary and natural meaning applied was confirmed by the

mandatory requirement in the definitions of “Licence to Underlet” and “Licence for

27

Alterations” that those Licences “shall be” in those forms (subject, in the case of the Licence for Alterations, to any amendments that the Superior Landlord may require to be made and are approved by BT and RSSB).

(4)

That neither document was ever delivered by the Superior Landlord as a

deed. Unless and until that occurred the Superior Landlord was free to change its mind about granting consent.

Aubergine Enterprises Ltd v Lakewood International [2002] EWCA Civ 177 The tenant under a commercial lease was entitled to assign its lease with the landlord’s prior written consent to assign; and later applied for such consent.

The landlord’s solicitors wrote letters to the seller’s solicitor headed “SUBJECT TO LICENCE”, in which they confirmed the landlord’s “consent, in principle, to the proposed assignment”, but stated that they “would proceed with producing the Licence to Assign on the basis that [their] clients’ legal and surveyor’s costs, plus VAT, [would] be deducted from the rent deposit … currently held in respect of the property”.

The letter was sent with enclosures, which included: 1.

Engrossments of Licence to Assign, in duplicate,

for execution by seller and buyer;

2.

Amendments to rent deposit deed for approval; and

3.

Provision of the final version of the authorised guarantee

agreement for execution by the seller.

The Court of Appeal (by a majority of 2 to 1) held that – i)

The landlord’s solicitors’ letters constituted clear consent in writing. All that

remained to be done was compliance by the buyer with the non-objectionable conditions and formal execution of the consent and accompanying documents. ii)

The landlord’s solicitors’ heading of a number of their letters “Subject to

Licence”, coupled with a statement of conditions, did not qualify the plain indication

28

of consent in the body of the letters so as to make it equivocal or uncertain. iii)

Although the landlord and the seller and buyer envisaged the completion

and exchange by completion date of a formal licence to assign by deed, the lease did not require it. iv)

Robert Walker LJ specifically confirmed that consent is given when the

landlord’s decision in principle is communicated to the tenant by the landlord himself, or by the landlord’s solicitors or other agents.

2) Was Notice of Termination Reversible?

Akzo Nobel UK Ltd v Arista Tubes Ltd [2010] EWCA Civ 28 Akzo as seller and Arista as buyer entered into an agreement made towards the end of 1998 to take underleases of five factory units.

Under the agreement, Akzo had agreed with Arista to purchase the head lease over the premises from a subsidiary; and upon completion thereof, to then grant underleases of the Premises to Arista for the residue of the term of the head lease, less 5 days.

Under the head lease, the lease could only be assigned to Akzo with the landlord’s consent, and the grant of the underleases to Arista also required the landlord’s prior consent.

Akzo agreed to use all reasonable endeavours to procure these ‘Property Consents’ to the transactions. Pending the obtaining of those consents, the completion of the assignment and the execution of the underleases, Akzo granted Arista a licence to occupy the premises.

Arista retained occupation for eight years under the licence. During that time, Akzo had taken steps to procure the consents and assignment into its own name.

Finally, it obtained the assignment of the lease and landlord’s agreement for the grant of the required consents on 13 December 2007.

29

However, on 30 October 2007 Arista had served on Akzo a notice to terminate the obligations of the parties in respect of the Premises as well as the licence agreement on 31 January 2009.

The key provision in the Akzo-Arista agreement stated that: “If by 31 December 1999 all Property Consents shall not have been obtained in respect of any Business Property then either the Seller or the Purchaser may, by three months’ notice in writing to the other, terminate on the date of expiry of that notice, the obligations of the parties hereto in respect of that Business Property under this Schedule 7 (Properties) (but without prejudice to antecedent breach) in which event the Purchaser shall vacate the Business Property in question by the end of such notice period.”

Decision The Court held that the appeal involved a short point of construction.

Arista’s entitlement to serve the notice on 30 October was undisputed. The notice was a notice to terminate the parties’ contractual obligations, and either party was entitled to serve such notice in order to escape from their respective obligations in relation to the Premises if Azko had not obtained the Property Consents by 31 December 1999.

In particular, the immediate effect of the notice was that there was no longer any obligation on Akzo to use reasonable endeavours to obtain property consents or an assignment of the lease, or on Arista to take underleases of the premises.

The Court further held that Arista’s notice had immediate effect when it was served.

It disagreed with Akzo that the language of the termination provisions permitted it to nullify that notice of termination by obtaining the Property Consents. Moreover, the obligation to take the underleases did not arise before the notice was given.

30

3) Had the Right to Rescind the Agreement Expired?

McGahon v Crest Nicholson Regeneration Ltd [2010] EWCA Civ 842 In October 2006, the seller (Crest Nicholson) and buyers (Mr and Mrs McGahon) exchanged contracts for the purchase of a long underlease of an off-plan block of flats. This 2006 contract was expressly conditional on the grant to the seller or its nominee of a head lease of the block of which the Property formed or was to form part. If the headlease was not granted by 1 June 2008, either party had the right to terminate the contract by written notice of rescission duly served. The service of such notice would terminate the contract, the seller would refund the deposit and the buyer would cancel any entry it had made on the Land Register.

By February 2008, the property had lost 25% of its value. By 1 June 2008, the buyers were unaware that the head lease had not been granted. In July 2008, they informed the seller-developer that they would be unable to complete unless the purchase price was renegotiated.

The head lease was granted on 4 September 2008. The buyers purported to serve notice of rescission on 29 September.

The Court of Appeal rejected the buyer’s contention that the right to rescind could still be exercised, even after the grant of the head lease. Therefore, the right to rescind only existed up until the grant of the headlease and did not continue once the headlease had been granted.

Furthermore, there was no contractual obligation on the seller to notify the buyer whether the head lease had in fact been granted by 1 June 2008. However, if they had wanted (or if they had been competently advised), the buyer could have taken steps at an earlier stage to discover whether the headlease had been granted.

31

January 2016 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72

(1)

The Provisions of the Lease

The claimant tenant was entitled to break its four commercial sub-underleases (collectively referred to as ‘the Lease’) on two dates in January 2012 and 2016, by virtue of clause 8 thereof. The lease had replaced an earlier sub-underlease (the Earlier Lease). The Lease ran “for a term of years starting on 25 January 2006 and ending on 2 February 2018” The deeds that granted the sub-underleases was collectively referred to as “the Deed”.

Moreover, clauses 8.3 and 8.4 of the Lease respectively stipulated that a break notice would only have effect – •

“if on the break date there are no arrears of Basic Rent or VAT on Basic Rent”;

and •

“if on or prior to the first break date the tenant pays to the landlord

the sum of £919,800 plus VAT”.

Clause 4 of the Deed provided that, if the tenant did not exercise its right to break the Lease on 24 January 2012 (i.e. the first break date), the landlords would pay the tenant £150,000 by crediting it against the tenant’s liability for the rent due on the following quarter day, 25 March 2012.

The Basic Rent was “£919,800 plus VAT per annum”, which was to be reviewed on certain specified “review dates”. The Basic Rent was to be “paid yearly and proportionately for any part of a year by equal quarterly instalments in advance”.

(2)

Payment Made by the Tenant

The tenant paid the full quarter’s rent due on 25 December 2011. On or about 18 January 2012, the tenant paid the defendants £919,800 plus VAT, pursuant to clause 8.4 of the Lease. As mentioned above, the first break date was 24 January 2012.

32

(3)

Background to the Supreme Court Decision

3.1

The High Court Decision [2013] EWHC 1279 (Ch)

Morgan J considered that the lease did not expressly provide for the tenant to be entitled to recover a part of the quarter’s rent paid in respect of the rent due on 25th December 2011. However, he concluded that there was to be implied into this particular lease a term requiring the lessor to repay to the lessee, on and after 24th January 2012, an apportioned part of the quarter’s rent paid on 25th December 2011 in relation to the period after 24th January 2012.

This was the first case in which a court had implied such provision into a lease.

3.2

The Court of Appeal ruling [2014] EWCA Civ 603

The Court overruled the High Court, concluding that there was no basis in the circumstances for implying a term for repayment of rent for ‘the broken period’.

In reaching this conclusion, the Court of Appeal took into account the following factors: a)

It would have been obvious to the parties before they signed up to the lease

that there was a possibility that rent would have to be paid on the last quarter day in full for a period which went beyond the break date. They could easily have added words to the effect that the lessor was to repay any rent (or other charges) paid for the broken period. b)

There was no precedent for implying such a term.

c)

It is likely that a reasonable person, having knowledge of this background,

would conclude that if the parties had really intended there to be an implied term for repayment they would have made express provision for it. d)

The words “proportionately for any part of a year” in the reddendum did

not apply in a case such as the present when on the last quarter day there was no certainty as to whether termination would take place on the break date. e)

The Court proceeded on the basis (without deciding the point) that the lessee

could make a proportionate payment of rent on the last quarter day if he had by then also paid the break premium of £919,800 plus VAT. However, this point was not fully argued before the Court.

33

(4) The Supreme Court Ruling (upholding the Court of Appeal’s decision, albeit on different grounds) Lord Neuberger delivered the judgment of the Supreme Court. This was unanimous so far as addressed to the issues between the parties.

This note does not consider the debate between Lord Neuberger and Lord Carnwath on the relationship between the approach to construction and the approach to the implication of a term into a legal document.

4.1

Implied terms in contracts

Lord Neuberger acknowledged that there were factors for and against implying a term into the lease which expressly obliged the landlords to pay the apportioned sum to the tenant.

The points that supported implying into the Lease the term contended for by the claimant were 1.

The contention that, if the defendant landlords could retain the apportioned

sum, it would have been unfairly prejudicial to the claimant and a pure windfall for the defendants.

2.

The choice of break dates was the anniversaries of the date of grant of the

earlier Lease. This date was itself dependent on the date on which the head-landlord gave its consent to the grant of the earlier Lease. Thus, it could fairly be said that the parties had agreed the terms of the break clause, not knowing whether the break dates would be shortly after, shortly before or even on, a quarter day.

3.

The Lease stipulated that the Basic Rent was to be “paid yearly and

proportionately for any part of a year by equal quarterly instalments in advance� (emphasis added). Therefore (a)

It was common ground that the effect of the italicised words was that, if the

Lease had run its full course to 2 February 2018, the tenant would only have had to pay an apportioned part of the Basic Rent due on 25 December 2017, because, as at that date, the parties would have known that the Lease would expire before the next quarter day, 25 March 2018.

34

(b)

It was also common ground that, because the claimant had not paid the

sum of £919,800 plus VAT due under clause 8.4 before 25 December 2011, it would not have been known as at that date whether the Lease would come to an end before 25 March 2012, and the tenant therefore had to pay the quarter’s rent in full: it only became clear that the Lease would determine on 24 January 2012 when the claimant paid the £919,800 plus VAT on 18 January. (c)

By contrast, Lord Neuberger agreed with the contention that if the claimant

had paid the £919,800 plus VAT before 25 December 2011, it would have been clear on 25 December 2011 that the Lease would have ended on 24 January 2012, so that the claimant would only have had to pay an appropriate proportion of the Basic Rent on 25 December 2011. (d)

In the light of the foregoing points, the claimant contended that commercial

common sense mandated that it should be in the same financial position whether it paid the £919,800 plus VAT before 25 December 2011 or chose to wait, as it was entitled to, until after 25 December 2011 to pay that sum (though the sum had to be paid, at the latest, by 24 January 2012).

The countervailing arguments were – 1.

The Lease was a very detailed document, which had been entered into

between two substantial and experienced parties, and had been negotiated and drafted by expert solicitors. In particular, the Lease made provision for a large number of contingencies.

2.

Given that there were the obligations under clause 8.3 to pay all rent due on

25 March 2012 in order to exercise the right to break and to also pay £919,800 plus VAT under clause 8.4, it would have been “somewhat peculiar” to imply into the Lease a term requiring the landlords to pay the tenant around £200,000 plus VAT on 25 January 2012.

3.

Clauses 8.3 and 8.4 of the Lease, together with clause 4 of the Deed, showed

that the parties had directed their minds to the specific question of what sums were to be paid if the right to break either was implemented or was not implemented.

However, the Supreme Court found that the terms of the lease and their commercial effect were not critical its ruling.

35

4.2

The general law on apportionment of rent payable in advance

The overriding factor was the established legal background against which the Lease was entered into, and in particular the general attitude of the law to the apportionability of rent payable in advance.

The legal position is that •

Neither the common law nor statute apportions rent in

advance on a time basis.

•

Section 2 of the Apportionment Act 1970 provides that “All rents, annuities,

dividends, and other periodical payments in the nature of income” should “like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly”.

•

It has been long established that section 2 applies to rent payable in arrear.

Therefore, the 1870 Act does not apply to rent payable in advance.

•

This was generally understood to be the position when the Deed and the

Lease were negotiated and executed.

•

The claimant’s argument, by contrast, was that a term should be implied into

the Lease that the Basic Rent payable in advance on 25 December 2011 should effectively be apportioned on a time basis.

Therefore, such an implied term was unsupportable in the face of these established legal principles. In particular, Lord Neuberger said at paragraph 50 “Given that it is so clear that the effect of the case-law is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances (eg where the contract could not work or would lead to an absurdity) express words would be needed before it would be right to imply a term to the contrary.”

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February 2016 Two Cases on Conditional Contracts:

(1)

Rentokil Initial 1927 PLC v Goodman Derrick LLP [2014] EWHC 2994 (Ch)

Mr Brown was an experienced solicitor and group legal director of Rentokil Initial plc, a director of the subsidiary claimant company.

Mr Brown had engaged a firm of surveyors known as Rapleys LLP to assist him with the disposal of the Property. Rapleys described themselves in their letterhead as commercial property and planning consultants. Mr Steele was a partner at the firm.

Eventually, Taylor Wimpey agreed to purchase the Property subject to the grant of planning consent for a residential development consisting of the demolition of all but one of the buildings on the site and the construction of a number of flats thereon. Completion was expressly dependent on the grant of planning consent with acceptable conditions.

The Agreement The contract made provision for adjustment of the purchase price of £4.388 million if the “Costs” were more or less than £590,000, subject to a proviso permitting either party to terminate the contract if the adjusted price fell below £3.5 million.

The word “Costs” was defined as: “the cost (or if not known within two months of the date of the grant of the Satisfactory Planning Permission the estimated costs) of complying with any obligation in a Planning Agreement excluding recoverable VAT” The expression “Planning Agreement” in turn included -

38

“any agreement pursuant to section 106 of the 1990 Act section 33 of the Local Government (Miscellaneous Provisions) Act 1982 section 38 and/or 278 of the Highways Act 1980 section 18 of the Public Health Act 1936 …”

One of the trigger events that obliged both parties to complete the transaction was the grant of “Satisfactory Planning Permission”, which was defined as “a Planning Permission permitting the carrying out of the Development which is unconditional or contains no Unacceptable Planning Conditions”.

There was provision for automatic termination of the contract on, inter alia, “the grant of Planning Permission subject to any Unacceptable Planning Condition”.

Issue 1: How the term ‘Unacceptable Planning Conditions’ was to be interpreted The term “Unacceptable Planning Conditions” was defined in Schedule 1 of the contract, the material parts of which were as follows: “An Unacceptable Planning Condition is a condition or requirement in a Planning Permission or Planning Agreement which has the effect of: ….

2.

limiting the Planning Permission to a set period of time...

10.

Imposing an obligation

10.1

which cannot be complied [sic.] with without the agreement of a competent

Authority or third-party … or 10.2

which prevents the commencement of the carrying out of and/or the use or

occupation of the whole of any part of the Development unless and until a condition has been complied with which cannot be satisfied without the agreement of a competent Authority or third-party and which cannot in the reasonable opinion of a reasonable developer be obtained on terms or at a cost or within a timescale acceptable to a reasonable developer 11

in the reasonable opinion of a reasonable developer delaying

commencement of the carrying out or completion of the whole or any part of the Development beyond the date on which such carrying out or completion would have occurred in the absence of such condition

39

12

any other condition in the reasonable opinion of the reasonable developer

in any other way restricting the carrying out of and/or the use or occupation of the whole or any part of the Development or requires the incurring of expenditure which would be likely to have a materially detrimental effect on the financial viability or the investment value of the Development”.

Judge Dight’s construction of the relevant clauses was as follows 1.

Clause 2 did not include the usual planning condition that the permitted

development must begin within three years of the date of the appeal decision. It would not have made commercial sense for the clause to render unacceptable such a planning condition.

2.

It was, in the circumstances, obvious that both sub-clauses 10.1 and 10.2

were intended to be qualified by the final disputed words “and which cannot in the reasonable opinion of a reasonable developer be obtained on terms or at a cost or within a timescale acceptable to a reasonable developer”. The inclusion of those words within the second sub-part had been caused by a formatting error.

3.

The condition in clause 11 had to be construed sensibly so as to give effect to

the clear intention, namely that the question of delay was to be viewed through the eyes of a reasonable developer who had to reach a reasonable opinion; and that it would not be a reasonable opinion if the delay were not material, even if that word were not used in the clause.

4.

The final words in Clause 12 (“which would be likely…”) governed the whole of

the clause, and not merely the second part to which they were physically adjacent.

Issue 2: The scope of the Solicitor’s retainer in drafting the agreement The Court found that – (i)

The defendant had not been negligent in the drafting of the definition of

the term ‘Planning Agreement’ because the drafting had reflected the parties’ intentions and the proper meaning of the definition was clear on its face, was not difficult to understand, and did not need specific separate explanation to Mr Brown or Mr Steele, each of whom knew that the scope of the “Costs” was wider than simply those which might be incurred pursuant to a section 106 agreement.

40

(ii)

The defendant had drafted the ‘Unacceptable Planning Conditions’ in a way

that reflected the heads of terms and the commercial deal which had been struck. (iii)

As a matter of fact, at all material times, Mr Brown had a proper

understanding of the risks inherent in the transaction and the detail and effect of the terms of the contract. The absence of a formal vendor’s report and specific evidence of a line by line explanation of the contract did not detract from the court’s finding about Mr Brown’s knowledge and understanding nor from the conclusion that the defendant did not fail in its duty to advise the claimant. (iv)

The practical effect of the various clauses was a matter for Mr Steele to advise

on, not the defendant solicitor; and it was entirely appropriate that the defendant should assume that Rapleys could provide such advice, as in the Court’s judgment they did.

(2)

Cohen v Teseo Properties Limited [2014] EWHC 2442 (Ch)

The contract in this case was for the sale of property in north-west London.

The parties entered into the said contract on the basis of Teseo’s conditional obligation to complete the purchase, covering various permutations which could arise in the course of an application for planning permission.

The Relevant Clauses •

Clause 3.1.2 provided that the contract was conditional upon -

“… the Effective Date occurring on or before the Long Stop Date PROVIDED THAT the Buyer will be entitled unilaterally on written notice to the Seller to call for completion on 15 Working days’ notice notwithstanding that the Effective Date has not occurred.”

•

The Completion Date under the contract was to be 28 days

from the Effective Date.

•

The ‘Effective Date’ was defined by clause 12 as the date on which the first,

if any, of the specified contingencies occurred in pursuance of an application for planning permission.

41

•

Clauses 12.2 provided that “The Effective Date cannot occur after the

Termination Date.”

•

Clause 13.1 defined the Termination Date as the first to occur, if any, of the

specified dates (which included the date of a planning application being refused, the date an independent surveyor determined that any planning condition was an ‘Unacceptable Planning Condition” or the ‘Long Stop Date’).

•

The ‘Long Stop Date’ was 6th January 2014 subject to an extension or

extensions if requested by the Buyer pursuant to Clause 13.5 up to and including 9th June 2014.

•

The term ‘Extension of Time’ was defined as: “an extension to the Long Stop

Completion Date requested by the Buyer pursuant to Clause 13.5 of not more than 6 months.”

•

Clause 13.5 stipulated, as far as material for our purposes, that –

“In the event that the Effective Date has not occurred by 6th January 2014 then 13.5.1 The Buyer shall be entitled to an Extension of Time.

13.5.2 The Buyer shall inform the Seller each time that it requires an Extension of Time by written notice to the Seller specifying the length of the extension required.

13.5.3 ....”

The combined effect of clauses 12.2 and 13 was that if the Termination Date came before an Effective Date had occurred, the parties would not be under an obligation to complete the sale and purchase of the property.

The Main Issue: Teseo’s Rights to Extension on Expiry of the Long Stop Date The issue was whether Teseo was entitled to give a notice under clause 13.5 after 6 January 2014. (i)

Clause 13.5

Given that clause 13.5 was open to more than one interpretation, the court adopted the interpretation which it regarded as most consistent with business common sense, in accordance with the guidance on contractual interpretation given by the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50.

42

Accordingly, the Court rejected Teseo’s contention that it was entitled to give notice to extend the Long Stop Date and the contract after the initial Long Stop Date of 6 January 2014 albeit not later than 9 June 2014.

The court considered that there were two highly significant features of the commercial context: •

First, it would not have been consistent with the commercial logic of the

parties’ bargain to require the Claimant to continue to be bound by a floating obligation to sell the property to Teseo which Teseo might crystallise at any time up to 9 June 2014 by making an extension request under clause 13.5.

•

Secondly, the commercial objective of the parties under clause 13.1 was that

they should with certainty know where they stood if one came to the end of the Long Stop Date of 6 January 2014 without any request for an Extension of Time. (ii)

Teseo’s alternative argument based on clause 3.1.2

The Court rejected Teseo’s further contention, based on clause 3.1.2 of the contract, that it remained entitled unilaterally on written notice to the Claimant to call for completion of the sale even though the Effective Date had not occurred, and now could never occur. Moreover, clause 12.2 clarified that once the Termination Date had passed, the Effective Date could no longer occur.

The Result Therefore, the Claimant was free from any obligation to proceed with the sale of the property to Teseo.

43

March 2016 Delivery of a Deed & Alleged Estoppel Arising During Negotiations

Background Note The cases selected for inclusion in this month’s publication demonstrate the importance for prospective parties to a contingent disposition of land to be clear with each other about their mutual expectations, especially whenever negotiations as to the terms of the disposition continue on a subject to contract basis.

(A)

Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55

The claimant property developer and defendant land owner made a verbal agreement, whereby the claimant would apply for planning permission and conservation area consent for the demolition of an existing building and the erection of six houses in its place. If these applications were successful, the defendant was to sell the property to the claimant for £12 million, who would then be entitled to the first £24 million profits; and the parties would split the gross sale proceeds in excess of £24.

The planning applications were granted, but then the defendant refused to honour the verbal agreements she had reached with the claimant.

The House of Lords held that no proprietary estoppel had arisen. A key factor in this decision was the finding that Mr Cobbe was an experienced property developer and Mrs Lisle-Mainwaring was an astute negotiator. She had not encouraged him to believe that the agreement was enforceable and he did not pursue the planning application in the mistaken belief that the agreement was legally enforceable.

Instead, his expectation was always a contingent one, contingent not simply on the grant of planning permission but contingent also on the course of the further contractual negotiations and the conclusion of a formal written contract.

44

(B)

Nazam v Manton Securities Ltd [2008] EWCA Civ 805

Mr Nazam (the claimant) occupied commercial premises in Birmingham.

In 1998, the defendant (Manton) started negotiating with the claimant for a 21-year full repairing and insuring lease. These negotiations proceeded intermittently until they broke down in 2005.

In 2002, the claimant reached agreement with the defendant to carry out repairs and improvements to the premises on the basis that the parties would enter into a formal lease after completion of the works.

By 2003, Mr Nazam’s builder had completed part of the agreed works. Mr Nazam claimed that he had agreed to do the works on the understanding reached with Manton that he was a business tenant and already had security of tenure.

The Court held that the Claimant was entitled to a 21-year equitable tenancy. This was because Manton was estopped from denying him his entitlement to such a tenancy because he had expended money in the repair and improvement of his premises under Manton’s encouragement of an expectation in him that it would grant him a 21-year tenancy of the premises from 7 November 1997.

The Claimant’s poor rent payment record did not deprive him of his entitlement to a lease in equity. Manton itself had not viewed Mr Nazam’s persistent late payment as a serious problem because it had done nothing about it.

Therefore, it would have been quite unjust to allow the landlord to invoke the late payment record as a ground for denying the claimant his equitable tenancy.

(C)

Lankester & Son Ltd v Rennie [2014] EWCA 1515

A lease for a term commencing on 1 May 2007 and expiring on 28 August 2017 demised to Mr and Mrs Rennie premises comprising a car showroom, a workshop and associated facilities (“the premises”). The lease also conferred on them (and nobody else) an option to determine the lease upon giving not less than six months’ notice in writing of their intention to do so provided they had paid the rent and any other monies due. The non-assignable option to determine expired on 1 May 2012.

In October 2008, Mr Rennie entered into discussions with the landlord about the possible grant by Lankester to Mr and Mrs Rennie of a licence to assign the lease to a company called The Car Agency Ltd (“TCA”).

45

The landlord indicated that it was prepared to its consent to the proposed assignment of the lease on condition that two directors of TCA each entered into a personal guarantee with Lankester of TCA’s performance of the tenant covenants in the lease. No such guarantees were ever forthcoming.

There was at no stage a formal assignment of the lease because •

The Rennies’ leasehold title was not registered until 8 December 2009 as a

result of delays in rectifying the freeholder’s title;

•

TCA’s directors were unwilling to give the personal guarantees required by

the landlord and TCA wanted the benefit of the break clause which under the lease would be lost upon assignment.

The Rennies vacated the premises and allowed TCA into occupation, but had been warned by Lankester that they would remain fully responsible for their obligations under the lease. From about December 2008, Lankester began to receive from TCA, initially on a quarterly basis, sums referable to the rent payable by Mr and Mrs Rennie under the lease.

By January 2009, the solicitors who were acting for the Rennies and TCA, held a transfer deed signed by Mr and Mrs Rennie.

On 24 February 2010 TCA gave Lankester written notice of TCA’s intention to vacate the premises. In or about July 2010 TCA agreed to pay Lankester the sum of £15,000 in respect of its claim against it. Lankester then pursued Mr and Mrs Rennie through the county court for the balance of rental arrears.

The Court of Appeal held – 1.

It was not concerned here not with the equitable rights as between Mr and

Mrs Rennie and TCA but with the legal rights as between Lankester and Mr and Mrs Rennie.

2.

It is well established that the final formality required in order for a deed to

become effective is delivery. This is essentially a question of the intention of the maker of the deed, but it must be shown that the maker intends the document to be executed as his deed and to be binding upon him.

46

2.1

There were several outstanding matters between assignors and assignees,

namely the inability of Mr and Mrs Rennie to register their own title, the unwillingness of TCA’s directors to provide the required personal guarantees and the requirement of TCA that there should be a break clause as a condition of its agreeing to become assignee.

2.2

The Solicitors were therefore holding the document on behalf of both Mr and

Mrs Rennie and TCA pending final instructions for its delivery.

3.

No estoppel by representation had arisen which estopped Lankester from

denying that TCA was the lawful assignee of the lease.

3.1

It is well established that an estoppel by representation is personal to the

parties.

3.2

Whatever may have been the position as between Lankester and TCA,

there was never any representation by Lankester to Mr and Mrs Rennie that it had accepted TCA as the assignee of the lease.

Indeed, any representation made by Lankester to TCA that it was the assignee had been countered by a representation to Mr and Mrs Rennie that they remained the tenants under the lease and that the assignment had never taken effect.

4.

An estoppel had arisen by convention had not arisen on the alleged basis

of Lankester, Mr and Mrs Rennie and TCA having all acted upon the common assumption that, as from December 2008, TCA was Lankester’s tenant in respect of the premises.

4.1

For such an estoppel to have arisen, it had to be shown that all these

parties proceeded upon a shared understanding or convention as to the basis of their relationship. However, for all of the reasons given above, no such shared understanding or convention ever existed, and the parties never conducted themselves on the basis that it did.

4.2

Accordingly, Lankester was not bound by an estoppel by convention

preventing it from asserting that Mr and Mrs Rennie were liable under the tenant covenants.

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(D)

Active Estates v Parness [2002] 3 EGLR 13

The tenant under a commercial lease (Gherkesh) was experiencing difficulties in paying the rent. After a bailiff was instructed by the landlord, the rent was paid by Jointport (another company in the same ownership as Gherkesh), and accepted by the landlord expressly on the basis that Jointport was acting as agent for Gherkesh.

A key finding in this case was that the landlord had continued to treat Gherkesh as the tenant while there were negotiations for a new lease and had also made it clear that Jointport could continue to occupy the premises effectively as licensee of Gherkesh, and that Jointport could pay the rent as agent for Gherkesh.

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49

April 2016 Sections 24 and 25 Landlord and Tenant (Covenants) Act 1995 Update

1.

Background Note

1.1

Section 24(2) of the 1995 Act (as far as material) reads as follows:

“Where – (a)

by virtue of this Act a tenant is released from a tenant

covenant of a tenancy, and

(b)

immediately before the release another person is bound by a covenant of

the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant, then, as from the release of the tenant, that other person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant.”

1.2

Section 25(1)(a) of the 1995 Act provides as follows:

“Any agreement relating to a tenancy is void to the extent that (a)

it would apart from this section have effect to exclude, modify or otherwise

frustrate the operation of any provision of this Act…” 1.3

London Diocesan Fund v Phithwa [2005] UKHL 70

The landlord covenants in the lease in this case were prefaced by the following provision ‘The Landlord covenants with the Tenant as follows (but not, in the case of Avonridge Property Company Limited only, so as to be liable after the Landlord has disposed of its interest in the Property).’

50

Avonridge was the original landlord under the lease.

The House of Lords held that there is nothing in the language or scheme of the 1995 Act to suggest the statute was intended to exclude the parties’ ability to limit liability under their covenants from the outset in whatever way they may agree. Consistently, it was open to the parties to agree to curtail the landlord’s liability from the outset in this way in order to release it automatically from the landlord covenants on parting with its interest in the reversion.

1.4

Tindall Cobham 1 Ltd v Adda Hotels [2014] EWCA Civ 1215

Patten LJ, delivering the Court’s judgment, observed “Section 25(2) makes it expressly clear that s 25(1) can apply to a covenant in the lease against assignments insofar as it regulates the giving of consent for the assignment. It seems to me that a condition which requires the tenant to procure a continuing guarantee from an existing guarantor does have the effect identified in s 25(1)(a). Section 25(1) is concerned to invalidate agreements which would have the s 25(1)(a) consequences. It is not limited to the exercise of the rights which such agreements contain. The ability of the landlords to bring about one of the prohibited consequences by the exercise of those rights is enough in my view to bring the contractual provision conferring those rights within the ambit of the section. …”

1.5

In K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA

Civ 904, the Master of the Rolls, delivering the judgment of the Court of Appeal summarised the following conclusions “[53] Reverting to the general effect of the 1995 Act on existing guarantors, our conclusion, as explained above is that the effect of ss 24 and 25 is that: “i)

an existing or contracting guarantor of a tenant cannot validly be required to

commit himself in advance to guarantee the liability of a future assignee,

ii)

subject to (iii) and (iv), a guarantor of an assignor cannot validly guarantee

the liability of the assignor’s assignee,

iii)

such a guarantor can validly do so by being party to an AGA which otherwise

complies with section 16, and

51

iv)

such a guarantor can in any event validly guarantee the liability

of an assignee on a further assignment.

[54]

Accordingly, we largely agree with Newey J’s analysis in Good Harvest [2010]

Ch 426, save in relation to AGAs (point (iii) in the previous paragraph), which he appears to have left open”: per Lord Neuberger MR, delivering the judgment of the Court of Appeal.

1.6

In addition to sections 24(2) and 25(1)(a) cited above, the following provisions

of the 1995 Act were also relevant to the UK Leasing case that is referred to in paragraph 2 below: 1.6.1 Section 3(2) provides (so far as relevant in relation to an assignment by a tenant): “(2) Where the assignment is by the tenant under the tenancy, then as from the assignment the assignee (a)

becomes bound by the tenant covenants of the tenancy except to the

extent that (i)

immediately before the assignment they did not bind the assignor, or

(ii)

they fall to be complied with in relation to any demised premises not

comprised in the assignment; and

(b) …”

1.6.2 Section 5(2) provides, so far as relevant: “(2)

If the tenant assigns the whole of the premises demised to him, he -

(a)

is released from the tenant covenants of the tenancy, …

(b) … as from the assignment.”

52

1.6.3 Section 11(1) and (2) provide (so far as relevant in relation to an assignment by a tenant): (1)

This section provides for the operation of sections 5 to 10 in relation to

assignments in breach of a covenant of a tenancy or assignments by operation of law (“excluded assignments”).

(2)

In the case of an excluded assignment subsection (2) or (3) of section 5 -

(a)

shall not have the effect mentioned in that subsection in relation to the tenant

as from that assignment, but

(b)

shall have that effect as from the next assignment (if any) of the premises

assigned by him which is not an excluded assignment.”

1.6.4 Section 16 sets out the circumstances in which an assignor tenant may be called on to give an authorised guarantee agreement (“an AGA”) in relation to the obligations of its assignee.

1.6.5

Sections 3, 5, 11 and 16 only apply to new tenancies (which are broadly

tenancies granted on or after 1 January 1996).

2.

UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] EWHC 53 (Ch)

2.1

The application of the 1995 Act to the facts

A lease was granted to T1, whose obligations thereunder were guaranteed by G. The lease was a new tenancy with the 1995 Act. In breach of covenant, T1 assigned the lease to T2 without landlord’s consent.

The effect of the assignment was to vest the lease in T2, who became bound by the tenant covenants therein (by virtue of section 3(2)(a) of the 1995 Act).

As the assignment was an “excluded assignment” within section 11 of the 1995 Act because it was effected in breach of covenant – •

T1 as the original lessee was not released under the 1995 Act from their

liabilities in relation to the tenant covenants in the lease pursuant to section 5(2)(a);

53

and •

G as the guarantor was not released from their liabilities under section 24(2)

thereof in relation to the tenant covenants in the lease.

2.2

Proposed Reassignment to T1

Morgan J in The High Court referred to the decision in K/S Victoria Street, where it was held that that section 25(1) invalidated any agreement which involved a guarantor of the assignor guaranteeing the assignor’s assignee, subject to one qualification.

This qualification was that if the assignor gave an AGA in relation to the assignee, the guarantor of the assignor (whilst it was the tenant) could also give a guarantee in relation to the assignor’s liability under that AGA. Therefore, Morgan J in UK Leasing held that there could be a valid direct reassignment by T2 to T1 followed by a new guarantee by G on the following basis “(1)

T2 will be released from the tenant covenants: section 5(2)(a);

(2)

T1 will be released from the tenant covenants entered into at the time the

lease was granted to T1: section 11(2)(b); (3)

G will be released from the earlier guarantee which it gave: section 24(2);

(4)

On the re-assignment to T1, T1 again becomes bound by the tenant

covenants: section 3(2)(a).”

The Court further concluded that the parties were entitled to proceed with a direct assignment by T2 to T1 with T1’s obligations being guaranteed by G. It reached this conclusion by applying the aforesaid qualification in K/S Victoria Street by analogy to the circumstances of this case. Most notably, Morgan J explained that “32. …On my analysis of the position of T1, when the lease is assigned by T2 to T1, T1 is released from its original obligations by reason of section 11(2)(b) but becomes bound by the tenant covenants under section 3(2)(a). If G is released from its original obligations under its original guarantee but enters into a fresh guarantee in relation to the tenant covenants, then G is released to the same extent as T1 is released.

Section 24(2) takes effect in accordance with its terms and is not frustrated for the purposes of section 25.”

54

2.3 The Alternative Proposal The tenants wished to resolve this situation in the following manner – 1.

First, by assigning the lease to an associated company, “Newco”.

2.

Second, a day or so later, Newco would assigns the term of the lease to T1

and G would enter into a fresh guarantee of the obligations of the tenant

under the lease.

3.

If this two-stage approach was valid, the landlord would

consent to the transaction.

The High Court considered this alternative route, in case that the extension of the qualification in Victoria Street had not been justified.

However, the Court considered that this suggested agreement would have frustrated the operation of section 24(2) of the 1995 Act because the landlord required there to be a binding commitment from Newco, T1 and G, prior to or as part of the landlord giving consent to the assignment to Newco, that those parties would take the further step of assigning to T1, with a fresh guarantee being given by G.

Concluding Thought The broader context of the UK Leasing case is that it provides clarity on the correct way of proceeding with a reassignment back from T2 to T1, in particular where – (i)

The earlier assignment from T1 to T2 was unlawful;

(ii)

T1 and T2 are in the same group of companies;

(iii)

T1’s obligations under the tenant covenants and then subsequently under an

AGA were guaranteed by the parent company; and

(iv)

It is proposed that their parent company should provide a fresh

guarantee on the re-assignment to T1.

However, it is unlikely that the case will be the final decision on the scope of the section 25(1) anti-avoidance provisions.

55

May 2016 Repair Covenants and Dilapidations Disputes

1.

Gaps and Overlapping Obligations

1.1

A lease of part of a building needs to allocate responsibility for repair of the

demised premises and the common parts. As the tenant is typically obliged to repair the demised premises, the extent of those premises needs to be clearly identified.

Furthermore, the lease should contain neither gaps (where neither party is responsible for repair of particular aspects or features of the building) nor overlapping obligations (where the lease makes both landlord and tenant responsible for repair of the same aspect or feature). For an example of the former, see Jacey Property Co Ltd v de Sousa [2003] EWCA Civ 510, where there was a gap in the repair provisions in respect of the drains and the Court held that it had no power to fill the gap or to rewrite the terms of the lease. Petersson v Pitt Place (EPSOM) Ltd [2001] EWCA Civ 86) is an example of the latter; in this case, it was held that the landlord’s repair obligation in respect of the ‘main structure’ of the premises implicitly extended to the roof terraces; and the tenant had covenanted to repair the demised premises, which included ‘one half in depth of the structure between the ceilings of the flat and … the flat or other premises above it and including one half part in depth between the floors of the flat and the flat or other premises below it’. The court in Petersson held that the tenant had to be responsible for the repair of the roof terrace, although it clearly reached this conclusion reluctantly. The overriding consideration was the perceived need to avoid a construction which resulted in dual liability.

1.2

In H Waites Ltd v Hambledon Court Ltd [2014] EWHC 651 (Ch), the High Court

considered the conflicting case law as to whether the lease of part of a building, prima facie, includes the airspace about the building.

56

Morgan J then made the following observations “Whether one says that there is a presumption to be applied, I consider that where one is dealing with a demise of a building, where the wording of the demise is expressed by reference to a vertical division, and there is no wording expressing any horizontal division, it is natural to react to that wording by holding that there is no horizontal cut off which excludes the airspace above the building or, for that matter, the sub-soil below the building...”

This case also demonstrates that the exclusion of the airspace above and below a building would (subject to the terms of the lease) general entitle the landlord to redevelop that airspace.

1.3

For example, the lease might deal with the problem of gaps and overlapping

obligations in the following way: The Tenant shall keep the Premises in good and substantial repair and condition PROVIDED THAT the Tenant’s repairing obligation does not extend to repair that is the responsibility of the Landlord whether under this Lease statute or otherwise IT IS HEREBY AND DECLARED that in the event that there is a gap in the repair provisions of this Lease so that neither the Landlord and Tenant are liable to repair a particular part or parts of the Building then that part or those parts (as the case may be) shall deemed to fall within the Landlord’s repairing obligations under clause … and that the Landlord is entitled to recover the cost of repairing that part or those parts as though the cost was an expense listed in the (relevant clause relating to service charge expenses)

2.

Schedules of Condition

2.1

A tenant should also be advised to consider having a Schedule of Condition

drawn up by a surveyor at the outset. This would involve an inspection followed by a report indicating the condition of the property in detail. The purpose of the Schedule is to avoid disputes about the state of the property at the outset. A properly drawn schedule will indicate whether individual parts or features of the building are in a good, reasonable, poor or very poor condition.

57

2.2

A ‘Schedule of Condition’ prepared by the tenant is likely to carry less weight

than one compiled by a Chartered Surveyor if there is a subsequent dilapidations dispute. Equally, a Surveyor can advise on the tenant on the type of survey to be undertaken, whether the property is potentially subject to specific defects and whether further investigations should be carried out (e.g. on mechanical or electrical services, or whether parts of the property should be opened up to check for latent defects).

2.3

The tenant repairing covenant may be qualified so that the covenant

expressly does not require the tenant to put the property in a better state than is evidenced in the schedule of condition; or requires the tenant to keep the property in no worse condition than evidenced by the schedule of condition.

2.4

There have been instances where a lease refers to a Schedule of Condition

that was not attached to the lease, or where a Schedule is attached, but the lease does not qualify the tenant’s repairing covenant by reference to the Schedule.

2.5

A schedule of condition may not protect the tenant if repairs are required

under the terms of some other tenant covenant, such as those requiring decoration of the premises or compliance with statutory requirements.

2.6

There is a risk that a schedule might not document the condition of part of the

property, particularly if it is not prepared by a qualified person.

2.7

As the schedule is intended to record the condition of the property at the

date the lease was granted, it should be prepared as near as possible to that date.

3.

Uninsured Damage

The tenant should also ideally not be made liable for damage or destruction caused by uninsured risks, to the extent that the tenant has done nothing to vitiate the policy. This is especially the case if the landlord insures under an obligation to reinstate in the event of damage or destruction. The insured risks should be drawn widely and preferably include terrorism cover, although premiums for such cover can be expensive.

58

4.

The Model Commercial Lease – Office-02

This section considers key aspect of the Model Commercial Lease (MCL), which is entitled ‘Lease of part of an office building (MCL-Office-02)’, June 2015 Version 1.1. This model lease is part of a suite of documents comprising various template commercial leases and associated documents that was originally commissioned by the British Property Federation and which has been shaped by a working group consisting of some well-known law firms, clients and trade organisations.

4.1

The Tenant Repairing covenant under the MCL: A Few Selected Clauses

The tenant covenant for repair is set out in clause 4.9 of the MCL. The tenant’s primary obligation is to “(a)

[keep the Premises and all Tenant’s Business Alterations in good and

substantial repair and condition and clean and tidy;] OR [keep the Premises in no worse state of repair and condition than they were in at the date of the Schedule of Condition that is attached for evidential purposes;]” Note: [Footnote 31 of the MLC contains the following guidance regarding the second alternative – “Include only where the Tenant’s repairing obligation will be limited to keeping the Premises in the state of repair current at the date the Lease is granted.”

The definition of ‘Tenant’s Business Alterations’ excludes alterations that affect the structural integrity of the Building: see clause 1.]

There are separate tenant repairing covenants in respect of •

Conducting Media, plant, equipment or fixtures forming part of the Premises

(or that exclusively serve them), and any External Works: see clause 4.9.1(b), (c); •

Glass forming part of the Premises: clause 4.9.2; and

•

Floor coverings: clause 4.9.3.

59

The tenant’s repairing obligation is excluded in certain cases where the damage is by any insured risk or by any uninsured risk: clause 4.9.5.

4.2

The Landlord repairing covenant under the MCL

By virtue of clause 5.3, the Landlord is obliged to comply with its obligations in Part 2 of Schedule 3.

Schedule 3 Part 2 clause 1.1 provides the following alternatives – “1.1

The Landlord, acting reasonably and in the interests of good estate

management: 1.1.1 [must supply the Services in an efficient manner at all appropriate times; and 1.1.2 may vary, reduce or extend those Services.]

OR 1.1.3 [must supply the Services listed in paragraphs 1 to [NUMBER] of Part 3 in an efficient manner at all appropriate times; and 1.1.4 may supply all or any of the remaining Services listed in Part 3; 1.1.5 may vary, reduce or extend those Services.]”

Part 3 of Schedule 3, which is headed ‘Services and Charges’, lists the Services referred to in Part 2 thereof. The first two Services are – “1.

Repairing … the foundations, roof, structure and exterior of the Building and all

Common Parts and Conducting Media.

2.

Repairing … any facilities (including means of access, Conducting Media,

party walls and other boundary structures) used in common between the Building and any adjoining premises.”

Paragraph 9 of Part 3 Schedule 3 also includes the Service consisting of maintaining and repairing “(a) all plant, machinery, apparatus and vehicles used in providing the Services…”

4.3

Interrelationship with Other Key Definitions

The parties’ respective repairing covenants are also determined by the definitions of relevant terms, such as the Building, the Common Parts and the Conducting Media.

So for instance “The Premises” excludes the airspace immediately above and below the Premises.

60

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June 2016 Pitfalls Arising from Break Rights

The following cases provide yet more examples of the pitfalls for tenants who have an option to determine their commercial leases.

Issue 1: Did the Lease Allow Retrospective Validation of an Initially Invalid Break Notice?

Orchard (Developments) Holdings Plc v Reuters Ltd [2009] EWCA Civ 6: The tenant purported to break its commercial lease on the break date 30 January 2006 by giving the required six months’ notice.

Clauses 8.1.2 and 8.1.3 of the lease (as far as material) read: “Unless the receiving party or its authorised agent acknowledges receipt a notice is valid only if it is given by hand sent by registered post or recorded delivery… and served … where the receiving party is a company incorporated in the United Kingdom … at its registered office …”

A break notice was sent by fax but it was common ground that the lease did not allow service by this method, until its receipt had been acknowledged by Orchard.

Another break notice was posted by a process server but in the wrong letterbox and thus was also invalid, unless and until its receipt had been so acknowledged.

Both notices were sent by 30 July 2005.

In a letter to the tenant’s Solicitors dated 8th December 2006 (which post-dated the break date), the landlord’s Solicitors said that their client’s position was that –

62

•

The break right had not been validly exercised; and

•

Neither of the notices had been acknowledged by their client

or its authorised agents.

This letter also observed that the tenant’s Solicitors had faxed notices to the landlord’s offices timed at 17.46pm on 29 July 2005 and 11.08am on 30 July, both times being when the offices were closed.

The issue was whether the reference in the letter to receipt of the faxed notices amounted to an acknowledgment of receipt thereof that operated to retrospectively validate the otherwise invalid notices.

The Court of Appeal found the inclusion of the words “is valid only” remarkable and held that – 1.

Clauses 8.1.2 and 8.1.3 required the notice to be served by hand or sent by

registered post or recorded delivery. Where a notice was given by hand, the lease required face-to-face delivery.

2.

Any other means (what was called an ‘informal notice’) would be invalid

unless duly acknowledged. An informal notice would only take effect at the time it is acknowledged. Therefore, the acknowledgment could not operate retrospectively.

3.

Therefore, an informal notice, if made and acknowledged in time, was a valid

break clause notice; otherwise it would be ineffective (unless perhaps the landlord subsequently acknowledged the notice as valid).

4.

It was too late for an acknowledgment when once

the break date had passed.

Issue 2: Had the Tenant Tendered Vacant Possession by the Break Date?

Mourant Property Trust Ltd v Fusion Electronic (UK) Ltd [2009] EWHC 3659 (Ch) Two identical commercial leases of adjoining warehouse units were granted to the Defendant tenant for a three-year term expiring on 18 March 2010. The tenant had an option to determine the leases on 19 March 2008. The break notice had been validly served.

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The leases both expressly provided that it was “a condition precedent to the customer’s [i.e. the tenant’s] right to determine this lease” that vacant possession was delivered to the landlord on the break date and that there was no material breach of tenant covenant subsisting at that date.

The issue was whether the tenant had given vacant possession and materially complied with its repairing covenants.

The landlord’s surveyors served an uncosted schedule of dilapidations on the tenant on 29 February 2008.

Livesey J observed that, as at the break date, the repair work “had been performed to a high standard but that the works on the dilapidations in both the premises was incomplete and ongoing”.

The tenant’s contractors remained on the premises until the work was eventually completed on 10 April 2008.

The High Court held as follows: -

On 19 March 2008, the tenant offered to hand back most but not all of the

keys to the premises. However, he had not made a simultaneous offer to instruct his contractors to leave at the landlord’s request.

-

The tenant was keen to retain possession so that his own contractors could

complete the works “at the more modest cost that he could achieve than the extortionate one that he anticipated would be levied by the landlord”.

-

On the break date the tenant had retained one set of keys so that the

contractors could continue and finish the works to completion.

-

The landlord’s surveyors had not been given the opportunity of taking

possession immediately and leaving the repairs uncompleted.

-

The uncompleted dilapidations were material.

For the above reasons, the tenant had not tendered vacant possession on the break date. Therefore, he had not validly exercised the break right.

64

Issue 3: Had the Break Notice been given on behalf of the Tenant?

Hexstone Holdings Ltd v AHC Westlink Ltd [2010] EWHC 1280 (Ch) The undertenant AHC purported to break its underlease by serving a break notice on the landlord. However, the break notice was stated to have been given ‘for and on behalf of Eddie Stobart Limited’ (ES), which owned the whole of the issued share capital in AHC’s parent company.

The High Court held that – 1.

The notice had been given by ES as principal. ES was the giver of the notice.

2.

There was no question of ES having given the notice as agent for AHC. There

was no evidence that AHC had made any decision to give the notice. The notice did not state that it was being given as agent of AHC. 3.

Subsequent ratification by the tenant could not save a break notice which

was given by the wrong person as principal. The notice was either good or bad when given.

4.

Consequently, the break notice was invalid.

The Prudential Assurance Co Ltd v Exel UK Ltd [2009] EWHC 1350 (Ch) A ten-year lease granted to two associated companies conferred on them a right to break the lease shortly before the fifth anniversary of the term.

The tenants were Tibbett & Britten Limited (“T&B”) and Tibbett & Britten Consumer Group Limited (“Consumer”).

The Exel Group subsequently took over the Tibbett & Britten Group. Consumer remained a wholly owned subsidiary of Exel. T&B’s name was changed to ‘Exel UK Limited’.

The tenant gave a break notice which stated that it was being served by “Exel UK Limited, the company formerly known as Tibbett & Britten Limited.” No reference was made therein to the company formerly known as Consumer.

65

1.

Solicitors Authorised to Serve Without Board Resolution?

The High Court held that the tenant’s Solicitors had been authorised to serve the notice, even though such authority had not been conferred by formal board resolution. This was because there was a well-established practice on the part of Exel Group companies of giving instructions to solicitors through its Property Department.

This practice had been followed on this occasion.

2.

Legal Principles on Errors in Break Notices

“The following principles emerge from the authorities: (1)

To be effective a break notice served by or on behalf of a tenant must

clearly and unambiguously communicate to the landlord that the person entitled to exercise the break provision is determining the lease on the permitted date; ...

(2)

If someone other than the tenant gives the notice without stating that he

acts as an agent, the notice will be valid provided that the giver of the notice was authorised to give it, and the circumstances are such that the landlord can act upon the notice safely in the knowledge that it will be binding upon the tenant;…

(3)

An objective approach is to be taken to construing a break notice…;

(4)

A mistake in the notice, even as to the identity of the person giving it, will

not necessarily invalidate it, provided that in all the circumstances its meaning is clear, the mistake is obvious, and the recipient can safely rely upon it...” (per Jeremy Cousins J).

Taking account of these principles, the High Court ruled that the break notice was invalid for the following reasons – •

The break right could only be exercised by the Tenant, which meant in this

case Exel and Consumer acting together, their successors in title or permitted assigns; •

A reasonable recipient would have had real doubt that the notice had been

served on behalf of Consumer, whose position had been left unexplained; and •

The Solicitors who served the break notice had indicated to the landlord’s

Solicitors at the time that they acted for Exel, without mention of Consumer.

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Issue 4: Had the Notice been given to All Relevant Parties?

Hotgroup plc v Royal Bank of Scotland plc [2010] EWHC 1241 (Ch) An underlease of part of a commercial building (‘the Property’) granted for a term of 10 years conferred on the tenant an option to determine after five years, upon giving not less than nine months’ prior notice to RBS (the landlord).

RBS (the landlord) held a long reversionary head-leasehold interest on trust for SEPUT, a large unit trust. SPRIM was SEPUT’s property manager.

The ‘Notices’ provisions of the underlease stated that during such period as the reversion to the underlease was vested in the trustee of SEPUT no notice served under the lease would be deemed to be validly served on the Landlord unless a copy of the notice was also served on SPRIM. The break notice had to be given by 3 October 2009. The underlessee served the break notice on RBS in September of that year but did not provide SPRIM with a copy of the break notice until mid-November 2009.

The High Court found that the commercial purpose of the requirement to serve a copy of a notice on SPRIM was to ensure that it came to the attention of the person with the actual responsibility for the management of the Property. The lease made clear that a notice served on the landlord could only be effective if a copy of the notice was also served on SPRIM. As service on SPRIM had taken place late, time being of the essence of service of a valid break notice by 3 October 2009, the tenant had not broken the lease.

67

July 2016 Advising Landlord and Tenant on Whether Consent to Underletting Can be Reasonably Withheld

1

At common law, when a head tenancy comes to an end by forfeiture, any

subtenancy derived out of it also automatically and simultaneously comes to an end: Pennell v Payne [1995] 2 All ER 592, CA. However, under s 146(4) Law of Property Act 1925, if a freeholder successfully pursues forfeiture proceedings against his immediate tenant (the head lessee), the former underlessee may apply to the court for an order vesting the whole or part of the premises demised to the head lessee for a term not exceeding the residue of the term of the original underlease. On the making of such order, the freeholder and underlessee would become immediate landlord and tenant of one another.

1.1 In Footwear Corporation Ltd v Amplight Properties Ltd [1998] EWHC Ch 313, the High Court held that the freeholder’s refusal to give licence to underletting on account of the weakness of the undertenant’s covenant strength was unreasonable.

The landlord was concerned that if the head lease was forfeited or it was disclaimed (which in itself would probably lead to forfeiture), the undertenant might then obtain relief from forfeiture and a vesting order and thereby become his immediate tenant.

The Court held that the possibility of forfeiture or disclaimer was not a matter the landlord could legitimately take into account in reaching his decision on whether to grant or withhold his consent. It would be for the landlord in any such forfeiture proceedings to argue that relief ought not to be granted and that the vesting order should not made.

1.2

By contrast, in NCR Ltd v Riverland Portfolio No. 1 Ltd [2005] EWCA Civ 312, the

tenant’s Solicitor wrote to the landlord on 30 June 2003 seeking consent to underlet to Telco on payment of a reverse premium of £3 million to Telco. The landlord had concerns about the covenant strength of the proposed undertenant and its guarantor. Moreover, it had to obtain its mortgagee’s consent to the underletting.

68

On the reasonableness of the landlord’s refusal of consent, it had already been established in an earlier Chancery Division ruling that the landlord could not reasonably object to the payment of the reverse premium. However, the landlord’s refusal was ultimately reasonable for two key reasons: (i)

the valuation evidence showed that the market value of the property without

the underlease was £7.86 million and with it was £7.32 million - a difference of over £500.000; and (ii)

a reasonable landlord is entitled to consider its position at the end of the

lease; if Telco remained in occupation at that time, it would have been entitled to apply for a new tenancy. Therefore, the landlord could take into account Telco’s weak covenant strength, notwithstanding the ongoing liability of the head tenant until the end of the contractual term of the head lease.

2

The underlease provisions setting the levels of underlease rent on grant and

subsequent rent review are also important from a superior landlord’s perspective. At the minimum, the rent should at no time during the term be anything less than the open market rent; the reviews should ideally coincide with the review dates in the head lease; and the rent payment intervals in both leases should be the same (e.g. quarterly in advance).

2.1 In Clinton Cards (Essex) Ltd v Royal and Sun Alliance Company Ltd [2002] 37 EG 154, the lease absolutely prevented underletting if the rent “was less than the rack-rental value”; though if the proposed rent was less than the “Basic Rent”, (being the £95,000 initial rent payable on grant of the head lease), the underlease would require the landlord’s agreement, such agreement not to be unreasonably withheld if the proposed rent was the full rack-rental value of the premises.

The proposed underlease rent was £75,000. The landlord’s refusal to give consent for an underletting at this amount was unreasonable because £75,000 was the best rack-rent of the premises reasonably available on the open market.

3

If the headlease conditions regarding underlease rent and rent review are

too restrictive, they might drive the parties to a proposed underlease into secret collateral contracts, or might make subletting practically impossible in a difficult market without an inducement, such as a reverse premium or rent-free period.

69

3.1

Homebase Ltd v Allied Dunbar Assurance plc [2002] EWCA Civ 666

The lessee (Homebase) wanted to underlet a retail warehouse. The lease contained a tenant covenant not to underlet without landlord’s prior consent.

The said covenant was accompanied by a number of provisos, including that: (i)

any underlease had to be granted at no less than the

full market rent reasonably obtainable,

(ii)

any such underlease had to contain underlessee covenants in the same form

(mutatis mutandis) as the tenant covenants in the lease, and

(iii)

the underlease rent was to be reviewed upwards only (as in the head lease)

to full market rent on the same rent review dates as in the head lease.

Due to low demand for warehouses of this type, Lairdale, the proposed undertenant, was willing to pay to Homebase for a sub-tenancy of the premises at a rent substantially below the level of the headlease rent. Furthermore, Lairdale would not have accepted the full repairing obligations appearing in the head lease.

Homebase and Lairdale produced a draft underlease which complied with the provisos.

Accompanying this was a draft collateral deed which was expressed to be personal to Homebase and the proposed undertenant. The deed would have limited the extent to which the obligations in the underlease would be enforced by Homebase against Lairdale. Accordingly, it provided that Homebase would indemnify Lairdale: (a)

for the difference between the agreed lower rent and the higher rent

expressed to be payable in the underlease; and

(b)

against the cost of complying with repairing obligations under the underlease

in so far as those obligations would require Lairdale to put the premises in any better condition than that evidenced by a schedule of condition.

Copies of both documents were sent to the landlord’s Solicitors. Consent was refused on grounds that the proposed underletting would breach all three of the above provisos.

70

The Court of Appeal held that the freeholder was entitled to withhold consent to the proposed underletting on the ground that the undertakings in relation to the rent and the repairing obligations, as set out in the collateral deed, were incompatible with provisos (ii) and (iii). It made no difference to the Court’s ruling that the undertakings were only enforceable as between the original parties.

4

The head lease in Crestfort Ltd v Tesco Stores Ltd [2005] 37 EG 148 required

any permitted underlease to be on the same terms as the head lease except as to rent and term. The head lessee was also subject to a full repairing covenant and the head lease reserved to the freeholder a right of entry to execute repairs.

The head tenant underlet without the landlord’s consent and was also in breach of its own repairing obligations. Furthermore, the underlessee was not required to put the property in a better state of repair than it was at the date of the underlease as evidenced by schedule of condition attached thereto; and the right of entry in the underlease was reserved to the head tenant but not the freeholder.

Taking into account all of these circumstances, the freeholder had reasonably withheld its consent to the underletting.

5 In Kened Ltd v Connie Investments Ltd [1997] 1 EGLR 21, the Court of Appeal held that a landlord, in considering whether to give his consent to an assignment, is not entitled to request details of the premium or any reverse premium payable for the assignment. By contrast, the Court held that a landlord is entitled to know the terms of a proposed underlease.

“There have been cases in which the court has held that a landlord who is asked for consent to a subletting is entitled to know the terms of a proposed underlease. That is obviously correct. A landlord must be entitled to know what it is to which his consent is being sought. A landlord who is asked to consent to the grant of an underlease is concerned with the terms of the underlease. But a landlord who is asked for consent to an assignment is not concerned with the terms of the assignment but with the identity and character of the assignee”: per Millet LJ delivering the judgment of the Court.

71

6 In Straudley Investments Ltd v Mount Eden Land Ltd, (1996) P & CR 306, CA,

Phillips LJ identified the following propositions of law from case law:

(a)

It will usually be reasonable to refuse consent or impose a condition, where

it is necessary to prevent the landlord’s rights under the headlease from being prejudiced by the proposed assignment or sublease. (b)

It is not normally reasonable to impose a condition designed to increase or

enhance the rights the landlord enjoys under the headlease.

In this case, the head tenant required the undertenant to pay to it a rent deposit of £13,500. The freeholder sought to impose a condition of its licence to underlet that the rent deposit be held in an account in the joint names of itself and the head tenant, so that 50% of this sum would be ‘held by’ the freeholder.

The Court of Appeal found that the condition had been unreasonably imposed because if circumstances arose where the head tenant would otherwise become beneficially entitled to the deposit, then the freeholder would have retained a security interest in it. It was an illegitimate attempt by the freeholder to improve its position under the terms of the head lease by seeking to make the deposit available to itself by way of security for the performance of the tenant’s covenants in the headlease.

72

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August 2016 Background Note on the Demised Premises, Structure, Exterior, etc.

1.

General Principles

1.1

Problems may arise because the demised premises have not been clearly

identified by the commercial lease in question. This is a key issue because the tenant is likely to be obliged to repair the demised premises. Furthermore on a lease of part of a building, a clear description will both let the tenant know the extent of its own obligation and go some way to avoiding potential disputes over the parts of the building that fall within the landlord’s repair covenant.

1.2

If a particular part of the building is let to tenant, then the tenant would

normally have to carry out the required repairs thereto at its own expense; if that part falls outside the demise, the service charge provisions will typically oblige the landlord to carry out the necessary works thereto and enable full recovery of the costs from the tenants via the service charge.

1.3

The boundaries of the demised premises should be clearly indicated and this

is particularly important where the demise is part of a building. The demise to the tenant might include the internal plaster and plasterboard, tiling and other surfaces and finishes of all walls, floors and ceilings; all floor coverings, floor boards or floor screeds; one half severed vertically of any non-loadbearing dividing the demised premises from any other parts of the building; the entirety of non-loadbearing walls situate wholly within the premises; any service media situated within the premises and exclusively serving the premises; and landlord’s fixtures from time to time within the premises (excluding service media within the premises which do not exclusively serve the premises). Equally, it might exclude the ‘structural parts ‘including (without limitation) any parts of the main structure, all loadbearing and exterior walls, foundations and roofs of the building but excluding the premises and any other part of the building let or intended to be let or constructed or adapted for letting; any service media within the premises which do not exclusively serve the premises; the

74

joists supporting beams or cross members on which the floors and ceilings rest; any area of the building above the surface of the ceiling or below the level of the floor and all the tenant’s trade fixtures and fittings.

Equally, all doors, windows and door and window frames might be included or excluded within the demise.

2.

The Structure and Exterior

2.1

One potential problem arises on a lease of part of a building where here is

a generic definition of the structure or structural parts of the building. Care should be taken to ensure that the structural parts of the building are excluded from the demise. It should also be borne in mind that the construction of the term ‘structure’ depends primarily on the wording of the lease, and not what a structural engineer might objectively regard as structural (Irvine v Moran [1991] 1 EGLR 261). For example, in Hallissey v Petmoor Developments Ltd [2000] EGCS 124, the court held that a roof terrace was included within the definition of the ‘main structure’, whereas in Petersson v Pitt Place (Epsom) Ltd (2001) EWCA Civ 86, the roof terrace was excluded from the term ‘main structure’.

2.2

Furthermore, the term ‘main structure’ is a more restrictive concept than

‘structure’ in that the word ‘main is intended to qualify the word ‘structure’ (see Ibrahim v Dovecorn Reversions Ltd [2001] 2 EGLR 46 and Marlborough Park Services Ltd v Rowe [2006] EWCA Civ 436). The Court in Hallissey v Petmoor Developments Ltd [2000] EGCS 124 expressed the view that ‘main structure’ includes “not only the bare concrete shell but also whatever additional surfaces were created by the lessor in order to make that shell a complete and effective structure for the purpose of maintaining the physical integrity of the flats within the development” (per Patten J).

2.3

In Rapid Results College Ltd v Angell [1986] 1 EGLR 53, CA, the landlord sought

to recover from the tenants via the service charge the cost of ‘maintenance of the exterior’. The question asked by the Court was ‘exterior of what?’ Was it the exterior of the whole building or the exterior of the demised premises, which consisted of first and second floor offices? On the construction of the lease, the latter applied and, unfortunately for the landlord, the roof could not be regarded as part of the exterior of the second floor offices.

2.4

The more individual features of the building that are expressly listed in the

lease, the less potential there is for a dispute to arise over the identification of the

75

demised premises and the parties’ respective repair obligations. See Ibrahim v Dovecorn Reversions Ltd (supra), in addition to the other cases on roof terraces (Hallissey and Petersson (supra). In the Marlborough Park Services case, the lease omitted to mention the joists but the Court of Appeal nevertheless, on the construction of the lease, held that the joists were included within the definition of the ‘main structure’.

3.

The Model Commercial Lease: Key Definitions

This section considers key aspect of the Model Commercial Lease (MCL), which is entitled ‘Lease of part of an office building (MCL-Office-02)’, published June 2015. This model lease is part of a suite of documents comprising various template commercial leases and associated documents that was originally commissioned by the British Property Federation and which has been shaped by a working group consisting of some well-known law firms, clients and trade organisations.

Important note: The remainder of this article considers relevant definitions within MCL-Office-02. However, the extracted definitions are incomplete, so when advising clients full reference should be made to original text of the Model Lease.

3.1

“Building Management Systems” are defined as -

“all or any of the following used within or serving the Building that do not exclusively serve any Lettable Unit: (a)

lighting systems;

(b)

security, CCTV and alarm systems;

...; (g)

air-conditioning, heating and climate control systems;

…; (i)

fire detection, alarm and sprinkler systems;

and all control systems, plant, machinery, equipment, Supplies and Conducting Media used in connection with them;” Comment •

The Building Management Systems (if any) within the Premises are also

expressly excluded from the demise of the “Premises” (as defined in the MCL).

76

3.2

“Common Parts” are defined as -

“subject to paragraph 4 of Part 2 of Schedule 1, any part of, or anything in, the Building that does not form part of a Lettable Unit and that is used or available for use by: (a)

the Tenant in common with others;

(b)

the Landlord in connection with the provision of the Services; or

(c)

visitors to the Building;”

Comment •

The lease does not define ‘visitors to the Building’. It contains one other

reference to ‘visitors to the Building’; and two references to ‘authorised visitors to the Building’.

•

The said paragraph 4 reserves certain rights to the landlord over the common

parts, such as right of entry in any emergency and the right in certain circumstances to change the extent of any Common Parts.

3.3

Clause 5.8 is headed ‘Designation of Common Parts and use of rights’,

which distinguishes between –

•

The Common Parts designated by the Landlord for the Tenant’s use;

•

If there is no such designation, all Common Parts required for the reasonable

and proper enjoyment of the Premises for their intended use, (but the Tenant would not have the right to use any Common Parts used solely by the Landlord for the provision of the Services); •

Any service risers allocated by the Landlord for the Tenant’s use; and

•

The landlord’s allocation of the roof space over which the Tenant

is granted rights for specified purposes.

3.4

Schedule 3 Part 3 is headed ‘Services and Service Charge’

and includes the following provisions -

77

•

Repairing, decorating, maintaining and cleaning the foundations, roof,

structure and exterior of the Building and all Common Parts

and Conducting Media;

•

The costs of cleaning the surfaces of any atrium facing

onto the Common Parts;

•

Lighting, heating, providing air-conditioning to and ventilating

the Common Parts; and

•

Providing, cleaning and renewing carpeting in the Common Parts.

3.5

The “Premises” are defined so as to include (inter alia) -

(i)

windows and window frames but excluding the external decorative finishes

of any windows on the external walls of the Building or dividing the Premises from the Common Parts; (ii)

doors and door frames but excluding the external decorative finishes and

frames of any that divide the Premises from the Common Parts; and

(iii)

any alterations to the Premises to which the Landlord has consented or for

which, under clause 4.11, the Landlord’s consent is not required.

3.5.1 The definition of ‘Premises’ excludes a number of matters, such as (i)

the glass walls, windows or partitions separating the Premises from

the atrium of the Building;

(ii)

the airspace between the lower surface of raised floor systems and

the floor slab immediately below the Premises; and

(iii)

the airspace between the upper surface of the suspended ceiling systems

and the floor slab immediately above the Premises.

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79

September 2016 Tenancy at Will or Periodic Tenancy?

This article considers whether a tenant who is allowed to enter into or to retain possession of premises holds as a periodic tenant or a tenant at will.

(1)

Relevant Case Law

In London Baggage Co (Charing Cross) v Railtrack Plc [2000] L&TR 439, Pumfrey J set out the following relevant legal considerations: “(i)

There is no rule that in a case in which the tenant holds over after the previous

tenancy has been determined, tender and acceptance of rent will raise the presumption of a periodic tenancy. (ii)

In deciding whether a periodic tenancy has come into existence, the court

will look at the intention of the parties and all the surrounding circumstances (see Javad v Aqil... (iii)

… The principles in relation to necessary intention to form a contract are, in

my judgment, the same in the case of a lease as they are in the case of any other contractual relationship … (iv)

Where a contractual relationship is said to arise from conduct, the onus is on

the party relying on the contract. This is clear from Javad v Aqil ... (v)

The holding over during the negotiation for a new tenancy is a classic

instance of a case in which the only relationship which it is necessary to imply is a tenancy at will: See Javad v Aqil.”

In Javad v Aqil [1991] 1 WLR 1007, Nicholls LJ (with whom Peter Gibson and Mustill LLJ agreed) analysed the law concerning the position where a tenant is in possession and making payments of rent.

Lord Nicholl indicated that the “simple situation”, whereby the law would imply that the parties intended that there should be a periodic tenancy merely because one

80

party permitted the other to go into possession of his land on payment of a periodic rent, “is unlikely to arise often”.

Nicholls LJ then added – “... Where parties are negotiating the terms of a proposed lease, and the prospective tenant is let into possession or permitted to remain in possession in advance of, and in anticipation of, terms being agreed, the fact that the parties have not yet agreed terms will be a factor to be taken into account in ascertaining their intention. It will often be a weighty factor. Frequently in such cases a sum called ‘rent’ is paid at once in accordance with the terms of the proposed lease: for example, quarterly in advance. But, depending on all the circumstances, parties are not to be supposed thereby to have agreed that the prospective tenant shall be a quarterly tenant. They cannot sensibly be taken to have agreed that he shall have a periodic tenancy, with all the consequences flowing from that, at a time when they are still not agreed about the terms on which the prospective tenant shall have possession under the proposed lease, and when he has been permitted to go into possession or remain in possession merely as an interim measure in the expectation that all will be regulated and regularised in due course when terms are agreed and a formal lease granted.”

Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd [2014] EWCA Civ 303 The main issue in these proceedings was whether an implied annual tenancy had arisen by virtue of the tenant holding over after expiry of the fixed term.

Patten LJ, with whom Clarke and Longmore LLJ agreed, said “23.

When a party holds over after the end of the term of a lease he does so,

without more, as a tenant on sufferance until his possession is consented to by the landlord. With such consent he becomes at the very least a tenant at will and his continued payment of the rent is not inconsistent with his remaining a tenant at will even though the rent reserved by the former lease was an annual rent. The payment of rent gives rise to no presumption of a periodic tenancy. Rather, the parties’ contractual intentions fall to be determined by looking objectively at all relevant circumstances. The most obvious and most significant circumstance in the present case, as in Javad v Aqil, was the fact that the parties were in negotiation for the grant of a new formal lease. In these circumstances, as in any other subject to contract negotiations, the obvious and almost overwhelming inference will be that

81

the parties did not intend to enter into any intermediate contractual arrangement inconsistent with remaining parties to ongoing negotiations. In the landlord and tenant context that will in most cases lead to the conclusion that the occupier remained a tenant at will pending the execution of the new lease. The inference is likely to be even stronger when any periodic tenancy would carry with it statutory protection under the 1954 Act which could be terminated by the tenant agreeing to surrender or terminating the tenancy by notice to quit: … This point is given additional force in the present case by the fact that the intended new lease, like the old lease, was to be contracted out.

“24.

… Mr Rosenthal for EHL accepted that one could have a case in which the

negotiations either broke down or came to an end but the tenant was allowed to remain in occupation paying the rent and other outgoings. In time the correct inference in such a case might be that the parties had chosen to regulate their legal relationship by something other than the grant of a new long lease and a periodic tenancy might then be implied...”

(2)

Relevant Statutes

Landlord and Tenant Act 1730, section 1 In summary, this section provides that in case any tenant for any term of years (i.e. a fixed term) shall “wilfully hold over … after the determination of such term … and after demand made and notice in writing given for delivering the possession thereof by his or their landlords or lessors …, then and in such case, such person or persons so holding over shall, for and during the time he, she, and they shall so hold over or keep the person or persons entitled out of possession…, pay to the person or persons so kept out of possession ...at the rate of double the yearly value of the lands …so detained, for so long time as the same are detained, to be recovered in any” court proceedings.

Section 18 Distress for Rent Act 1737 In essence, section 18 provides that where a tenant has given a notice to quit premises and yet refuses to deliver up possession at the expiration of the notice, the tenant will become liable to pay double the rent during all the time such tenant shall continue in possession.

(In practice, this Act is rarely relevant, given Nicholls LJ’s observation above concerning the infrequency with which periodic tenancies arise by default.)

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(3)

Case Law on these two Statutes

1)

The 1730 and 1737 Acts are to be treated as two parts of a single code:

Ballard (Kent) Ltd v Oliver Ashworth (Holdings) Ltd, [1999] 2 All ER 791, [1999] 3 WLR 57, CA. Accordingly, in Cutting v Derby (1776) 2 WBl 1075, Blackstone J said that “The statutes of [1730] and [1737] … ought to have the same construction …”

2)

The right to double rent conferred by s. 18 of the 1737 Act only arises where

(a) the tenant holding over after his own notice to quit is in fact a trespasser (thus, the notice must be valid), and (b) the landlord treats him as such: Ballard (Kent) Ltd v Oliver Ashworth (Holdings) Ltd, CA. The section does not require that the landlord has a new tenant ready and waiting: Ballard (Kent) Ltd v Oliver Ashworth (Holdings) Ltd, CA. Therefore, the right to double rent conferred by s. 1 of the 1730 Act would only arise where (a) the tenant holding over after determination of the term is in fact a trespasser, and (b) the landlord treats him as such.

3)

The double rent is to be claimed and paid while the tenant occupies either

after his own notice to quit (in the case of s 18) or after the determination of the term (in the case of s 1 LTA 1730): Ballard (Kent) Ltd v Oliver Ashworth (Holdings) Ltd, CA. 4)

The right to double rent under either Act does not arise where a tenant

holds over in circumstances where the landlord himself asserts that the tenancy is continuing or, by accepting single rent, has acquiesced in his erstwhile tenant’s remaining on the premises: Ballard (Kent) Ltd v Oliver Ashworth (Holdings) Ltd, CA. 5)

An invalid tenant’s notice to quit would not have effect to determine a

tenancy, so s 18 would not apply if such notice were given: Johnstone v Hudlestone (1825) 4 B & C 922.

6)

Under the 1730 Act, a tenant “wilfully” holds over when he stays on while

knowing he has no right to do so. If a tenant stays on thinking he has a right to do so, his holding over is not wilful: French v Elliott [1959] 3 All ER 866, QBD.

83

October 2016 Rent Review Provisions that are Drafted by Lawyers but Applied by Surveyors

Important: This note concerns rent review provisions in a commercial lease that set out the terms of a hypothetical lease (with assumptions and disregards) that are to be applied when determining the level of reviewed rent. The accompanying questions and answers are also concerned with such provisions.

1.

The Hypothetical Lease

1.1

Where a rent review is to be based on the terms of a hypothetical lease, one

important issue for the landlord’s conveyancer to consider is the extent to which the provisions of that hypothetical lease should differ from the terms of the actual lease.

This is especially important where any of the key clauses of the actual lease might, if taken into account upon review, materially devalue the level of the reviewed rent.

1.2

For instance, an onerous tenant’s covenant can have a downward effect on

the reviewed rent. See Norwich Union Life Insurance Society v British Railways Board [1987] 2 EGLR 137, Ch D, where a tenant’s renewal covenant reduced the level of revised rent by 27.5% compared with the level which would have been payable had the tenant been subject to a mere repair obligation.

1.3

Equally, where the actual lease has the benefit of the protection of Part II

Landlord and Tenant Act 1954, the landlord should avoid including an assumption that the hypothetical lease is contracted out from sections 24 to 28 of this Act. [If such an assumption were to be made, a surveyor might determine a reduced rent on the basis that a notional willing tenant would be prepared to bid a lower rent for a contracted-out lease than for a tenancy with security of tenure.]

Moreover, if the hypothetical lease is not contracted-out of the 1954 Act, the valuer may take into account the possibility of the actual tenant holding over at the end of the contractual term and obtaining a renewal of the tenancy under Part II of the 1954 Act. For example, in Pivot Properties Ltd v. Secretary of State for the Environment

84

[1980] 2 EGLR 126, the Court of Appeal held that the surveyor was entitled to take into account the possibility (hope value) of continuation or renewal of the tenancy, which resulted in an arbitrator’s rent-review award of £2,925,000. Had the arbitrator in this case not been able to take into account these possibilities, the award would have been £2,100,000 instead.

2. User 2.1

The narrower the permitted user covenant in the lease,

the lower the rent will tend to be on review.

For example, an absolute user covenant not to use other than offices for the tenant’s business of consulting engineers in Plinth Property Investments Ltd v Mott, Hay & Anderson (1978) 249 EG 1167, CA significantly reduced the market rent as assessed by the valuer. Matters were made worse for the landlord because the valuer was not entitled to take into account the possibility that the landlord may have relaxed or waived the user restriction, which meant that the rent was reviewed to £89,200. Had the lease been drafted differently so as to entitle the valuer to take into account this possibility, the rent would have been reviewed to £130,455.

2.2

Where the lease instead contains a ‘qualified’ tenant covenant (i.e. requiring

the landlord’s prior consent to a change of use), it would seem logical that the likelihood or prospects of the landlord granting consent ought to be taken into account on review. However, it should also be borne in mind that the landlord is not obliged by any statutory provision to refrain from unreasonably withholding its consent to a change of use. In other words, the landlord would have sole discretion on whether to consent or not.

2.3

Where a user covenant is ‘fully qualified’ in that it expressly obliges the

landlord not to unreasonably withhold consent to a change of use, the valuer might entitled to consider any other notional user to which the landlord could not reasonably object.

2.3.1 This was so held in Tea Trade Properties Ltd v CIN Properties Ltd [1990] 22 EG 67, Ch D, where the lease contained a ‘fully qualified’ user covenant and the permitted user was “showrooms, warehouses and ancillary offices”. The Court held that the valuer was entitled to take into account a notional office user as an additional use to which a hypothetical tenant could put the premises. On the facts, the landlord

85

could not have reasonably refused to give its consent to a notional change of use to offices.

2.3.2 However, in The Faucet Inn Pub Co Ltd v Ottley Corporation [2006] EHHC 1170 (Ch), another case where the user covenant was ‘fully qualified’, it was held that the rent was to be reviewed on the basis that the premises were let only for the permitted user and any other user which the landlord had approved by the relevant review date.

A key factor that distinguished this case from Tea Trade was the assumption in the review provisions that the premises were let with vacant possession fit for immediate occupation and use, for the uses for the time being permitted under the lease (or for the actual use or uses if attracting a higher value) and the premises may lawfully be so used.

3.

The Hypothetical Term

3.1

The length of term of the hypothetical lease might have a significant influence

on the level of the reviewed rent.

3.2

The first possibility is that the notional term would commence at the review

date but run for the residue of the term of the actual lease.

For example, take a lease granted on 23 July 2005 for a term of nine years commencing on that date with three yearly rent reviews. On the first review date in 2008 (i.e. 23 July), a surveyor would assess the level of reviewed rent on the basis of a hypothetical term of six years (which would also equate to the residue of the term of the actual lease).

3.3

A second option arises where the term of the actual lease commences on a

date prior to the date of grant. Thus, if an underlease was granted on 27 November 2005 for a term of six years commencing on 11 December 2004, with a rent review on 27 November 2008, the hypothetical term might be six years commencing on either the date of grant in 2005 or the term commencement date in 2004.

3.4

A third option is for the hypothetical term to be of the same length as the term

of the actual lease, save that it would commence on the relevant review date (as opposed to the date of grant or term commencement date of the actual lease).

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Thus, if a lease were granted on 17 July 2006 for a term of nine years with three-yearly reviews, the hypothetical term on the 2009 and 2012 reviews would be nine years commencing on the review dates respectively (i.e. 17 July of 2009 and 2012). So, the hypothetical term would in either case extend beyond the term of the actual lease.

3.5

Fourth, the parties’ lawyers may agree a notional term of, say, 10 or 15 years,

or perhaps half of the original lease term.

3.6

Fifth, where the lease has an unexpired residue of such length that would

in practice attract no willing occupational tenants, the notional term may be expressed to be a term that a landlord and tenant might reasonably be expected to enter into, given all the circumstances prevailing at the review date. See Brown v Gloucester City Council [1998] 16 EG 137, CA and Westside Nominees Ltd v Bolton Metropolitan Borough Council (2000) 81 P & CR 130, QBD. However, a disadvantage with this choice is that the length of the hypothetical term would be uncertain from the outset.

4.

Tenant’s Improvements

4.1

If the tenant has during the term carried out improvements to the premises at

its own expense and there is no express direction to disregard those improvements, then the landlord is entitled to have those improvements taken into account on review: Ponsford v HMS Aerosols Ltd [1979] AC 63, HL. So, such improvements would probably enhance the level of the reviewed rent and the value of the landlord’s reversion, despite the fact that the works were carried out and paid for by the tenants.

4.2

A distinction should be drawn between the tenant’s rights to carry out

improvements and the actual improvements made by the tenant. It is not in the landlord’s interest to disregard the said tenant’s right: see the observations on Iceland Frozen Foods PLC v Starlight Investments Ltd, [1992] 07 EG 117, CA in the case of Lewisham Investment Partnership Ltd v Morgan [1997] 2 EGLR 150, ChD. 4.2.1 In the Iceland Foods case, the ground floor of the demised premises was actually divided into two units that were occupied. The review provisions of the lease expressly disregarded tenant’s improvements carried out with landlord’s consent except pursuant to an obligation under the lease. The Court of Appeal held that the

87

tenant’s right to carry out improvements could not be taken into account on review.

Therefore, the valuer could not consider the effect on market rent of the potentiality to sub-divide the ground floor into seven units.

4.2.2 The Iceland case was criticised in the Lewisham Investment case on the ground that the Court of Appeal in the former case had confused the right to improve which ought to be rentalised and the tenant’s improvements which should not be rentalised. In other words, the rent review provisions in the Iceland lease merely required actual tenant improvements to be disregarded.

4.3

Level Properties Ltd v Balls Brothers Ltd [2007] EWHC 744 (Ch)

In the actual lease, the tenant had taken a single letting of the whole premises, but those premises were capable of being let as two separate units.

The Court held that, on the construction of the rent review provisions, the open market rent was to be determined on the basis of a single letting; or, if it produced a higher figure, on the basis of two notional lettings, one of the ground floor and one of the basement, the ‘open market yearly rent’ being the aggregate of the rents payable under those two lettings.

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89

November 2016 Rent Deposits – Ensuring Security for Landlord and Clarity for Tenant

1

Amount of Deposit

1.1

The amount of a rent deposit typically equates to x months of rent, (which

tends to range from 3 to 6 months).

1.2

Where the lease contains provision for rent review, consideration should be

given to increasing the amount of the deposit in line with any increase in the rent that ensues upon review.

1.3

If there is a possibility that the landlord will charge VAT on the rent, there is the

separate issue of whether the rent deposit should be x months’ rent plus VAT. If so, it would be in the tenant’s best interests for the deposit only to be increased by the amount of VAT chargeable, in the event that the landlord opts to tax VAT.

2

Ownership of Deposits

If the deposit were to belong absolutely to the landlord, then the tenant would be vulnerable to the risk of the landlord being made bankrupt or entering into administration or into liquidation. To prevent this, the tenant would ideally have a charge over the deposit. However, sometimes the parties agree that the deposit is to be owned by the tenant but held by the landlord on trust for the tenant.

Equally, the landlord would be at similar risk if the deposit belongs absolutely to the tenant. This is why rent deposit deeds sometimes provide that the tenant has to charge the deposit to the landlord.

Rent deposits are often held with the tenant as owner of the deposit less any lawful withdrawals made by the landlord.

90

2.1

If the landlord holds the deposit on trust for the tenant, the rent deposit deed

should ideally require the landlord to pay the deposit into a separate bank account.

2.2

If the tenant holds the deposit but charges it to the landlord, the rent deposit

deed should require the deposit to be held in an account opened by the landlord.

3 Withdrawals 3.1

The landlord’s entitlement to make a withdrawal from the deposit account is

often stated to be exercisable upon a breach by the tenant of its covenants in the lease.

3.2

Payments other than rent may be classified as additional rent. Whether or

not they are, the rent deposit can make clear what payments it covers, e.g., nonpayment of rent, service charges, insurance premiums, VAT, and legal costs and expenses incurred by the landlord in connection with such breach, or disclaimer or forfeiture.

3.3

The agreement should also oblige the tenant to ‘top-up’ the deposit in

the event of any permitted withdrawal from the deposit account. Consideration should be given as whether the obligation to ‘top-up’ is dependent on the landlord giving the tenant prior notice of the amount of and reason for the withdrawal. If the landlord resists this, then in the event of the landlord making a withdrawal, the tenant will become aware of this when the landlord issues a demand to make the top-up payment.

3.4

The landlord’s conveyancer might include provision for interest, perhaps at 4%

above a particular bank’s base rate, in the event that the tenant is late in ‘toppingup’.

3.5

Finally, the landlord’s conveyancers should ensure that their client’s powers of

re-entry and forfeiture in the lease are expressly extended to breaches by the tenant of its obligations under the deposit agreement. For example, if the tenant fails to top-up a deposit, the agreement thus drafted would entitle the landlord to forfeit the lease.

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4

Determination of Rent Deposit Agreement

4.1

The agreement should also make provision for determination of the deposit

account arrangement. Typically, the deposit account is to be closed on, or within (say) 10 working days of, the earlier of the happening of the following events: (i)

determination of the lease, whether by effuxion of time or otherwise, (or a

stated time following such determination), possibly with a stipulation that the tenant yields up the premises in accordance with the relevant tenant covenants; (ii)

the landlord receiving notice of an assignment of the lease which was

completed in accordance with the tenant covenants of the lease; perhaps with a proviso that the assignee provides the landlord with a similar rent deposit and signed rent deposit agreement; and (iii)

if agreeable with the landlord, where the tenant’s covenant strength

improves; namely, where the tenant’s net profits for the last 3 years equate to three times the annual rent, its net assets equate to 10 times the annual rent, or it has complied with its covenants under the lease for 3 years.

4.2

Where the deposit account is so closed, the landlord will usually be expressly

entitled to apply the closing balance in satisfaction of any claims it has under the rent deposit agreement, before remitting the balance to the tenant.

5

Registration of a Rent Deposit Taken Before 6 April 2013

5.1

Prior to 6 April 2013, a charge over a rent deposit was registrable at

Companies House whenever (i) the tenant was a company and (ii) the landlord was an individual or if more than one was operating in an unincorporated partnership. If such a charge was not so registered, then the charge was void as a security against a liquidator, administrator or creditor of the company: s 874(1) Companies Act 2006.

5.2

However, the Financial Collateral Arrangements (No.2) Regulations 2003

exempted rent deposits from registration at Companies House if the rent deposit was a “security financial collateral arrangement”. Such an arrangement broadly consisted of an agreement or arrangement, evidenced in writing, where: i)

both the tenant giving the deposit and the landlord taking the

deposit were limited companies,

ii)

the rent deposit was taken as security for the tenant’s financial obligations;

and 92

iii)

the deposit was held under the possession or control of the landlord,

or a person acting on its behalf.

6.

Changes Taking Effect on 6 April 2013

Section 859A(6)(a) Companies Act 2006 (inserted by SI 2013/600, reg 2, Sch 1) provides that where a company creates “a charge in favour of a landlord on a cash deposit given as a security in connection with the lease of land”, the deposit does not have to be registered at Companies House. This provision came into effect on 6 April 2013.

7

Landlord or Personal Covenants?

7.1

The Landlord and Tenant (Covenants) Act 1995 makes specific provision

regarding ‘new leases’, which are broadly leases granted on or after 1 January 1996.

7.2

In the case of ‘new leases’ –

(i)

Landlord covenants are binding on the landlord for the time being:

section 3 of the 1995 Act; and

(ii)

Landlord covenants may also be contained in a “’collateral agreement’,

[which] in relation to a tenancy, means any agreement collateral to the tenancy, whether made before or after its creation”: s 28(1) of the 1995 Act. 7.3.

Thus, any landlord covenants in a rent deposit deed are landlord covenants

for the purpose of the 1995 Act, as such a deed is a collateral agreement. So, if the landlord were disposing of its reversion, those covenants would bind its successor in title. The outgoing landlord would then need to disclose the deed’s existence to the incoming landlord.

7.4

Equally, there is the issue of whether the rent deposit deed should contain

provision automatically releasing the landlord from its obligations in relation to the deposit when the landlord parts with its reversionary interest. If it does not, then the landlord could, in connection with the transfer of its said interest, apply to the tenant for a release from those covenants under the procedure set out under section 8 of the 1995 Act (which again applies only to new leases).

93

8

Examples of Template Rent Deposit Deeds

8.1

In 2009, the City of London Law Society Land Law Committee issued a form of

rent deposit deed. One of the stated aims of the deed is “to cater for the majority of issues arising in a rent deposit situation, but without it becoming a complex banking document.”

8.1.1 The provisions of the deed cover a number of key issues, such as: i)

The right for the landlord to make withdrawals on notice to the tenant; and

the tenant’s obligation to replenish any deficit;

ii)

The tenant retains ownership of the deposit, subject to the terms of the deed;

iii)

The landlord can require the tenant to ‘top up’ the deposit if

the rent is increased; and

iv)

The return of any deposit balance to a tenant who is assigning its lease

- see also optional cl. 7.1.3.

8.2

The Model Commercial Lease (MCL) is part of a suite of documents

comprising various template commercial leases and associated documents that was originally commissioned by the British Property Federation and which has been shaped by a working group consisting of some well-known law firms, clients and trade organisations.

8.2.1 The template Rent Deposit Deed, which is designed to accompany the Model Commercial Lease, contains a number of definitions, which include – •

“Covenants”: the tenant’s obligations and conditions contained in the Lease;

•

“Deposit Balance”: the balance from time to time standing to

the credit of the Deposit Account; and

•

“Event of Default”: which includes the disclaimer of the Lease by the Crown.

8.2.2 Full reference should be made to the terms of the Rent Deposit Deed,

but in summary -

94

•

Clause 3 deals with the opening and maintaining of the deposit account.

•

By virtue of clause 4.3, the Tenant charges the Deposit Balance by way of first

fixed charge to the Landlord.

•

Clause 5 deals with, e.g., permitted withdrawals from the

Deposit Account, topping up the Minimum Balance and interest earned

on the Deposit Account.

•

The payment of interest to the tenant is provided for by clause 6.

•

Clause 7 provides for repayment to the tenant of the deposit balance and

any interest, but after making permitted deductions.

•

Clause 8.1 requires the landlord to take specified steps in the event of a

disposal of the reversion in order to ensure that its successor becomes bound by the rent deposit deed.

•

The deed is expressly supplemental to the lease and breaches by the tenant

of the terms of the deed are treated as breaches of the terms of the lease: clause 9.1.

95

December 2016 Get Nominees Ltd: Option to Rescind

A.

Background Note

(1) In Alchemy Estates Limited v Astor & Astor [2008] EWHC 2675 (Ch), the right to rescind the agreement for sale arose out of clause 8 of the Standard Conditions of Sale.

Standard Condition 8.3.3 provides a right to rescind a contract that is conditional on obtaining a consent to let, assign or sub-let required to complete the contract in the following terms “Unless he is in breach of his obligations under condition 8.3.2 either party may rescind the contract by notice to the other party if three working days before the completion date (or before a later date on which the parties have agreed to complete the contract): a)

the consent has not been given or

b)

the consent has been given subject to a condition to which

a party reasonably objects.

In that case, neither party be treated as in breach of contract and condition 7.2 applies.�

(2) In Get Nominees Ltd v Trinity Welsh Homes Ltd (see below), the right of

termination arose out of a special condition of the agreement for sale.

(3)

Time is of the essence of the exercise of an option for the renewal of a lease,

or for the purchase or re-purchase of a property; which means that failure to exercise such an option, by way of giving the required notice within the option period, would cause the option to lapse (Di Luca v Juraise (Springs) Ltd [1998] 18 EG 131, CA).

96

Equally, if the option stipulates that it is to be completed on or by a fixed day, the option would lapse if completion does not take place by that date (Lord Ranelagh v Melton [1864] 2 Dr & Sm 278, cited in Di Luca).

(4)

By entering into an option agreement, the grantor has for the whole of the

option period precluded himself from disposing of his estate in the option land to anyone other than the grantee (United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, HL).

(5)

Registration of the option as an estate contract is advisable in order to protect

the grantee’s priority vis-à-vis any third party to whom the grantor might make a disposition of the option land. Even in the absence of registration, the grantor would remain liable in damages for making such disposition in breach of the option agreement. However, grantees should beware any provision the effect of which is that failure to register the option within x days following the grant would render the option void.

B.

Get Nominees Ltd v Trinity Welsh Homes Ltd [2014] EWHC 4737 (Ch)

This action arose out of an agreement dated 22 June 2010 for the sale of a freehold property for a sum of £613,500, which was conditional on a satisfactory planning permission (as defined therein) being obtained.

The agreement provided for the right to rescind if an “event of default” occurred, which was defined as there being no final, unappealed grant of planning permission issued by 21 June 2013 (referred to as the “termination date”).

By 21 June 2013, an event of default had occurred.

The Key Completion & Rescission Contractual Provisions Clause 2.1 of the schedule to the agreement provided as follows “If an event of default shall occur either the seller or the buyer shall have the right to rescind this agreement by notice in writing given within 14 (fourteen) days of the event of default to the other party (as the case may be) whereupon this agreement shall immediately determine but without prejudice to the accrued rights and liabilities of any party against the other parties and the parties shall not be entitled to be paid any costs or compensation whatsoever.”

97

Clause 4.1 of the schedule further provided as follows: “Completion of the sale and purchase of the property and payment of the balance of the purchase price in the sum of £613,500 by the buyer to the seller shall take place on the completion date as defined in this schedule being the date 14 days after whichever is the earlier of the operative date and the termination date on or before 2.00 pm at the offices of the seller’s solicitors or where they may reasonably direct.”

The special conditions of the agreement disapplied condition 8.1.1 of the Standard Commercial Property Conditions (2nd Ed), which expressly provides that time is not of the essence of the contract unless a notice to complete is served. Despite this disapplication, there was no suggestion in this case that time was of the essence of the completion date.

The purported rescission On 10 July 2013 the claimant’s solicitors wrote to the defendant’s solicitors contending that “As the termination date defined in the contract was 21 June 2013, and as neither party has rescinded the contract, completion should now take place immediately …”

In response sent the next day, the defendant’s solicitors purported to rescind the agreement, contending that the right to rescind survived beyond “the purported completion date” of 21 June 2013 on the basis that the contract had not made time of the essence to rescind the agreement.

On 31 July, the claimant’s solicitors wrote in terms that they did not accept the notice to rescind the contract.

The Central Question His Honour Judge Purle QC held as follows – (i)

The question in this case was whether time was of the essence under clause

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2.1. (ii)

This question was dependent on whether a particular clause could be

described as unilateral or mutual.

(iii)

Clause 2.1 had ”more of the flavour of an option or break clause, where time

is of the essence” for the following reasons -

•

Under the clause, either seller or buyer might have exercised the right to

rescind timeously, of its own initiative, without any cooperation from the other.

•

Had the person seeking to exercise the right to rescind been the only party

upon whom that right was conferred, the analogy with a unilateral break clause would be complete, and time would clearly be of the essence.

•

The construction (and result) cannot be different just because they each had

a right to rescind, which either of them could exercise.

•

The draftsman of the agreement carefully provided for the completion date

in clause 4.1 to coincide with the date of expiry of the rescission period (though perhaps somewhat strangely at 2 p.m. rather than the close of business). That meant that rescission might take place later on the same day, in which case completion would no longer be required.

•

There were (conventionally expressed) two unilateral rights to rescind which

either party might exercise, and the position was the same as in the case of a simple option or break clause. Strict compliance was required. (iv)

Therefore, the right to rescind within 14 days had to be strictly complied with,

and therefore had to be exercised by 5 July 2013 or not at all.

Relevance of the Alchemy Estates case His Honour Judge Purle QC in Get Nominees – (i)

Found support for the above conclusions from the decision in Alchemy Estates

Limited v Astor & Astor (supra), even though that decision concerned the scope of Standard Condition 8.3.3 as opposed to a special condition of the agreement.

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(ii)

Extracted passages from Sales J’s judgment in Alchemy Estates on the scope

of the aforesaid standard condition, including the following -

“It is significant that the provision creates an option for either party to rescind at that stage, which is to say that it allows for each of them to re-assess in the light of the up-to-date information available at that point the extent of the risks which he will assume if he proceeds with the agreement, and to choose to unwind it if he then decides he does not wish to accept the obligations which the agreement will impose upon him moving forward into the future. I consider that it is clear that neither the drafters of the Standard Conditions nor the parties intended that the effect of a right to rescind arising under standard condition 8.3.3 shortly before the contractual completion date should continue indefinitely thereafter so as to afford each party the potential ability to bring the agreement to an end without any warning at all (no matter how much time, effort and expense the other may have put into working for the proper completion of the agreement after the contractual completion date has passed, and no matter how close they may be to being able to achieve completion). If the right of rescission under standard condition 8.3.3 is not exercised promptly - by which I mean by the contractual completion date … or perhaps a matter of a day or two thereafter - both parties must be taken to have decided that they wish to proceed with the original allocation of risk set out in their agreement.” …

“The contractual right of rescission under the standard condition must be exercised promptly, which means by the contractual completion date or, possibly, within a day or two thereafter.” (iii)

Emphasised that Sales J used the language of an option, which was consistent

with time being of the essence, and the general requirement of notice under the Standard Conditions pointed against extending the unilateral right to rescind indefinitely beyond the completion date.

C.

Concluding Comment

1)

Ultimately, the court’s decision that time was of the essence of clause 2.1 was

determined by its view of the proper construction of the contract.

2)

It is possible for the parties to a conditional contract to agree that time is

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not of the essence of the right to rescind the contract in the event that specified condition or conditions are not met by a certain date.

For instance, in Akzo Nobel UK Ltd v Arista Tubes Ltd [2010] EWCA Civ 28, the agreement provided that if by 31 December 1999 all landlord’s consents that were required for the grant of five underleases, either seller or purchaser could give three months’ notice to terminate the contract. The buyer validly served notice to terminate the contract on 30 October 2007, by which date the landlord’s consents had still not been issued.

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