This is a transcript of a Stubb Legal CPD training course.

What follows is the full text of the script used to produce the audio recording. This script has been read verbatim, and lasts approximately one hour. Once you have listened to the audio recording, you should be able to answer the Multiple Choice Test at the end of this page.

 

STUBB LEGAL AUDIO RECORDING SCRIPT
Subscription Area: Property
Month of Production: April 2010

This audio recording will concentrate on Commercial Leases.
Quotations from judgments of the House of Lords are the copyright of the United Kingdom Parliament and from other judgments are Crown copyright. Quotations from statutory legislation are Crown copyright.


PART ONE - 1954 ACT

1 Newham LBC v Van Staden {[2008] EWCA Civ 1414}

This case was decided by the Court of Appeal. It concerns contracting out of the Landlord and Tenant Act 1954. The Landlord and Tenant Act 1954 was introduced to address a chronic shortage of commercial premises. Tenants were vulnerable to exploitative landlords using the end of the contractual term to demand greatly increased rents for a renewal lease or to take on, without compensation, goodwill or improvements made by the tenant. The Landlord and Tenant Act 1954 allows tenants to request a new tenancy on terms derived from the original lease, and at a rent fixed by the court if the parties cannot agree. Crucially, the original Landlord and Tenant Act 1954 made no provision for "contracting out". Security of tenure applied whether or not the parties wished to be bound by it.
By 1969 the supply of commercial premises had eased. The Landlord and Tenant Act 1954 was in need of an overhaul. The Law of Property (Miscellaneous Provisions) Act 1969 introduced a limited exception from section 38 of the 1954 Act. It allowed landlords and tenants, before entering into a tenancy, to exclude security of tenure so that the tenant's right to occupy premises ended with the contractual term of the lease. The landlord serves a warning notice, and the tenant signs or swears a declaration.
There are, therefore, two types of commercial lease in the market. There are those which are protected under the the 1954 Act, and there are those which are not. Protection gives the tenant the right to remain in the property when the lease expires, provided that it is using the property for business purposes. It grants rights to have a renewal of the lease for a new fixed term of up to 15 years, and the right to have the rent under the new lease fixed by the court.
A landlord and a tenant are entitled to agree that a fixed term tenancy is not going to be protected. There is a statutory procedure to follow to make that agreement valid, but it is not an onerous one. The parties used to have to make a joint application to the court for a stamp of validity, although this was always a fairly simple paper process. In June 2004, the procedure was made shorter still. All that is necessary now is for the landlord to serve the tenant with a notice to warn him that he will not have protection under the Act, and for the tenant to execute a declaration saying he understands this.
The operation of the Landlord and Tenant Act 1954 will be familiar to landlord and tenant practitioners. The Act affords security of tenure to business tenants so that a lease of commercial premises does not come to an end on the expiry of the contractual term but continues until terminated in accordance with the provisions of the 1954 Act. The 1954 Act remains rooted in the assumption that tenants require long-term security and a succession of leases based on the original terms.
These rules create a trap for landlords and tenants who are not legally advised. Parties wishing to enter into short term or informal agreements are frequently confounded by the statutory provisions that prevent contracting-out. Contracting-out is available only where a lease creates a "term certain", and any attempt to exclude security of tenure from a periodic tenancy will fail. Licences to occupy do not give security of tenure, but even if landlords call their documents licences, the court may well decide that they are leases. Tenancies at will do not give security of tenure, but the courts are likely to seize upon any ambiguity or inconsistent provision such as a forfeiture clause, a restriction on assignment or a notice period for termination to conclude that the agreement is not a tenancy "at will", but a protected tenancy.
Where a "contracted out" lease ends and the parties are actively negotiating for a new "contracted out" lease, the tenant's continuing occupation will not create security of tenure. However, if negotiations are not active, for example because the landlord has not pressed for signature of the new lease, the court may well conclude that the tenant's continuing occupation is as periodic tenant, protected by the 1954 Act.
Contracting out is usually the best option, especially for the landlord. Lawyers concerned to ensure that the process is valid, tend to insist that the landlord's warning notice is served and the tenant's declaration made only when the final form of lease is agreed. Contrary to the government's intentions, this means that tenants are frequently required to swear a statutory declaration rather than being able to sign a simple declaration, as the gap between the landlord's warning notice and the grant of the lease is less than 14 days. To swear a statutory declaration, tenants must attend the office of an independent solicitor. Even experienced property practitioners run into difficulty with the "contracting out" process. Where there is a guarantor of the tenant's obligations, then the landlord must go through the contracting-out process with the guarantor as well as with the tenant before granting the original lease.
The decision in Newham v Van Staden {[2008] EWCA Civ 1414}, is of potentially wide-reaching effect in determining when an agreement which purports to exclude the 1954 Act will be effective.
The new section 38A now makes it possible to exclude the provisions of sections 24-28 of the 1954 Act without any court order. The agreement to exclude the 1954 Act must be preceded by the service of a notice in a prescribed form and the tenant must also make a statutory declaration in the prescribed form before entering into the tenancy.
On the face of it, the requirement of a tenancy for a term of years certain might appear unnecessary as, of course, in order to be a valid tenancy at all an agreement for lease must provide for a term which can be ascertained at the outset. However, it is suggested that the intention of including this wording was to ensure that the security of tenure of the 1954 Act cannot be excluded in relation to tenancies which are initially created as periodic tenancies. Thus in Nicholls v Kinsey {[1994] 1 EGLR 131}, it was held that a term expressed to be for 12 months and thereafter from year to year was not a term of years certain. After some judicial disagreement, it appears now to be settled that the fact a lease includes a break clause does not prevent it from being a lease for a term of years certain within the meaning of these sections.
The facts of the Van Staden case were straightforward. Newham London Borough Council granted the appellant a lease of commercial premises on 9 January 2004. The term of the lease was from 1 January 2003 to 28 September 2004 and prior to the grant of the lease, which was made before the amendments to the 1954 Act came into force, the parties applied for and obtained an order from the county court excluding the provisions of the 1954 Act. Clause 1 of the lease which set out the term granted, reads as follows.
"from and including 1 January 2003 to 28 September 2004 (hereinafter called "the term" which expression shall include any period of holding over or extension of it whether by statute or at common law or by agreement)..."
The tenant remained in occupation of the property after the expiry of the lease in September 2004. The council served a notice requiring possession of the property in July 2005, purportedly pursuant to a clause in the lease entitling the landlord to terminate the lease at any time on giving 28 days' prior written notice. The tenant did not vacate and the council issued possession proceedings. At first instance, the tenant argued that following the expiry of the fixed term of the lease, she had continued to occupy the premises under a periodic tenancy which was protected by the 1954 Act and was not affected by the county court order which, if effective at all, applied only to the fixed term and not a periodic tenancy arising after the expiry of that term. The tenant had remained in occupation paying rent on a monthly basis for nearly 18 months after the fixed term expired and before the council commenced possession proceedings. The judge at first instance made an order for possession and the tenant appealed. She was granted leave to appeal on the grounds that the judge had been wrong to conclude that in remaining in occupation and paying rent after the expiry of the fixed term, she did so under a tenancy excluded from protection under the 1954 Act. On the appeal, the tenant argued that a holding over clause is inconsistent with the provisions enabling contracting out of the 1954 Act. The council argued that if there had been no new tenancy after the expiration of the contractual term, the tenant was holding over as a tenant at will, a form of tenancy which could not attract the protection of the 1954 Act.
The Court of Appeal allowed the tenant's appeal on the apparently broad grounds that a lease could only be excluded from the 1954 Act if it was for a term of years certain. Clause 1 of the lease meant that the lease did not create a term of years certain. It followed that the purported contracting out was invalid in its entirety and the tenant had at all times enjoyed security of tenure. The Court of Appeal summed up in the following judgment.
"...I favour the view that [the words of extension] had the effect of defining the term as including any period of holding-over or extension... The lease created a tenancy for a term of years certain until 28 September 2004 plus, by the words of extension, any further period of holding-over or extension of it on one or other of the bases referred to...I cannot see how a term of that nature can be regarded as a tenancy for a 'term of years certain'. The consequence was that the term created by the lease was not contracted out of sections 24 to 28. That being so, the appellant's tenancy continued after 28 September 2004 under section 24, and it has not been determined by Newham by a notice served under section 25."
The scope of this decision is potentially significant. The wording of the lease is by no means an uncommon form of words. Many leases define the term granted to include any period of holding over or statutory continuation. Obviously, whether or not a lease has effectively been contracted out of the 1954 Act will turn on the precise wording of the lease and how the term is defined. It is likely, however, that there will be many cases in which the wording is at least similar to that employed in the Van Staden case.
The decision also produces a rather surprising result. There is no doubt that both parties entered into the original lease on the basis that the provisions of the 1954 Act were excluded. The parties both intended to exclude the 1954 Act, but the result meant that they had inadvertently created a tenancy which provided the tenant with security of tenure. The construction of the lease adopted therefore produced a result which both parties had intended to avoid.
Those involved in negotiating and drafting commercial leases which are intended to be excluded from the 1954 Act should therefore avoid using any words of extension in defining the term of the Lease. This can be achieved relatively easily. The term can be defined to be, for example, five years, and if it is thought desirable to ensure that if the tenant holds over they will do so on the same terms as the lease, a separate clause can be included to that effect. In short, following the Van Staden decision, care must be taken to ensure there is no suggestion that the term continues beyond the fixed contractual date.
Newham LBC v Van Staden {[2008] EWCA Civ 1414} might appear to be an innocuous decision on the meaning of the definitions clause in a lease of a small shop in Newham. But the consequence of it may be to confer statutory protection under Part 2 of the 1954 Act on swathes of tenants whose landlords had quite reasonably believed the leases were unprotected.
To appreciate the importance of Newham v Staden, there first has to be a short mention of City of London Corporation v Fell {[1994] 1 AC 458 (HL)}. Fell concerned the rental liability of an original tenant when an assignee of the lease holds over after the expiry of the contractual term. Mr Fell had taken a lease from the City of London in 1976. In 1979 he assigned it. The term of the lease expired in 1986, but the assignee remained in occupation under a continuation tenancy created by the the 1954 Act. Subsequently, the assignee went into liquidation and defaulted on the rent. The City of London then pursued Mr Fell for the arrears. They did not succeed, though. Mr Fell's original covenant with the City of London to pay the rent throughout the term of the lease meant simply what it said. It was not a covenant to pay any rent that might fall due after the contractual term had expired.
The response to the decision in Fell was for landlords' draftsmen to adjust their precedents accordingly. What they did was to draft new leases which extended the original tenant's liability, and that of any guarantor, to include the period of any continuation tenancy as well as just the original contractual term. The conventional drafting solution has been to do this by including a definition of "the term" which states that in includes any continuation tenancy under the the 1954 Act or, sometimes, any period during which the tenant holds over after the contractual term has expired. Extended definitions of "the term" are now embedded in the precedents and are commonplace in commercial leases, both protected and unprotected.
It may be that Newham v Staden is just a short decision on the construction of the terms of an individual lease, which other courts will now distinguish away to nothing. Or it may be that the definitions clause in that lease is so similar to the definitions clauses in most other commercial leases granted since 1994 that a vast number of ostensibly unprotected leases have actually now been given protection.

The 1954 Act broadly gives business tenants security of tenure – a statutory right to remain in their business premises when their lease ends and to seek a new tenancy. If the landlord and tenant cannot agree on a new lease, the tenant can apply to the court, which will fix the terms of the new tenancy. These will reflect the terms of the existing tenancy, but the new rent will reflect the current open market rent for similar premises. There is also provision for interim rent, which the court can order to be payable pending determination of the new rent.
The landlord may oppose renewal on limited, specific grounds set out in the 1954 Act. Among these are grounds where the tenant has failed to pay the rent or meet other lease obligations, but the landlord may also seek possession on certain specific grounds where the tenant is not at fault. These include the provision of alternative suitable accommodation; the need to reorganise the holding where sub-letting has taken place; the redevelopment of the premises; and, subject to certain safeguards, the landlord’s intention to carry on a business at the premises or live there. A landlord successfully opposing the grant of a new tenancy under certain of the “no fault” provisions must pay compensation to the tenant. The amount payable depends on the rateable value of the premises and how long the tenant has occupied them.
The renewal or termination process begins with either the landlord serving a notice of termination on the tenant (a section 25 notice) or the tenant submitting a request for a new tenancy (a section 26 request). There is no longer any requirement for a tenant wishing to renew the tenancy to serve a counternotice to the landlord’s section 25 notice. However, there is a continuing obligation on a landlord wishing to oppose renewal to serve a counternotice to the tenant’s section 26 request. The parties may then agree terms for a new tenancy without going to court. But if there is no agreement, the tenant must apply to the court within certain time limits or he loses the right to renew. There are now also provisions enabling a landlord to apply to the court for the renewal or termination of the tenancy.
The Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004 made some changes to the procedures. There is a new requirement for landlords not opposing renewal to set out their proposals for the new tenancy in the termination notice. This should help to speed up the renewal process. The notice warns the tenant that the proposals are purely for negotiation.
Termination by tenant is more straightforward. As long as the tenant continues to carry on business in the premises, the 1954 Act automatically extends a business tenancy beyond the agreed end of the lease until one of the parties takes action to renew or end it. Once the lease has been extended in this way, the tenant must give the landlord three months’ notice of termination. New provisions clarify what the tenant must do to avoid continuing obligations beyond the agreed end of the lease. They make it clear that a tenant who has either given three months’ notice before the end of the lease, or who has quit the premises by the end of the lease, will not face any continuing lease obligations.
There are several changes to the rules on interim rent:
• tenants as well as landlords may apply for interim rent;
• changes to the rules on the timing of interim rent remove any incentive for the
landlord or tenant to delay renewal proceedings;
• the amount of interim rent will be fairer to both parties. Usually, it will be the rent for the new tenancy, backdated, but subject to adjustment if market conditions change significantly over the period interim rent is payable. Similarly, there may be an adjustment if the new occupational terms are significantly different from the old ones. In some cases, the old method of determining interim rent will continue to apply.

To oppose renewal of a business lease under Part II of the 1954 Act, a landlord must be able to rely on one of the grounds set out in section 30 subsection 1.
In the recent case of Somerfield v Spring {[2009] EWHC 2384 (Ch)}, the landlord went into administration after serving a counter notice opposing renewal of the tenant's lease on redevelopment grounds. The landlord's administrator sought to defer the tenant's application for a new tenancy until it could put together a scheme of redevelopment that would satisfy section 30 of the 1954 Act.
It was common ground that a landlord cannot normally defer a tenant's application where it has no current and credible scheme for redevelopment. However, the administrator sought to buy time by relying on the moratorium imposed by Insolvency Act 1986 that "no legal process...may be instituted or continued against the company or property of the company except with the: (a) consent of the administrator, or (b) permission of the court".
The tenant applied to the court for permission to pursue its proceedings. In determining the tenant's application, the court had to balance the statutory objectives of administration against the crucial issue under the claimant's 1954 Act application, namely whether or not the landlord, or the administrator in its place, intended to redevelop the premises. In Somerfield, the tenant had a lease of commercial premises. The tenant's lease expired and it applied to court to renew its lease pursuant to the 1954 Act. The Landlord opposed the claim, arguing it intended to redevelop the premises, in accordance with subsection (f). The Landlord then entered administration. The Tenant asked the administrator for consent to continue the proceedings and the Administrator refused. The Tenant applied to the court for permission. The Administrator wished to defer the proceedings until a later date, because it accepted it could not, at that time, evidence the intention to demolish or reconstruct the premises. The intention the Landlord must evidence is composed of two main components:
• a fixed and settled desire to do that which it says it intends to do; and
• a reasonable prospect of being able to bring about the desired result.
The burden of proof rests with the Landlord. If the Landlord cannot so satisfy the court at the date of the hearing, then its claim will fail.
An administrator of a company must perform his functions in line with the statutory objectives of:
(i) rescuing the company as a going concern; or
(ii) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up; or
(iii) realising property in order to make a distribution to one or more secured or preferential creditors.
Where it can be achieved, the primary objective is to rescue the company as a going concern. The realisation of property in order to make a distribution to secured or preferential creditors is an objective to which the administrator must have regard if, but only if he thinks that it is not reasonably practicable to achieve either of the primary objectives. Even then, the interests of the creditors of the company as a whole must not be harmed unnecessarily.
The judge found that for practical purposes the administration in this case was being carried out, at least so far as regards this property, for the benefit of the bank as secured creditor. There was no suggestion that the landlord could be rescued as a going concern. The judge considered that hearing the tenant's 1954 Act proceedings, now or in the future, would have no effect on other unsecured creditors. Nor would they prevent any realisation of the property to make a distribution to the bank, though the bank's position might be improved by delaying them. The tenant was not a creditor, and so its interests fall outside the administrator's statutory objectives. However, the judge emphasised that its 1954 Act right to a new tenancy was the equivalent of a proprietary right. The tenant also had a right, in the interests of justice, to have its application heard without undue delay. The onus was on the administrator to demonstrate that there was an intention to redevelop before section 30 of the 1954 Act could be invoked. If the administrator could not meet that test then the tenant would be entitled to a new lease.
Balancing the rights of the administrator to conduct an orderly administration in accordance with the statutory objectives and the right of the claimant to have its application heard, the judge considered that it would be wrong to withhold permission to continue the proceedings where it was virtually common ground that the defendant could not currently meet the test of intention to redevelop the premises.
The landlord, or its administrator, must establish the necessary intention at the date of the hearing. If at that date the landlord can demonstrate a realistic prospect of putting in place the necessary finance and consents, then the court may consider the appropriate terms of any renewal lease. Rather than ordering immediate termination, the court may order a short tenancy or one with a break exercisable when redevelopment is to begin. Given that acceptance, it seemed to the judge that the matter should proceed with proper expedition. It would be wrong of the court to improve the position of the administrator or the bank to the prejudice of the tenant, which has a right to have its proceedings heard without undue delay, and the right to a new tenancy.
The court found that a distinction must be drawn between the interests of the landlord's creditors as a whole, and the interests of secured creditors looked at separately. Accordingly, it was not a legitimate aim to improve the position of a secured creditor, ie the bank, over a party such as the tenant, which had a proprietary interest in the premises. The rights of third parties, whether creditors or not, were not to be prejudiced unless truly necessary to achieve the administration objective. Accordingly, the Tenant succeeded against the Administrator.
Tenants should be wary when the Administrator requires the Tenant to obtain permission to continue proceedings. The Administrator's actions could amount to no more than a stunt designed to delay matters for its own tactical advantage. It may, therefore, be that the Administrator's apparently innocent protestations about increasing revenues for creditors, may not be as well intended as they first appear.


PART TWO - TERMINATION

2 Gabriella Shaw v Hazel Doleman {[2009] EWCA Civ 279}

This case was decided by the Court of Appeal. It concerns forfeiture for rent arrears. Mrs Shaw appealed against a decision that she was liable to pay arrears of rent to Mrs Doleman. Mrs Shaw was the original tenant under a lease of a retail unit. She assigned the lease to a company. The company fell into arrears with the rent and went into liquidation. The liquidator disclaimed the lease. However, when the lease was originally assigned by Mrs Shaw, the then landlord asked her to sign a guarantee agreement under which Mrs Shaw gave a guarantee in respect of the rent. The guarantee was stated to remain in force for ‘the liability period’, which was defined as ‘the period during which the assignee is bound by the tenant covenants of the lease’. Mrs Doleman issued proceedings against Mrs Shaw based on the guarantee and the judge found in Mrs Doleman’s favour.
Mrs Shaw argued that her guarantee liability under the terms of the authorised guarantee agreement was limited to ‘the liability period’, that that period had expired when the company ceased to be bound by the covenants in the lease, that the company ceased to be bound when the liquidator disclaimed the lease, and that her liability under the guarantee had ended.
The Court of Appeal dismissed the appeal. It held that the disclaimer terminated the lease and the liability of the assignee company, but that did not affect the liabilities of any other person. Section 178 of the Insolvency Act 1986 stated that the rights and liabilities of third parties, such as a guarantor, were not to be affected. The liabilities remained, as though the lease had not come to an end but had continued after the disclaimer. That was the legal landscape.
Mrs Shaw remained liable as guarantor if the company was bound by the tenant covenants. Although the lease was determined and the company ceased to be liable to Mrs Doleman under the tenant covenants, the company was, so far as other parties such as Mrs Shaw were concerned, still bound by the tenant covenants as though the lease had not determined. The ‘liability period’ of Mrs Shaw’s guarantee and her liability to Mrs Doleman had not therefore terminated. Accordingly, the judge had been correct to find in Mrs Doleman’s favour.

Tenants who assign or sublet should always contemplate the insolvency of the new tenant. Even simple landlord and tenant relationships can be ruined by the insolvency of one party. Take the following example. A landlord has let some premises to a tenant. The tenant is overburdened with debt, but nevertheless it has a sound underlying business. The simple solution? It puts itself into administration, and the administrator then sells the business to a new company formed for that purpose by the outgoing management team. The business carries on just as before, but now it is free of its debts. The creditors, on the other hand, are left to claw back the debt out of a share of the proceeds got in by the administrator from the sale of the business. Most of the debt will, of course, have to be written off. But where does the landlord fit into this unhappy picture?
What the landlord will almost certainly find is that the premises are now being occupied, not by the old company, or by the administrator, but by the new company, which is now trading from them. The new company will probably have gone in without asking for permission, and that is likely to have been a breach of the alienation covenant prohibiting the tenant from parting with possession. Probably also, the landlord will find that the rent is not being paid. And what can he do about all this?
The first thought might be to try and forfeit the lease. But on reflection that is unlikely to be the preferred option. Because the tenant is in administration, the landlord first needs the consent of either the administrator or the court in order to forfeit, even by peaceable re-entry. The administrator is likely to refuse his consent, saying that the lease is needed for the purposes of the administration, and the law reports are littered with cases where consent to forfeit has been refused by the courts, even in the face of rent arrears and an obvious breach of the alienation covenant. In any event, with rents often much lower today than they were at the time when the lease was granted, the landlord might well prefer just for the lease to be assigned to the new company. First, this avoids a potentially lengthy void period. Secondly, the rent will then come in at the level agreed under the existing lease, and not at the much lower rate that might have to be agreed on an entirely new letting.
The landlord will often find, though, that the application from the new company to take an assignment of the lease is glacially slow in materialising. Why is that? Looking at it cynically, the administrator may have little interest in forcing through the assignment unless there happens to have been a separate premium agreed for the sale of the lease, which in the case of a rack rented lease there probably will not have been. And why would the new company expeditiously pursue the assignment when, first, it has no substantial trading record to present to the landlord on its application for consent and, secondly, it can in the meantime occupy the premises rent free and without fear of forfeiture?
The pressing question for most landlords in the current climate is therefore this: if my tenant has gone into administration, how can I get my rent paid while I wait for the eventual assignment of the lease to the new company? The landlord does not want to have to compete with the other creditors for a few pence in the pound out of the proceeds of sale of the business, particularly when the rent that is owed is not an old debt but an ongoing and increasing one.
The landlord may not need to have to take his chances with a dividend, however, if it happens that the rent counts as one of the "expenses" of the administration. The "expenses" have a privileged status {para 99, Sch Bl, IA 1986}, and they have to be paid by the administrator in priority to all of the claims of the mainstream creditors.
But this begs the question: when does the rent count as an "expense" of the administration?
The recent case of Exeter City Council v Bairstow {[2007] EWHC 400 (Ch)} found that business rates for occupied premises fall within the definition of necessary disbursements under rule 2.67 of the Insolvency Rules. Rent would seem to be a similar sort of "necessary disbursement". Moreover, rent falling due under a lease which a liquidator was intending to sell was treated as a "necessary disbursement" under rule 195 of the old Insolvency Rules 1949. If the administrator does profess to want to retain the lease, in order to assign it to the new company, then it seems likely that it will therefore count as a "necessary disbursement" under rule 2.67. And if that is so then the landlord ought to be able to claim the rent from the administrator, as of right, as an expense of the liquidation, and irrespective of the views of the administrator or the court about whether that is appropriate.

Termination of a lease often brings the risk that the tenant has left the property in a state of disrepair. The Court of Appeal decision in Van Dal Footwear Ltd v Ryman Ltd {[2009] EWCA Civ 1478}, has left little doubt about what test the courts must apply when looking to cap damages arising from a breach of covenant to keep a property in repair. Ryman occupied a 17th-century listed building under a lease, the term of which had expired. It continued to occupy the premises under a series of tenancies at will, each of which kept alive the repairing obligation.
Unable to agree terms for a new lease with the landlord, Ryman eventually vacated the premises but left it in a state of disrepair. The High Court had to decide whether a sum representing the amount of damages arising from the breach of the repairing covenant was capped by the application of section 18 of the Landlord and Tenant Act 1927. The High Court found, as a matter of fact, that the value of the building in repair would have been £1,068,838 and that the value of the building in its actual condition would have been £950,000, a difference of £118,838.
In general, damages for breach of a repairing covenant is the reasonable cost of repair plus, in an appropriate market, the loss of rent for the period in which the work is carried out. This recovery is capped by section 18 of the Landlord and Tenant Act 1927 which provides that damages for breach of a repairing covenant shall not exceed the amount by which the value of the reversion in the premises is diminished owing to the breach.
The Court of Appeal held that section 18 clearly identified what needed to be valued, namely "the value of the reversion". This was the landlord's then interest in the premises, or the bundle of rights that the landlord actually had on the valuation date. Therefore, any reversionary lease, whenever made, is to be disregarded.
The Court of Appeal also went on to clarify that the point in time at which the reversionary interest is to be valued is the moment when it vested in the landlord unencumbered by the old lease or any new lease. This interpretation was confirmed by a number of authorities.

There has also been a recent case about yielding up possession at the end of a lease. The law implies a term in every tenancy that the tenant will deliver possession of the premises to the landlord at the end of the tenancy. Most leases do not rely on the implied term, but contain an express covenant by the tenant to yield up the premises. Until recently, there has been very little guidance from case law as to what constitutes yielding up. The broad advice has been that tenants should give back the keys to the landlord and leave the premises clear of tenants’ fixtures and fittings and clear of any sub-tenants or other occupiers. Beyond that, what constitutes yielding up has always been a matter of fact and degree. That is, until the case of John Laing Construction v Amber Pass {(2004) 17 EG 28 (CS)}.
The tenant, Laing, following a company merger, tried unsuccessfully to negotiate terms for a surrender of its lease. Being a lease of a whole office block, the fact that the premises remained empty for a considerable period of time gave rise to security problems. The tenant took responsible steps in this regard, in that it arranged for 24-hour security for the building and premises. Fortuitously for Laing, the lease contained a break clause, which it duly exercised. The terms of the break clause were that the tenant had to give six calendar months’ notice expiring at the end of the 15th year of the term; pay a sum equivalent to one year’s rent at the break date; and yield up the entirety of the premises. Notice being duly served and the payment being made at the allotted time, Laing considered that it had done what was required. The landlord, Amber Pass, did not agree and asserted that the lease had not been broken since, among other things, Laing had not yielded up the premises in accordance with the requirement in the break clause. The landlord argued that there had been no formal event of yielding up, in that: there were still security personnel present at the premises; fencing and concrete structures outside the premises remained in place; and keys had not been offered up. The Chancery Division of the High Court concluded in the following judgment.
“The position adopted by the defendant [landlord] is wholly artificial and its reliance on the claimant’s efforts to provide for the security of the premises is negating any ‘yielding up’ is misplaced.”
The judge’s reasoning was as follows:
• The use of the term “handing back” was not to be substituted in place of the notion of ‘yielding up’. This was not least because land and buildings, being immovable, could not be ‘handed’ to anyone.
• There is no prescribed form or procedure for yielding up. The task of the court is to look objectively at what has occurred and determine whether a clear intention has been manifested to effect a termination, and whether the landlord could occupy the premises without difficulty or objection.
• Retention of keys or failure to return them can be significant, or may not be. It may suggest an oversight, or the desire to protect the premises without signifying any assertion of continuing rights in respect of the property, or be inconsistent with effective termination of such rights.
• There is no general rule that a tenant must, in order to validly yield up premises, proffer the keys to the landlord.
Neither Laing’s continued instruction of security personnel, nor the retention of temporary barriers to protect the premises, created any hindrance to the landlord such as to support the conclusion that Laing had failed to yield up the premises for the purposes of implementing the break clause.
• It would have been a wise precaution, at least symbolically, to have tendered the keys.
On this basis, each case needs to be looked at upon its own merits. Laing gives helpful guidance as to the type of reasoning the courts will employ in borderline cases. However, in practical terms, the correct advice to give to tenants in respect of yielding up, will still be to hand back the premises in an unequivocal fashion, including giving up the keys to the landlord. The test for any tenant is to place itself in the landlord’s shoes and ask the following: (i) Has a clear intention been shown by the tenant to terminate the lease? and (ii) Am I, as landlord, able to occupy the premises without difficulty or objection? If the answer to these two questions is a clear “yes”, there is a good chance that the premises will have been properly and effectively yielded up. If possible, tenants are advised to seek written confirmation from the landlord that the yielding up is accepted at the time of the actual event; obviously, some landlords will be more forthcoming than others. For landlords, the decision muddies the waters as to the circumstances where a tenant’s supposed yielding up could be effectively challenged. The case ought, in less than clear circumstances, at least make landlords think twice about following the example in the instant case.

For the landlord who is chasing rent arrears, the good news is that he is entitled to his costs of proceedings. The general principle is that a landlord is not to be deprived of his contractual expectation to costs without "good reason". The following reasons are bad reasons: that the landlord is in a strong bargaining position; the existence of a fixed costs regime; and that the case is a straightforward one.
In considering the general principle and when it does and does not apply it is sometimes possible to overlook what should always be the starting point in any case: what the relevant covenant in the lease actually says.
A well drafted costs covenant will provide that the tenant will indemnify the lessor on the full indemnity basis for all legal costs caused by the tenant's breach of any covenant under the lease.
Following the determination the landlord will have a money judgment and it will
then be a matter of choice as to whether it forfeits the lease or seeks to enforce the judgment. If the dispute progressed to forfeiture proceedings then a landlord would be in a stronger position to argue that the proceedings were "in contemplation" of forfeiture. For actions to recover amounts of service charge which fall below the small claims limit, a costs provision in the lease may be the landlord's only prospect of recovering the bulk of its legal costs.
Commercial landlords faced with a similarly worded clause will be in a more difficult situation. If they contemplate forfeiture then there is no equivalent restriction on their remedy. The landlord may have brought proceedings for a money judgment because they do not want to forfeit the lease for commercial reasons. The landlord may have waived its right to forfeit. In these situations it will be very difficult to rely on a narrowly worded costs clause.
If the costs clause in the lease does apply there is then the question of the basis of assessment to be adopted. Clear words such as "to indemnify" and "fully for any costs" are required to allow a landlord to recover costs on the indemnity basis. If a costs provision in a lease is to be relied upon then it must be properly pleaded in the particulars of claim. A costs provision in a lease can go against provisions of the Civil Procedure Rules relating to fixed costs regimes and even the principle of costs following the event.
What then amounts to a good reason? The existence of a fixed costs regime which conflicts with the contractual provision is not of itself a good reason. The fact that a particular case was straightforward or that the landlord was in an unfairly strong bargaining position as to the terms of the tenancy were also stated not to be good reasons. The good reason must involve the conduct of the landlord.
The reasonableness of bringing proceedings is likely to be dependent on the facts in each particular case. It is submitted that reasonableness should not be judged with the benefit of hindsight but on the facts available to the landlord at the time. The question of an appeal is inevitably more difficult. The landlord has already been unsuccessful once but that should not mean that an appeal is automatically unreasonable. If the appeal related to the question of how a discretion was exercised then, given the threshold for such appeals, a landlord may have some difficulty convincing an appellate court that despite being unsuccessful it should still recover its costs. Appeals on points of law of wider importance would be more arguable—it seems likely it would come down to whether the landlord was acting reasonably in appealing the original decision. An appellate court may look unfavourably on a point of wider application which is the resolution of ambiguity in the andlord's own standard form lease.
Finally it must always be remembered that even under the indemnity principle a Landlord is not entitled to costs which are unreasonably incurred or unreasonable in amount. While the fact that a case is straightforward is not a reason to deprive a landlord of their costs in principle it may be highly relevant to the amount of costs being claimed.
The question of the lessor's entitlement to the cost of proceedings under the terms of a lease is one of considerable practical importance. Costs covenants in leases need to be considered carefully before being relied upon. An applicable covenant can allow a landlord to recover costs where it would not otherwise do so or achieve a more favourable basis for assessment. However, the contractual right is not an absolute one and does not oust the jurisdiction of the court to make another order if there is a good reason for doing so.

NOTE TO LAWYERS
If you intend to quote one of these cases to a judge, first you must obtain a full copy of the judgment. Use "The Law Reports Index" or "Current Law Case Citator". Judges are entitled to insist upon sight of a full copy of the judgment, before they take notice. When citing a case reference, however, always use the neutral citation.


MULTIPLE CHOICE TEST
Subscription Area: Property
Title of Recording: Commercial Leases (Apr 2010)


NAME OF LAWYER...............................................................................................

RING THE CORRECT ANSWER

PART ONE - 1954 ACT
Question 1: Jose owns a listed building in London. He rents it out to Peter, who runs an accountancy business there. Which other condition must be satisfied for it to be covered by the Landlord and Tenant Act 1954?
A the landlord must be a business
B it must be for a term certain less than 15 years
C none

Question 2: How can Jose contract out of the provisions of the Landlord and Tenant Act 1954?
A by serving a notice and getting Peter to sign a declaration
B by applying to the court
C by a clause excluding the 1954 Act

Question 3: Peter serves a section 26 notice at the end of the fixed term. Jose wants to redevelop. Which ground of section 30(1) is this?
A d
B e
C f

PART TWO - TERMINATION
Question 4: Peter fails to pay the rent, and but does not go bankrupt, Does this entitle Jose to forfeit the lease?
A yes
B only with the consent of the court
C no

Question 5: If Jose issues court proceedings to recover the rent, which of the following reasons would deny him his costs?
A the fact that there are fixed costs available
B the fact that he has behaved unreasonably
C the fact that it is an uncontested case

Question 6: Jose then serves a notice to terminate the lease, and commences court proceedings to regain possession. After the date on which the court has ordered possession, Peter leaves the property and hands back the keys. Which of the following events marks the end of Peter's possession?
A landlord's notice of termination
B delivery of keys
C court order for possession

 

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