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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