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This article was first published in issue 161 of the Property Law Journal, published by Legalease Ltd.
LANDLORD AND TENANT
2005: a round-up John Martin sets out a reminder of the more important commercial landlord and tenant cases of this year and looks at a possible further development in 2006 his year has seen the usual proliferation of commercial landlord and tenant cases reported; always a fruitful area. While many cases are concerned with no more than the construction of wording in the lease in question, others provide a reminder of basic principles and a few even indicate a degree of development of the law.
T
Rent and rent review John Martin is director of property law research with Pinsent Masons
‘Had the tenant's contention been a correct one in Debenhams v Sun Alliance, the introduction of VAT would have given it an uncovenanted bonus.’
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Challenging an arbitrator’s award In recent times, the authorities suggest that more challenges to arbitrators’ awards in rent review arbitrations fail than succeed. However, St George’s Investment Co v Gemini Consulting [2005] involved a successful challenge to an arbitrator’s award under s68(1) Arbitration Act 1996, on the ground of serious irregularity. Here the arbitrator had clearly failed to recognise that the landlord and tenant had set down a complete framework for the arbitration by agreeing a discount approach. (This was because the onerous terms of the lease rendered the available comparables of limited value.) The arbitrator accepted the discount approach and applied a discount of 40%. However, he then went on to apply a further discount to reflect the onerous terms of the lease. The deputy judge held that this amounted to a serious irregularity causing substantial injustice to the landlord. That injustice was an element of double counting. Turnover rents Turnover rents present their own problems. In Debenhams Retail Plc & anr v Sun Alliance & London Insurance Co Ltd [2005] the question was whether the turnover rent should reflect sums charged to customers as VAT. The lease, granted in 1971, reserved a basic rent together with an
additional rent calculated by reference to the department store’s turnover. This was defined as ‘the gross amount of the total sales’. The tenant sought a declaration that turnover for this purpose did not include sums charged to customers as VAT, even though previously purchase tax had never been excluded. The Court of Appeal held that VAT had to be regarded as a substitute for purchase tax and as part of the ‘gross amount of the total sales’. The lease had to be construed in its 1965 context, but its purposes and values were applicable in the changed factual circumstances. Had the tenant’s contention been a correct one, the introduction of VAT would have given it an uncovenanted bonus. The lease was entered into before the introduction of VAT on 1 April 1973, and this clearly contributed towards the tenant’s problems. Today, a tenant would expect to see VAT expressly excluded from the definition of ‘turnover’ in such a case. Trigger notices The facts of Lancecrest Ltd v Asiwaju [2005] are slightly involved, but in a nutshell the landlord’s trigger notice was served some 54 weeks after the relevant review date. The tenant’s counternotice was in the form of a letter in somewhat ambiguous terms. The first issue for the Court of Appeal was whether the landlord had lost the right to have the rent reviewed as a result of having failed to serve a trigger notice before the relevant review date. The second issue, which depended on determination of the first, was whether the letter written by the tenant operated as a valid counternotice to the trigger notice. The Court of Appeal held that it was open to the landlord to serve a trigger 5 December 2005
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LANDLORD AND TENANT notice after, indeed well after, the final date specified for service because time was not of the essence in relation to that date. The decision of the House of Lords in United Scientific Holdings Ltd v Burnley Borough Council [1978] was binding on the Court, and the presumption set out in that decision applied. By a majority, the Court of Appeal then held that the tenant’s letter did constitute a valid counternotice. The relevant test was whether a reasonable recipient, apprised of the terms of the lease, would understand what the server of the notice intended. This test should not be applied in a legalistic way, nor should too strict an approach be adopted in the case of counternotices of this kind. A sensible degree of common sense should be applied. Either-way reviews In Hemingway Realty Ltd v The Clothworkers’ Company [2005] the landlord was able to frustrate an apparent either-way rent review. The lease, at the material time, granted the landlord ‘the right to review the yearly rent’ at sevenyear intervals. The tenant anticipated that a review in 2003 would result in a decrease in the rent, and contended principally that if the landlord refused to implement the review it would be the equivalent of converting an either-way rent review clause into an upward-only rent review clause. Patten J found in favour of the landlord. He held that the opening words of the rent review clause had a plain and obvious meaning to which effect must be given. There was no scope for implying any term obliging the landlord to implement the review. This decision demonstrates that it is vital for the tenant to secure, at the lease negotiation stage, the ability both to initiate the rent review and to bring about its conclusion. The benefit to a tenant of an either-way rent review clause can easily be lost in the event that the lease enables only the landlord to take those steps.
Landlord and tenant covenants Securing release on disposal Avonridge Property Co Ltd v Mashru & ors [2004] involved an attempt by an original landlord to secure a release on a disposal of the reversion. The original landlord had covenanted with the tenant to pay the rent reserved by the headlease but had sought to qualify that 5 December 2005
covenant by the addition of the words ‘but not, in the case of [the original landlord] only, so as to be liable after the landlord has disposed of its interest in the property’. The original landlord subsequently assigned the headlease to a third party. The Court of Appeal held that the original landlord remained liable. The qualifying wording was not sufficient to render the covenant to pay the rent reserved by the headlease a personal
Underlettings In NCR Ltd v Riverland Portfolio No 1 Ltd (No 1) [2004] the issue for the court was whether an intended underletting of grossly overrented premises was in accordance with the headlease requirements. To persuade the proposed undertenant to take an underlease at the equivalent of passing rent (a pre-condition required by the headlease), the tenant had agreed to pay a reverse premium of £3m. The landlord refused
The benefit to a tenant of an either-way rent review clause can easily be lost in the event that the lease enables only the landlord to take those steps. covenant. The covenant bound the original landlord’s successors in title. Accordingly, it was a landlord covenant of the tenancy. The qualifying wording fell foul of the anti-avoidance provisions contained in s25(1)(a) Landlord and Tenant (Covenants) Act 1995 in that it would ‘have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act’. There has been a further appeal to the House of Lords. Judgment is presently awaited.
consent, contending that the effect of payment of the reverse premium was to reduce the real rent to a level below that of passing rent. (The landlord was also concerned about the financial status and covenant strength of the proposed undertenant.) On the trial of a preliminary issue, Peter Smith J made a declaration to the effect that the proposed underletting was within the terms of the headlease. The fact that an inducement had to be paid did not detract from the rent that
The tenant’s right of equitable set-off Altonwood Ltd v Crystal Palace FC (2000) Ltd [2005] raised a number of issues in relation to a lease of a football ground reserving both a basic and a turnover rent. In resolving one of those issues, Lightman J held that the words ‘without deduction or set-off’ in the covenant to pay rent were sufficient to exclude the tenant’s right of equitable set-off. (In the earlier case of Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] the Court of Appeal held that the words ‘without deduction’ alone were not sufficiently clear for this purpose.) The problem in Edlington Properties Ltd v JH Fenner & Co Ltd [2005] was a somewhat more complex one. The tenant sought to set off a damages claim brought against its original landlord against recent arrears of rent and insurance premiums claimed in proceedings brought by its current landlord. (The reversion had been assigned.) By way of background, the Court of Appeal had held earlier in Muscat v Smith [2003] that equitable set-off was available to a tenant in respect of arrears of rent, the benefit of which had been transferred either expressly or as a result of the operation of s141 Law of Property Act 1925 to a successor landlord. The basis for this is that the assignee of a chose in action takes subject to all rights of set-off and other defences available against the assignor. However, in the present case Bean J held that the tenant had no right of equitable set-off against the current landlord. This was not an instance where the current landlord was claiming pre-assignment arrears, the benefit of which had been transferred to it either expressly or by the operation of statute. The right to the rent in question did not amount to a chose in action. It was merely an incident of the reversion. Furthermore, the reversion itself was not a chose in action. No scope for equitable set-off therefore arose.
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LANDLORD AND TENANT was to be reserved by the underlease. That rent would also be the rent an assignee of the underlease would be bound to pay, and the rent that an assignee of the reversion to the underlease would be entitled to recover. Later, the proposed undertenant withdrew, and the litigation proceeded further. The tenant sought a declaration that the landlord was in breach of the duties that it owed under s1(3)
proposed undertenant’s strength of covenant, the appeal judges held that, despite the security provided by the tenant’s continuing covenant, a reasonable landlord could also be expected to take account of the position at the end of the headlease and the likely entitlement of the undertenant to seek a new tenancy. Pre-conditions also limited the ability of the tenant to apply for consent to
The Court of Appeal in Belcourt held that the negative act of failing to demand rent or service charges and to pursue arrears could not amount to unequivocal conduct sufficient to accept an implied surrender. Landlord and Tenant Act 1988. In NCR Ltd v Riverland Portfolio No 1 Ltd (No 2) [2004] the Court of Appeal held that, in the absence of special circumstances, a period of three weeks from the date on which the tenant had submitted its full case was not inherently unreasonable for the purpose of reaching and communicating a decision on the tenant’s application. On the question of the
underlet in Crestfort Ltd and ors v Tesco Stores Ltd & anr [2005]. In particular, any permitted underlease was to be granted ‘subject to like covenants and conditions as are herein contained’. The tenant allowed the proposed undertenant into occupation, and later granted it an underlease without the landlord’s consent. Contrary to the requirements of the headlease, the
Reference point For further discussion on: •
St. George’s Investment v Gemini Consulting, see PLJ 143 ‘Challenging an arbitrator’s award’
•
Debenhams v Sun Alliance, see PLJ 146 ‘Finding a good alternative’
•
Hemingway v The Clothworkers Co., see PLJ 147, ‘Frustrating an either way review’
•
Avonbridge v Mashru, see PLJ 144, ‘Caught in the Act’
•
NCR v Riverland (No. 1), see PLJ 153, ‘Total surrender - almost!’
•
NCR v Riverland (No. 2), see PLJ 149, ‘Return to Riverland’
•
Crestfort v Tesco Stores, see PLJ 156, ‘Restrictive lease provisions’, and PLJ 153 ‘Total surrender - almost!’
•
Joint London Holding v Mount Cook, see PLJ 160 ‘Take away or eat in’
•
Smith v Titanate, see PLJ 154, ‘Two’s a crowd’
•
Lancecrest v Asiwaju, PLJ 146, ‘A timing issue’
•
Altonwood v Crystal Palace, see PLJ 148, ‘Anti-set-off clauses revisited’
•
Edlington v JH Fenner, see PLJ 160, ‘Right to withhold’
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underlease imposed a limited repairing liability only on the undertenant, and failed to reserve a right of entry onto the premises in favour of the landlord in the event of failure to repair. Lightman J held that underlease was not subject to the like covenants and conditions as set out in the headlease. The term ‘like’ imported similarity in substance, without the need for similarity in form, detail or wording. The tenant had failed to include the ‘like’ covenant in respect of repair and the ‘like’ right of entry in favour of the landlord. Accordingly, the pre-condition had not been met, and s1 Landlord and Tenant Act 1988 had never been engaged. He went on to grant an injunction requiring the surrender of the underlease and awarded damages against the tenant and the undertenant in addition. This was pretty much a sweeping victory for the landlord, and should serve as a warning to tenants who contemplate breaching an alienation covenant in this way, on the assumption that the landlord will view forfeiture as the only realistic remedy but will be reluctant to see the headlease prematurely terminated. User covenants The Court of Appeal was concerned with the interpretation of a user covenant in Joint London Holding Ltd v Mount Cook Land Ltd [2005]. That user covenant was contained in a long lease granted in 1950 and it prohibited the use of the premises for the business of ‘victualler, vintner, tavern keeper, vendor of malt liquor, restaurant or coffee house keeper’ without the consent of the landlord. The tenant, who wanted to sub-let the premises for use as a Pret a Manger sandwich shop selling pre-prepared sandwiches and coffee largely for consumption off the premises, sought a declaration as to the proper interpretation of the user covenant. The Court of Appeal confirmed the approach of the first instance judge, namely that the court had to place itself in the same context or factual background as the parties at the time of the grant of the lease. The words ‘coffee house keeper’ would have been understood at that time to include a café, snack bar or tea shop where food was consumed on the premises, and so the user covenant would not, in that 5 December 2005
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LANDLORD AND TENANT respect, be breached by the sale of sandwiches and coffee for consumption off the premises. However, the appeal judges disagreed with his conclusion that ‘victualler’ was in this case restricted to a licensed victualler. They concluded that it referred both to a person who sold food and to one who sold drink. It followed, therefore, that the sale of either item, whether for consumption on or off the premises, would breach the user covenant.
Forfeiture and termination In Peer Freeholds Ltd v Clean Wash International Ltd [2005] the Mannai principle saved a tenant’s break notice. The break right was exercisable at the end of the third year of the term on six months’ notice. The tenant wrote to the landlord seeking to exercise the break right ‘at the end of the third year of this lease on 22nd August 2004’. In fact, the third year of the lease expired in November 2004. Evans-Lombe J held that the notice was effective, applying the principle in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997]. In this case it was clear that a reasonable landlord with knowledge of the break clause would have understood that the letter was intended to operate that break clause despite the error that the letter contained. The practical lesson to learn from this (and from Mannai) is that where the contractual provisions do not require it, the draftsman of such a notice should not volunteer the precise date on which the notice is to take effect. The decision in Belcourt Estates Ltd v Adesina [2005] confirms that failure alone to demand rent and service charge does not amount to acceptance of a surrender. The landlord granted a tenancy of business premises in August 2000. The tenant paid no rent and left the premises in November 2000, telling the landlord that she no longer wanted them. The premises remained empty for several months. Subsequently the landlord forfeited the tenancy for nonpayment of rent and sued for the arrears. The tenant contended that the landlord’s failure to demand rent amounted to acceptance of a surrender of the tenancy. The Court of Appeal held that the negative act of failing to demand rent or service charges and to pursue arrears could not amount to unequivocal conduct sufficient to accept an implied surrender. 5 December 2005
In Legend Surf Shops Plc v Sun Life Assurance Society Plc [2005] the tenant held premises under a lease that obliged it, prior to any assignment, to provide the landlord with an AGA within the meaning of s16 Landlord and Tenant (Covenants) Act 1995 in a form reasonably required by the landlord. The tenant went into administrative receivership and sought to assign the lease. The landlord insisted upon an AGA to be given both by the tenant and the administrative receivers personally. When this was refused, the landlord forfeited the lease. It then applied to strike out the tenant’s application for relief. Laddie J found for the tenant in dealing with this application, holding that, despite the fact that the tenant was in administrative receivership, an AGA executed by the tenant alone was still an AGA for the purpose of s16 of the 1995 Act, and fell within the meaning of the lease. The
This is a useful example of the court correcting an obvious error in a lease by means of construction rather than rectification. Two conditions must be satisfied for this to be possible. There must be a clear mistake on the face of the document and it must also be clear what correction ought to be made to remedy the mistake.
Business lease renewals Dual occupation The leading case on the issues arising out of dual occupation of business premises is Graysim Holdings Ltd v P&O Property Holdings Ltd [1996]. There the House of Lords held that dual occupation was largely inconsistent with the scheme of the Landlord and Tenant Act 1954. A similar problem arose in Smith & ors v Titanate Ltd [2005]. There the tenant company held a building comprising six self-contained flats and a
The lesson to learn from Peer Freeholds and from Mannai is that where the contractual provisions do not require it, the draftsman of a break notice should not volunteer the precise date on which the notice is to take effect.
landlord could only make reasonable objections to the form. Whether it was reasonable for the landlord to insist upon the personal covenants of the administrative receivers was a question of fact for the trial judge. Finally, under this heading, we come to Littman v Aspen Oil (Broking) Ltd [2005]. The lease contained a mutual break right. It was expressly provided that in the case of a landlord’s break notice, the tenant must have paid the rent and observed the tenant’s covenants in the lease for the lease to determine at the break date. The tenant served notice to determine the lease, contending that its right to do so was unconditional. The landlord argued that as the tenant had not complied with the tenant’s covenants in the lease, the break notice was ineffective. Hart J held that the break clause was an absurdity. He accordingly construed the words ‘in the case of notice given by the landlord’ as meaning ‘in the case of a notice given by the tenant’.
small office under a long lease expiring in June 2004. The flats were occupied individually as serviced apartments for varying periods of time. Judge Roger Cooke refused, in the Central London County Court, to make a declaration that the tenant was in business occupation of the building for the purposes of s23 Landlord and Tenant Act 1954. He concluded that the flats were occupied under tenancies with the necessary consequence that the occupiers enjoyed the right of exclusive possession. The tenant company therefore did not have a sufficient degree of control over the flats to establish that it was in business occupation. Section 30(1)(f) opposition The decision in Wessex Reserve Forces & Cadets Association v White & anr [2005] serves as a reminder of what a landlord has to establish to satisfy the ground of opposition in s30(1)(f) of the 1954 Act. The tenant applied for a new tenancy of land and buildings that it occupied. The Property Law Journal 9
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LANDLORD AND TENANT landlords opposed the application on the ground that they intended to demolish or reconstruct. All the structures on the premises, save for one small stone shed, had been placed there by the tenant. They included two large huts. The deputy judge ruled in favour of the tenant, holding that the structures were tenant’s fixtures. A landlord would generally be unable to establish a reasonable prospect of demolishing a tenant’s fixtures since the tenant would usually remove its fixtures at the termination of the tenancy. The evidence in the present case was that the tenant intended to do so. The authorities clearly establish that, in such circumstances, the landlord must not only have a firm and settled intention to carry out the works in question; it must also establish that it has a reasonable prospect of being able to bring that state of affairs about by its own act of volition. Lease/licence distinction The distinction between a lease and a licence was at the heart of Clear Channel UK Ltd v Manchester City Council [2005], a case involving 13 substantial advertising sites. The Court of Appeal ruled that the occupier had no rights of renewal under the 1954 Act since the terms of the agreement between the parties militated against any intention to grant exclusive possession of any areas of land. The principles laid down in Street v Mountford [1985] applied. Accordingly, no more than a licence had been created.
The forthcoming year 2006 is likely to see the spotlight fall on alienation covenants in leases. On 15 March 2005 Yvette Cooper, the Minister for Housing and Planning, announced that the government does not propose to legislate against upward-only rent review clauses at present. She warned, however, that the government does intend to undertake a review of the law of assignment and subletting, including looking at legislative options. Its particular concern is with the difficulties faced by tenants in disposing of overrented premises. We are likely to see a consultation paper published early in the new year. April 2005 saw the British Property Federation (BPF), with the support of a number of major firms of surveyors and solicitors, publish a declaration signed by 20 or more leading developers and 10 Property Law Journal
investors which states that in relation to negotiations commenced on or after 30 April 2005, all new occupational leases that the signatories grant will not contain provisions requiring sublettings (of the whole or part) to be at the higher of passing or reserved rent and the market rent. In the case of existing leases, the signatories also agree to waive such a provision, at the request of the tenant, where certain conditions are met. (It is claimed that the signatories own £76bn of commercial property.) If the government favours statutory intervention, primary legislation would probably be necessary to amend the 1927 and 1988 Landlord and Tenant
Altonwood Ltd v Crystal Palace FC (2000) Ltd [2005] EWHC 292 (Ch) Avonridge Property Co Ltd v Mashru & ors [2004] EWCA Civ 1306; (2005) 05 EG 204 Belcourt Estates Ltd v Adesina [2005] EWCA Civ 208; (2005) 18 EG 150 Clear Channel UK Ltd v Manchester City Council [2005] PLSCS 198 Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 Crestfort Ltd & ors v Tesco Stores Ltd & anr [2005] EWHC 805 (Ch); (2005) 37 EG 148 Debenhams Retail Plc & anr v Sun Alliance & London Insurance Co Ltd [2005] EWCA Civ 868; (2005) 38 EG 142 Edlington Properties Ltd v JH Fenner & Co [2005] EWHC 2158 (QB); (2005) 43 EG 189 CS Graysim Holdings Ltd v P&O Property Holdings Ltd (1996) 03 EG 124 Hemingway Realty Ltd v The Clothworkers’ Company [2005] EWHC 299 (Ch); (2005) 11 EG 181 CS Joint London Holding Ltd v Mount Cook Land Ltd [2005] EWCA Civ 1171; (2005) 42 EG 234 CS Lancecrest Ltd v Asiwaju [2005] EWCA Civ 117; (2005) 16 EG 146
Acts, to allow tenants to sublet at less than the rent passing under the lease, provided that market rent was achieved. It is most unlikely, however, that any such legislation would be retrospective, so the problems would continue for some time and a two-tier market would be created. The BPF initiative should provide an appealing alternative, but only if it goes on to attract even more signatories, it is seen to be enforceable, and it is accepted by the British Retail Consortium and other tenant support bodies. Experience of the Code of Practice for Commercial Leases suggests that this may not necessarily be so. ■
Legend Surf Shops Plc v Sun Life Assurance Society Plc [2005] EWHC 1438 (Ch); [2005] PLSCS 136 Littman v Aspen Oil (Broking) Ltd [2005] EWHC 1369 (Ch); [2005] NPC 88 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 Muscat v Smith [2003] EWCA Civ 962; (2003) 3 EGLR 11 NCR Ltd v Riverland Portfolio No 1 Ltd (No 1) [2004] EWHC 921 (Ch); [2004] L&TR 31 NCR Ltd v Riverland Portfolio No 1 Ltd (No 2) [2004] EWCA Civ 312; (2005) 22 EG 134 Peer Freeholds Ltd v Clean Wash International Ltd [2005] EWHC 179 (Ch); (2005) 17 EG 124 Smith & ors v Titanate Ltd (2005) 20 EG 262 (Central London County Court) St George’s Investment Co v Gemini Consulting (2005) 01 EG 96 Street v Mountford [1985] 1 EGLR 128 United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 Wessex Reserve Forces & Cadets Association v White & anr [2005] EWHC 983 (QB); (2005) 22 EG 132 CS
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