Technical Aspects of Business Leases: Overcoming the Practical Difficulties (Hawksmere Report)

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TECHNICAL ASPECTS OF BUSINESS LEASES OVERCOMING THE PRACTICAL DIFFICULTIES

Malcolm Dowden

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TECHNICAL ASPECTS OF BUSINESS LEASES Overcoming the Practical Difficulties

Malcolm Dowden

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The authors Malcolm Dowden is the senior professional support lawyer in the property department at Nabarro Nathanson.Based at the Reading office,he provides a full range of professional support services to property lawyers across the firm,including regular updates on new legislation and case law. He is also a regular contributor to the legal and professional press – including The Estates Gazette, Property Law Journal and Butterworths’ online law journal In Context. Malcolm graduated from Oxford in 1986 with a first class honours degree in Modern History. After a spell of historical research and teaching he converted to law, qualifying as a solicitor in 1994 and joining Nabarro Nathanson in 1998. The ‘key issues’discussed in this Report stem from Malcolm’s work as a professional support lawyer – a role which involves frequent and ongoing discussion of points encountered by fee earners during lease negotiations.Perhaps surprisingly,it is these nitty-gritty issues, rather than the ‘rocket science’ of rent reviews or complex deal structures,that can result in delay and stalemate during negotiations.Consequently this Report,like the seminars and lectures that Malcolm regularly delivers,focuses on the steps that can be taken by landlords, tenants and their respective agents to spell out their agreed terms, and to cut down the lawyers’ scope for argument. Charlotte Trotman is a professional support lawyer in the commercial property department at Nabarro Nathanson.Based in Reading,Charlotte provides advice and assistance on landlord and tenant and leasehold security matters to property lawyers in all of the firm’s offices. She is a contributor to the firm’s in-house training programme and has published articles on issues relating to business leases in a number of professional journals including the Property Law Journal.

CONTENTS

Contents

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IS THERE A TENANCY?

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The lease-licence distinction ........................................................................2 The risk of informal arrangements ...............................................................4 Tenancies at will – holding over after the expiry of a contracted-out tenancy ..............................................................5 Terminating the implied tenancy at will – what happens next? ...................8 Short-term tenancies excluded from protection ...........................................9 Can a mere licensee grant a lease? ............................................................10

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EXCLUDING SECURITY OF TENURE

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Landlord and Tenant Act 1954 – section 38(4) ...........................................14 Alterations to the draft lease .......................................................................15 The purpose of section 38(4)......................................................................16 Using the ‘wrong’ Court ..............................................................................19 Ripe for reform? ..........................................................................................20

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BREAK CLAUSES

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Break notices and the Mannai test ..............................................................23 Conditional break clauses ...........................................................................26 Break clauses and the survival of underleases ............................................28

CONTENTS

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LANDLORD AND TENANT ACT 1954 – END OF TENANCY

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When does a tenancy end?..........................................................................33 Sight & Sound Education Ltd v Books etc Ltd [1999] 43 EG 161 ............33 Conclusions drawn from recent cases.........................................................35

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THE LANDLORD AND TENANT (COVENANTS) ACT 1995

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Can a surety be required to give an Authorised Guarantee Agreement (AGA)? ..................................................40 Can a landlord require an AGA as of right or must the requirement be reasonable? ........................................................45 Section 17 notices ......................................................................................46 Section 3(5) and the enforcement of covenants ........................................49

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LANDLORD’S CONSENT

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The landlord’s entitlement to information .................................................53 Withholding consent because of an anticipated breach of covenant ........54 Dealing with an unauthorised assignment or underletting ........................56 Inadvertent grant of consent ......................................................................57

CONTENTS

7 8 9

DEROGATION FROM GRANT

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Chartered Trust v Davies [1997] 2 EGLR 83 .............................................60 Petra Investments Ltd v Jeffrey Rogers plc [2000] EGCS 66......................61

QUIET ENJOYMENT

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Cases in the House of Lords ........................................................................64 Housing of the Working Classes Act 1885 ...................................................65

LEASE VARIATIONS – LETTING GUARANTORS OFF THE HOOK

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Avoiding the trap ........................................................................................70 Contractual terms .......................................................................................72 Primary or secondary liability? ...................................................................73 Conclusion .................................................................................................74

CONCLUSION

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INTRODUCTION

Introduction A business lease is a working document that is consulted by interested parties throughout its term. It sets the rent and the mechanism to be used for reviews of the rent throughout the term.It also contains the covenants given by the landlord and tenant which allocate responsibility for the repair and maintenance of the premises, and regulate the tenant’s ability to deal with the lease by assignment or underletting.Lastly,it specifies the use to which the premises may be put,and sets out any which are prohibited. As the essential document of estate management,a lease must be easily understood by non-lawyers.However,given the complex legal framework within which business leases operate, it is inevitable that there will be issues which require a technical understanding of the law relating to landlords and tenants.The purpose of this Report is to highlight areas where technical issues might lead to practical difficulties, and to give clear guidance to help those involved in property management avoid pitfalls.

Is there a tenancy? THE LEASE-LICENCE DISTINCTION THE RISK OF INFORMAL ARRANGEMENTS T E N A N C I E S AT W I L L – H O L D I N G O V E R A F T E R T H E EXPIRY OF A CONTRACTED-OUT TENANCY T E R M I N AT I N G T H E I M P L I E D T E N A N C Y AT W I L L – W H AT H A P P E N S N E X T ? S H O R T- T E R M T E N A N C I E S E X C L U D E D F R O M P R O T E C T I O N CAN A MERE LICENSEE GRANT A LEASE?

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Chapter 1: Is there a tenancy? At first sight this might appear to be a question that does not need to be asked. Surely, if there is a tenancy it will be obvious.The tenant will be in occupation and paying rent in accordance with the lease, and the landlord will be collecting their rent.However,landlords can frequently find themselves in situations where there is a doubt – typically if occupation is allowed before the formal grant of a lease,or if a tenant is allowed to remain in occupation after the expiry of its lease. This chapter will examine such situations in the light of judicial comment, highlighting the problems that can arise from ‘informal’ arrangements or from poorly drafted documents. Whether or not a tenancy exists will depend upon the intention of the parties. However, it must be appreciated that intention will be assessed objectively.The intention of the parties will be gathered from the terms of the documentation they have entered into, or from their conduct. If those factors point towards the existence of a tenancy then it will do the landlord no good to say ‘I didn’t mean it’. A subjective statement of intention,expressed after the arrangement has come into being, will cut little ice with the Courts.

The lease-licence distinction In the leading case of Street v Mountford [1985] AC 809 the House of Lords reviewed a great bulk of authority on the question of whether occupation of premises was as tenant or as mere licensee. A lease or tenancy gives the tenant an interest in the land. By contrast a licence is merely a personal permission to occupy the land.‘The tenant possessing exclusive possession is able to exercise the rights of an owner of land,which is in a real sense his land albeit temporarily and subject to certain restrictions. A tenant armed with exclusive possession can keep out strangers and keep out the landlord unless the landlord is exercising limited rights reserved to them by the tenancy agreement,to enter and view and repair. A licensee lacking exclusive possession can in no sense call the land their own and cannot be said to own any estate in the land.The licence does not create an estate in the land to which it relates but only makes an act lawful which would otherwise be unlawful.’

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So why does it matter whether a person is in occupation as tenant or as mere licensee? It matters because a range of statutes give protection to tenants, but not to licensees.For landlords of business premises the most significant statutory protection afforded to tenants is security of tenure under Part II of the Landlord and Tenant Act 1954 (the ‘1954 Act’). Licensees enjoy no such protection. For business landlords,then,the true significance of the lease-licence distinction becomes apparent in circumstances where the landlord is seeking to recover possession of the premises. If the occupier is a secure business tenant then its tenancy can only be brought to an end using the mechanisms prescribed by the 1954 Act. From the landlord’s perspective this means that the tenancy may be brought to an end only by serving a valid notice under section 25 of the Act. In the section 25 notice the landlord must specify which of the grounds set out in section 30 of the 1954 Act they are relying on to justify termination of the tenancy. If the landlord cannot make out any of the grounds for termination, and if the tenant is unwilling to give up possession, then the tenancy will continue. Even if the landlord can satisfy section 30 the tenancy can generally be brought to an end only by providing alternative accommodation or by paying compensation for disturbance.These requirements can only be avoided if the landlord is able to make out one of the ‘bad tenant’ grounds set out in section 30(1)(a), (b) and (c) – an extremely difficult hurdle to overcome. Section 38 of the 1954 Act provides that any agreement to restrict or exclude a tenant’s right to compensation for disturbance will be void unless the landlord can show that as at the date of termination of the tenancy there has been less than five years’ continuous business occupation by the tenant or the tenant’s predecessor in the same business.The potential usefulness of the ‘five year rule’ is blunted where the landlord has been proceeding on the basis that occupation was as licensee and not as tenant.Having assumed that the occupier was a licensee it is highly unlikely that the landlord will be able to point to anything like an agreement to exclude the right to compensation. Consequently, even if the arrangement has been in place for less than five years,it is unlikely that the landlord will be able to avoid the payment of compensation.

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The risk of informal arrangements So how can a situation arise in which a landlord finds themselves unwittingly saddled with a secure business tenant? All too easily.

Early occupation It is a fairly common scenario. A would-be landlord and tenant are negotiating the terms of a new business lease. The tenant needs to gain access to the premises as soon as possible to begin its fitting out works – perhaps to ensure that the premises are ready to trade in time for Christmas.If the tenant is not allowed access at once then the deal will fall through.In these circumstances the landlord might well be tempted to let the prospective tenant in to begin their works – taking the precaution of putting in place a ‘licence’. Once in occupation a tenant’s attention might well shift away from the negotiations for the lease.Equally,once the landlord begins to receive their ‘licence fee’the urgency of putting in place the formal lease might bleed away – particularly if the licence fee is equal to the rent that would have been payable had the lease been completed. So what can go wrong? A licence is not a licence if it: •

grants exclusive possession

•

is for a fixed term

•

reserves a rent.

There is a danger that, in granting a licence that has these constituent elements, the landlord could inadvertently create a tenancy which may be protected by the 1954 Act. If the document is not carefully drafted then there is a significant risk that the arrangement will be construed as a lease rather than as a licence. In Street v Mountford the House of Lords emphasised that the Courts will look to the substance of an agreement, and not to the label that the parties choose to apply to it. Consequently,if the ‘licence’in fact confers exclusive possession then it is highly likely that it will be construed as a lease giving rise to a secure business tenancy. Even if the document was carefully drafted there is still a possibility that the arrangement will have given rise to a tenancy, again because it will in fact have conferred exclusive possession.The Courts will look to all the circumstances,and not just to the words used. For example, the landlord may attempt to rebut any idea that exclusive possession has been given by reserving a right to require the occupier to move to another part of the premises. This approach would be effective if the landlord had other premises enabling them to turn the right into a reality.

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However,if the ‘licensed’premises comprise the whole of a building or the landlord’s premises within the building,or if all of the other units within a scheme are already occupied, then it will be clear that, in fact, the landlord has no ability to move the ‘licensee’ around.

Tenancies at will – holding over after the expiry of a contracted-out tenancy When a contracted-out lease expires the tenancy created by that lease ends.Once the lease has expired the tenant has no further right to occupy the premises. Any continuing occupation amounts to a trespass.In practice,however,tenants frequently remain in occupation whilst negotiations proceed for the grant of a new contracted-out lease. The key question in these circumstances is what, if any, documentation or correspondence is required to safeguard the landlord’s position?

The use of open and ‘without prejudice’ letters An approach favoured by some practitioners is to write an open letter to the former tenant to inform them that any continuing occupation of the premises will be regarded as trespass. A second letter expressed to be ‘without prejudice’follows this open letter. In some cases the ‘without prejudice’ letter informs the former tenant that it will in fact be regarded as a tenant at will whilst the negotiations proceed.In other cases (probably the majority) the ‘without prejudice’letter informs the former tenant that the landlord will not pursue its remedies in trespass provided that the former tenant signs a proffered form of tenancy at will.

What happens if there is no such correspondence, but merely negotiation? The perceived risk in this situation, particularly if negotiations are protracted, is that the former tenant will acquire rights which confer security of tenure – for example by paying periodic sums equivalent to rent. For the landlord the risk has been obviated by the decision of the Court of Appeal in Javad v Aquil [1991] 1 WLR 1007 and by the decision in Cardiothoracic Institute v Shrewdcrest [1986] 1 WLR 368. These decisions indicate that where a former tenant is in occupation whilst the terms of a new contracted-out lease are being negotiated, then that occupation must be a tenant at will. Key to the Courts’ reasoning is the essential requirement of intention to create a tenancy. If the parties are negotiating the terms of a lease which is to be contracted-out then they cannot sensibly be taken to have intended to create as an interim measure an arrangement which attracts security of tenure.

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In view of these decisions the landlord’s principal concern will be to demonstrate that negotiations for a new contracted-out tenancy were in fact in train. Given evidence of such negotiations the Courts will have little option but to analyse the basis of occupation as being a tenancy at will in accordance with authority. Notwithstanding the strength of authority on the point, practitioners may be uncomfortable with an approach which relies upon inference alone. Moreover, clients might well prefer the comfort of having the situation covered by some form of documentation – not least because in inferring the existence of a tenancy at will the Court will not necessarily rule on its terms.Consequently,for a landlord concerned to maintain their income stream during the period of negotiation,there is a strong incentive to have the terms of occupation made express.Issues arising from the creation of an express tenancy at will are dealt with below.

The ‘two letter’ approach – risks and misconceptions As noted above,if the Courts are presented with evidence of ongoing negotiations for the grant of a new contracted-out lease, following the expiry of a previous tenancy,then continuing occupation will be treated,in the absence of any indication to the contrary, as a tenancy at will. Sending an open letter to the former tenant stating that continuing occupation will be treated as a trespass is inconsistent with the existence of a tenancy at will.The effect of such a letter might well be to terminate any implied tenancy at will which came into being on the expiry of the former tenancy.

Double value under the Act of 1730 A letter stating that continued occupation is trespass amounts to a written demand for possession. It therefore brings into play section 1 of the Landlord and Tenant Act 1730.This provision was enacted to penalise tenants who wilfully refused to yield up possession at the end of their tenancy. Under it, the landlord is entitled to sue for double the yearly value of the premises. The value is ‘what an occupier would give, and the landlord would otherwise have received, for the use of the freehold and everything connected with it, during the time that the possession is withheld’(Robinson v Learoyd (1840) 7 M&W 48 per Parke B). The statute was intended to penalise tenants who held over wilfully,so there was no need to prove that the landlord would in fact have been able to let the premises during the period of holding over. The Act of 1730 is therefore a powerful weapon in the hands of a landlord and represents a significant incentive on the tenant to yield up possession. Given the draconian nature of the remedy its operation is closely circumscribed. It is essential that the tenant should hold over wilfully or ‘contumaciously’(French

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v Elliott [1960] 1 WLR 40 at 51).The tenant holds over wilfully only when he ‘holds over in the absence of a bona fide belief that he is justified in doing so’ (Swinfen v Bacon (1861) 6 H&N 846 at 848 per Cockburn CJ). It is possible that the carrying on of negotiations for a new lease will in itself suffice for a tenant to resist any claim for double value. Authority on this point is slight, stemming from a comment of Lord Mansfield referred to in the English Reports (Anon (1805) 5 Esp.215). However, the suggestion seems tenable in that during negotiations the ex-tenant might reasonably expect to be permitted to remain in occupation, giving rise to a bona fide belief that he is justified in doing so. The availability of double value becomes even more doubtful where the landlord accompanies or follows their letter asserting trespass with another letter (albeit one expressed to be ‘without prejudice’) indicating a willingness to allow the tenant to remain. As noted above, such a letter might itself purport to set up a tenancy at will or it might proffer a form of tenancy at will for signature.In either case it would support a tenant’s view that its holding over was not wilful or contumacious so as to give rise to liability for double value. The extent to which a tenant could rely upon the ‘without prejudice’letter to defend any claim for double value would of course depend upon the admissibility of the letter. If properly used the ‘without prejudice’ formula would cause privilege to attach to the correspondence. However, it is arguable that the use of ‘without prejudice’ correspondence is inappropriate in this context since the contents probably do not seek to contribute towards the settlement of a dispute. If use of the ‘without prejudice’formula were held to be inappropriate in this context then the letter reassuring the former tenant that it would be allowed to remain in occupation would be admissible and would support the tenants’ contention that double value ought not to be recoverable. In any event, any benefit obtained by attaching privilege to that correspondence would be nullified if the former tenant were able to adduce other correspondence or evidence of ongoing negotiation. In summary,if the attraction of sending a letter asserting trespass is to make available to the landlord the remedy of double value, then it is likely that such attraction is illusory unless that letter genuinely stands alone.

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Terminating the implied tenancy at will – what happens next? As noted above,a letter stating that the landlord will regard continued occupation as trespass is inconsistent with the existence of a tenancy at will. Such a letter will bring to an end any existing tenancy at will, including any implied pursuant to the decisions in Javad v Aquil and Cardoiothoracic v Shrewdcrest. The ‘without prejudice’ letter which follows might purport to set up a tenancy at will or it might proffer a form of tenancy at will for signature.The key risk in either situation is that the expressly created arrangement might contain an element fatal to its status as a tenancy at will – common examples being the inclusion of any period of notice, a right of re-entry or the reservation of a periodic rent. In short,the tenancy implied by the Courts during a period of holding over,pending negotiation, will be a tenancy at will. An arrangement put in place by the parties themselves might be labelled as a tenancy at will but might in fact be something else – a tenancy enjoying protection under the 1954 Act.

Recommendations •

Do not leap in with a letter alleging trespass unless you mean it.It causes uncertainty and probably achieves nothing if the objective is to trigger entitlement to double value.

•

Try to conclude negotiations for the new lease before the expiry of the old lease.

•

If this is not possible,but negotiations are well advanced,it is safe enough to rely upon the implied tenancy at will.Should negotiations go off then the tenancy at will may be terminated and the letter asserting trespass can be sent.

•

If an express tenancy at will is to be entered into ensure that it is truly at will and does not unwittingly create a protected tenancy.

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Short-term tenancies excluded from protection Given the vulnerability of poorly considered licence agreements and tenancies at will,landlords are often well advised to consider granting a short-term tenancy to cover a situation in which access is required prior to the full lease being concluded.This approach finds its basis in section 43(3) of the 1954 Act which excludes from the protection of Part II of that Act a tenancy granted for a term certain not exceeding six months unless: •

The tenancy contains provision for renewing the term or for extending it beyond six months from its beginning

•

The tenant has been in occupation for a period which,together with any period during which any predecessor in the carrying on of the business carried on by the tenant was in occupation, exceeds twelve months.

For practitioners, debate has focused on the point at which section 43(3) ceases to apply. If negotiation of the full lease proves to be a protracted affair landlords may find themselves under pressure to grant a succession of short-term tenancies to ensure that continuing occupation by the tenant is properly regulated.There is disagreement,though,about the extent to which section 43(3) will protect a landlord who grants more than one such tenancy.Certainly,it is possible to grant two successive leases of just less than six months.Each lease will be for a term certain of less than six months and at no point will the tenant have been in occupation for twelve months or more. However, it is sometimes argued that the landlord would remain within the protection of section 43(3) if a third such lease were granted since,at the point of grant,the tenant would not have been in occupation for twelve months or more. According to this view it does not matter that during the course of the third short lease the tenant will pass the twelve month mark. Some guidance as to the scope of section 43(3) was given in Cricket Limited v Shaftsbury [1999] 2 EGLR 57.This case arose from a situation in which two fixed term tenancies, each of less than six months, were followed by a period in occupation as tenant at will.The occupier argued that once they had been in occupation for more than twelve months they acquired protection under the 1954 Act.That contention was rejected on the grounds that occupation as tenant at will, following the expiry of the second tenancy, could not revive that second tenancy once twelve months of occupation had been chalked up. Occupation would have to be ‘as tenant’ which, in this context, must mean as tenant under a lease creating a term certain. Whilst Cricket Limited v Shaftsbury did not deal with a situation in which a third fixed term tenancy of less than six months was granted,the comments of Neuberger J do seem to indicate that landlords will not be on safe ground in granting a series of more than two short terms. Although the wording of section 43(3) seems to

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direct attention to the length of prior occupation at the point when the lease is granted, there is a distinct possibility that a lease which is not protected by Part II of the 1954 Act when it is granted, might attract that protection at the point when the period of occupation exceeds twelve months. For landlords, then, the prudent approach must be to grant no more than two leases,each not exceeding six months, having first ensured that there is no period of prior occupation to be taken into account.

Can a mere licensee grant a lease? In Bruton (AP) v London and Quadrant Housing Trust [1999] 2 EGLR 59 the House of Lords found that in certain circumstances a mere licensee can create a tenancy which attracts the protection of statutory provisions. A lease may be valid as between ‘landlord’ and ‘tenant’ but not against the rest of the world. It is not necessary for the ‘landlord’to have an estate in land to create a binding ‘tenancy’ as between himself and his ‘tenant’. Quadrant are a housing trust. They are licensees of a block of flats owned by Lambeth Borough Council (the Council). The Council permitted Quadrant to use the premises in connection with its charitable housing objects. Quadrant allowed Bruton to occupy a flat on a ‘weekly licence’ paying £18 per week.The agreement made it clear that Quadrant only had a licence from the Council and provided that Bruton would vacate on receiving reasonable notice from Quadrant. Bruton claimed that Quadrant was in breach of the repairing obligations implied by section 11 of the Landlord and Tenant Act 1985.Those implied duties apply to ‘a lease of a dwelling house granted on or after October 1961 for a term of less than seven years’. The question, therefore, was whether the arrangement constituted a lease,notwithstanding its description as a licence,and notwithstanding that Quadrant itself only had a licence. In essence, the case was dealt with by straightforward application of Street v Mountford [1985] AC 809.Where residential accommodation is granted for a term, at a rent and with exclusive possession, the landlord providing neither attention nor services, the grant is a tenancy, notwithstanding the fact that the agreement professes an intention by both parties to create a mere licence. It is the legal consequences of the agreement which are determinative rather than the label which the parties have chosen to attach to it.In this case Quadrant granted exclusive possession to Bruton – a fact which (as Lord Jauncey of Tullichettle observed) was fortified by Quadrant’s reservation of rights of access for limited purposes.

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In Lord Hoffmann’s view there was no need to look beyond Street v Mountford to decide the case.However,he considered it necessary to comment on the leading majority judgment delivered by Millett LJ in the Court of Appeal, in the course of which Millett LJ had (somewhat startlingly) stated that an agreement could not be a lease unless it created a legal estate in the land which ‘binds the whole world’. The House of Lords specifically overruled the Court of Appeal on this point.The term ‘lease’ or ‘tenancy’ describes a relationship between two parties who are designated landlord and tenant.It is not concerned with the question of whether the agreement creates an estate or other proprietary interest which may be binding on third parties.The sequence derived from Lord Hoffmann’s speech is: •

Analyse the document to ascertain whether it is a lease or a licence

•

If the agreement is a lease, determine whether that lease creates a proprietary interest.

‘It is putting the cart before the horse to say that whether an agreement is a lease depends upon whether it creates a proprietary interest.’ Lord Hoffmann suggested that Millett LJ may have been misled by the ancient phrase ‘tenancy by estoppel’,into thinking that it described an agreement which would not otherwise be a lease or tenancy but which was treated as being one by virtue of an estoppel. In fact, it is the tenancy which creates the estoppel, not the estoppel which creates the tenancy.The basis of the estoppel is that having entered into an agreement which constitutes a lease or tenancy, a party cannot escape its obligations under that agreement by denying its validity,on the ground that no legal estate was created. The House of Lords’decision has effectively dispatched the additional requirement proposed by Millett LJ in the Court of Appeal – that the agreement should create a legal estate.In analysing whether an agreement is a lease or a licence,it is necessary only to look at the arrangement between the parties,applying Street v Mountford. The decision closes a potential method,suggested by the Court of Appeal majority judgments,of avoiding the security of tenure provisions of the 1954 Act.If it were the case that a mere licensee could not grant a tenancy, then a landlord would need only to grant a licence to its nominee, out of which the occupational agreements would be carved.These occupational agreements could be nothing more than licences and so would fall outside the protection of the 1954 Act. In this case,the effect of the decision is that the Council could dispossess Quadrant (for breach of its licence – assuming that on analysis it could not be said to be a lease) and then Bruton.However,whilst Quadrant remains as licensee the Council cannot dispossess Bruton and Quadrant cannot dispossess Bruton since between them there is a tenancy with statutory protection.

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Whether this has significant implications for landlords of business premises remains to be seen. If a mere licensee can grant a tenancy that is effective as between itself and the occupier, then there seems to be no reason in principle why that tenancy should not attract the protection of Part II of the 1954 Act. However, it must be doubted that such a tenancy would bind the superior landlord so that the superior landlord would become the ‘competent landlord’ for the purposes of the security of tenure and lease renewal provisions of the 1954 Act. The tenancy created by a licensee is effective only as between the licensee and its ‘tenant’. The House of Lords ruling in Bruton has been criticised by a number of commentators (see for example Sandi Murdoch’s item in the Legal Notes section of the Estates Gazette,31 July 1999) as having overturned a fundamental principle of the law relating to landlords and tenants. It remains to be seen whether an enterprising occupier might seek to test the applicability of the decision in the context of business occupation.

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Excluding security of tenure LANDLORD AND TENANT ACT 1954 – SECTION 38(4) A LT E R A T I O N S T O T H E D R A F T L E A S E THE PURPOSE OF SECTION 38(4) USING THE ‘WRONG’ COURT RIPE FOR REFORM?

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TENURE

Chapter 2: Excluding security of tenure

Landlord and Tenant Act 1954 – section 38(4) As originally enacted the 1954 Act had no provision for ‘contracting out’ of the security of tenure provisions. Consequently, even where the parties agreed that the letting was to be for a short-term, the landlord was faced with the prospect of having to serve a valid section 25 notice in order to bring the tenancy to an end following expiry of the contractual term.Given the possibility that the tenant would claim a new lease at the end of the term the landlord would be reluctant to tone down the tenant’s covenants to reflect the short-term nature of the initial letting.Consequently,a tenant seeking to occupy premises for a short period might well be faced with full repairing and insuring terms more suitable for a long term tenancy. Section 5 of the Law of Property Act 1969 introduced a procedure for taking a lease outside the security of tenure provisions of the 1954 Act. Its effect was to introduce into the 1954 Act,section 38(4),under which the Court was empowered to authorise agreements between would-be landlords and tenants to exclude sections 24 to 28 (inclusive). Section 38(4)(a) states that the Court may: ‘On the joint application of the persons who will be the landlord and the tenant, in relation to a tenancy to be granted for a term of years certain, which will be a tenancy to which this Part of this Act applies, authorise an agreement excluding in relation to that tenancy the provisions of sections 24 to 28 of this Act.’ The agreement must be contained in or endorsed on the agreement,creating the tenancy or such other instrument as the Court may specify. It is extremely important to note that the only persons entitled to apply for an order under section 38(4) are those who ‘will be’the landlord and tenant in relation to a tenancy to be granted for a term of years certain.In other words,if the parties are already landlord and tenant in relation to the tenancy, then it is too late to apply to the Court. Once the landlord-tenant relationship has been established it is not open to the landlord to exclude the security of tenure provisions of the 1954 Act.

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The need to obtain an order under section 38(4),before any relationship of landlord and tenant is established,is clearly of great significance where a tenancy has been inadvertently created (for example where a licence proves to be a lease or where a tenancy at will contains fatal flaws). It is equally important to keep the requirements of section 38(4) in mind when there is no doubt that the parties intend to create a tenancy.This tenancy must not be created until the section 38(4) order has been obtained. A trap that is easily fallen into is to equate the creation of the tenancy with the granting of the lease. A landlord acting under this misapprehension might decide to bind the prospective tenant to the deal by exchanging an agreement for lease. Unless that agreement is expressed to be conditional upon obtaining a section 38(4) order then the landlord will have missed their chance. Entering into an unconditional agreement for lease will itself create a tenancy – a point expressly recognised by the Landlord and Tenant (Covenants) Act 1995,section 28 of which defines ‘tenancy’ to include an agreement for a tenancy.

Alterations to the draft lease The need to obtain the Court order before the landlord-tenant relationship is established gives rise to a significant practical difficulty. Section 38(4) requires that the parties’ agreement must be contained in or endorsed on the agreement creating the tenancy. Consequently, the practice developed of annexing the proposed form of lease to the application. The prevalence of that practice has led to a situation in which the Court’s order has been regarded as applying to the particular form of lease attached to the application.Consequently,if any amendments are made to the draft lease between obtaining the order and the grant of the lease,counsel of caution has been to obtain a fresh order – however slight the amendment. Practitioners have formed sharply divergent views on this issue. For those who consider that any difference between the draft put before the Court and the lease actually entered into could be fatal, there is no alternative to a fresh application. Others have looked to the provisions of section 38(4) and have concluded that there is in fact no requirement for the Court to approve – or even to see – the draft lease. It merely requires that the parties’ agreement to exclude sections 2428 should be contained in or endorsed on the agreement creating the tenancy. So long as the Court is satisfied that the agreement was in place the precise terms of the draft lease should not matter.Yet others have focused on the requirement that the parties making the application should be those who are to be landlord

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and tenant ‘in relation to a tenancy’. This focus has led to the view that the true test is whether changes to the draft lease are so fundamental that,had the tenancy been granted on the basis of the original draft,those changes would have triggered a surrender and regrant. At the beginning of 2000 the Courts were presented with an opportunity to provide guidance on this vexed issue. On 9 February 2000 the Court of Appeal gave judgment in the case Receiver for the Metropolitan Police District v Palacegate Properties Ltd [2000] All ER (D) 151.The case concerned the validity of a section 38(4) order in circumstances where the lease as entered into by the parties differed from that presented to the District Judge. Overturning the ruling at first instance, the Court of Appeal held that changes to the provisions relating to payment of rent did not nullify the order. However, Pill LJ was at pains to stress that this did not amount to a ‘green light’for landlords to make wholesale changes to the draft tenancy submitted to the Court, when approval was sought. The lease entered into must bear a ‘substantial similarity’ to that before the Court when authority was given.

The purpose of section 38(4) Central to the case was the remit of the Court when dealing with section 38(4) applications.Pill LJ agreed that the purpose of the section was ‘to enable the Court to satisfy itself that the prospective tenant understands that that they are foregoing the protection of sections 24 to 28 of the Act’. The Court’s role is not to consider the fairness of the bargain which the parties propose to make.So,even if the terms of the lease seem to be weighted heavily in favour of the landlord,the Court would not be empowered to refuse an order if satisfied that the tenant understood the consequences and agreed to forego the protection of the security of tenure provisions. Pill LJ stressed, though, that effect must be given to the words ‘in relation to that tenancy’. In his view those words require the lease entered into by the parties to bear a substantial similarity to that submitted to the Court as part of the application.In particular,changes material to the need for protection may nullify the authority granted.

What are ‘changes material to the need for protection’? To illustrate the approach that would be taken Pill LJ referred to a situation in which a lease contemplates substantial capital expenditure by the tenant. He observed that a Court authorising an agreement excluding protection would be expected to make greater enquiry as to the proposed tenant’s consent if the term was a

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short one,rather than if the term was a long one and so a change which substantially shortens the term would be material.To expand upon this example – suppose a tenant is to enter into an obligation to spend £50,000 on works which will become landlord’s fixtures at the end of the term; the Court will be readier to believe that a tenant who is taking a ten year lease appreciates the consequences of excluding sections 24 to 28 than it would be if the proposed term were three years. Consequently if a Court,satisfied that the tenant has given informed consent,makes an order in respect of a ten year lease and that term is subsequently shortened to three years, then the order may be nullified. It is important to note that the Court is making no judgment as to the fairness of the terms,rather,its attention is focused on the degree to which the tenant can be taken to have understood, and agreed to, the consequences of foregoing security of tenure.

The ‘Friends Provident’ point On behalf of the landlord, Kim Lewison QC argued that the test of materiality should be drawn by analogy with the Court of Appeal decision in Friends Provident v British Railways Board [1996] 1 All ER 336.Friends Provident was concerned with the question of whether a variation to a lease amounted to a surrender and regrant.The Court of Appeal held that a surrender and regrant by operation of law would occur where the variation affected the legal estate and either increased the extent of the demised premises or the term for which they were held. If a variation does not trigger a surrender and regrant by operation of law then the lease, and the tenancy, remain intact. Pill LJ rejected the argument that the analysis of section 38(4) should be couched in these terms. Indeed, had he accepted that a variation would be material only if it would trigger a surrender and regrant, then the example which he gave of a reduced term would have been untenable. A change to the lease terms may nullify the section 38 order even if it does not trigger a surrender and regrant.The test is whether the Court should have made more extensive enquiries as to the tenant’s informed consent had it been faced with the amended lease,rather than the lease as submitted to it.

Implications Before the decision in Palacegate it was widely considered that the only safe course was to obtain a fresh Court order if any amendments or variations were made to the lease between the date of the Court order and the grant of the lease.If obtaining a new order was not practicable due to time pressures,then the practical approach often adopted was to grant the lease in the form annexed to the Court application,but on terms that it would be varied immediately after the grant.The

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reasoning was that it would then be open to the landlord to argue that the instrument creating the tenancy was in the form approved by the Court and (provided that the amendments did not trigger a surrender and regrant) that the tenancy remained unaffected by the subsequent variation. Palacegate seems to have established that, so long as the amendments are not material, the parties may enter into a form of lease which does differ from that seen by the Court. Consequently, in view of Palacegate there is no reason in principle why amendments should not be made before the lease is granted – so long as those amendments are not ‘material’ in the sense discussed in the case. The case provides considerable comfort where certain fairly common amendments are to be made,for example,inserting a forgotten stamp duty certificate,(arguably) adding a new clause to exclude the operation of the Contracts (Rights of Third Parties) Act 1999,and correcting the details of the parties and/or of their registered offices.In these instances,it is highly unlikely that such amendments would nullify the Court’s order and so there will be no need to obtain a replacement.The tenancy entered into would be substantially similar to that considered by the Court when making the order. An example at the other extreme would be the insertion of a landlord’s break clause. This would clearly be capable of negating the order since it would allow the landlord to shorten the term.Equally,an amendment which increased the tenant’s repairing obligations might well negate the order, for example, where the draft put before the Court indicated that the tenant’s liability was limited by reference to a schedule of condition;removal of that limitation would make the tenancy substantially different to that envisaged by the draft. Any major amendment to the terms of the lease might negate the order and require you to seek a replacement. As ever, there will be borderline cases. Caution is still necessary. If the amendment to be made goes beyond the administrative details of the lease (parties’details,addresses,stamp duty certificate) then caution should still prevail. The section 38(4) order is for the benefit of the landlord.If there is a risk that it might be nullified then the landlord’s solicitor should consider obtaining a new order. An application in the Palacegate case for leave to appeal to the House of Lords has since been rejected.

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Using the ‘wrong’ Court In 1994 the decision in Nicholls v Kinsey [1994] 1 EGLR 131 confirmed that an order granted in excess of the Court’s jurisdiction would be invalid. The case turned on whether the lease granted created a ‘term of years certain’. The lease was granted for a year but was to continue thereafter from year to year. The Court of Appeal held that this was not a term certain and that the County court’s order was a nullity. Section 38(4) provides narrow grounds on which an agreement which would otherwise be void may be authorised. In other words, section 38(4) defines the limits of the Court’s jurisdiction. If the Court operates outside those limits then its order is invalid. The decision in Nicholls v Kinsey emphatically ousted any idea that if the parties managed to obtain a Court order then they were home and dry.The parties had to be sure that the Court was acting within its powers when granting the order. Attention shifted from the requirements of section 38 to the rules governing applications to the Court. Practitioners reasoned that the Court could exceed its jurisdiction in other ways – for example by making an order where the application was made in the wrong Court – and that any order made in excess of jurisdiction would be a nullity. Concern arose from the common practice of making section 38(4) applications to County courts used to dealing with such applications and conveniently located for the solicitor making the application, rather than to the County court serving the area in which the property was located or in which one of the parties carried on its business. Solicitors making such applications would include in the application a statement that notwithstanding the location of the property the parties submitted to the jurisdiction of that Court. The suggestion that this practice might have given rise to an enormous number of void orders was far from welcome. Worries were dispelled by the Court of Appeal in St Giles Hotel Limited v Microworld Technology Limited and others [1997] 2 EGLR 105. The Court confirmed that orders made pursuant to applications brought to the ‘wrong’Court would not be a nullity,but merely an irregularity.It was pointed out that the County court Rules Ord 16 rule 2 gave the Court various options when dealing with an out-of-jurisdiction application. It could: •

Transfer the proceedings to the Court in which they ought to have been commenced

•

Order the proceedings to continue in the Court in which they had been commenced

•

Order the proceedings to be struck out.

If the Court elected to continue the proceedings and made an order then that order would stand.

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The issue re-emerged in 1999 with the introduction of the new Civil Procedure Rules (the ‘Woolf reforms’).The rules dealing with the choice of Court closely followed the wording of the County court Rules. However, the accompanying practice direction was couched in emphatic – indeed mandatory – terms indicating that applications could only be made to the Court serving the area in which the property was located or in which one of the parties carried on business. The concern was that whilst the new rules preserved the Court’s discretion to accept out-of jurisdiction applications, the practice direction limited the Court in its exercise of that discretion. Moreover, the new Civil Procedure Rules were not to be construed in the light of pre-existing case law and so cases such as St Giles v Microworld offer no comfort. During the year in which the Woolf reforms were implemented practitioners’ concerns on this issue have largely subsided.When applying for an order under section 38(4) practitioners routinely include in the claim form a specific request that the Court should exercise its discretion under CPR 30.2 to continue a claim notwithstanding the location of the property. The draft order submitted to the Court records that the Court has considered the point and has exercised its discretion to continue the application and to make an order.Faced with an order which makes it clear that the Court has specifically addressed the question of jurisdiction it is unlikely that a tenant could successfully argue that the order was a nullity. Nonetheless, this apparently dry technical point has had the salutary effect of focusing practitioners’attention on the requirements for a valid section 38 order. Solicitors are now acutely aware that an application should be made to the correct Court and that to apply to any other Court is to run the risk that the District Judge will decide not to continue the claim. In such cases critical time – and perhaps even the deal – might be lost.

Ripe for reform? As the flurry of concern and commentary following Nicholls v Kinsey and the implementation of the Woolf reforms demonstrates, the practical importance of section 38(4) orders means that practitioners must be fully aware of the detailed technical requirements and the various pitfalls associated with the Court procedure.Indeed,many consider that a disproportionate amount of time is spent dealing with these orders. However, the prospects of reform seem slight. Before the 1997 election a working party was in operation, examining the possibility of replacing the Court-based process with a simple exchange of letters confirming that the parties did not intend security of tenure to attach to the tenancy.With the election of the ‘New Labour’ government the working party disappeared. A

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recent attempt by the British Property Federation to restore this issue to the political agenda seems to have been decisively rebuffed by the government – perhaps deterred by the prospect of headlines declaring that it was making it easier for landlords to deprive tenants of their rights under the 1954 legislation.

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Break clauses BREAK NOTICES AND THE MANNAI TEST CONDITIONAL BREAK CLAUSES BREAK CLAUSES AND THE SURVIVAL OF UNDERLEASES

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Chapter 3: Break clauses As the property market moved from the boom of the 1980s,through the recession of the early 1990s and into the technological revolution of recent years, an increasingly competitive environment has fuelled the trend towards shorter and more flexible leases. A key source of flexibility is the inclusion within the lease of break options. As their use has become more widespread so the drafting and operation of break clauses has come under closer scrutiny, leading to a number of extremely important rulings.

Break notices and the Mannai test Break options – and in particular the service and operation of break notices – formed the subject matter of one of the most significant House of Lords decisions of recent years, signalling a fundamental shift in the approach to be taken by the Courts in determining the effectiveness of contractual notices. In Mannai Investment Co Ltd v Eagle Star Assurance Co Ltd [1997] 1 EGLR 57 the House of Lords departed from the view that any error or defect in a break notice would automatically invalidate that notice. Prior to the Mannai ruling, notices were required to conform strictly with their contractual or statutory prerequisites.Some errors could be corrected, notably those on the face of the notice that rendered it obviously wrong. However, in the vast majority of cases, mistakes in matters such as name or date would invariably make the notice invalid.Following Mannai, the rule is that the notice will be invalid only where an error would cause a reasonable recipient to be misled. The Mannai principle is particularly applicable to cases in which the date on which the break is to take effect is wrongly stated. Such errors can easily occur – for example where the break date has to be calculated by reference to another date, such as the term commencement date. A break date occurring on the ‘fifth anniversary of the term’ will not be the same as one occurring ‘at the end of the fifth year of the term’.Further discrepancies can arise from the way in which the term commencement date is expressed. A term ‘commencing on 25 December’ may well differ from a term ‘from 25 December’. Before Mannai, a break notice could stand or fall depending on the ability of the tenant or its advisers to identify the correct date – often an exercise in arcana.

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In Mannai itself the tenant served two break notices expressed to take effect on 12 January 1995.The landlord contended that on a true construction of the lease the term commencement date was January 13 1992 and so the third anniversary of the term under each lease was January 13 1995. On this basis the Court of Appeal accepted that the notices were invalid.The tenant’s appeal was allowed by the House of Lords, holding that it would have been obvious to the reasonable recipient of the notices with knowledge of the terms of the leases, that the tenant intended to exercise its break on the third anniversary. The mistake as to the precise date would not have misled the reasonable recipient. Since Mannai was decided a number of decisions have served to indicate the scope of the ‘reasonable recipient’ principle. An error involving the omission of a warning or statement required by statute cannot be cured by applying the ‘reasonable recipient’ test (Sabella Ltd v Montgomery [1998] 1 EGLR 65). By contrast, the test can be applied to elements of a statutory notice which are not an absolute prerequisite to its validity (York v Casey [1998] 2 EGLR 25). The Mannai principle has also been discussed in the context of notices served by the wrong person – a particularly easy trap to fall into where the property is held within a group of companies. A tenant’s notice to determine a lease must be served either by the tenant themselves or by a duly authorised agent.This was the issue in Lemerbell Limited and another v Britannia LAS Direct Limited [1998] EGCS 138. It was held that a notice served by a group company which wrongly believed itself to be the tenant was not valid.The notice could be saved neither by the rule in Mannai, nor by an inference that the company serving the notice was doing so as general agent for the tenant. The tenant under two leases was a company called LAS Direct Limited (‘Direct’). The Life Association of Scotland (‘Life’) was a company in the same group.In 1992 the solicitors acting for the parent company wrote to the landlord informing them that henceforth the premises would be occupied by employees of Life.Crucially, there was no assignment from Direct to Life. Correspondence and invoices in respect of the premises were addressed by the landlord to Life, and Life paid the rents.Then, in November 1994, Life purported to serve notices under the Landlord and Tenant Act 1954, section 27(1) to bring the leases to an end.The notices described Life as ‘successors in title’ to Direct.

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Life argued that, even though the notices contained a number of inaccuracies, they ought to be held valid following Mannai since they would not have misled a reasonable recipient, and that in any event Life must be taken to have served the notices as general agent of Direct. In the High Court, it was accepted that Life had been acting as general agent for Direct,and that the landlord had known of this,as evidenced by the correspondence and invoices. This decision was reversed by the Court of Appeal. The Court of Appeal held that there was not sufficient material from which it could properly be inferred that Life was authorised to serve notices on behalf of Direct. Accordingly,the landlords could not have acted on the break notices safely in the knowledge that they were effective. Moreover, even if it could have been shown that Life was authorised to service notices on behalf of Direct,it is doubtful that the particular notices which were served would have been effective.The decision in Mannai was distinguished. It was held that this was no mere slip, such as an incorrectly typed or calculated date. The notices could not be construed as having been given on behalf of Direct since Life had in fact described itself as the tenant by virtue of being ‘successor in title’ to Direct. Life had, in fact, offered an explanation which was wholly inconsistent with the notices having been served on behalf of Direct and so the tenancy had not been brought to an end. The issue was considered against a different factual background in Havant International Holdings Ltd v Lionsgate (H) Investment Ltd [1999] EGCS 144. The lease in this case was vested in the name of a holding company (HIHL). Due to a variation in the lease made when the lease was assigned to it, HIHL had the benefit of a personal right to break the lease in 1999. However, the break notice was served by, and in the name of, the main operating company, Havant International Ltd (HIL). When the validity of this notice came before the Court two main issues had to be decided.Firstly,in deciding whether or not a reasonable recipient would have been misled, what evidence could be put before the Court? Secondly, are some mistakes so fundamental that they will always invalidate the notice? In Mannai Lord Steyn said the Court should ask ‘what reasonable persons circumstanced as the parties were,would have had in mind’.In Havant the tenant argued that when deciding whether a reasonable recipient would have been misled, the Court must take account of what the actual recipient knew. The landlord contended that the test was objective and that evidence as to its particular state of knowledge was inadmissible. In the landlord’s view the only relevant information was the terms of the lease and its variations, and also, in the present case, the fact that HIL existed as a separate company.

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Hart J concluded that the reasonable recipient test was objective,and that evidence as to the knowledge of the actual parties was not admissible.However,the question of HIL being a separate entity was different – and crucial.If this information were not admissible,then the notice would have to be regarded as valid,since a reasonable recipient could only have concluded from the use of the name HIL that either HIHL had changed its name or that a simple clerical error had been made.However, the Judge was satisfied that the fact that HIL existed must be admitted;it was not a matter of subjective knowledge, but of material that was in the public domain. This meant that the outcome hinged on the construction of the notice.The Judge rejected the landlord’s contention that an error as to the party giving the notice was so fundamental that it always rendered the notice invalid. In his view, it is always necessary to look at each individual notice.Thus,the key issue was whether a reasonable recipient would take the view that there had simply been a mistake as to the description of the tenant, in which case the notice would be valid, or whether like the landlord in Lemerbell, he would entertain the possibility that there had been an unlawful assignment to a company that now wrongly believed that it could exercise the right to break.While the answer was not easy, he concluded that the notice was valid.

Conditional break clauses It is common for a tenant’s break clause to be conditional on compliance with the lease covenants. Sometimes this is limited to ‘material’ or ‘substantial’ compliance. In practice such qualifications are of little effect. Any outstanding failure to comply, however minor, will mean that the exercise of the break will fail (see Trane (UK) Ltd v Provident Mutual Life Assurance [1994] EGCS 121). A provision that the break is ‘without prejudice to either parties’rights in respect of any antecedent breach’will not detract from the need to comply. The significance of this point for tenants is enormous.The decision of the Liverpool County court in Osborne v Britannia (unreported) confirmed the worst fears of practitioners. In this case a tenant lost their right to break because they had failed to comply with their decorating covenant – having applied only two coats of paint rather than the three coats required by the lease.Tenants will therefore strongly (and with good reason) resist a break clause which is conditional upon compliance with all covenants.The tenant’s arguments on this point are: •

The parties have agreed a break and so its exercise should not be prevented by minor breaches of covenant

•

Exercise of the break will be without prejudice to the parties’ rights in respect of antecedent breaches and so the landlord will have a remedy in respect of such breaches.

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A breach which has been remedied (so that the landlord no longer has a cause of action in relation to it) will not defeat a break clause (Bass Holdings v Morton Music (1987)).If there are breaches which can be remedied,then the tenant should attempt to remedy them. Where ‘the lease’ includes supplemental documents, these must be checked for additional obligations, for example reinstatement obligations in a licence for alterations.Where reinstatement obligations are at the landlord’s discretion, the landlord should be requested to elect whether or not they wish to exercise that discretion and,if so,in relation to which alterations. The landlord should be asked to give that election within a reasonable time so that the tenant has time to carry out the relevant works. Where the tenant must comply with repairing or decorating covenants, it may be sensible to instruct surveyors to advise on what is necessary to comply with the lease:surveyors should be directed to the specific clauses of the lease which they are to advise on. If dilapidations are identified,the landlord can be asked to confirm that specified remedial works will satisfy the relevant condition in the break clause.The tenant would normally have to pay any landlord’s surveyor’s fees in connection with giving such a confirmation. In some cases, for example, if it is believed that the landlord intends to redevelop the property, the tenant may want to ask for a confirmation that it need not comply with repairing or decorating covenants. Another common condition is that the tenant must have paid all rents due.The definition of ‘rents’ will be important here. If it includes all sums due under the lease,then it may be wise to ask the landlord for a specific confirmation that there are no outstanding sums.Moreover,care must be taken if the break date is a quarter day.Where rent is payable quarterly in advance the whole of each quarter’s rent falls due on the relevant quarter day. So, for example, on 25 December, the rent payable in respect of the period 25 December – 24 March becomes due and payable. Therefore,in order to comply with the precondition as to payment of rent where the break date was 25 December the tenant would have to pay the whole sum up to 24 March. Although authority on the point is slight, it is likely that in the absence of express wording the tenant will not in fact be entitled to recovery of sums paid in advance since they will have fallen due and become payable on the quarter day.This problem can be avoided if the break date does not fall on a quarter day and if express provision is made for any recovery. Given the strict way in which the Courts have upheld conditions precedent means that tenants’ solicitors are extremely unwilling to agree break clauses which are conditional upon full compliance with covenants.Indeed,arguments over conditional break clauses can add significantly to the time and cost of negotiating a lease.

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So what can be done to remove this point of contention? One possibility would be to cover the point in heads of terms, cutting down the lawyers’ room for argument.If the parties agree that there should be a break then it should be made clear at the heads of terms stage whether the break is to be conditional and, if so,on what.If heads of terms specifically stated that the break was to be conditional upon (for example) service of the requisite notice,payment of rent up to the break date and yielding up vacant possession, then it would be extremely difficult for the landlord’s solicitor to justify the inclusion of a break clause requiring full compliance with all covenants.

Break clauses and the survival of underleases The valid exercise of a break clause can be a matter of great significance to the parties to a lease. For landlords, break options can provide the key to the costeffective redevelopment of a site.For tenants,a break clause can provide an escape from further liability in circumstances where their business is not living up to hopes and expectations, or where shifts in the market lead to an increase in rent at review. However, it is not enough for the landlord and tenant to only consider their respective positions. If any underleases have been granted then the position of the undertenant following exercise of a break must be assessed.Two recent decisions, Pennell v Payne [1995] 1 EGLR 6, [1995] 2 All ER 592 (Court of Appeal) and Barrett and others v Morgan [2000] 06 EG 165, [2000] 1 All ER 481 (House of Lords) have focused attention on the fate of an underlease following determination of the headlease out of which it was carved. Barrett (like Pennell) was concerned with agricultural tenancies. In both cases termination of the headlease had the effect of bringing to an end an underlease by virtue of the common law principle, that termination of a lease brings to an end any leases underlease carved out of it.In Pennell the headlease was terminated by a tenant’s notice to quit.In Barrett the chosen method was a landlord’s notice to determine. Service of the landlord’s notice in Barrett was part of a scheme to achieve vacant possession for the landlord.The tenant accepted service of the notice, having previously agreed not to serve a counter-notice claiming protection under the Agricultural Holdings Act 1986.When no counter-notice was received within the period specified by the 1986 Act the headlease came to an end and, as a result, so did the underlease.The landlord then began possession proceedings against the undertenant.

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The undertenant resisted the possession claim on the basis that the scheme cooked up between the landlord and tenant meant that termination of the headlease was collusive and in fact amounted to a surrender of the headlease.This argument was accepted by the Court of Appeal, where the arrangement was said to be ‘tantamount’to a surrender. A surrender,being a consensual act between landlord and tenant, is not allowed to prejudice the interests of an undertenant. As Lord Millett said in Barrett,‘It is a general and salutary principle of law that a person cannot be adversely affected by an agreement or arrangement to which he is not a party’.This underlying principle was given statutory expression in the Law of Property Act 1925, section 139, which preserves an underlease in the event that the reversionary interest is surrendered or merged. Lord Millett,expressing the unanimous view of the House of Lords,firmly rejected the Court of Appeal’s analysis. The arrangement was ‘not tantamount to,but very different in character from’a surrender. The tenants might have consented to service of the notice to quit but, critically, their consent was not necessary. Service of the landlord’s notice was a unilateral act and it took effect as such.Consequently, the underlease was determined in accordance with the common law principle referred to above. Lord Millett was at pains to stress the key difference between consensual and unilateral methods of termination. To be effective a consensual method requires the consent of both parties. A tenant may offer to surrender its lease but unless that surrender is accepted by the landlord it will not take effect.By contrast unilateral methods of termination are not dependent upon consent for their validity. A party with the benefit of a break clause may exercise it whether or not the other party agrees.The exercise of a break option is a pre-arranged method for bringing an end to the lease. Having accepted the provision at the outset the party on the receiving end of a break notice must, however reluctantly, accept that the lease may be brought to an end in that way. By extension, an undertenant who takes an interest carved out of a lease which may be broken must accept that its interest is vulnerable to the operation of that break.

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Both Pennell and Barrett were concerned with the position at common law. It is important to remember that the common law position may be overridden by statute. For example, where an underlease is protected by Part II of the Landlord and Tenant Act 1954 the exercise of a break to determine the headlease will be effective to end the contractual term of the underlease, but the tenancy created by that underlease will continue by virtue of section 24(1) which provides: ‘A tenancy to which this Part of this Act applies shall not come to an end unless terminated in accordance with the provisions of this Part of this Act; and, subject to the provisions of section 29 of this Act, the tenant under such a tenancy may apply to the Court for a new tenancy: •

If the landlord has given notice under [section 25 of this Act] to terminate the tenancy

•

If the tenant has made a request for a new tenancy in accordance with section 26 of this Act.’

Section 24(2) provides that nothing in section 24(1) will prevent a tenancy from coming to an end by notice to quit given by the tenant, by surrender, by forfeiture, or by the forfeiture of a superior tenancy unless: •

In the case of a notice to quit,the notice was given before the tenant had been in occupation in right of the tenancy for one month

•

In the case of an instrument of surrender, the instrument was executed before, or was executed in pursuance of an agreement made before the tenant had been in occupation in right of the tenancy for one month.

Importantly,section 24(2) does not provide for the coming to an end of a tenancy where a superior tenancy is determined by notice to quit.Consequently,the exercise of a break clause in a headlease will not terminate the tenancy created by an underlease where that underlease enjoys the protection of Part II of the 1954 Act. For commercial property practitioners the application of the 1954 Act will frequently be the determining factor. When negotiating a landlord’s break option close attention must be paid to the possibility that the tenant might at some stage grant an underlease. In order to be sure that its break will be effective, in respect of the headlease, a landlord will often insist that the lease should contain an agreement to exclude the provisions of sections 24-28 of the 1954 Act (the ‘security of tenure provisions’). Without that provision the landlord’s break will only end the contractual term of the lease. In order to end the tenancy the landlord would have to serve a section 25 notice setting out valid grounds for termination in accordance with section 30

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of the 1954 Act. In order to ensure vacant possession in these circumstances the landlord should also insist that the underlease term does not extend beyond the headlease break date and that any underlease should contain an agreement to exclude the security of tenure provisions.Where both the headlease and any underlease are contracted out, service by the landlord of its break notice should ensure that the headlease and any interest carved out of it comes to an end. ‘Should ensure?’Is it not possible to say ‘definitely will ensure’that the headlease and any interest carved out of it comes to an end? Unfortunately not. The common law principle seems clear enough,but the decision in Pennell was framed in terms that suggest it was largely driven by policy considerations.In particular,the Court of Appeal seems to have been swayed by the consequences which would have followed a holding, that the underlease could survive the tenant’s notice to quit in respect of the headlease.Firstly,the landlord would have had foisted upon him an occupying tenant not of his choosing.Secondly,the landlord would have been unable to enforce the undertenant’s covenants since the Law of Property Act 1925, section 139 operates only where the headlease is determined by merger or surrender. These policy considerations were echoed by Lord Millett in Barrett. Whenever faced with a decision that is expressed in terms of policy,practitioners might reasonably wonder what would happen in a case where those policy considerations were not applicable.In most cases where an underlease is granted out of a commercial lease the landlord will have exercised a degree of control over the underletting. Consent will have been required, and this will have been documented in a licence to underlet. In that licence the landlord may well have taken direct covenants to enable enforcement by the landlord of the underlease covenants.Given these factors the landlord will be unable to say that the continued existence of the underlease would foist upon him a tenant not of his choosing and against whom covenants could not be enforced. After all, the whole point of taking direct covenants is to ensure that the landlord is able to enforce the underlease covenants should the head tenant drop out of the picture. The landlord’s case might sound even more hollow if, when granting the underlease, he failed to ensure that there was express provision for the termination of the underlease in the event that the headlease break were exercised.The landlord might be able to rely upon Barrett to say: •

That breaking the headlease terminates the underlease as a matter of common law

•

The exclusion of the security of tenure provisions means that there is no statutory overriding of that common law principle.

However,such reliance could be a poor substitute for ensuring that the underlease is contracted out and cannot possibly extend beyond the break date contained in the headlease.

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Landlord and Tenant Act 1954 – end of tenancy WHEN DOES A TENANCY END? S I G H T & S O U N D E D U C A T I O N LT D V B O O K S E T C LT D [1999] 43 EG 161 CONCLUSIONS DRAWN FROM RECENT CASES

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Chapter 4: Landlord and Tenant Act 1954 – end of tenancy

When does a tenancy end? This apparently simple question requires close analysis where the tenancy in question is protected by Part II of the 1954 Act.If the lease is contracted out then the answer is clear – the tenancy ends when the lease expires. However, where the security of tenure provisions apply it was thought (prior to the Court of Appeal decision in Esselte AB v Pearl Assurance [1997] 2 ALL ER 41) that the tenancy could only be brought to an end in accordance with the 1954 Act.From the tenant’s perspective that would mean that if they did not wish the tenancy to continue they would have to serve a section 27 notice,even if they had vacated the premises before the end of the contractual term. Esselte confirmed an alternative analysis – that statutory notices are only required where the tenant remains in occupation (or perhaps more accurately when it remains solely entitled to possession) at the end of the contractual term.If the tenant has vacated the premises with no intention of returning then the continuation tenancy effected by section 24 of the 1954 Act never comes into existence. For tenants Esselte represented a way of bringing to an end obligations and liabilities under the lease in circumstances where service of the statutory notices had been overlooked. The decision prevented a landlord from claiming rent and other sums under a lease where the tenant had in fact vacated before the end of the term. However,landlords have subsequently attempted to use the principle established in Esselte to argue that tenants who vacate before the end of the term – or before the date set in the landlord’s section 25 notice for the end of the tenancy – forego their entitlement to compensation.The Courts’ efforts to ensure that tenants are not deprived of their rightful compensation have led to something of a conflict within the concept of ‘occupation’ for the purposes of the 1954 Act.

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Sight & Sound Education Ltd v Books etc Ltd [1999] 43 EG 161 Sight & Sound Education Ltd v Books etc Ltd [1999] 43 EG 161 concerned a tenant’s right to compensation where its landlord served a section 25 notice relying upon grounds (f) and (g) of section 30(1) of the Landlord and Tenant Act 1954 (‘the 1954 Act’).The contractual expiry date of the lease was 28 September 1997. The date specified for termination in the section 25 notice was 25 February 1998. The tenant vacated a few days before the contractual expiry date.The question before the Court was whether the tenant was entitled to compensation for disturbance based on twice the rateable value of the premises.The entitlement to compensation based on twice the rateable value arises under section 37(2) of the 1954 Act where ‘during the whole of the fourteen years immediately preceding the termination of the current tenancy, the premises being or comprised in the holding have been occupied for the purposes of the business carried on by the occupier or for those and other purposes’. The landlord’s argument was that the tenant had not been in occupation for a period of fourteen years immediately preceding the ‘termination of the tenancy’. There was no doubt that the tenant had been in occupation for fourteen years preceding the expiry of the lease,but the landlord pointed out that for the purposes of section 37 the phrase ‘termination of the tenancy’ was defined to mean the date of termination specified in the landlord’s notice under section 25 or, as the case may be,the date specified in the tenant’s section 26 request,as the date from which the new tenancy is to begin.The date specified in the landlord’s section 25 notice was 25 February 1998.The tenant had vacated on or before 28 September 1997. The landlord’s argument succeeded Judge Robert Pryor QC put the matter as follows: ‘As I have said, the tenant vacated shortly before 28 September 1997, the original contractual term date,and the consequence of that was that, having vacated with no intention to resume occupation,the tenant ceased to enjoy the protection of the 1954 Act.The Act ceased to apply and so the contractual arrangements reasserted themselves, if one can put it in that way, with the result that the tenancy, or tenancies, expired by effluxion of time on 28 September 1997.That is the consequence of a decision of the Court of Appeal in Esselte AB v Pearl Assurance [1997] 2 ALL ER 41.The result therefore was that the tenant vacated,the tenancy came to an end, the tenant’s obligation to pay rent came to an end and the tenant’s right of occupation came to an end.The tenant could not have remained in occupation or resumed occupation after 28 September 1997, having discontinued its proceedings and vacated, without being a trespasser.’

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On behalf of the tenant it was argued that the 1954 Act was defective, in that the reference in section 37 to the termination of the tenancy should have been to the date specified in the landlord’s section 25 notice,the tenant’s section 26 request ‘or if earlier,the date on which the tenancy actually determines’.Judge Pryor QC rejected the contention that these words had to be read into the Act in order to reflect the true intention of Parliament. He conceded that the operation of the Act might be harsh,perhaps requiring the tenant to commit to two sets of premises in order to retain their right to compensation on their former premises.However, he concluded that the statutory wording was clear and workable.This decision adds to the volume of case law on the question of when 1954Act protection ceases.

Conclusions drawn from recent cases Following are some conclusions to be drawn from recent cases: •

If a tenant vacates premises before or at the end of the contractual term then Part II of the 1954 Act ceases to apply. The tenancy is not continued by virtue of section 24.The tenant’s liabilities under the lease end, and so does their right to occupy.In these circumstances a tenant who does not wish to continue in occupation is probably not required to serve notice under section 27 of the 1954 Act (Esselte AB v Pearl Assurance).

•

If a tenant does not vacate premises by the end of the contractual term then section 24 takes effect. The tenancy is continued. In these circumstances a tenant who wishes to vacate and put an end to its liabilities is required to serve notice under section 27(2) of the 1954 Act (Esselte AB v Pearl Assurance).

•

A tenant will not be held to have vacated prior to the end of the contractual term merely because it has ceased to trade and has moved out its trade fixtures and fittings in readiness for the end of the term. Provided that there are no competing claims to the right to occupy, the tenant’s continuing right to occupy until the end of the contractual term allows the Court to disregard a few days of non-trading where they amount to reasonable preparations for vacating the premises. (Bacchiocci v Academic Agency Limited [1998] 2 All ER 241,a case which concerned the efficacy of provisions for contracting out of the landlord’s obligation to pay compensation,where the tenant has not been in occupation during the whole of the five years immediately preceding the date under which the tenant under a tenancy to which Part II of the 1954 Act applies is to quit the holding).

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For the purposes of claiming compensation under section 37,the phrase ‘termination of the tenancy’ is precisely defined. It only refers to the date specified in the landlord’s section 25 notice as the date for termination or in the tenant’s section 26 request,as the date from which the new tenancy is to run.

So where does this leave tenants? According to Esselte, if a tenant vacates before the end of the contractual term then no continuation tenancy arises under section 24 of the 1954 Act. However, cases such as Bacchiocci suggest that a tenant will not be treated as having given up its right to occupation merely by moving out and removing its fixtures and fittings before the end of the term. In practice, if a tenant wishes to be sure that its liabilities will come to an end then it should serve the proper notice under section 27,rather than relying upon the decision in Esselte. If a tenant wishes to ensure that its right to compensation is preserved then it should make it clear to the landlord that ceasing to trade and moving out of the premises shortly before the termination of the tenancy does not amount to giving up the right to occupy. As in most circumstances, clear communication is the best way to avoid dispute.

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The Landlord and Tenant (Covenants) Act 1995 CAN A SURETY BE REQUIRED TO GIVE AN AUTHORISED GUARANTEE AGREEMENT (AGA)? CAN A LANDLORD REQUIRE AN AGA AS OF RIGHT OR MUST THE REQUIREMENT BE REASONABLE? SECTION 17 NOTICES SECTION 3(5) AND THE ENFORCEMENT OF COVENANTS

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Chapter 5: The Landlord and Tenant (Covenants) Act 1995 Since the late 1980s property law has seen an intense period of legislative activity affecting, or even overturning, long established principles and rules. During this period the rules relating to privity of contract have come under particular scrutiny. For landlord and tenant practitioners perhaps the most dramatic changes were effected by the Landlord and Tenant (Covenants) Act 1995 (the ‘1995 Act’) which came into force on 1 January 1996. The Act was in large part a response to the pressures of the recession of the early 1990s. Under the pre-1995 Act law an original tenant, and any assignee who gave direct covenants to the landlord, would remain liable on the tenant covenants throughout the term of the lease.Consequently,a former tenant could find themselves faced with a bill for rent arrears or for works required to remedy breaches of covenant,many years after assigning the lease in question. As tenants succumbed to economic downturn,former tenants – particularly those with evident covenant strength – could find themselves on the hook for several years’ arrears run up by a successor in title, or for the consequences of another’s neglect of the premises. To address the perceived injustice of this situation the 1995 Act sought to effect a complete and automatic release from tenant covenants on the assignment of a ‘new’ tenancy. A ‘new’ tenancy for the purposes of the 1995 Act is one created by a lease granted on or after 1 January 1996 (provided that the lease does not fall into one of the limited exceptions – e.g. leases granted after 1 January 1996 pursuant to an agreement for lease made before that date). While section 3 of the 1995 Act transmits the burden of tenant covenants and the benefit of landlord tenants from the outgoing tenant to its assignee,section 5 provides for the release of the outgoing tenant. The regime envisaged by sections 3 and 5 gave rise to concerned comment within the property industry. If enacted in its original form the 1995 Act would have meant that a landlord would only ever be able to look to its current tenant for performance of the tenant covenants in the lease.In order to mitigate the impact of the 1995 Act on investment values, representatives of the property industry lobbied for the inclusion of section 16, which allows a landlord to require as a condition of giving its consent to an assignment,that the outgoing tenant should provide an Authorised Guarantee Agreement (an ‘AGA’).Under an AGA the former tenant guarantees performance by its immediate assignee of the tenant covenants

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of the tenancy.The former tenant’s obligations under its AGA fall away on the next permitted assignment of the lease. The mechanism for transmission of covenants and for the release of outgoing tenants applies only to ‘new’ tenancies. Other provisions of the 1995 Act apply to both ‘new’and ‘old’tenancies.In particular,section 17 limits the landlord’s right to recover arrears from former tenants and guarantors. Section 17 applies to ‘fixed charges’ which are defined to include arrears of rent,service charge or any amount payable under a tenant covenant providing for payment of a liquidated sum in the event of a failure to comply with any tenant covenant. A landlord may recover a fixed charge from any former tenant or guarantor which is still on the hook if, within six months after the sum falls due, a section 17 notice is served on the person from whom payment is sought. If a person on whom a valid section 17 notice is served pays all of the sums demanded, that person is then entitled to the grant of an overriding lease. Again,this provision stemmed from complaints raised during the recession,when former tenants found themselves having to pay arrears and damages for premises they could not occupy, and in circumstances where they had no ready means of preventing further breaches of covenant by the current tenant. Under the 1995 Act the ability to demand an overriding lease means that former tenants and/or guarantors are able to slot into the leasehold structure as the immediate landlords of the defaulting tenant and so are in a position to forfeit the defaulting tenant’s lease. As enacted,the 1995 Act sought to strike a balance between the interests of tenants seeking a release from covenants on assignment and those of landlords seeking to protect the investment value of their reversions. Inevitably, in view of the fundamental reforms brought in by the 1995 Act, the limits of the new regime and its application to commercially significant points are constantly being tested by landlord and tenant practitioners. In particular, attention has focused on the wide-ranging anti-avoidance provisions contained in section 25. Section 25 (1) provides that any agreement relating to a tenancy is void to the extent that: •

It would apart from this section have effect to exclude,modify or otherwise frustrate the operation of any provision of this Act

•

It provides for:

•

–

the termination or surrender of the tenancy

–

the imposition on the tenant of any penalty, disability or liability, in the event of the operation of any provision of this Act

It provides for any of the matters referred to above and does so (whether expressly or otherwise) in connection with, or in consequence of, the operation of any provision of this Act.

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This wording is stern indeed. An agreement which falls foul of this section is void. It does not matter that the parties to such an agreement might have entered into it willingly and fully intending that it should be valid.The test is not what the parties intended, but whether the agreement conflicts with the 1995 Act. It is with this in mind that practitioners have been grappling with the application of the 1995 Act to the commonly-encountered situations discussed below.

Can a surety be required to give an Authorised Guarantee Agreement (AGA)? As noted above,section 16 of the 1995 Act was introduced as an amendment during its passage through Parliament. It provides a mechanism which is designed to mitigate the impact of the provisions which release an outgoing from liability under the tenant covenants of a lease once it has assigned that lease. Section 16 provides that nothing in the 1995 Act (and in particular section 25) precludes the outgoing tenant from entering into an AGA with respect to the performance of the tenant covenants of the lease by its assignee. Consequently, if the landlord is in a position to impose a requirement that an AGA should be given (as a condition of giving its consent to the assignment), then that AGA will not be rendered void by the anti-avoidance provisions. So long as the landlord complies with the provisions of section 16(4) as to the contents of the AGA, the outgoing tenant may be kept on the hook until the next permitted assignment, or until the end of the term if there is no further assignment. In some circumstances the ability to retain the covenant of the outgoing tenant may give little comfort to the landlord. Where a prospective tenant’s covenant strength does not satisfy a landlord the grant of the lease is often conditional upon the tenant providing additional security – often taking the form of a guarantee from a parent company or some other entity with greater substance than the tenant. Having been persuaded to grant the lease by the provision of a guarantor,a landlord may find themselves in a potentially invidious situation if the tenant then requests consent to an assignment. Unless the landlord is able to withhold their consent without breaching the statutory duties imposed by the Landlord and Tenant Acts of 1927 and 1988, they will have to give consent to the assignment. Once the assignment takes place the outgoing tenant will be released from the tenant covenants of the tenancy. Furthermore, by virtue of section 24(2) of the 1995 Act, the outgoing tenant’s guarantor will be released ‘to the same extent’ as the outgoing tenant in respect of the tenant covenants of the tenancy. Section 16 allows the landlord to keep the former tenant on the hook by means of an AGA.However, there is no provision allowing the landlord to retain the covenant of the guarantor.

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Consequently, on an assignment the landlord faces the prospect of losing the covenant which induced him to grant the lease in the first place. The question of whether the guarantor of an outgoing tenant may be called upon to enter into a further guarantee of that tenant’s obligations under its AGA has been hotly debated since the 1995 Act came into force. The argument is characterised by two general approaches.The first holds that because section 24(2) provides for the release of the guarantor on the assignment of the lease, any attempt to retain the covenant of the guarantor will be void as an attempt to ‘exclude,modify or otherwise frustrate the operation of any provision of this Act’. Section 25(2) provides: •

To the extent that an agreement relating to a tenancy constitutes a covenant (whether absolute or qualified) against the assignment, or parting with possession of the premises demised by the tenancy or any part of them: –

the agreement is not void by virtue of subsection (1) by reason only of the fact that as such the covenant prohibits or restricts any such assignment or parting with possession, however,

–

the paragraph above does not otherwise affect the operation of that subsection in relation to the agreement, to the extent that it purports to regulate the giving of,or the making of any application for, consent to any such assignment or parting with possession.

The argument based on section 25(2) suggests that any attempt to keep the guarantor on the hook (for example by providing that its guarantee will subsist for so long as the tenant remains liable under the lease or under an AGA) or to require the guarantor to enter into a new set of obligations (for example a guarantee of the former tenant’s obligations under its AGA) will run into trouble.Specifically, section 25(2)(b) would apply so that,whilst the provision is not void merely because it restricts assignment, it would be void under section 25(1) because its effect would be to ‘exclude,modify or otherwise frustrate’the operation of a provision of the Act – namely section 24(2). The second approach flows from the premise that a provision will not be void under section 25(1) if it produces a situation envisaged by the provisions of the 1995 Act. If a situation is envisaged and accommodated by the terms of the 1995 Act then it will not be caught by the anti-avoidance provision.Proponents of this second approach find support in the detail of section 24(2) and in section 19(1A) of the Landlord and Tenant Act 1927,which was inserted into that Act by section 22 of the 1995 Act.

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Section 24(2) says: Where: •

by virtue of this Act a tenant is released from a tenant covenant of a tenancy, and

•

immediately before the release another person is bound by a covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant.

Then, as from the release of the tenant, that other person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant. Importantly, section 24(2) applies on a covenant-by-covenant basis. In each case it is necessary to consider whether you are dealing with a tenant covenant of the tenancy.If the covenant in question is not a tenant covenant then the outgoing tenant will not be released from it by virtue of section 5.If the tenant is not released from a particular covenant then the guarantor will remain on the hook for its corresponding covenant. Having concluded that the guarantor’s release in section 24(2) applies only to tenant covenants from which the outgoing tenant is released,it becomes necessary to determine the status of a tenant’s obligation to give an AGA. Section 28 of the 1995 Act defines a ‘tenant covenant’as a covenant which should be complied with by the tenant of the premises demised by the tenancy.Section 28 also confirms that ‘covenant’ includes term, condition and obligation. Section 16 permits the landlord to impose as a condition to its consent to an assignment,a requirement that the outgoing tenant enters into an AGA guaranteeing the performance of the tenant covenants of the tenancy by the assignee. Since that covenant guarantees the performance of the tenant covenants by the assignee, it is not one which should be complied with by the outgoing tenant qua tenant, but rather by the outgoing tenant qua guarantor. Consequently, the tenant is not released from that covenant/condition on the assignment.If the outgoing tenant’s guarantor has agreed to enter into an agreement which imposes any liability or penalty in the event of the former tenant’s failing to comply with its obligations under the AGA then that agreement will not be caught by section 24(2).

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If the original guarantee agreement is expressed to extend to any period during which the tenant is bound by an AGA then there seems to be nothing in the 1995 Act to invalidate that agreement.The guarantor will be released on an assignment from those of its covenants that relate to tenant covenants from which the outgoing tenant is released by section 5. The guarantor will not be released from its obligation to stand behind the former tenant’s obligations under the AGA. If the original guarantee is not framed in terms which extend to the period of an AGA, then the landlord might seek to impose on the guarantor a requirement to enter into a sub-guarantee of the AGA as a condition of giving consent to an assignment. Alternatively, the landlord may simply specify that consent may be withheld unless such a sub-guarantee agreement is forthcoming.Both approaches are made possible by section 19(1A) of the Landlord and Tenant Act 1927. Section 19(1A) provides the landlord with a defence to any allegation that its consent is being unreasonably withheld,in breach of the landlord’s duties under the Landlord and Tenant Acts 1927 and 1988. It provides: Where the landlord and tenant under a qualifying lease have entered into an agreement specifying for the purposes of this subsection: •

Any circumstances in which the landlord may withhold his licence or consent to an assignment of the demised premises or any part of them, or

•

Any conditions subject to which any such licence or consent may be granted,

then the landlord: •

Shall not be regarded as unreasonably withholding his licence or consent to any such assignment if they withhold it on the grounds (and it is the case) that any such circumstances exist, and

•

If they give any such licence or consent subject to any such conditions,shall not be regarded as giving it subject to unreasonable conditions

and section 1 of the Landlord and Tenant Act 1988 (qualified duty to consent to assignment etc) shall have effect subject to the provisions of this subsection. Importantly, section 19(1A) refers to any circumstances and to any conditions specified for the purposes of this subsection.Consequently,if the landlord specifies that it may withhold consent in circumstances where the guarantor of the outgoing tenant has not agreed to provide a further guarantee of the outgoing tenant’s AGA obligations,and if the landlord withholds consent on those grounds,then it ought not to be vulnerable to an allegation of unreasonable withholding.If the landlord

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may safely withhold consent in those circumstances then a refusal on the part of the guarantor to stand behind the AGA would result in the assignment not happening.The guarantor would remain on the hook. Similarly, if the landlord relied upon section 19(1A) to impose as a condition of consent that the outgoing tenant’s guarantor should stand behind its AGA, then the landlord would be safe from any allegation that the condition was unreasonable. Unless and until the condition was satisfied, the consent would have no effect. The imposition of such a condition has no impact upon the operation of section 24(2).The guarantor is released from all of its obligations relating to tenant covenants of the tenant.Its agreement to stand behind the former tenant’s AGA is not within the scope of section 24(2) and so does not seek to exclude, modify or otherwise frustrate the operation of that provision. It must be stressed that discussion of this issue is carried out in the absence of authority as the matter has yet to come before the Courts.The debate stems from practitioners’ articles and from opinions which can only represent informed estimates of how the Courts will interpret and apply the anti-avoidance provisions of the 1995 Act. Certainly, some practitioners would doubt the conclusion that the Act does not preclude a guarantee, which is expressed to extend to any period covered by an AGA given by the tenant in respect of whom the guarantee is given. Equally, the contention that it is open to a landlord to require a guarantor to enter into a fresh set of obligations in respect of the former tenant’s AGA would meet with opposition. Consequently,draftsmen are constantly seeking to find watertight ways of dealing with the landlord’s desire to retain the covenant of its former tenant’s guarantor if retention is necessary to give any commercial strength to the AGA arrangement. One approach recently encountered in the market involves a requirement that the tenant must first assign to its guarantor.The guarantor is then able to apply for consent to pass the lease to the intended assignee.The requirement for an assignment through the guarantor is achieved either by specifying as a section 19(1A) circumstance that the landlord may withhold consent unless such an intermediate assignment takes place or,more directly,by imposing a section 19(1A) condition. Either way the objective is to ensure that, for however short a time, the guarantor becomes the tenant under the lease and so is in a position to give an AGA in its own right when the lease is passed on to the intended assignee. The ‘intermediate assignment’ approach is ingenious.Whether, as its opponents suggest, it is void as being a clear attempt to frustrate the operation of section 24(2) remains to be seen.

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Can a landlord require an AGA as of right or must the requirement be reasonable? The 1995 Act continues to be a topic of considerable debate as the property industry adjusts to what Neuberger J has referred to as ‘a sea change in the law relating to a tenant’s liability after they assign the lease’.This comment was made in Wallis Fashion Group Limited v CGU Life Assurance Limited [2000] 27 EG 145.The case concerned the terms of a renewal lease under the Landlord and Tenant Act 1954, as amended by the 1995 Act. Section 35 of the 1954 Act, as amended by the 1995 Act, provides: •

The terms of a tenancy granted by an order of the Court under this Part of this Act (other than terms as to the duration thereof and as to the rent payable thereunder) shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the Court;and in determining those terms the Court shall have regard to the terms of the current tenancy and to all relevant circumstances

•

In subsection (1) of this section the reference to all relevant circumstances includes (without prejudice to the generality of that reference) a reference to the operation of the provisions of the Landlord and Tenant (Covenants) Act 1995.

The House of Lords provided authoritative guidance as to the proper approach to adopt when applying section 35 in O’May v City of London Real Property Co Ltd [1983] 2 AC 726. Commenting on the requirement that the Court should ‘have regard to’the terms of the current tenancy,Lord Wilberforce observed that the ‘elastic’ nature of those words compelled something between an obligation to reproduce existing terms and an unfettered right to substitute others. In his view (agreed with by the other three Law Lords hearing the case) the effect was to impose an onus upon a party seeking to introduce new,or substituted,or modified terms to justify the change, with reasons appearing sufficient to the Court. The Wallis case arose because the landlord was seeking to introduce alienation provisions to reflect the fact that the 1995 Act had come into force since the previous lease was granted.Whilst the previous lease had created an ‘old’ tenancy, for the purposes of the 1995 Act the renewal lease would give rise to a ‘new’ tenancy. Consequently,rather than remaining on the hook throughout the term of the renewal lease the tenant might, on an assignment, obtain a release by virtue of section 5 of the 1995 Act.

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In order to mitigate the impact of the provisions which effect a complete release of the tenant on a permitted assignment, the 1995 Act permits the landlord to obtain an Authorised Guarantee Agreement (AGA) under which the former tenant guarantees the obligations of its immediate assignee. Section 16 of the 1995 Act stipulates that a landlord’s requirement for an AGA must be ‘lawfully imposed’.The landlord argued that the new lease should contain terms which would allow it to require an AGA as of right on any assignment.The tenant argued that an AGA should be required only ‘where reasonable’. In support of its argument the landlord pointed to the fact that of the other 15 tenants who had agreed new tenancies in the centre,14 had consented to alienation provisions which allowed the landlord to require an AGA.Consequently,the landlord argued that such a requirement represented market practice. Neuberger J concluded that in this particular case the words ‘where reasonable’ ought to be included as contended by the tenant. It is undoubtedly possible for a landlord negotiating a new lease under the 1995 Act to include a provision which allows it to require an AGA as an absolute precondition to giving consent to an assignment.The Wallis case does not cast doubt upon the validity of such provisions. However, it does provide an indication of the way in which the Courts are likely to approach the issue when considering the terms of a renewal lease where provisions applicable to a new tenancy need to be brought into a lease based upon an old tenancy.

Section 17 notices Section 17 of the 1995 Act applies to both ‘old’ and ‘new’ tenancies.The section was introduced to address the perceived injustice arising from the rules relating to privity of contract,whereby a former tenant or guarantor might be faced with a bill for several years’arrears of rent and service charge,long after an assignment of the property in question. Landlords would routinely take direct covenants on each assignment of a lease and,in the event of default by the current tenant,they would be able to look down the list of former tenants and guarantors and seek recovery from any who were still in business.The purpose of section 17 was to limit the liability of former tenants and their guarantors in such circumstances. Section 17 applies where the current tenant has defaulted in respect of ‘fixed charges’.Section 17(6) defines fixed charges as rent,service charges and any amount payable under a tenant covenant of the tenancy providing for a liquidated sum, in the event of a failure to comply with any such covenant. Under section 17, a former tenant or its guarantor will not be liable to pay any amount in respect of

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a fixed charge unless the landlord serves a notice under section 17(2). The landlord’s notice must be served within six months after the fixed charge became due. In theory, therefore, a former tenant or guarantor should never be faced with an unexpected bill for more than six months’ arrears of fixed charges (although, of course,there may be a series of such bills if the current tenant’s default continues, in which case the former tenant or guarantor might consider it sensible to exercise its right under section 19, to call for an overriding lease). The decision in MW Kellog Limited v Tobin (Queens Bench Division,8 April 1997) has recently come to notice as a potential flaw in the protection offered by section 17. In that case, a lease was granted in 1978 to Kellog.The lease (or rather part of that lease) was assigned to Tobin.There were two further assignments before the ultimate assignee went into insolvent liquidation.The lease was disclaimed, and the landlord looked to the previous tenants for payment of arrears of rent and service charge. In 1995 Kellog paid arrears amounting to £24,610.30.In 1996 Kellog paid a further sum of £4345.56 in respect of arrears and then sought reimbursement from Tobin. The claim for reimbursement was based on the indemnity covenants contained in the assignment from Kellog to Tobin.The assignment contained an express indemnity, whereby Tobin promised to keep Kellog indemnified against all proceedings, costs, claims and expenses on account of omissions to pay the rent or any breach of the covenants,agreements and conditions contained in the lease so far as they related to the assigned premises.Kellog also relied upon the indemnity covenants implied by the Law of Property Act 1925,Sch 2 (the lease having been granted before the Law of Property (Miscellaneous Provisions) Act 1994 came into force). Tobin denied liability on the grounds that he was protected by section 17 of the 1995 Act. It was common ground that no section 17 notice had been served by the landlord. However, the Judge (D Barker QC sitting as a Deputy Judge of the High Court) subjected section 17 to close analysis and, having done so, rejected Tobin’s argument.

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There was no doubt that Tobin was a ‘former tenant’, and therefore would be protected in circumstances covered by section 17. However, the Judge pointed out that section 17 related to a situation in which a former tenant had assigned its lease but remained bound by a tenant covenant of the tenancy under which any fixed charge were payable.Consequently,to fall within the protection of section 17 three questions had to be answered in the affirmative: 1.

Is there a tenant covenant?

2.

If so, is it a covenant of the tenancy?

3.

Is a fixed charge payable under that covenant?

Tobin’s argument fell at the first hurdle.Having been referred to Megarry and Wade, The Law of Real Property (5th ed.p 751),the Judge concluded that the obligations under the indemnities were purely personal and did not run with the land.The obligations rested with Tobin, whether or not he remained as tenant under the tenancy. This being so,they did not fall within the definition of a ‘tenant covenant’ contained in section 28(1) of the 1995 Act – being a covenant failing to be complied with by the tenant of premises demised by the tenancy. For the same reason, the Judge could not regard the indemnity as being a covenant ‘of the tenancy’. For completeness, the Judge considered the argument that the indemnities fell within the definition of ‘tenant covenants’ by virtue of the reference in section 28(1) to a collateral agreement. This contention was rejected because the indemnities could not be regarded as agreements collateral to the tenancy.Section 17(3) did not assist Tobin since, although Kellog was a former tenant, the giving of indemnity covenants by Tobin to Kellog did not make Tobin a guarantor of Kellog’s obligations. Tobin was therefore held liable in respect of the arrears of rent and service charge which had been properly due and paid by Kellog to the landlord.The absence of a section 17 notice was irrelevant since that section did not apply to the sums demanded. They were payable pursuant to the indemnity covenants given by Tobin to Kellog, and not pursuant to any ‘tenant covenant’ of the tenancy. At first sight this is an alarming conclusion.Indemnity covenants (whether express or implied by statute) are a routine feature of assignments and other conveyances. Former tenants, however, might take some comfort from the distinction drawn by the Judge between the various payments made by Kellog to the landlord. Tobin was liable to reimburse the £24,641.30 paid by Kellog on various dates during 1995 – before the 1995 Act came into force. At that point there was no doubt about Kellog’s liability to pay those sums, being a former tenant on the hook through privity of contract.

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When considering the sum of £4,345.56 paid by Kellog on 1 May 1996,however, the Judge was able to reach a different conclusion. As noted above,Tobin could not claim the protection of section 17 because his liability stemmed from indemnity covenants.However,he was able to argue that liability under the indemnities did not arise because Kellog had paid that sum as a volunteer. Kellog was a former tenant and so had the benefit of section 17(2) which provides that a former tenant ‘shall not be liable’ to pay a fixed charge arising from a tenant covenant of the tenancy unless the statutory notice is served. No such notice was served, and so Kellog was not in fact liable to pay that sum. Having paid when there was no liability to do so, Kellog could not then claim reimbursement from Tobin. So where does this leave former tenants? •

In respect of sums paid before 1 January 1996 (the date when the 1995 Act came into force) a former tenant who has given indemnities will (subject to the relevant limitation periods) be liable to its assignor for sums paid to the landlord

•

In respect of sums paid on or after 1 January 1996,where a former tenant received a valid section 17 notice and paid the sums demanded, then that former tenant will be able to seek reimbursement from its assignee where indemnity covenants were given

•

In respect of sums paid on or after 1 January 1996 where the former tenant received no (or no valid) section 17 notice but paid anyway,then that former tenant cannot call upon indemnities since it will have paid as a volunteer.

Section 3(5) and the enforcement of covenants The 1995 Act deals with the transmission of the benefit and the burden of covenants between assignors and assignees of the term and of the reversion.In dealing with these matters the 1995 Act raises issues which seem to suggest that parties other than the landlord and tenant might acquire the ability to enforce certain covenants – a potentially startling proposition in an Act which pre-dates the Contracts (Rights of Third Parties) Act 1999. The issue was tested in relation to covenants affecting the old GLC building in London. Oceanic Village Limited is a tenant of the premises at the old County Hall. Oceanic operates a gift shop connected with the London Aquarium. In Oceanic’s lease the landlord covenanted not to permit any other gift shop to be operated in the building (with the proviso that the restriction should not apply to any hotel in the building).

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Earlier in 1999 the landlord failed in an attempt to have the lease rectified so that the restriction was confined to gift shops selling aquarium-related goods (Oceanic Village Limited v Shirayama Shokusan Co Limited and another [1999] All ER (D) 545,BLD 270599590).Rectification was refused on the grounds that the Court would not assist a party who had merely missed a point or who had failed to appreciate the possible or likely effect of a particular provision. Having won that round,Oceanic sought an assurance from the tenant of another part of the building that they would not use their premises as a gift shop.The other tenant (United Attractions Limited) refused to give such an assurance.Oceanic issued proceedings against United Attractions for an injunction to restrain use of their premises as a gift shop and/or damages. The claim was rejected by Neuberger J in a judgment handed down on 9 December 1999 and summarised as Oceanic Village Limited v United Attractions Limited [1999] All ER (D) 1398, BLD 1312991547. Neuberger J refused the injunction (and the alternative claim for damages) on the grounds that the restrictive covenant could not be enforced against United. The conclusion was not surprising – after all, it was the landlord and not United who had given the covenant in question. However, to arrive at that conclusion Neuberger J had to consider the argument put forward by Oceanic that the covenant created a restriction on the use of land, and that the burden of that restriction had passed to United. Oceanic contended that the burden had passed either by operation of section 3(5) of the 1995 Act or because United had notice of the relevant provision in Oceanic’s lease before taking its own lease. Oceanic’s first contention succeeded.The landlord’s covenant did create a restriction on use. However, success on that point did not help Oceanic’s overall case.The burden of the restriction had not passed to United and so the restriction could not be enforced against them.

Section 3(5) of the 1995 Act Section 3(5) provides that a landlord or tenant covenant that is restrictive of the user of land is enforceable not only against an assignee but also against any person owning or occupying ‘any demised premises’to which the covenant relates.Oceanic argued that the words ‘any demised premises’ referred to any premises demised by the landlord. Had that interpretation been accepted, then the covenant would have been directly enforceable against other tenants of the landlord.United argued for a more limited meaning – namely that the expression ‘any demised premises’ referred to premises demised by the lease in question.Neuberger J was persuaded to accept United’s argument by the fact that the same expression had been used in two neighbouring subsections in a manner which could only allow for the more

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limited meaning.The covenant could not be enforced against United because they occupied premises under a separate lease.

The doctrine of notice Oceanic’s other line of argument was that United ought to be bound by the restrictive covenant, having taken their lease with notice of the restriction.This argument also failed.The landlord’s title was registered. Consequently, the grant of the lease to United took effect as a ‘registered disposition’ and, by virtue of section 20(1) of the Land Registration Act 1925,United took free of all rights which were not protected by registration. Neuberger J acknowledged that this might be regarded as unfair since the covenant contained in Oceanic’s lease fell within the exception to section 50 of the Land Registration Act.That section allows rights to be protected by entry of a notice, except where they arise from covenants between lessor and lessee. A tenant in Oceanic’s position might therefore be left without effective protection. Having said that, of course, were United to open a gift shop, then it would be open to Oceanic to proceed against the landlord on the grounds that it was in breach of its covenant.

So why didn’t Oceanic take action against the landlord in this case? The covenant is clearly binding on the landlord,so why did Oceanic choose instead to issue proceedings against United? Quite simply, because there was no breach on the part of the landlord.This was a pre-emptive strike.Oceanic had sought an assurance from United that they would not be opening a gift shop.United refused to give such an assurance. Oceanic was seeking an injunction to prevent United from opening a gift shop at any stage.The injunction was refused. Nevertheless, should United decide to open a gift shop then Oceanic would have a cause of action against the landlord, though one likely to yield only damages rather than the closure of the rival shop.

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Landlord’s consent T H E L A N D L O R D ’ S E N T I T L E M E N T T O I N F O R M AT I O N W I T H H O L D I N G C O N S E N T B E C A U S E O F A N A N T I C I PAT E D BREACH OF COVENANT DEALING WITH AN UNAUTHORISED ASSIGNMENT OR UNDERLETTING INADVERTENT GRANT OF CONSENT

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Chapter 6: Landlord’s consent

The landlord’s entitlement to information Hardly a month passes by without a decision of the Court relating to the giving or withholding of landlord’s consent.The steady stream of case law reflects the fundamental importance of this issue to both landlords and tenants.For landlords, the identity and covenant strength of its current tenants (and undertenants) are matters of great significance when it comes to estate management and to maintaining the value of an investment. For tenants the ability to assign a lease or to grant an underlease can be key to the adaptability,and therefore to the viability of their business. The Landlord and Tenant Act 1988 (the ‘1988 Act’) implemented a significant change in the law relating to the giving of consent, by shifting to the landlord the onus of proving that its withholding of consent is not unreasonable.The landlord’s duty is, within a reasonable time, to give consent except where it is reasonable not to give consent.The landlord must serve on the tenant written notice of its decision, specifying in addition: •

If consent is given subject to conditions, the conditions and/or

•

If consent is withheld, the reasons for withholding it.

If the landlord withholds consent then it must rely upon the reasons set out in its written notice. If a landlord gives inadequate written reasons it cannot rely on better reasons adduced after the expiry of the reasonable time allowed by the 1988 Act (see Footwear v Amplight [1998] 2 EGLR 38 and Blockbuster Entertainment Limited v Leakcliff Properties Limited [1997] 1 EGLR 28). Since the landlord only has a limited time within which to make its decision, it is essential to know when that time begins. This is an area of considerable difficulty in practice.In Norwich Union Life Insurance Society v Shopmoor Limited [1998] 2 EGLR 167 the Court confirmed that where a landlord is asked for consent to an assignment they are entitled to ask for all relevant information as to the nature and details of the assignment and as to the substance of the proposed assignee. However,it is clear from Shopmoor that the landlord must formulate their questions and put them clearly and explicitly to the tenant. In practice, the landlord must specify and request the information it requires as soon as the application is received

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– and preferably in one hit. If the landlord’s requirements are spelt out on a piecemeal basis in the course of correspondence then the landlord will be vulnerable under the 1988 Act.In Shopmoor itself the landlord’s agent requested various pieces of information over a five-month period.Sir Richard Scott VC found that the landlord was in breach of their positive duty to give consent since, at the expiry of the reasonable time allowed for dealing with the application,it would not be shown that it was reasonable for the landlord to withhold consent. In order to avoid problems under the 1988 Act landlords and their agents would be well advised to devise a ‘shopping list’ of information likely to be required in connection with an application to assign or underlet and to request the relevant information as soon as an application is received – making it clear that the landlord cannot be expected to reach an informed decision as to consent until all of the required information has been received.If this line is adopted then there is more chance of resisting an allegation of unreasonable withholding or delay where the tenant fails to provide, or provides inadequate, information.

Withholding consent because of an anticipated breach of covenant Can a landlord withhold consent to an assignment on the grounds that the proposed assignee intends to use the premises for a purpose which is not permitted by the lease? This was the question of general importance before the Court of Appeal in Ashworth Frazer v Gloucester City Council, decided on 21 December 1999. The premises in question adjoined the cattle market in Gloucester.They were part of a site developed as an industrial estate pursuant to a lease granted in 1969. The first question before the Court was whether that lease restricted the user of the premises to uses falling within Use Classes III,IV or X of the Use Classes Order of 1963.Having concluded that the use was restricted by the lease,the Court then had to consider whether the landlord’s refusal of consent to an assignment to Mountstar Metal Corporation was unreasonable. The landlord’s reason for withholding consent was that Mountstar had applied for,and obtained,planning permission to use the site for the sorting, storage, packaging and distribution of reclaimed, predominantly non-ferrous metals.The landlord considered that this proposed use would inevitably amount to a breach of the user provision. Chadwick LJ, having conducted a careful review of the relevant authorities, considered himself bound by the decision in Killick v Second Garden Property Co Ltd [1973] 1 WLR 658 to hold that the landlord was not justified in withholding consent.The landlord may have had good reason to suppose that the proposed

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use would amount to a breach of the user provision, but it could not be said that granting consent to the assignment would inevitably lead to an unrestrainable breach. It would be entirely possible for the landlord to consent to the assignment whilst making it clear that the restriction on use would be enforced. This case points out a significant difference between the considerations applicable to assignments and sublettings. A landlord will be justified in withholding consent to a subletting where the use permitted by the sublease would clearly amount to a breach of restrictions contained in the headlease.This is because it would not be open to the landlord to give consent to the subletting whilst reserving its right to enforce the restriction in the headlease. Consenting to the grant of a sublease containing a user provision which conflicts with that in the headlease,would bar the landlord from complaining about the inevitable breach of the headlease covenant once the subtenant’s use had begun. The same cannot be said of an assignment. The assignee is stepping into the shoes of the tenant, and so is taking on their rights and obligations. It is not open to the landlord to withhold consent solely on the grounds that the assignee’s proposed use will amount to a breach.Once the assignee has taken on the lease,it will have taken on the burden of the covenant restricting use, and so the landlord ought to be able to enforce that covenant against the assignee.Provided that the landlord has taken sensible steps to protect its position, it will be in the same position as before.The landlord will be barred from enforcing the restriction only if consent is not given incautiously – knowing that the assignee’s intended use will necessarily amount to a breach but failing to make it clear that giving consent is without prejudice to its right to insist that the restriction is observed. A landlord giving consent in these circumstances might well be estopped from relying on the covenant, or alternatively held to have waived its right to enforce that covenant. In the Ashworth case it was accepted for the purposes of argument that the assignee’s proposed use would amount to a breach of the lease terms. However, Chadwick LJ was at pains to point out that it was not in fact inevitable that Mountstar’s proposed use would be a breach. Mountstar might succeed in its contention that the use was within Use Class IV of the 1963 order, and so was permitted by the lease. Alternatively, Mountstar might apply successfully to the Lands Tribunal for a discharge or modification of the restriction. Chadwick LJ emphasised that the landlord is not entitled, by refusing consent, to compel the applicant to accept its interpretation of the user covenant.

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Where there is any dispute as to whether the proposed use will amount to a breach, and the landlord has no other grounds on which to withhold consent, the safest course open to the landlord is to give consent,together with a notice stating that should the assignee’s use prove to be in breach of the user provisions, those provisions will be enforced. Landlords must remember that the consequences of a finding under the Landlord and Tenant Act 1988 that consent has been unreasonably withheld or delayed is that the need for consent is removed. In practice a proposed assignee will, sensibly, be reluctant to complete the assignment until the question of user is resolved.It would be a brave or foolhardy assignee who took on the tenant’s obligations in circumstances which might preclude the carrying on of the proposed business at the premises.

Dealing with an unauthorised assignment or underletting One of the key reasons underlying a landlord’s concern with assignments and underlettings is the need for full and current information regarding the occupiers of its building. Consequently, a landlord must be alive to the possibility of unauthorised assignments,underlettings or arrangements,whereby the tenant parts with possession of the premises. Even if unauthorised an assignment or underletting will be effective to pass or to create a legal title. The significant exception to this rule is where the assignment involves a registered lease in which case, as emphasised in Brown & Root Technology v Sun Alliance and London Assurance Co. [1997] 1 E.G.L.R. 39, legal title does not pass until the assignment is registered at HM Land Registry. Although the 1988 Act imposes upon the landlord a positive duty to consent it does preserve the landlord’s right to withhold consent where it is reasonable to do so. Nonetheless, a landlord might discover that despite its valid withholding of consent the tenant completes the assignment or underletting. The tenant’s breach of covenant will enable the landlord to forfeit the lease. However, forfeiture of the tenant’s lease may not be a desirable outcome for the landlord.Even if the landlord were to seek forfeiture it would be open to the tenants (and indeed the undertenant) to seek relief from forfeiture. An alternative to forfeiture was indicated by the decision in Hemingway Securities Limited v Dunraven Limited [1995] 1 EGLR 61.The tenant granted an unauthorised sublease. Rather than seeking forfeiture the landlord promptly sought mandatory injunctions against both the tenant and the subtenants requiring an immediate surrender of the sublease.

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In addition to the tenant’s breach of covenant the landlord’s case was that the subtenants were guilty of the tort of inducing or aiding that breach.The Judge found in favour of the landlord on all points. The availability of an injunction depends upon swift action by the landlord. If the landlord wishes to have the lease re-assigned following an unauthorised assignment or to have the sublease surrendered following an unlawful subletting then its application must be made without delay. Moreover, it is likely that an injunction would be available only in circumstances where the landlord would have had reasonable grounds to withhold consent to the transaction.Nonetheless, the approach taken by the landlord in Hemingway provides a useful example to others faced with tenants determined to complete a transaction whether or not the landlord consents.

Inadvertent grant of consent The decision in Prudential Assurance Co Ltd v Mount Eden Land Ltd [1997] demonstrated just how easy it is for a landlord to be bound by an inadvertently given consent. In this case the landlord’s agents had responded to a request for consent to alterations by way of letter which gave the required consent – albeit expressed to be ‘subject to licence’. The Court of Appeal held that the rubric ‘subject to licence’ meant nothing, since the lease did not require consent to be given by way of a formal deed. The issue was recently revisited by Neuberger J in Rose v Stavrou [2000] L&TR 133.The case arose from a tenant’s request for consent to change the use of premises from a shop to a restaurant.The relevant clause in the lease provided that the tenant was not to use the premises other than as a shop, without the landlord’s prior written consent. The landlord’s consent was not to be unreasonably withheld. The landlord’s managing agent responded to the tenant’s application by letter, stating that the landlord had no objection to the change of use, subject to a deed of variation being drawn up.The tenant contended that this letter amounted to the grant of consent.There was no provision in the lease allowing the landlord to require a formal deed of variation. Neuberger J agreed. This inadvertent grant of consent had unfortunate consequences for the landlord. The tenants of flats above the restaurant successfully claimed damages against the landlord on the grounds that the landlord had breached covenants in their leases by permitting the premises to be used as a restaurant. Then,when the tenant of the restaurant sought to assign the lease of the restaurant the landlord failed in its attempt to establish that the consent for restaurant use would not run for

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the benefit of successors in title to the lease. Neuberger J pointed out that the consent was not expressed to be personal to the assigning tenant and so the assignee was free to continue the restaurant use. It is vital that a landlord uses a form of words in these circumstances which cannot be construed as the giving of consent.The inclusion of wording along the following lines in the first letter which the landlord or its agent writes after receiving the request for consent might assist: ‘Your application is being considered.Until completion of a formal licence to [assign][underlet][alter][change use] on terms to be agreed, which has been executed as a deed by the landlord [and][,] the tenant [and the proposed [assignee][undertenant]], no consent whether express or implied, shall be given or be deemed to have been given.’ Where an agent is acting, he might also consider stating expressly that he has no authority to grant consent. Even with these precautions it is conceivable that a Court could hold that a landlord had consented to a tenant’s request simply by telling the tenant that he had instructed solicitors to prepare a draft licence (see Next plc v National Farmers Union [1997] EGCS 181).Nevertheless,taking this precautionary approach does reduce the risk to the landlord of being bound by a hastily and/or inadvertently given consent.

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Derogation from grant CHARTERED TRUST V DAVIES [1997] 2 EGLR 83 P E T R A I N V E S T M E N T S LT D V J E F F E R Y R O G E R S P L C [ 2 0 0 0 ] E G C S 6 6

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Chapter 7: Derogation from grant Faced with poor trading results a tenant might be tempted to pursue any avenue to divest itself of liabilities.In recent years considerable attention has been focused on the circumstances in which a landlord might be said to be in repudiatory breach of the lease by reason of having derogated from its grant. A landlord will be vulnerable to a claim of derogation from grant if its acts or omissions render the premises ‘unfit or materially less fit to be used for the purpose for which the demise was made’ (per Parker J in Browne v Flower [1911] 1 Ch 219 at 226).

Chartered Trust v Davies [1997] 2 EGLR 83 In extreme cases tenants might find that an argument based on derogation from grant provides an escape route.Such a case was Chartered Trust v Davies [1997] 2 EGLR 83.In that case a unit was let within a new shopping mall which the letting particulars held out as a high class development with a policy of letting only to tenants ‘within the category of a high class retail outlet’. The tenant took a lease to operate a niche business selling puzzles and executive toys. The centre failed to achieve the success predicted by its developers and the tenant found herself next door to a pawnbroker,whose customers and potential customers often waited in the mall outside the shop.This had a detrimental effect on the tenant’s business and repeated complaints were made to the landlord, but to no avail. Eventually, with the business in ruins, the tenant ‘disclaimed’ the lease. When the matter came before the Courts the tenant’s argument was that the landlord had derogated from its grant. After careful consideration the Court agreed,though taking pains to stress that the derogation did not lie in the mere fact of the letting to the pawnbroker.Rather,the landlord’s repudiatory breach lay in its failure to take steps to regulate the carrying on of the pawnbroker’s business and the nuisance caused to the tenant.The landlord had reserved to itself the right to control the mall and to impose and enforce regulations. In this context, it was no answer to say that a tenant’s sole protection is his own ability and willingness to bring his individual action. Litigation is too expensive, too uncertain and offers no proper

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protection against,say,trespassing and threatening members of the public. The duty to act should lie with the landlord. Summing up his conclusions, Henry LJ said: ‘What is clear is that the landlords could have acted to stop the pawnbroker’s clientele queuing in the access and, if necessary, could have cleared the tables and chairs obstructing that access. Then the back shops might have had a chance. This could have been done either directly under the lease, enforcing the covenant against causing a nuisance, or by making rules ensuring that the passageway was kept clear. This might have involved the pawnbroker rearranging the interior of her premises, but that was her problem. Instead, the landlords prevaricated and did nothing. They could have acted effectively and they should have done so.Instead they chose to do nothing,and thereby made the premises materially less fit for the purpose for which they were let. In failing to act to stop the nuisance, in my judgement, the landlords continued the nuisance and derogated from their grant.’

Petra Investments Ltd v Jeffery Rogers plc [2000] EGCS 66 A tenant’s claim of repudiation based on derogation from grant fared less well in the recent case of Petra Investments Ltd v Jeffrey Rogers plc [2000] EGCS 66.Like Chartered Trust v Davies the Jeffrey Rogers case concerned a shopping mall in respect of which grandiose claims had been made – specifically that the centre would place an emphasis on ‘high fashion retail’.That aspiration was not realised, and the initial lettings were for the most part to retailers catering for a more ‘mass’ market. By 1996 the centre had experienced a high turnover of tenants and the landlord had decided to let premises within the centre to Virgin for use as a Virgin Megastore. This involved considerable works including the installation of a mezzanine floor. In return for a substantial rent reduction Jeffrey Rogers plc agreed to tolerate the disruption arising from those works. Whilst the new Virgin store attracted more shoppers to the centre it did not improve the trade of the tenant. Indeed, the tenant alleged that the signage now gave the impression that the whole of the centre was a Virgin Megastore. Consequently, by late 1998 the tenant decided that it was entitled to withhold rent.In response to the landlord’s claim for rent the tenant asserted that its obligations under the lease were discharged by the landlord’s repudiatory breach of its implied covenant not to derogate from grant.

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Jeffrey Rogers plc received considerably less sympathy from the Court than the unfortunate tenant in Chartered Trust v Davies. The fact that the premises were let specifically as a retail unit within a centrally-managed centre did not imply that the landlord had assumed a general responsibility not to do anything that might cause damage to the business of its tenants.The landlord was entitled to grant a lease to Virgin, the result of which from the landlord’s perspective was to improve the performance of the centre.Granting the lease was not an act which rendered the Jeffrey Rogers premises ‘unfit or materially less fit’ to be used for the particular purpose for which the demise was made. The concept of a ‘sophisticated department store’was nothing more than an unrealised aspiration. Given changes in the market, and the experience of recession during the early 1990s,the landlord could not be restrained from shifting the emphasis of the mall. Moreover – and significantly – the acceptance by Jeffrey Rogers in 1996 of a sizeable rent reduction precluded any claim that the landlord had broken an obligation not to alter the centre so as to affect the character of the ground floor. As this recent decision demonstrates, the Courts will not lightly conclude that the failure of a tenant’s business is attributable to some act or default of the landlord amounting to a derogation from grant.The Jeffrey Rogers case provides a graphic reminder that the business interests of the landlord and tenant are not identical, and that a landlord is entitled to take steps to protect its own interests provided that those steps do not directly damage the tenant.To go any further would be to load onto landlords too great a weight of responsibility for the business performance of their tenants.

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Quiet enjoyment CASES IN THE HOUSE OF LORDS HOUSING OF THE WORKING CLASSES ACT 1885

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Chapter 8: Quiet enjoyment Towards the end of 1999 the House of Lords delivered its judgment on the true construction of a landlord’s covenant for quiet enjoyment. To the delight of purist property lawyers the decision confirms that the covenant for quiet enjoyment does not amount to an implied warranty that the tenant will be able to enjoy its premises in quiet. For the local authorities involved in the cases this outcome means that the allocation of housing budgets will not be distorted by an obligation to spend millions on the provision of soundproofing to existing housing stock. Lord Hoffmann acknowledged that, if read literally, the words of a landlord’s covenant for quiet enjoyment should cover a situation in which the tenant suffers disturbance arising from the noise of neighbours going about their everyday business – ‘the flat was not quiet and the tenant was not enjoying it’. However, he emphasised that the covenant came from a time when, in a conveyancing context,the words ‘quiet enjoyment’had a technical meaning different from what they would signify today to a non-lawyer who was unacquainted with their history. It was in fact a covenant that the tenant’s lawful possession of the land would not be substantially interfered with by the acts of the lessor or those lawfully claiming under him.

Cases in the House of Lords It may well be possible for disturbance caused by regular and excessive noise to amount to a breach of the landlord’s covenant for quiet enjoyment, but only if that noise itself amounts to an actionable nuisance.In the cases before the House of Lords, problems arose because the flats were inadequately soundproofed.The claimants could hear all the sounds made by their neighbours – crying babies, cooking and cleaning, quarrels and love making. These sounds were annoying but did not amount to an actionable nuisance.It was therefore a legal impossibility for the landlord to be held to have authorised a nuisance. The claimants’ tenancies contained no express warranties on the part of their respective landlords that the flats had sound insulation or were in any way fit to live in.The principle of caveat lessee applied,and so the tenants took the premises in the state and condition in which they found them.The tenants must reasonably have contemplated that there would be other tenants in the adjoining flats. Consequently, their complaint was not in reality about the noise made by their neighbours, but rather about the absence of soundproofing.

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The flats had inadequate soundproofing when they were let. Consequently, the tenants could not rely upon the landlords’express covenants to keep the structure in repair. Keeping in repair means remedying disrepair. It does not mean putting the premises into a better condition than they were in at the outset.Because there was no soundproofing at the outset,its absence was an inherent defect for which the landlord assumed no responsibility. It was because the landlords’ covenants to repair did not cover the defect that the tenants were forced to argue that the noise amounted to a breach of the implied covenant for quiet enjoyment or,alternatively,that the noise constituted a nuisance which had been authorised by the landlord.Having dismissed the nuisance point, and having established that the words ‘quiet enjoyment’ in the landlord’s covenant bear a narrow technical meaning,it therefore fell to the House of Lords to consider whether those words should be widened to include a duty to provide reasonable soundproofing. To widen the covenant in this way would have required an excursion into judicial lawmaking. Their lordships considered the history of statutory provisions imposing upon landlords duties in respect of the state and condition of premises let as dwellings. It was noted that the legislation in force at the time when the flats were converted contained no requirement as to soundproofing. Such a requirement was subsequently introduced as part of the Building Regulations 1985 (SI 1985/1065), which provided that the walls and floors which separate one dwelling from another should resist the transmission of airborne and impact sound. Since the 1985 Regulations had no retrospective effect they could not assist the tenants.

Housing of the Working Classes Act 1885 Lord Hoffmann referred to a body of statutory provisions dating back to the Housing of the Working Classes Act 1885. He noted that some of those provisions imported a statutory warranty of fitness for human habitation,though none of the provisions could assist the tenants in the present cases. He emphasised that the existence of those statutory provisions precluded the development of any common law rule permitting the Courts to imply such a warranty,whether as part of the covenant for quiet enjoyment or otherwise.In McNerny v London Borough of Lambeth [1989] 19 EG 77, (1988) 21 HLR 188 the Court of Appeal had been asked to develop just such a rule. Dillon LJ observed that the legislature had ‘conspicuously refrained’ from updating the rent limit applicable to the relevant statutory provisions and that it was not for the Courts to create liabilities which Parliament had not thought fit to enact.Lord Hoffmann commented that this showed ‘a proper sensitivity to the limits of permissible judicial creativity and to be no less than constitutional propriety requires’.

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Lease variations – letting guarantors off the hook Co-author

Charlotte Trotman AVOIDING THE TRAP CONTRACTUAL TERMS PRIMARY OR SECONDARY LIABILITY? CONCLUSION

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Chapter 9: Lease variations – letting guarantors off the hook The provision of a guarantee can provide vital security for a landlord of commercial premises. Since the introduction of the Landlord and Tenant (Covenants) Act 1995 the number of people to whom a landlord can turn to secure performance of a tenant’s covenants has reduced significantly.On any assignment not only is a tenant now released from all future liability under the lease but any guarantor is also released to the same extent as the tenant. It is essential that the security of a guarantee is not lost inadvertently when dealing with routine management issues. Few practitioners appreciate just how easily this can be done by any alteration in, or addition, to the lease terms. It is generally understood that a guarantor will be released on any variation of a lease but this is simplistic.The law providing for the release of sureties is much wider. It is not limited to express variations per se but to any alteration in the terms of a landlord and tenant relationship.The principal and prevailing authority in this area is Holme v Brunskill (1878) 3 QBD 495 which held that: ‘…if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and… if he has not consented to the alteration,although in cases where it is without enquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety,the surety may not be discharged; [but] if it is not self-evident that the alteration is unsubstantial or one which cannot be prejudicial to the surety the Court will not… go into an inquiry as to the effect of the alteration… but will hold that in such a case the surety himself must be the sole judge of whether or not he will consent to remain liable… and if he has not so consented he will be discharged.’ The effect of a discharge is a total release from all future liability and not merely a limitation on the extent of the guarantor’s existing liability.Importantly,a release of a guarantee will also trigger a release from all ancillary obligations, including any requirement to take up a new lease on forfeiture or disclaimer.

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It follows from the rule laid out in Holme v Brunskill that, any term contained in any document supplemental to a lease has the potential to completely release a guarantor from all liability, if that term differs from the lease contract which is guaranteed.This is of particular relevance to management licences in which it is commonplace to find additional covenants entered into by the tenant which do not appear in the lease. Where a lease contemplates that consent may be given by a landlord to a certain act or thing and that lease is guaranteed then, if that consent is actually given within the terms provided,it is considered that the guarantee must remain in place. In giving the guarantee the guarantor has sanctioned the possibility of the giving of consent. However, what is the position where a landlord has agreed to waive a restriction appearing in a lease and gives its consent to something otherwise prohibited? This is not something which has been sanctioned by the guarantor and constitutes a clear departure from lease terms. Accordingly it must fall within the scope of Holme v Brunskill and so be capable of releasing the guarantor. A landlord also needs to be wary of conduct amounting to a variation.For example, a landlord and tenant may informally agree to alter the insurance or rental arrangements once a lease is in place.Where a landlord and tenant do agree to act in a way which differs from that set out in the lease their doing so is capable of constituting a variation.The longer they act in this manner,the greater the risk of a variation being inferred.The rule in Holme v Brunskill will apply to a variation by conduct as it applies to more formal variations. It will be noted that the Holme v Brunskill judgment contains an important exception to the general rule of release – namely that a guarantor will not be released by reason of any alteration which is self-evidently unsubstantial or nonprejudicial. Unfortunately for landlords the Court went on to make it clear that it would enter into no enquiry on this point in any given case.If there is a perceived possibility of prejudice a guarantor may claim a release. This approach was followed in both Selous Street Properties Ltd v Oronel Fabrics Ltd [1984] 1 EGLR 50 and Howard de Walden Estates Ltd v Pasta Place Ltd [1995] 1 EGLR79. In giving judgment in the former Hutchison J says: ‘I have… stated two conclusions:the first,that the presence of the toilets, once they were legitimised by the licence,was something which could arguably have increased the rental value of the premises; the second,…that their presence, so legitimised, did not have that effect. It seems to me that the second of these conclusions is analogous to the jury’s finding in Holme v Brunskill and that I ought not in the present context to place reliance upon it. The important finding in the light of that authority is the first because here is an alteration in the contract between the creditor and the principal debtor which is not self-evidently

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unsubstantial,which is not one which cannot be prejudicial to the surety. If that conclusion be correct, then it seems to me that what happened was sufficient to discharge the surety…’ The Holme v Brunskill judgment received more recent comment from the Court of Appeal in 1995 in Metropolitan Properties Co (Regis) Ltd v Bartholomew [1996] 1 EGLR 82.In a relatively short judgment with which the other Judges concurred, Millet LJ raised a number of interesting and important issues about the effect a lease variation may have on a guarantors liability. The case concerned a personal concession granted by the landlord to an assignee which permitted the assignee to share occupation of the premises with a group company.The guarantors of a previous tenant were not a party to that concession and claimed to be released. Millet LJ quoted the Holme v Brunskill judgment with approval but then appeared to depart from the judgment by identifying a further category of variations which will not release a guarantor. He stated that it is necessary to distinguish between a material variation in the nature or extent of the obligations undertaken by a tenant which may discharge a guarantor from liability and conduct which merely affects the cost of complying with those obligations, which would not. In Metropolitan he found that the cost of compliance with a tenant’s covenants may be affected by the intensity of occupation of the premises, but changes in the intensity of occupation did not affect the tenant’s obligations in respect of which the guarantees were given and accordingly it would not release the sureties. Later in his judgment Millet LJ dismissed the guarantors’argument that the variation had the effect of allowing the assignee to make greater use of the premises than it would have done if the variation had not been agreed.He said this was the wrong comparison to make. The proper comparison was between that which was permitted by the underlease before the variation and that which was permitted thereafter.In this instance there was no change in the permitted level of occupation. At first reading this part of the judgment appears to be very helpful in breaking new ground but it can only be of limited practical assistance.For example,in how many circumstances will a variation not involve a change in the nature or extent of the obligations undertaken by a tenant? If the ‘proper’ comparison suggested by the Court is applied how many variations will escape it? In Metropolitan the intensity of occupation argument is convincing but the application of the comparison is difficult even here, in fact something else was allowed by the variation. A significant question remaining from this judgment, despite the guidance given by the Court, is when is a variation a material variation? Possibly the judgment may make some personal concessions less likely to release a guarantor because a

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personal concession will usually be temporary and will leave behind it an underlying obligation which is in fact unaltered. Additionally and importantly it may be less likely to impact on rent review than a permanent variation. The issue of rent review was only touched on in Metropolitan.The guarantors claimed that the concession granted to the assignee might have had an effect on rent review.The point was left undecided although Millet LJ did say that he doubted that a personal concession of the kind in question would be sufficient to justify the implication of a variation into the notional lease on review. However it is of relevance that the point was considered as there is a strong suggestion that even a variation falling within the category identified by the Court of Appeal as not releasing a guarantor, may be capable of releasing a guarantor if it were capable of having an effect on rent review. It is well recognised that a variation having an effect on review will be capable of releasing a guarantor. A prudent practitioner has to conclude that for so long as Holme v Brunskill is cited as good authority he or she must proceed with caution according to the principles laid down in that case. Metropolitan may be of help in limited cases but is perhaps likely to be of most use to landlords seeking to save a guarantee which otherwise appears lost! Draftsmen bearing the strictures of Holme v Brunskill in mind are recommended to join any existing guarantors to supplemental documentation to avoid their outright release.It may not be possible to increase the liability of a guarantor other than that of the current tenant by reason of Section 18 Landlord and Tenant (Covenants) Act 1995, but by joining them in their total, release will be avoided.

Avoiding the trap Faced with a scenario in which a lease has been altered, what protection might a landlord have which will enable it to mount a successful claim against the surety?

Limitations A guarantee may be limited to a specified period or to the liability of a specified person.Where a lease has been varied, this can assist a landlord. If the variation is not effected within the period of liability or if it has no effect on the liability of the person guaranteed,then there can be no release of the guarantee in question. This is illustrated by the Court of Appeal ruling in Metropolitan Properties Co (Regis) Ltd v Bartholomew [1996] 1 EGLR 82. In this case the sureties concerned had given a guarantee to secure the performance of a named tenant, Margaux. The obligations which were guaranteed were the obligations which

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Margaux undertook to observe and perform;namely,the covenants and conditions contained in an underlease.The guarantee did not extend to any subsequent tenant. Giving judgment Millet LJ drew on the recently decided case of Friends Provident Life v British Railways Board [1996] 1 All ER 336.He stated that Margaux would be liable for any transaction which was contemplated by the underlease because it would be within the scope of the obligations that it has covenanted to perform. In the same manner the guarantors would be liable because that transaction would be within the scope of the obligations which they had guaranteed.The situation would be different in the case of a transaction not within the contemplation of the lease. This would not be within the contemplation of the obligations undertaken by Margaux and so would not be binding on Margaux.Consequentially it would not be binding on the guarantors. Margaux would not be bound by any subsequent variation in the terms of the underlease unless it both consented to it and also expressly or by necessary implication agreed to a consequential variation in its own obligations. Prior to an assignment of the lease by Margaux, the landlord granted a licence to assign,in which it permitted the assignee to share occupation of the premises with a group company. Margaux was a party to that variation.When a claim was subsequently made against the sureties for unpaid rent they claimed to be released from the guarantees given.They argued that Margaux had consented to the variation and so was bound by it with the result that the obligations which they had guaranteed (those of Margaux) had been altered. As the guarantors did not agree to the variation which had the potential to increase their liability they were discharged from the guarantees given. The Court of Appeal did not agree. Millet LJ agreed that Margaux must be taken to have consented to the variation.It was made at Margaux’s request and without it the assignment would not have proceeded. However, it did not follow that Margaux was bound by it.The variation requested was a variation which would be available to the assignee only once the assignee became tenant. It could not affect Margaux because Margaux would no longer be the tenant when it came into effect.Whilst Margaux could not object to the concession being granted to the assignee which it had requested and to which it had consented, it did not agree to any modification in the terms of the obligations which it had undertaken. Its obligations remained unaltered and so the sureties were not discharged.

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Contractual terms It is quite usual for the guarantee provisions in any commercial lease to list a number of circumstances in which a guarantor will not be discharged despite the occurrence of an event which would otherwise release it. In particular it is commonplace to find a provision stating that a guarantor will not be discharged from liability by reason of any variation in the terms of the lease. However, it is essential to note that such saving provisions are construed strictly in favour of a surety and if the saving words are to protect the landlord they must be absolutely clear in their meaning. In West Horndon Industrial Park Ltd v Phoenix Timber Group plc [1995] 1 EGLR 77 the guarantor covenanted as follows: ‘That if the Tenant shall make any default at any time during the term… in payment of rent or in observing or performing any of the covenants or restrictions herein contained, the Guarantor will pay the rent and observe or perform the covenants or restrictions, in respect of which the Tenant shall be in default notwithstanding… any… act or thing whereby but for this provision the Guarantor would have been released.’ The guarantor successfully claimed to be released following the inclusion in a licence to assign of a new provision allowing the landlord extended rights of entry to the demised property to enable it to carry out improvements.This could have had an adverse effect on the tenant on rent review.The Court found in favour of the guarantor,notwithstanding the saving provision.This was because the guarantee made reference to ‘covenants and restrictions herein contained’;it was considered that it was not the intention of the parties that the guarantee should extend to provisions contained in subsequent documents and the saving provision was not intended to have this effect. The landlord was more successful in Selous Street Properties Ltd v Oronel Fabrics Ltd [1984] 1 EGLR 50.It had sanctioned the execution of works which had been carried out in breach of covenant.The works were capable of having an effect on rent review and the guarantor who was not a party to the licence, claimed it was released. After some tortuous consideration the Court decided it was not by reason of the saving provisions.These provided that: ‘…any time which may be given to the Lessee by the Lessor shall not release or exonerate or in any way affect the liability of the Guarantor.’

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The Court decided that this wording was adequate to cover a retrospective licence for works because what this achieved was merely a delay in the landlord’s enforcement of the tenants covenant to alter and the removal of the works. It is important to note that wording of this nature may avoid releasing a guarantor from liability but this is distinct from binding it into additional liability on a lease variation.

Primary or secondary liability? A covenant of guarantee is a secondary liability only. A mere guarantor will not be liable unless the person it has guaranteed – its principal – remains liable and is in default. A principal debtor liability is just that, it is a principal or primary liability. It is not collateral but is a free-standing obligation in its own right In modern leases it is usual to find that a surety covenants as ‘principal debtor’ and this is widely thought to be an effective means of avoiding the complex rules of suretyship. In Metropolitan the Court of Appeal considered the liability of a former tenant and the effect of subsequent lease variations on a principal debtor’s liability: ‘It is not a surety. It is a principal debtor. Its liability may or may not be affected by any alterations in the terms of the underlease which may afterwards be agreed between the parties to the underlease from time to time, but it is not discharged.’ Consequently, the argument runs, if the guarantor covenants not as mere surety but as principal debtor then, like the original tenant in Metropolitan, its liability will not be affected by subsequent variations. This argument must be treated with great caution.It is unlikely that a clause,which simply characterises the guarantor as a ‘principal debtor’ or ‘primary obligor’ without more, will achieve the desired effect. As noted above,provisions designed to keep a guarantor ‘on the hook’will be construed in favour of the guarantor. There is probably no magic in the words ‘principal debtor’ or ‘primary obligor’. If the prudent landlord wishes to avoid inadvertent release,then the lease must spell out the circumstances (eg variations or the giving of time or other indulgence to the tenant) in which the guarantor will remain bound.

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Conclusion Without doubt it is very easy to release a guarantor from all liability by means of some alteration to the terms of a lease. Best practice must always be to join a guarantor into any supplemental documentation wherever possible.Where this is not possible there is still protection for a landlord but ultimately this is likely to depend on the wording of the guarantee in question. All practitioners must be aware of the potential risks and protection available and draftsmen must prepare their guarantees with these in mind.

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Conclusion Unlike many contracts,which are born and die with a single transaction,a business lease forms the basis of an ongoing relationship that can last for many years.When negotiating a new lease the parties and their advisers must bear in mind the points at which the interests of the parties are likely to diverge,or to come into conflict. The parties must recognise that future dispute can be avoided by clarity of expression. They must also recognise that the draftsman of a lease can only express the parties’ intention where the parties have in fact agreed upon their intention. It is a fact of modern legal practice that,unless instructed otherwise,lawyers will base their drafting on precedents downloaded from the office system. These precedents will, usually, seek to reflect normal market practice and to strike a reasonable balance between the interests of the parties. However, because it is conventional for the landlord’s solicitor to draft the lease, any area of doubt is likely to be resolved at the initial drafting stage in the landlord’s favour. So, for example, it is common to find precedent break clauses that seek to make the exercise of the tenant’s break conditional upon compliance with all of the tenant’s covenants. As discussed in chapter three a landlord’s solicitor,working from heads of terms which provide for a break but which do not specify and limit the conditions applicable to that break,will tend to include a fully conditional clause.The result can be weeks if not months of argument – a drain on time and resources which can be avoided if the parties deal with the point during the initial formulation of the lease terms. As the relationship progresses the parties can do much to ensure that disputes do not arise. A key point of pressure occurs when the tenant wishes to assign or underlet. All too often landlords and tenants come to (metaphorical) blows over the question of consent. Landlords have a duty to give consent within a reasonable time or to give reasons for withholding consent.Landlords are entitled to receive all information necessary to allow them to make an informed decision as to consent. However, matters involving the giving of consent regularly degenerate into dispute because the landlord’s pursuit of basic information shades into the tenant’s claim that consent is being unreasonably withheld or delayed. It would be entirely open to the parties to agree at the outset what information is required in order to give proper consideration to an application, and to spell out in the lease the agreed regime for giving or withholding consent. Each month there are several reported cases dealing with disputes arising from business leases.All too often these disputes arise from ‘grey areas’ – whether in the general law or in the drafting of the lease.The parties to a lease can do little to resolve grey areas in the general law.However,an open and positive discussion

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between the parties and their respective lawyers maximises the chance of producing a lease that truly meets the objectives of the parties. Necessarily, this involves a recognition that all leases are different.Premises differ. The commercial interests and relative bargaining positions of the parties will differ.Incentives and concessions will differ.Contrary to the views sometimes expressed in the property press the author of this Report believes that there is no such thing as a ‘standard’ lease. There are,of course,precedent clauses which can be drawn upon,but landlord and tenant relationships are bespoke, not ‘off the peg’.

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