Commercial Landlord and Tenant Disputes

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Commercial Landlord and Tenant Disputes information in this section:


RENEWAL LEASES

Tenants of a commercial property are able to continue to occupy the premises when the term of their existing tenancy comes to an end if certain conditions set out in the Landlord and Tenant Act 1954 apply and they have security of tenure. The tenancy will continue on the same terms as the existing tenancy.

There may be circumstances where the landlord or the tenant does not want the tenancy to continue on the same terms as the existing tenancy or even at all. In these circumstances, there are various notices that either the landlord or the tenant can serve.

It may be the case that the landlord wishes to grant the tenant a new tenancy but on different terms to the existing tenancy. For example, with an increased rent or new lease term. In this case, the landlord should serve a notice pursuant to section 25 of the Landlord and Tenant Act 1954 which will bring the existing tenancy to an end but will set out the landlord’s proposals for the terms of the new tenancy. If the terms of the new tenancy cannot be agreed between the parties then either the landlord or the tenant can apply to Court and the Court will decide the terms of the new business tenancy.

If the landlord does not wish to grant the tenant a new tenancy then it will need to serve a hostile notice pursuant to section 25 of the Landlord and Tenant Act 1954 stating that it opposes the grant of a new tenancy to the tenant. In this notice the landlord will need to rely upon one of the grounds set out in the Landlord and Tenant Act 1954 which entitle the landlord to oppose the renewal tenancy. The grounds are limited and include for example, where the landlord wishes to redevelop the premises or where the landlord wants to occupy the premises itself. If the landlord fails to establish the ground that it is seeking to rely on then the tenant will be entitled to a renewal lease.

If a notice has not already been served by the landlord then the tenant can serve a request for a new business tenancy pursuant to section 26 of the Landlord and Tenant Act 1954 setting out its proposals for the new tenancy. If the landlord is opposed to granting the tenant a new lease then it can serve a counter-notice stating its grounds for opposing the request. However, this must be done within 2 months.

Both the landlord and tenant’s notices must be served not more than 12 months or less than 6 months before the date of termination of the existing tenancy.

Myerson Property Litigation has a wealth of knowledge and experience of dealing with renewal business tenancies. This is a technical and very tactical area of the law so landlords and tenants should always seek specialist advice.


BREAK NOTICES

Break clauses are provisions in leases that allow either the landlord or the tenant to bring the lease to an end early. The landlord or tenant’s right to break may arise on a specific date or, depending upon the terms of the lease, may be a rolling provision that can be exercisable at any time. Break clauses may be conditional upon a number of factors. For example, vacant possession being provided and rent being paid up to date.

Executing a break clause is often not as straight forward as it may first seem. Break clauses are interpreted strictly by the Courts and it is imperative that if a landlord or tenant wants to bring the lease to an end early that the break clause is exercised correctly. Lord Hoffman in Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited stated “if the notice clause had said that the notice had to be on blue paper, it would be no good serving the notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease”.

Failure to exercise a break clause correctly can have devastating consequences. A landlord may be left with a tenant in the property for the remainder of the term of the lease when they do not want the tenant in the property. If the tenant fails to exercise a break clause correctly then the liabilities in the lease will continue until the term of the lease expires. The tenant may not be able to meet these liabilities or may have wanted to relocate.

Myerson Property Litigators have a significant amount of experience in exercising break clauses correctly. Landlords and tenants should seek specialist advice when considering exercising a break clause to ensure that the break notice is correctly drafted and served on the relevant party.


BREACH OF COVENANT CLAIMS

A covenant is a legal promise by one party to another either to do something or not to do something. Covenants are usually in writing (express) and are contained in leases or other deeds such as transfers or conveyances of property. The most common form of covenants in commercial leases are covenants:

  1. To pay rent, service charge or other payments due under the terms of the lease.
  2. To repair and to keep in repair.
  3. Not to cause damage to the property.
  4. To yield up the property at the termination of the lease in the required state of repair.
  5. To use the property only for a permitted user.
  6. Not to assign, sublet or part with possession.
  7. Not to carry out alterations.
  8. To comply with planning or other local authority requirements.
  9. To allow the landlord access to the premises.

In freehold situations covenants are often contained in transfers of properties. Common forms of covenants in these situations are:

  1. To allow a right of way over the land transferred.
  2. Not to build or develop on the property conveyed (an absolute prohibition) or not to except in accordance with plans submitted and approved by the party with the benefit of the covenant.
  3. Not to do anything which might cause a nuisance to neighbouring property.
  4. To build a fence or other boundary structure.
  5. To pay a percentage of profit or sale proceeds in the event that property is developed and sold at a profit (known as an overage payment).

Whether the covenant is contained in a lease or other deed provided it is properly drafted and has the necessary legal requirements to make it a binding obligation a party in breach of covenant can be sued usually for damages but the party with the benefit of the covenant can also sue for specific performance and in certain circumstances, for an injunction.

The measure of damages is specific to the particular covenant. For example a dilapidations claim (a breach of covenant to keep in repair) will usually be for the cost to the landlord of putting the premises into the required state of repair. In the case of a right of way the first remedy would usually be to seek an injunction against the party in breach.


ENFORCEMENT OF COVENANTS

Landlord’s self help remedy for breach of repair covenants

There are statutory limitations on what damages a landlord can recover for a tenant’s breach of repair covenants during the term of the lease. Therefore, some landlords reserve the right to enter the property and carry out repair works themselves.

For landlords to be able to do this, the lease needs to provide for this. Such lease clauses are often referred to as “Jervis v Harris” clauses which normally entitle a landlord to enter the property, carry out repair works and recover the cost from the tenant as a debt.

Landlords need to be careful when exercising this right as if the landlord carries out works which go beyond the specific repair required, the landlord could be liable for trespass on the basis it had no right to enter the property to do those works.

Specific performance

This is an equitable remedy where the court would compel the tenant to carry out its obligations under the lease. However this is a discretionary remedy and the court will not order it where damages would be an adequate remedy for the landlord. Furthermore, specific performance will only be available where the obligation to be enforced is precise enough to be capable of specific performance.

Specific performance is not generally ordered in relation to breach of a tenant’s repair covenants except in exceptional circumstances. Also, the courts will not order specific performance if the contract requires performance or constant supervision over a period of time and the covenants in the lease are not clearly defined.

Damages

A landlord’s entitlement to recover damages for breaches of covenant tends to be the most common remedy. The starting point is that the landlord is entitled to be put back into the position it would have been in had the tenant complied with its obligations.

However, damages may not be an adequate remedy on its own. This will depend on the circumstances. Landlords may also need to apply for an injunction or to forfeit the lease.

In order to claim damages, landlords have to pursue tenants through the courts. This can become protracted and costly. Even if the court orders the tenant to pay damages, landlords may then face a battle to obtain actual payment.

A landlord’s right to recover damages for breach of repair covenants during the term of the lease may also be restricted by Section 18(1) of the Landlord and Tenant Act 1927 which limits the damages a landlord can recover in respect of diminution of value caused by the tenant’s breach. Section 1 of the Leasehold Property (Repairs) Act 1938 may also come into play if a lease was granted for a term of at least seven years and the lease has at least three years left to run.

Due to the difficulties landlords may face in pursuing a tenant for damages, this is why many landlords opt for the self help remedy mentioned above.

Injunctions

These are also an equitable remedy. The courts will not grant landlords an injunction in order to enforce an overbearing covenant and are more likely to award damages instead. Injunctions are most common where damages would not be an adequate remedy and where the landlord requires the tenant to restore the premises to their former condition.

At the same time as applying for an injunction, it may also be appropriate for landlords to threaten forfeiture at the same time. If this is suitable, a section 146 notice can be served at the same time as a letter before action threatening the injunction.

Our team of property litigation solicitors can advise on the enforcement of property covenants. Please do not hesitate to contact a member of the team to discuss this issue further.


DILAPIDATIONS

Under the terms of a commercial lease, the tenant is likely to have obligations to repair the property. Upon termination of a lease, the tenant can have substantial liability towards the landlord if it has not complied with these obligations.

Relevant types of covenant include:

  • Repairing covenant.
  • Decorating covenant.
  • Reinstatement requirements relating to alterations carried out by the tenant.

Establishing a breach of covenant

This can be an elusive concept, and will ultimately come down to the wording of the covenant. However, generally speaking:

  • When assessing the appropriate standard of repair, the age, locality and character of the premises is relevant.
  • The tenant is required only to repair, not to improve, the property.

To establish a breach of covenant, the landlord will usually instruct a surveyor to complete a Schedule of Dilapidations. This will list the issues, and will be sent to the tenant, along with a Quantified Demand. The Quantified Demand will set out clearly all of the aspects of the dispute and substantiate the damages, and any other losses, claimed.

The tenant will then usually instruct a surveyor to respond to the Schedule of Dilapidations and the Quantified Demand.

Remedies available to the landlord

Remedies available depend on the specific terms of the lease, and whether or not the term of the lease has expired. In addition to the legal position, there may be practical and commercial considerations as to how and when the landlord takes enforcement action.
The remedies available include:

  • Damages. There is a distinction between what can be claimed during the term, and what can be claimed after the term has ended. During the term, the starting point in measuring damages is the diminution in value of the reversion.A claim for damages is the landlord’s only remedy once the lease has ended, and the measure of damages is the reasonable cost of doing the works, plus loss of rent for the period until the works have been completed.Calculation of damages is a complex concept, and there are various statutory restrictions. Our property litigation experts can provide detailed advice on what you may be entitled to, or what you may be liable for.
  • Forfeiture. This remedy is only available if the landlord has an express right of re-entry for breach of covenant by the tenant.
  • Self help. Some commercial leases entitle the landlord to enter the property during the term of the lease, carry out the repair works, and recover the cost of doing so from the tenant.
  • Specific performance. This is a claim that the tenant should be ordered by the court to comply with its obligations under the lease. This is only appropriate in rare cases, and usually other remedies are more suitable.

Practical and commercial considerations for the landlord and tenant

There are various broader considerations for both the landlord and tenant when dealing with dilapidations.

Issues for the landlord include:

  • Establishing the extent of the breach. The landlord should not exercise any right of re-entry until the extent of the tenant’s purported breach has been thoroughly investigated, and the correct procedure followed. Further there may be conditions that apply to the right of re-entry, such as time restrictions.
  • Timing issues. During the term of the lease, the tenant has a reasonable time in which to remedy the breach before the landlord can forfeit. After the lease has ended, there is a Dilapidations Protocol that should be followed before a claim is issued. The landlord should begin investigating any claim for dilapidations as soon as possible. Unnecessary delay may lead to complications.
  • Market conditions. The state of the market will be a factor when a landlord is considering the most appropriate method of enforcement. The landlord may be reluctant to forfeit a lease in a poor economic climate, if the tenant is complying with its other covenants.
  • Lease renewals. Where the tenant has statutory renewal rights under the Landlord and Tenant Act 1954, the landlord should take action before the renewal is completed; otherwise there is a risk the base line for the standard of repair has dropped, and the tenant may be under a reduced obligation to repair.
  • Risk of tenant insolvency, and ability to comply.
  • Costs of enforcement, and whether those costs are recoverable.

Issues for the tenant to consider include:

  • Validity of notices. If a notice served by the landlord is not technically correct, or if the repairs are not the tenant’s responsibility, the notice could be invalid.
  • Statutory safeguards. There may be provisions under statute that provide safeguards to tenants, such as applying for relief from forfeiture, or applying for relief from liability for internal decorative repairs, if the landlord’s requirement is unreasonable. We can advise you further as to whether or not these apply.
  • Should the repairs be carried out? Unless the tenant disputes the breaches, generally it is practically and commercially better to simply carry out the work without delay. This will avoid incurring unnecessary costs, and maintaining a relationship with the landlord.

Further, carrying out the repairs itself will enable the tenant to use its own contractors, at a time that will be of least disruption to the tenant’s business.

This is a broad and complex area of law. Dilapidations can be a minefield for landlords and tenants alike, and parties are best advised to seek independent legal advice as soon as they believe there may be an issue.


ASSIGNMENT AND SUBLETTING

Most Commercial Leases will contain a covenant against assignment, subletting or parting with possession. The most common form of restriction is an absolute prohibition against assignment of part but would allow the tenant to assign the whole of the lease with the landlord’s consent which is not to be unreasonably withheld. Section 19 (1) Landlord and Tenant Act 1927 also provides that it is implied that the landlord’s consent (where it is required) cannot be unreasonably withheld.

Where the landlord’s consent is required and where that consent is not to be unreasonably withheld the landlord has certain obligations imposed by the Landlord and Tenant Act 1988. They are:

  • To give consent, except where it is reasonable not to do so.
  • To give consent within a reasonable time.
  • To give the tenant a written notice of the decision and if the landlord wants to apply any conditions to his consent those conditions must be specified.
  • If consent is refused the landlord has to give reasons for the refusal.
  • A failure by a landlord to give consent within a reasonable time would amount to unreasonably withholding consent and therefore breach of the landlord’s duty. What is a reasonable length of time will depend upon the facts of the case and can vary in each situation.

The landlord can require the tenant to enter into an authorised guarantee agreement (AGA). The law relating to AGAs is detailed and advice must be sought at the earliest opportunity.

The landlord and tenant can agree in advance the circumstances in which it would be reasonable for the landlord to withhold consent.

If a tenant assigns a lease in breach of the covenant the tenant will be in breach of covenant and the tenant will still be liable for certain sums due under the lease (including rent) because the assignment in breach of covenant without consent would be an excluded assignment. There are important conditions attached to such a situation and require the landlord to serve a notice (known as a section 17 notice) on the former tenant within certain timescales.

Assignments or subletting of leases which require consent imposes legal obligations on a landlord when served with a notice by a tenant and we would be happy to discuss details of any particular circumstances with you.


How We Can Help


A member of our specialist team will be happy to help.

To discuss Commercial Landlord and Tenant Disputes issues, please either use the contact form on the right, email us at lawyers@myerson.co.uk or call us today on +44(0)161 941 4000 to speak to a member of our team.

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