The past year has provided the usual spate of cases, and a very limited amount of legislative reform. However, as anticipated 12 months ago, we have experienced a flood of guidance on good practice. This has been a cause of frustration to those practitioners who would have preferred to see statutory regulation, on the basis that they then know exactly where their clients stand. Let us hope for a slightly quieter time in 2008!

General issues

There are a number of developments to mention here, the first being a significant one.

Business leases code

The replacement for the 2002 Code of Practice for Commercial Leases in England and Wales was launched in March under a changed title, and in a more condensed form. This was against the background of a farfrom- veiled threat of government intervention from Housing and Planning Minister Yvette Cooper if landlords fail to support the 2007 edition, which again is voluntary.

The Code for Leasing Business Premises in England and Wales 2007 is endorsed by many industry bodies, together with RICS and the Law Society. It is, in fact, a package consisting of three items, namely:

• the Landlord Code, comprising ten sets of requirements to be met by landlords;

• the Occupier Guide, made up of 37 specific tips for tenants; and

• Model Heads of Terms, which can be completed online and downloaded.

It also contains a reminder of the earlier British Property Federation (BPF) declaration in relation to applications for consent to sublet where there is an existing lease covenant requiring subleases to be at the higher of passing and market rent.

This was followed in July by the launch of the Commercial Landlords Accreditation Scheme (CLAS), an initiative of the BPF also supported by the government. The BPF believes that landlords that subscribe to CLAS will have a marketing advantage in terms of letting premises.

Landlords joining CLAS as members consent to be bound by five basic rules, enforceable by means of an agreed disciplinary process. However, it seems to be the intention that members will be able to opt out of any specific requirements of the Landlord Code (subject to disclosure and explanation) and not just those requirements where it expressly anticipates a departure, eg in relation to the tenant’s repairing obligations. (The fear, apparently, was that without this ability, landlords would not subscribe to CLAS.)

This apparent concession must water down the value of the Landlord Code generally in the eyes of tenants.

Code of Measuring Practice

RICS has just published the sixth edition of its Code of Measuring Practice. This updated version is intended to take into account changes in law and practice. In particular, the influence of the decision in Kilmartin SCI (Hulton House) Ltd v Safeway Stores plc [2006], referred to last year, can be identified.

Company voluntary arrangements (CVAs) and guarantors

Commercial property investors generally took comfort this year from the decision of Etherton J in Prudential Assurance Company Ltd & ors v PRG Powerhouse Ltd & ors [2007], where he held that nothing in the Insolvency Act 1986 made the CVA in that case – which purported to release a parent company guarantor from its guarantee to certain landlords – binding and enforceable between the guarantor and the landlords. He also held that in all the circumstances this particular CVA was unfairly prejudicial to those landlords.

However, his judgment makes it clear that it is legally possible for a CVA to prevent a creditor from enforcing an obligation of a third party to the creditor where performance of that obligation would give rise to a right of recourse by the third party against the company. (When a landlord claims against a guarantor in respect of moneys due from the tenant, the guarantor has a right of indemnity from the tenant in respect of the sums so paid.)

Subject to the issue of unfair prejudice, a carefully drafted CVA could therefore still be used effectively to prevent a landlord from enforcing a parent company or other guarantee.

Rights to light

The decision of Lewison J in RJH Ltd v FT Patten (Holdings) Ltd [2007] is helpful to a landlord, on the grant of a lease of part, seeking to safeguard future development opportunities. It makes it clear, in the context of rights of light, that the landlord is only effectively protected by a clause that prevents both:

(a) the creation of rights by express or implied grant at the date of the lease; and

(b) the future acquisition of rights by prescription.

The latter limb need not refer expressly to light as long as what it authorises would clearly interfere with light. (Here the landlord had simply reserved the right to build on adjoining land. That amounted to consent or agreement for the purposes of s3 of the Prescription Act 1832.)

Rent and rent review

We have some important, though long anticipated, statutory interference to consider and a handful of cases. Other cases reported on rent review depended very much on their own facts, and so do not merit separate mention here.

Distress

The Tribunals, Courts and Enforcement Act 2007 received royal assent on 19 July 2007. Of particular interest to landlord and tenant lawyers are the provisions that will abolish the common law right to distrain for rent arrears, and replace it – in the case of commercial premises – with a modified out-of-court regime known as commercial rent arrears recovery (CRAR). These provisions rely upon regulations being made, and are yet to come into effect.

CRAR will only be available in respect of wholly commercial premises that are demised by means of a lease, and the right to exercise CRAR can be excluded in the lease. Nothing other than rent in the pure sense, together with VAT and interest on it, may be recovered. The rent must be certain or capable of being calculated with certainty. A notice of enforcement must first be served before an enforcement agent (previously a certified bailiff) can take action. The court is empowered to intervene in the CRAR procedure at various stages.

Section 17 notices

In Scottish and Newcastle plc v Raguz [2007] the Court of Appeal confirmed the first instance decision of Hart J. The appeal judges held that a landlord seeking to recover arrears of rent increase, following a protracted review, from a former tenant or former guarantor must serve notice on that third party throughout the period of the review in Form 1 (including the optional warning paragraph) within six months of each rent payment day on which the reviewed rent accrues as a liability – even though at that point it could not be demanded from the tenant because its amount had not been fixed – and then serve notice in Form 2 within three months of the date on which the amount of the reviewed rent is determined.

They went on to say that although this was a burden on landlords, it was the result of the legislative language, and the anomaly that it created was no reason for adopting a different reading. In many cases, of course, the Form 1 notices will show a nil liability.

Rent arrears and mitigation

Landlords were probably more impressed by the decision of the Court of Appeal in Reichman & anr v Beveridge & anr [2007]. There the tenants simply left the premises before the end of the term, no longer having use for them, and ceased paying rent. The landlords sued for arrears.

The principal issue for the Court of Appeal was whether it could be said that the landlords had acted wholly unreasonably in failing to take steps to find an alternative tenant, rather than leaving the lease in place and suing for the rent as it fell due – in other words, electing not to accept a repudiation, but rather to enforce their right to maintain the contract in being.

The appeal judges held that the landlords were not obliged to mitigate their loss when seeking to recover rent arrears. It was not unreasonable, in principle, if a landlord chose to leave it to the tenant to propose an assignee, subtenant or substitute tenant under a new tenancy rather than taking the initiative itself. They went on to make the point that there was no English authority for the proposition that a landlord could recover damages for loss of future rent after termination.

Rent review and the strictness of time limits

The decision of Blackburne J in Secretary of State for Communities and Local Government v Standard Securities Ltd [2007] provides a useful illustration of one of the ways in which the presumption that time is not of the essence in relation to time limits in rent review clauses may be rebutted.

The lease provided for upward-only rent reviews at seven-year intervals, the contractual review date being the last day of the preceding seven-year period. The new rent was to be agreed not less than two months before the contractual review date or, if not so agreed, was to be determined by an independent surveyor on the request of the landlord. A proviso stated that if no request had been made by the contractual review date, the rent was to remain the same for the next seven years.

The landlord made a request that was three months late. The tenant contended that time was of the essence, and that accordingly the rent remained the same for the next seven years.

The judge held that the proviso stipulated the consequences of a failure by the landlord to request determination by an independent surveyor by a given date. That was a sufficient contraindication to rebut the presumption that time was not of the essence. The rent was therefore to remain the same for the next seven years. The proviso was part of the rent review machinery, and did not merely provide a fall-back position pending a completed review.

Landlord and tenant covenants

Under this heading there are four cases to consider.

Leases and collateral contracts

The tenant in Business Environment Bow Lane Ltd v Deanwater Estates Ltd [2007] terminated its lease by exercising a break right. The landlord claimed damages, following service of a terminal schedule of dilapidations. The tenant argued principally that it had only executed the lease because of a letter, written by the landlord’s solicitor to the tenant’s solicitor during the lease negotiations and some six weeks before completion, giving an assurance that a terminal schedule of dilapidations would not be served. Accordingly, a collateral contract had arisen by which the landlord had relinquished any right to enforce the repairing covenants after the termination of the lease. This precluded the claim.

The Court of Appeal disagreed with this argument, concluding that the correspondence as a whole did not show objectively that the landlord and the tenant had intended at the time to make any contract other than the lease. The assurance was at best a term integral to the grant of the lease that was neither contained in the lease nor in any separate contract that complied with s2 of the Law of Property (Miscellaneous Provisions) Act 1989. The appeal judges said that the law relating to collateral contracts had to be applied with caution in connection with sales and leases.

Enforcement of tenant covenants post assignment of the reversion

In Wembley National Stadium Ltd v Wembley (London) Ltd & ors [2007] the landlord granted a lease for 125 years to the tenant, the consideration for which included payment of a service charge. Subsequently, the landlord transferred the reversion to nominees who simultaneously declared that they held the lease as trustees for the landlord absolutely. Later, the landlord claimed from the tenant service charges amounting to £660,000. The tenant contended that it was not liable to pay the sums to the landlord because the effect of the transfer of the reversion was to transfer to the nominees the benefit of the tenant covenants of the lease. Alternatively, the effect of s3 of the Landlord and Tenant (Covenants) Act 1995 was that the nominees alone were entitled to the benefit of the tenant covenants.

The Chancellor held that, whether or not the burden of the landlord covenants of the lease had passed to the nominees, it was implicit from s6(2) of the 1995 Act that, in the absence of a release under that Act, the landlord remained bound by the landlord covenants of the lease, and continued to be entitled to the benefit of the tenant covenants. The landlord could therefore recover the service charge moneys.

Contract (Rights of Third Parties) Act 1999

While landlord and tenant lawyers tend to view it almost as standard practice to exclude the operation of this Act, on occasion the possible impact of the 1999 Act is overlooked.

In The Prudential Assurance Co Ltd v Ayres [2007] the landlord granted consent to the tenants to assign their lease of office premises to the assignees, a firm of US attorneys, subject to the tenants entering into an authorised guarantee agreement. Separately, the landlord entered into a supplemental deed with the assignees under which it agreed that the liability of the assignees would be limited to the partnership assets, and that there could be no recourse to the personal assets of individual partners.

It was also expressly agreed with the assignees that the landlord’s right to recover from any previous tenant was similarly limited. (This was to ensure that no indemnity claim could be made against the personal assets of individual partners by a former tenant whose guarantee had been relied upon by the landlord.)

The assignees subsequently became bankrupt both in the US and in the UK. The landlord claimed the whole of the rent arrears and interest from the tenants. They denied liability, relying upon the terms of the supplemental deed.

Lindsay J found for the tenants, holding:

• On the correct construction of the supplemental deed, the landlord was entitled to nothing more than was derived from the partnership assets, either from the assignees or from the tenants.

• The tenants were entitled to the benefit of this by virtue of the Act. They were expressly identified in the supplemental deed, there was no indication that the parties did not intend the term to be enforceable by the tenants and the term purported to confer a benefit on them.

The judge pointed out that the 1999 Act does not require that the predominant purpose of the term must be to confer a benefit on the third party.

Section 18 of the Landlord and Tenant Act 1927

The main issue in Lyndendown Ltd v Vitamol Ltd [2007] was whether diminution in the value of the landlord’s reversion had occurred. There, the landlord granted a licence to the tenant to sublet the premises to the sub-tenant. In the licence, the sub-tenant covenanted with the landlord to observe and perform the covenants in the headlease. Prior to the licence being granted, the tenant’s parent company gave an undertaking to the sub-tenant, by means of a side letter, that its obligations to repair would be limited to making the premises wind- and watertight. Any repairs surplus to that obligation would be paid for by the parent company.

After expiry of the headlease, the sub-tenant remained in possession of the premises upon the terms of the sublease and in accordance with the provisions of the Landlord and Tenant Act 1954. The landlord claimed damages against the tenant for breach of the repairing covenants in the headlease.

The trial judge held that there was no diminution in value of the landlord’s reversion for the purpose of s18 of the 1927 Act. The sub-tenant remained in possession under a sublease to which the 1954 Act applied and which contained the same or similar repairing covenants, which the landlord could enforce directly by virtue of s65(2) of the 1954 Act. The side letter did not alter the position. The landlord appealed.

The Court of Appeal dismissed the appeal, holding that there was no basis for interfering with the trial judge’s findings of fact.

Service charges

Again we have seen further guidance on good practice and (unusually) two decided cases.

The Service Charges Code of Practice

In June 2006 RICS launched ‘Service Charges in Commercial Property: RICS Code of Practice’. (This was based upon the second edition of ‘Service Charges in Commercial Property – AGuide to Good Practice’, which was published in October 2000 under the auspices of leading industry bodies.) It came into effect on 1 April 2007 and has been specifically endorsed by the Code for Leasing Business Premises in England and Wales 2007.

While the Guide was voluntary, it is suggested that this new Code of Practice will have more prominence by virtue of its status as an official RICS guidance note. It has the approval of many industry bodies and is applicable to England and Wales only.

The specific topics covered are:

• management;

• communications;

• transparency;

• service standards and provision;

• administration; and

• additional shopping centre services.

But how effective in practical terms is this new Code of Practice likely to be? Compliance is an entirely voluntary matter. Its existence merely serves as an encouragement to landlords and tenants to negotiate and apply the terms of the lease in accordance with the recommendations the new Code of Practice sets out. Many landlords simply may not be prepared to go along with this, when possibly the only recognisable sanction is a very general one, namely the threat that the government may one day impose statutory controls.

Advance payments and lease determination

In Brown’s Operating System Services Ltd v Southwark Roman Catholic Diocesan Corporation [2007] quarterly on-account service charge payments had produced a large surplus. The tenant requested a service charge ‘holiday’. The landlord refused, and so the tenant gave six months’ notice to quit pursuant to a break right in the lease. It refused to make service charge payments for that period on the basis that the landlord had sufficient funds in hand. The landlord sued for those payments, contending that the lease provisions entitled it to create a reserve fund and that fund was not repayable to the tenant, even if it had not been expended at the expiry of the lease.

The Court of Appeal held that the lease did not provide for the creation of a reserve fund, albeit that it did entitle the landlord to include in the annual service charge reasonable provision for expenditure likely to be incurred in the future. However, that was restricted to expenditure likely to be incurred during the currency of the lease. Sums remaining unspent thereafter belonged to the tenant.

It is worth noting that the Court of Appeal distinguished the decision of Rimer J in Secretary of State for the Environment v Possfund (North West) Ltd [1997]. There the judge found, as a matter of construction, that the lease made provision for a depreciation allowance in the landlord’s favour in respect of the air-conditioning plant serving the premises.

Service charge cap and landlord’s delay

The Court of Appeal came to the rescue of the tenant in Princes House Ltd v Distinctive Clubs Ltd [2007]. There the lease of basement premises obliged the landlord to use all reasonable endeavours to provide specified services to the building, so far as consistent with the principles of good estate management, and the tenant to contribute to the cost by means of a service charge. The tenant’s service charge liability was capped under its lease until 2003. Separately, the lease provided that the landlord was not to be liable for any failure to provide the services unless and until the tenant had notified the landlord of such failure, and the landlord had failed within a reasonable time to remedy that failure.

In 2002 the landlord submitted the expenditure budget for 2003 to the tenant, asking it to note that a certain roof area was to be replaced in the summer of 2003. In fact, the works were not carried out until 2004. The landlord then claimed service charge arrears from the tenant. The tenant counterclaimed for damages, contending that the landlord should have carried out the works in 2003, in which case the tenant would have benefited from the service charge cap.

The Court of Appeal held as follows:

• The trial judge was right to conclude that, had the landlord used all reasonable endeavours, it could have completed the works by the end of 2003.

• The landlord had waived the entitlement to notice by informing the tenant that it intended to repair the roof area in the summer of 2003. This had been inserted solely for the protection of the landlord.

• Patch repairs were inappropriate once the landlord had been advised that replacement was required and had devised a scheme of replacement. This had happened in 2002.

Forfeiture and termination

Here we simply look at three decided cases.

Impact of compromise agreement on break notice

In Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2007] the tenant served break notices in June 2003 purporting to determine its leases on 30 December 2004. The break rights were conditional, inter alia, on compliance with the tenant’s covenants and delivery of vacant possession. Following discussions about the tenant’s accrued liability for repairs, the landlord and tenant entered into an agreement in October 2004 whereby, in consideration of a payment by the tenant of £172,000, the landlord released the tenant from all liability past and present under the lease.

After the break date the landlord claimed arrears of rent and service charge, contending that the tenant had failed to give vacant possession. At the break date it had left quantities of unwanted property on the demised premises, its personnel were still clearing the demised premises and it had failed to surrender the keys. The tenant argued that the October 2004 agreement settled all claims between the parties, including the exercise of the break rights. The leases had therefore been validly terminated.

By a majority, the Court of Appeal affirmed the decision of Lewison J at first instance and held that the leases had been validly terminated. Sir Anthony Clarke MR said that it was necessary, to give business efficacy to the settlement agreement, to imply a term to the effect that the leases would come to an end whether or not the tenant succeeded in giving vacant possession by the end of December 2004.

It is worth noting that at first instance Lewison J went on to say that, had it been necessary to decide the point, he would have held that the tenant had breached its obligation to give vacant possession since the landlord could not have gone into occupation on the break date without difficulty.

Appropriation of rent, forfeiture and waiver

A company voluntary arrangement also featured in Thomas v Ken Thomas Ltd [2007]. There the tenant, under a tenyear lease granted in May 2004, encountered financial difficulties and failed to pay the monthly instalment of rent due for November 2004. In early December it informed the landlord of its intention to enter into a CVA, stating that the rent due for November would go into the CVA as an unsecured amount, and that the rent for December would be paid in two equal instalments. The landlord insisted on treating the two instalment payments as rent paid for November. The tenant then made further payments to the landlord in respect of the January rent.

In February the landlord issued forfeiture proceedings for non-payment of one month’s rent. In March the CVAwas approved, despite the landlord’s opposition to it.

The Court of Appeal held that tenant’s appropriation was an effective one, notwithstanding the landlord’s refusal to accept it. Consequently, the landlord was to be taken to have accepted rent for December and January, and to have waived the right to forfeit the lease for non-payment of the November rent.

Furthermore, the landlord was not entitled to forfeit for non-payment of rent falling due prior to approval of the CVA, where that rent had been subsumed into the CVAand replaced by payments to be made under it.

Mistakes in tenant’s break clause

The somewhat troublesome case of KPMG LLP v Network Rail Infrastructure Ltd [2007] reached the Court of Appeal.

Wording that had been included in the draft lease annexed to the earlier agreement for lease appeared to have been omitted from the lease itself. That omission was catastrophic, from the point of view of the landlord, in its impact on a clause creating break rights in favour of the tenant. An additional two break opportunities arose.

At first instance Blackburne J refused to construe the lease in such a way as to incorporate the ‘missing’ wording, but did hold that there should be rectification, as contended for by the landlord, so as to restore those words. The tenant appealed.

The Court of Appeal allowed the appeal, holding that the landlord had not established all of the facts necessary to support the claim for rectification.

Nevertheless, the appeal judges concluded, using the agreement for lease as an aid to construction, that the correct construction of the lease – considering the structure and grammar as a whole – required that the ‘missing’ words be reinstated.

The form of draft lease annexed to that agreement left no doubt as to the nature of the words that were missing.

Business lease renewals

One short consultation paper and two decided cases are all that need concern us here.

The Landlord and Tenant Act 1954

The Department for Communities and Local Government has published a consultation paper setting out proposals to use the Regulatory Reform Act 2001 to repeal s57 and to widen s30(1) of the 1954 Act. These are likely to prove uncontroversial.

Mixed-use premises and the 1954 Act

In Broadway Investments Hackney Ltd v Grant [2007] the tenant was originally granted a licence to occupy the premises (comprising basement, ground and first floors) from the local authority in 1993. The tenant renovated the premises in order to make them habitable, and commenced living in the upper part in 1995 when the local authority granted him a lease for a term of ten years. By 2000 the tenant had made the lower part of the premises fit for shop use, and was selling fish and groceries from there.

The lease described the property as ‘shop premises’ and the permitted uses were specified as the sale and catering of fish in the lower part of the premises and residential use only in the upper part. It contained covenants by the tenant to carry out specified works, to keep the premises open as a shop for carrying on the permitted use and to maintain an appropriate display in the shop windows.

The question for the Court of Appeal to determine was whether the tenancy created by the lease was, at the time when the proceedings commenced, a business tenancy within the 1954 Act.

The Court of Appeal held that the 1954 Act applied. The question posed by s23(1) of the 1954 Act was a ‘factual’ one. From January 2000 onwards the tenant had occupied the lower part of the premises for the purposes of a business, and he was still doing so both when proceedings were commenced and at the date of the hearing. On the basis of these facts, it was difficult to see how there could be any doubt that the tenant occupied the premises and, in respect of the lower part of the premises, for the purposes of the business carried on by him there.

Costs and s29(5) of the 1954 Act

The decision of the Court of Appeal in Lay & ors v Drexler & ors [2007] effectively remedies a deficiency in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.

On the expiry of a five-year lease, the landlords applied to the court under s24(1) of the 1954 Act (as amended by the 2003 Order) for an order for the grant of a new tenancy to the tenants. Some months later the tenants notified the court that they no longer wanted a new tenancy, and the landlord’s claim was accordingly dismissed under s29(5) of the 1954 Act (as also amended by the Order). The judge made no order as to costs, taking the view that the tenants’ notification amounted to a compromise of the landlords’ claim. The landlords appealed.

The Court of Appeal allowed the appeal, holding that the service by the tenants of a notice under s29(5) of the 1954 Act was equivalent to a notice to discontinue proceedings in which they had been seeking an order for the grant of a new tenancy. By entering an acknowledgment of service to the landlords’ claim the tenants were, in effect, commencing their own proceedings. The normal rule in CPR 38.6(1) then applied.

2008

We may just see further amendments to the Landlord and Tenant Act 1954 in view of the DCLG’s report submitted to Parliament at the end of 2006 It makes recommendations for a number of amendments to the existing legislation.

(Unsurprisingly, the majority relate to the process of contracting out.) More importantly, however, it is greatly to be hoped that Parliament will at last find time for the Termination of Tenancies Bill, also published in 2006 by the Law Commission as part of its final report on termination of tenancies for tenant default.