Update: commercial property

The decision in Heronslea (Mill Hill) v Kwik-Fit Properties [2009] EWHC 295 (QB) shows the importance for landlords, when granting leases, of expressly reserving all the rights of entry that they might need to exercise during the term.

Heronslea had reserved the right to enter onto premises demised to Kwik-Fit for the purpose of 'inspecting the premises for any purpose or making surveys or drawings of the premises'. It wished to undertake an environmental investigation survey which would have involved drilling 14 boreholes of various depths of up to 20 metres. Kwik-Fit refused Heronslea access on the basis that the reserved right did not cover such activities.

Heronsea argued that 'survey' meant more than making plans and drawings, but the court agreed with Kwik-Fit. It said that the context of the word, along with the interaction with the quiet enjoyment covenant, supported Kwik-Fit's view that its scope was more limited.

Rent arrears

Management surveyors no doubt heaved a collective sigh of relief following the House of Lord's decision in Scottish & Newcastle v Raguz [2008] UKHL 65 (see 'Paying your dues', Solicitors Journal 9 December 2008).

In this case, the term of a lease had been assigned on from the original tenant to a first assignee and then on to a second assignee. The second assignee went into administrative receivership and failed to pay the rent including increases from two rent reviews. The landlord sought to recover the rent from the original tenant who paid up as it wished to have the lease reassigned to a new solvent assignee. The original tenant, in turn, sought to recover from the first assignee under the indemnity contained in section 24(1) of the Land Registration Act 1925.

The first assignee contented that it was not obliged to pay the original tenant as the original tenant itself had not been obliged to pay the landlord in view of the landlord's failure to serve notice under s.17 of the Landlord and Tenant (Covenants) Act 1995. It said that, pursuant to s.17(2), within six months of each rent day following the review dates, the landlord should have served notice on the original tenant specifying in the schedule to the notice that the sum intended to be recovered was then nil but mentioning the possibility of the rent being determined to a greater sum and, once the reviewed rents were determined, within three months, the landlord should have served further notices pursuant to s.17(4). The House of Lords considered, however, that the service of 'nil' notices could not have been intended by Parliament and that notice in respect of post-review rent had to be served only after the rent level had been determined. There had thus not been failure by the landlord under s.17 and the original tenant had been bound to pay the arrears.

Disputed rent reviews

Arbitrators need to consider carefully all the issues put before them regardless of the quality of the submissions they receive on those issues. In Metropolitan Property Realizations v Atmore Investments [2008] EWHC 2925 (Ch) the rent review of a long lease of a multi-let property was in dispute and referred to an arbitrator for determination. The landlord submitted that the new rent should be the sum of the rents achievable net of management costs and voids. The tenant submitted that there was no market for the lease and so the rent should be a peppercorn. The arbitrator rejected the tenant's comments and accepted the landlord's valuation approach. The tenant challenged the arbitrator's determination on the basis that no allowance was made for an element of profit for the notional tenant.

The court agreed that there had been a serious irregularity within s.68(2)(d) of the Arbitration Act 1996. It said that, though the issue of a profit element had not been raised by the tenant in its submissions, nevertheless, the arbitrator should have satisfied himself that his award was coherent in the light of the approach he chose to adopt. The arbitrator had assumed that the notional tenant would seek a profit but had failed to allow for the profit element in his award. The matter was remitted back to the arbitrator for redetermination.

Service charges

Inadequately drafted service charge clauses continue to give rise to disputes as to their interpretation. In Boots UK v Trafford Centre [2008] EWHC 3372 (Ch) the lease of a unit in a shopping centre provided for the tenant to contribute towards the cost of services provided at the centre by the landlord in the usual way. However, the lease also provided for the landlord to bear 50 per cent of the cost of 'promotion' in any service charge period and that the cost of 'promotion' was not to exceed ten per cent of the total service charge.

'Promotion' was defined as 'advertising and other forms of promotion of the centre intended to bring additional custom to the centre which shall be reasonable and proper'. A dispute arose as to whether four matters provided by the landlord were part of the 'promotion' of the centre. The four matters were entertainment, such as bands, Christmas decorations, a Santa's grotto and a large permanent television screen in the food court.

The tenant argued that items were 'promotion' where their sole, dominant or the substantial part of their purpose was to bring custom to the centre and that each of the four items satisfied that test. The court broadly accepted that approach but came to the opposite conclusion. It said that each of the matters was not a promotion of the centre but a service, facility or amenity within the centre.

Alienation

'Virtual assignments' of leases are regularly used in outsourcing deals and corporate transactions to allow a new owner/manager of a business into a property used by the business without the approval of the landlord.

The case of Clarence House v National Westminster Bank [2009] EWHC 77 (Ch) considered the legality of such arrangements. A lease of office premises contained common form restrictions against alienation, including covenants not to execute a declaration of trust, not to share or part with possession or occupation and not to assign or underlet without the landlord's prior written consent.

When the premises became surplus to its requirements, the tenant sublet the whole with landlord's consent. Subsequently, it transferred the entire economic benefit and burden of the lease, but not the actual leasehold interest, to a third party under a 'virtual assignment' arrangement. The landlord's consent to the arrangement was not sought. On becoming aware of the arrangement, the landlord sought a declaration that it represented a breach of the lease alienation provisions.

The court reviewed the virtual assignment. It considered the decision in Abbey National v CRC [2006] EWCA Civ 886, which concerned the VAT status of a similar arrangement but concluded that that case was of little assistance. It found that the current arrangement was not a breach of the covenant not to assign or sublet as no legal interest had been transferred and that it was also not a declaration of trust. However, the transfer of the right to receive the subrent did, the court said, represent an unlawful parting with or sharing of possession.

The decision of the High Court in Landlord Protect v St Anselm Development Company (see Landlord and tenant update, Solicitors Journal, 4 November 2008) has been overturned by the Court of Appeal ([2009] EWCA Civ 99). The Court of Appeal was of the view that the landlord, in its demands for a guarantor who was to be released only on reasonable alternative security being provided, had sought more than that to which it was entitled under the lease. The proposed assignee had therefore been entitled to rescind the contract and was entitled to the return of his deposit.

The case of Royal Bank of Scotland v Victoria Street (No.3), in which a summary judgment application by the tenant that his landlord had unreasonably withheld consent to an assignment to a newly formed company was dismissed (see Landlord and tenant update, Solicitors Journal, 10 June 2008), went to a full hearing [2008] EWHC 3052 (Ch).

At the full hearing the tenant argued, among other things, that where a landlord will still have the benefit of the original tenant's covenant, it can only object to the covenant of the assignee where it calls evidence that the value of its reversion will be diminished and that it proposes to sell its reversion in the near future. The court rejected that suggested limitation saying that there was not and should not be a rule of law on the point; the matter was a question of fact.

Break notices

The overriding importance of getting break notices right has again been emphasised. In Orchard (Developments) Holdings v Reuters [2009] EWCA Civ 6, a 15-year lease of commercial premises permitted the tenant to terminate at the end of the fifth year by giving six months' written notice. The lease notice provisions provided that, unless the receiving party acknowledged receipt, a notice would be valid only if it was given by hand or sent by registered post or recorded delivery.

The tenant sought to exercise the break shortly before the six month deadline. However, the process server it instructed to hand-deliver the break notice ('the formal notice') posted it in the wrong letter-box. A copy of the break notice was also faxed to the landlord ('the informal notice') but the landlord did not acknowledge receipt of the informal notice until some ten months after the break date.

The landlord disputed that the break had taken effect. The tenant contended that the belated acknowledgement by the landlord of the informal notice retrospectively validated it and so the lease was at an end. However, the court said that once the break date had passed without acknowledgement of the informal notice it was too late and the lease continued.

Forfeiture

Useful guidance for landlords on how to avoid waiving their right to forfeit is contained in the decision of Seahive Investments v Osibanjo [2008] EWCA Civ 1282. A landlord served a statutory demand on its tenant for arrears of rent and, when the arrears were still not paid, petitioned for his bankruptcy. The landlord subsequently became aware that substantial alterations and a change of use had been made to the property without its consent, as well as a parting with possession. Shortly before the bankruptcy hearing, the tenant sent a cheque to the landlord that covered not only the bankruptcy arrears but also sums that had fallen due since. The landlord banked the cheque, retained the bankruptcy arrears and returned the balance. It agreed the dismissal of the bankruptcy petition but sought to forfeit the lease for the breaches of covenant.

The tenant contended that by (1) banking the cheque, (2) petitioning for the tenant's bankruptcy or, alternatively, (3) accepting the bankruptcy arrears, the landlord had waived the right to forfeit the lease. The court held, however, that (1) it was necessary for the landlord to bank the cheque to obtain the bankruptcy arrears and this was made clear by the landlord, (2) the petition pre-dated the landlord's knowledge of the breaches and (3) similarly, the bankruptcy arrears pre-dated knowledge of the breaches. The court added that parting with possession was a continuing breach for which the landlord remained entitled to forfeit regardless.