Update: commercial property

The case of London Development Agency v Nidai [2009] EWHC 1730 (Ch) shows the importance to a tenant of investigating the landlord's title before entering into the lease as a landlord cannot pass on any better title than it has.

The case concerned two lock-up shops. The LDA was seeking possession of the shops for a regeneration project. The shops were unusual in that they had been constructed over a river; they stood on a raft of reinforced joists which, in turn, rested on the retaining walls of the river. They were also attached to a bridge that also spanned the river.

In order to construct the shops, the original developer had entered into three agreements. The first agreement (the bridge agreement) granted the developer 'licence' to erect and maintain the shops 'in contact with' the bridge. The second (the retaining walls agreement) 'permitted' the developer to erect the shops on the retaining walls. The third (the river agreement) contained the river owner's 'licence and consent' to the erection and maintenance of the shops over the river.

Following the construction of the shops, the developer's successor granted 20-year leases of the shops to the tenant. The LDA subsequently acquired the interest of the river owner and sought to recover possession of the shops from the two 'tenants' in order to proceed with its redevelopment plans. It said that the tenants were in fact only licencees and that it was not bound by either the agreements or the leases.

It was agreed that a licence does not create an interest in land and therefore cannot bind a successor in title and that the LDA was not bound by the river agreement. However, a number of other arguments were put forward by the tenants.

They suggested first that that bridge and retaining walls agreements were building leases. They argued that, in line with Street v Mountford [1985] 1 AC 821, the mere naming of a document as a licence was not determinate if there was evidence of a contrary intention and that, given that the substructure of the shops was dependant on the bridge and the walls and that the terms of the two agreements granted exclusive possession and reserved a rent for a term, there was sufficient evidence to find that they were leases.

The tenants further argued that, as the developer and its successor had occupied the shops following the grant of the bridge and retaining wall agreements, the developer's successor was entitled to grant the leases which were protected overriding interests. The tenants finally argued that the river agreement was not a bare licence but a licence coupled with an interest in property, that there was authority to suggest that such interests were irrevocable and that, therefore, again the developer's successor had sufficient interest to grant the leases.

The court rejected the tenants' arguments. It thought that it was artificial to seek to construe the bridge and retaining wall agreements as leases. In its view, neither agreement sought to create an interest in land or to grant exclusive possession. It rejected out of hand the suggestion that the river agreement was an irrevocable licence; it did not think that this was such a case and could not see what the separate property interest might be. Finally, the court said, even if the bridge and retaining wall agreements were leases, the LDA was still entitled to possession as the shops were almost wholly built in the airspace over the river.

Agreements for lease

Quest Advisors v McFeely [2009] EWHC 2651 (Ch) raises a number of interesting points concerning agreements for lease, their assignability and their repudiation.

Quest was the owner of a mixed residential and commercial development site. It entered into a 'sale and leaseback' agreement with Mr McFeely under which it agreed to transfer the site to Mr McFeely. In return, he was to pay £12.7m and to grant Quest a number of 999-year leases of the commercial element at a peppercorn rent. Prior to the grant of the leases, Quest was to make staged contributions towards the building cost of the development based upon the floor area of the commercial element. The agreement incorporated standard conditions which prohibited Quest from transferring the benefit of certain parts of the agreement, though Quest could direct that the leases be granted to a third party.

Pursuant to the agreement, the site was initially transferred to Mr McFeely and registered in his name. At a later point, the site was transferred into the joint names of Mr McFeely and his brother but the transaction was not an 'arm-length' one and no money seems to have changed hands.

Despite the terms of the agreement, Quest sought to assign the benefit of the agreement to a related company, Sharriba. Notice of the 'assignment' was not given to Mr McFeely until some 18 months had passed. Shortly thereafter, Sharriba wrote to Mr McFeely to inform him that funds to discharge the staged payments which had fallen due but had not been made were to hand. Mr McFeely responded by alleging that the purported assignment by Quest to Sharriba represented a repudiatory breach of the agreement which repudiation he sought to accept.

The issues of breach and repudiation were the first matters that the court had to consider. The court reviewed the agreement and the standard conditions and concluded that, though the standard conditions did not prohibit Quest from assigning the benefit of the site sale element of the agreement, they did prohibit it from assigning the lease grant element. However, Quest still had the right to direct that the leases be granted to Sharriba.

As regards the alleged repudiation of the agreement by the purported assignment, the court said that, in order to establish this, it had to be shown that the relevant acts or conduct amounted to an intimation of an intention to abandon and altogether refuse performance of the contract. It found that there was not a refusal to pay but a belief (albeit incorrect) that Sharriba, not Quest, was obliged to pay.

A further issue arose concerning thetransfer of the site by Mr McFeely into joint ownership with his brother. As Mr McFeely's brother was not a party to the agreement, it was suggested that the obligation to grant leases to Quest did not bind him. The agreement was noted on the title to the site by way of a unilateral notice but the beneficiary of the notice was Sharriba, not Quest. However, the court pointed out that, under section 29(1) of the Land Registration Act 2002, third parties took free of interests not properly protected by registration only if the there was a disposition for valuable consideration. However, as no valuable consideration had passed between Mr McFeely and his brother, they were both bound by the agreement.

Business tenancies

The decision in Inclusive Technology v Williamson [2009] EWCA Civ 718 is the first case on the new compensation provisions set out in section 37A of the Landlord & Tenant Act 1954 which came into force in 2004.

Subsection (2) provides:

'Where (a) the tenant has quit the holding '“

(i) after making but withdrawing an application under section 24(1) of this Act; or

(ii) without making an application; and

(b) it is made to appear to the court that he did so by reason of misrepresentation or the concealment of facts, the court may order the landlord to pay to the tenant such sum as appears sufficient as compensation for damage or loss sustained by the tenant as the result of quitting the holding.'

In this case, the landlord of commercial premises was considering refurbishing the premises. The premises were leased until January 2007. In February 2006, the landlord gave the tenant an initial warning of the possibility of refurbishment taking place. By June 2006, the landlord had come to the firm decision to refurbish and served a section 25 notice on the tenant, stating that the grant of a new lease would be opposed under section 30(1)(f). The covering letter that accompanied the section 25 notice referred to the previous exchanges regarding the proposed refurbishment and said that it was 'necessary to obtain vacant possession to carry out the intended works'. In August 2006, the landlord indicated to the tenant that it still intended to carry out the refurbishment works. The tenant offered to pay an increased rent of £45,000 if it could stay in occupation, but the landlord said that it was expecting to achieve a rent of at least £54,000 after refurbishment.

However, by the end of September 2006, the landlord was having second thoughts about the refurbishment project and decided to 'hold fire' until the circumstances were right. In October 2006, the landlord instructed its agents to market the premises, clearly having decided no longer to carry out the refurbishment. However, the tenant was not informed of the landlord's change of mind. In November 2006, the tenant signed a lease of new premises, and in December 2006 vacated. In 2007, when it became clear that the landlord was not intending to carry out the refurbishment of the premises, the tenant commenced proceedings for compensation under section 37A(2) of the 1954 Act.

The judge at first instance was of the view that the section did not apply as there was neither misrepresentation nor concealment. He said that the landlord's covering letter accurately stated its intentions at the time it was sent and that the landlord did not represent that it would not change its mind in the future nor that it would inform the tenant if it did change its mind. The judge was also of the view that the word 'concealment' was to be contrasted with a term such as 'non-disclosure' and indicated that there had to be some deliberate conduct on the part of the landlord.

The Court of Appeal, however, took the opposite view. It said it was implicit in section 37A that there may be a representation or concealment resulting from the conduct of the landlord even where no application for new tenancy is made, and the tenant simply takes the landlord's representations at face value and acts on them. It said that the representation given by the landlord in this case was not simply a statement of what was in the mind of the landlord at that time, but was directly referable to a statutory process designed in due course to enable the landlord to obtain possession and that, therefore, it either should be regarded as a continuing representation which became false, and therefore a misrepresentation or gave rise to a duty or, at least, an expectation that the landlord would inform the tenant if it changed its mind and its failure to do so should be regarded as concealment.