Update: landlord and tenant

Creation of tenancies

The case of Hutchinson v B & DF [2008] EWHC 2286 (Ch) highlights the need for parties to take care when discussing short-term leases, or they may find themselves bound earlier than anticipated. In Hutchinson, a tenant took assignments of leases of a number of units on an industrial estate for its commercial catering business. Prior to the expiration of the leases, the landlord served notices under s.25 of the Landlord and Tenant Act 1954. The tenant did not make court applications prior to the date stated in the notices but was nevertheless allowed by the landlord to remain in occupation and continued paying rent. The tenant took occupation of further units and paid rent in respect of those also. It was then orally agreed that the tenant would enter into new leases for three-year terms for all the units, save for one in respect of which a five-year term was agreed. However, when the tenant was unable to obtain planning permission to make alterations to the units to deal with an odour problem that was causing a nuisance to local residents, it vacated all the units.

The landlord claimed that the tenant was bound by the oral agreements. The tenant denied the agreements had been made and denied receipt of the s.25 notices. It said further that the leases of the original units had continued under s.24 of the 1954 Act and had been terminated by s.27 notices and that, in respect of the new units, it had occupied them under a tenancy at will.

The court held that agreements had been reached between the parties for the grant of new leases. With regards to the three-year leases, by virtue of s.54(2) of the Law of Property Act 1925, those agreements created immediate binding legal leases and there was no requirement for a written contract under the Law of Property (Miscellaneous Provisions) Act 1989. However, the agreement for the five-year lease fell foul of s.2 of the 1989 Act and was void, and so that unit had been occupied only under a yearly periodic tenancy. The court said that the new binding agreements overturned any old arrangements and therefore the issue of receipt of the s.25 notices was irrelevant.

Manton Securities v Nazam [2008] EWCA Civ 805 is a further example of an informal arrangement leading to a formal lease being put in place. Mr Nazam acquired a cash-and-carry business that was operated from a leased property. He did not, however, take an assignment of the lease which was contracted out of the 1954 Act. But the landlord did not object to the change of occupation and entered into discussions with Mr Nazam for the grant to him of a new lease. Subsequently, the landlord acquired land at the rear of the property and agreed with Mr Nazam that, if he undertook works of improvement to the property, he would be granted a new lease for 21 years. Mr Nazam carried out works to the property while the landlord built a warehouse on the land it had acquired. Mr Nazam then also occupied the warehouse.

The parties later fell out over the cost of the works to the property and warehouse. Mr Nazam served a purported notice under s.26 of the 1954 Act. In response, the landlord claimed that Mr Nazam merely occupied under a tenancy at will and purported to terminate that tenancy.

Mr Nazam argued that, following his expenditure on the property under the landlord's encouragement of an expectation that it would grant him a 21-year tenancy, the landlord was prevented by the principles of proprietary estoppel from denying his entitlement to such a tenancy. The landlord countered that, if there was an estoppel, Mr Nazam should not be granted a new lease because his rent payment record was poor.

The court agreed that, through his expenditure on the property, Mr Nazam had established an equitable tenancy and was entitled to a 21-year lease. It did not think that his late payment record justified denying him that tenancy.

Service charges

The decision of the High Court in Leonora Investment Company v Mott Macdonald ([2008] SJ 152/23, 10 June 2008) has been upheld by the Court of Appeal ([2008] EWCA Civ 857).

Rent review arbitrations

Arbitrators need to take into account all matters put before them by the parties, or they risk having their awards overturned. In Dodds v West Register (Public Houses III) [2008] 22 EG 169 (CS) the lease of a public house provided for the review of the rent to open market level. The pub was a 'tied house' and the price of beer supplied by the brewery to the tenant was higher than that available in the open market to tenants 'free-of-tie'. The parties could not agree the rent at review and appointed an arbitrator to determine the rental value of the pub. The arbitrator adopted the usual 'profit assessment' method of valuation for licensed premises but he took no account of the effect of the beer tie on profits when assessing the rent. The tenant contended that the arbitrator had erred as it had been accepted that a tied tenant should be no worse off than one who was not tied, and therefore account should have been taken of the difference in the wholesale price of beer sold to tied and free-of-tie tenants.

The court held that there had been a serious irregularity on the part of the arbitrator within s.68(2)(d) of the Arbitration Act 1996, since ignoring the difference in the wholesale prices paid by free-of-tie and tied tenants would inevitably lead to tied tenants being worst off. The award was therefore remitted back to the arbitrator for reconsideration.

Repairs

With disrepair claims, as with all contract damages claims, the onus is on the party seeking damages to mitigate its losses and to put forward appropriate evidence in support of its claim. In Hawkins v Woodhall [2008] EWCA Civ 932, premises that were in a poor condition were leased by the landlord to tenants on the basis that, for a 12-month period, the tenants would have no responsibility for any defects in the premises that existed at the date of the lease, that during that period the landlord would rectify all defects and reinstate the premises to the satisfaction of an independent surveyor, and that, on the completion of the works, the landlord and tenant would enter into a new long-term lease. The landlord failed to repair the property.

Two years after the initial grant of the tenancy, the tenants transferred the business into a company of which they were the sole directors and shareholders. Four years after taking occupation of the premises, the tenants left claiming that the landlord had breached its agreement to repair the premises, and sought damages for loss of profit and diminution in the value of the lease. The judge at first instant gave judgment for the tenants on their claim and awarded them £118,000 for loss of profit and diminution. The landlord appealed that award.

The Court of Appeal reduced the damages award substantially. It said that the tenants could not claim for loss of profit for the period after which they had transferred the business into the company. As regards the period during which the tenants were running the business direct from the premises, the court said that the tenants had been under a duty to take reasonable steps to mitigate their losses in view of the landlord's failure to repair. Mitigation could have taken several forms, it said. For instance, they could have done the works themselves and claimed the costs. In view of this, the court said that the tenants were entitled to damages for no more than 15 months. It said that the diminution in value of tenancy over that period was no more than £12,500. As regards loss of profit, the Court of Appeal said that the tenants had failed to produce expert evidence in support of their claim for loss of profits and therefore it declined to make any further award.

The decision in Business Environment Bow Lane v Deanwater Estates [2008] EWHC 2003 (TCC) is a salutary lesson for landlords on the risks of making exaggerated dilapidations claims. A landlord made a dilapidations claim against its former tenant in respect of City offices. The claim exceeded £550,000. When negotiations failed to produce a settlement, the landlord issued proceedings in which it claimed a figure of £415,000.

A preliminary issue in the proceedings was decided in the landlord's favour but, subsequently, in view of substantial refurbishment work it had undertaken which negated virtually all of its claim, the landlord agreed a settlement at a level of just over £1,000.

However, the issue of costs remained outstanding. The landlord argued that, as it had received some, albeit very limited, payment from the former tenant, it had 'won' and that the usual rule of 'costs following the event' should apply.

The court was, however, very critical of the landlord and the manner in which it conducted itself both prior to and during proceedings. It said that the landlord knew or ought to have known that the claim that it was making was unsustainable and ordered, pursuant to its powers under CPR Rules 44.3 and 44.4, that the landlord pay the former tenant's costs on an indemnity basis.

Assignments

In Landlord Protect v St. Anselm Development Company [2008] 28 EG 113 (CS), the parties adopted a 'winner-takes-all' approach to their assignment dispute when an expedited declaration from the court on the point might have been a less risky way of proceeding. The lease of a property permitted the tenant to assign with landlord's consent but such consent was not to be unreasonably withheld in the case of a respectable and responsible assignee. The tenant entered into an agreement to sell the property to a proposed assignee. The agreement provided for the payment by the proposed assignee of a deposit of £100,000, was conditional upon landlord's consent to the assignment being obtained in respect of which the tenant was to use all reasonable endeavours to obtain, and required the proposed assignee to execute any licence or deed of covenant that might be required by the landlord and to provide guarantees, a rent deposit or other security.

The agreement further provided that if, within three months of the date of the agreement, all required licences and consents had not been obtained, either party could rescind. The agreement finally provided for the forfeiture of the deposit if the proposed assignee failed to comply with a notice to complete properly, served in accordance with the agreement.

The proposed assignee was a dormant company that had never traded and thus had no accounts or bank references. The landlord therefore required that the sole director of the proposed assignee company guarantee the terms of the lease. A dispute arose as to the detailed terms of the guarantee. The landlord proposed that it be a term that, on a subsequent assignment, the director be released from his guarantee provided that reasonable alternative security was provided by the new assignee. The proposed assignee objected to that proviso on the basis that the landlord was seeking something to which it was not entitled under the lease. After three months, the proposed assignee purported to rescind the agreement. The tenant did not accept the rescission and sought to forfeit the deposit for the proposed assignee's failure to complete. The matter turned on whether or not the landlord's requirements were reasonable.

The court said that the landlord was not entitled to a guarantee throughout the term of the lease but that was not what was being sought.

Reference to 'security' could include the covenant of the new assignee itself. Thus the landlord's request was reasonable and therefore the tenant was entitled to forfeit the proposed assignee's deposit.