LANDLORD AND

TENANT APRO703.2

ABSTRACT This assignment have assessed two scenarios related

to a lease renewal and a lease assignment. It looks at

the situation from all parties’ perspectives and after

careful consideration of circumstances surrounding

each case, it reaches a conclusion explaining the

influential factors that are likely to impact the

outcome of the court.

Payam Roodashtyan Msc Facilities and Property Management

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TABLE OF CONTENTS

1 SCENARIO 1 – LEASE RENEWALS __________________________________________ 4

2 Preface _____________________________________________________________________ 4

3 Commercial Lease Renewals __________________________________________________ 4

3.1 Statutes _________________________________________________________________ 5

3.1.1 Landlord and Tenant Act 1954 _________________________________________ 5

3.2 Security of Tenure ________________________________________________________ 5

3.2.1 Section 25 and 27 ____________________________________________________ 5

3.2.2 Section 26 ___________________________________________________________ 5

3.2.3 Regulatory reform order 2003 __________________________________________ 5

3.3 Landlord Opposing Lease renewal __________________________________________ 5

3.4 Contracting Out __________________________________________________________ 6

4 Past Issues __________________________________________________________________ 7

4.1 Dilapidations _____________________________________________________________ 7

4.1.1 Section 30 (1) (a) _____________________________________________________ 7

4.1.2 Schedule of dilapidations ______________________________________________ 7

4.1.3 Suzi’s Dilapidations ___________________________________________________ 8

4.1.4 Court’s Discretion ____________________________________________________ 8

4.1.5 Judgement __________________________________________________________ 9

4.2 Rent Arrears _____________________________________________________________ 9

5 Procedural Steps ____________________________________________________________ 10

5.1 Section 25 – Landlord opposing lease renewal ______________________________ 10

5.2 Section 26 – Tenant’s Notice for Lease Renewal ____________________________ 10

6 Conclusion _________________________________________________________________ 10

7 Scenario 2 - Guarantees _____________________________________________________ 12

8 Preface ____________________________________________________________________ 12

9 Legislation __________________________________________________________________ 12

9.1 Pre-Landlord and Tenant (Covenants) Act 1995 _____________________________ 12

9.2 Post- Landlord and Tenant (Covenants) Act 1995 ___________________________ 13

9.3 Code of leasing _________________________________________________________ 14

10 Securities ________________________________________________________________ 14

10.1 Rent Deposit ____________________________________________________________ 14

10.2 Third Party Guarantees __________________________________________________ 15

10.3 Authorised Guarantee Agreements ________________________________________ 15

10.3.1 Indemnity __________________________________________________________ 15

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11 Consent to assignment _____________________________________________________ 15

12 AGA _____________________________________________________________________ 16

12.1 Issues _________________________________________________________________ 16

12.2 Anti-Avoidance Provisions ________________________________________________ 17

13 Conclusion _______________________________________________________________ 17

14 References _______________________________________________________________ 19

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TABLE OF AUTHORITIES

CASES

Beard v Williams 1986 ---------------------------------------------------------------------------------------------------------------- 8

Eichner v Midland Bank Executor and Trustee Co Ltd 1970 ------------------------------------------------------------ 8

Good harvest LLP v Centaur services Limited (2010) ------------------------------------------------------------------- 17

Hazel v Hassan Akhtar (2001), -------------------------------------------------------------------------------------------------- 10

Hurstfell Ltd v Leicester Square Property Ltd (1988) ---------------------------------------------------------------------- 9

K/S Victoria street v House of Fraser (2011) -------------------------------------------------------------------------------- 17

Lyons v Central Commercial Properties Ltd (1958) ------------------------------------------------------------------------ 8

O’May v City of London Real Property Co Ltd (1983), -------------------------------------------------------------------- 4

Zoe youssefi v Joan Mussell white (2014) ------------------------------------------------------------------------------------- 6

STATUTES

Landlord and Tenant (covenants) Act 1995 --------------------------------------------------- 13

Landlord and Tenant Act 1954 ------------------------------------------------------------- 4, 9, 10

Landlord and Tenant Act 1990 --------------------------------------------------------------------- 5

landlord and tenant covenants act 1995 ------------------------------------------------------- 13

Law of Property Act 1969 ---------------------------------------------------------------------------- 5

OTHER AUTHORITIES

Code of leasing in business premises 2007 in England and Wales --------------------- 15

REGULATIONS

Regulatory Reform Order (business tenancies) 2003 ----------------------------------- 5, 11

Table of Figures

FIGURE 1 ................................................................................................................................................................ 4 FIGURE 2 ................................................................................................................................................................ 6 FIGURE 3 .............................................................................................................................................................. 12 FIGURE 4 .............................................................................................................................................................. 13 FIGURE 5 .............................................................................................................................................................. 14 FIGURE 6 .............................................................................................................................................................. 14 FIGURE 7 .............................................................................................................................................................. 16

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1 SCENARIO 1 – LEASE RENEWALS

Figure 1

2 PREFACE

I aim to answer the questions by referring to relevant statute laws, common laws and

other accessible information.

Then, it is important to establish the degree of breach, so when making comparisons

with other cases we can estimate the likely judgment if case goes to court. This

case is within Landlord and Tenant Act 1954 as the lease has not been contracted

out of the act and all provisions in that act will impose duties on the landlord and

tenant.

3 COMMERCIAL LEASE RENEWALS

The general principle is that tenant is entitled to a new lease with the same terms

and the leading case is O’May v City of London Real Property Co Ltd (1983), this

case held if one of the parties seek to change terms of the lease he must show the

reason for that change and must illustrate it is fair and reasonable to make those

changes. (Coulthard, 2015)

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3.1 STATUTES

3.1.1 Landlord and Tenant Act 1954

The aim of this legislation is to ensure the relationship between landlord and tenant

in commercial tenures work well and all parties are treated fairly, it also encourages

the fabrics of the building is maintained well. (Stapleton, 1994)

Under Landlord and Tenant Act 1954 tenant has certain rights to renew the lease.

Sections 24 to 28 of the Landlord and Tenant Act 1954 describes the tenants’ rights

to renew the lease. (Practical Law, 2015)

Section 30 of this act explains the grounds under which the landlord can oppose a

lease renewal application.

3.2 SECURITY OF TENURE

In summary, business tenants have the right to renew their lease under Landlord and

Tenant Act 1954 part II.

3.2.1 Section 25 and 27

On the termination of the existing lease a statutory lease arises which can only be

terminated by landlord serving a section 25 notice or tenant serving a section 27

notice.

3.2.2 Section 26

Tenant can apply to court to grant a new lease under section 26. Landlords can

oppose grant of a new lease on certain grounds.

3.2.3 Regulatory reform order 2003

Regulatory reform order 2003 makes the following amendments:

1- Clarifies what a tenant must do in section 25 notice to terminate a lease.

2- Abolishes the requirement of a tenant to serve a counter notice

3- Allowing landlord and tenant to apply to court for renewal of the lease and

sets new time limits for applications.

4- Making it obligatory to respond to section 40 for information

3.3 LANDLORD OPPOSING LEASE RENEWAL

There are seven statutory grounds under section 30(1) of the landlord and tenant act

1954 which entitles a landlord to oppose the application of the renewal of a

commercial lease, in summary these are:

a) Tenants failure to carry out repairing obligations

b) Persistent delay in paying rent

c) Substantial breaches of other obligations under the current tenancy, or any

other issues related to use or management of the premises

d) Suitable alternative accommodation is available for the tenant

e) On sub-letting of part, the landlord requires the whole property for subsequent

letting

f) Landlord intends to demolish and reconstruct the property

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g) Landlord intends to occupy the property

If landlord oppose the application for renewal, it is vital to know which grounds he is

relying on. Grounds (f) and (g) are mandatory and if landlord proves it, court must

give possession. But if it is on ground (c) landlord must prove the issues existing i.e.

poor relationship, poor management of the premises, not giving access to landlord,

poor use of the premises and other breaches of the covenants in the lease. These

issues are sufficient if landlord proves it amounts to a substantial breach and court

will accept it as in the case of Zoe youssefi v Joan Mussell white (2014), court held

other breaches of the lease were substantial and tenant’s application for renewal

was refused, this was due to tenant’s refusal to give access to the landlord to inspect

the property and her failure to use the premises as a shop in one of the designated

classes (there were explicit clauses in the lease). (Secker, 2014)

Dilapidations and late rent payments will be looked at in more details.

3.4 CONTRACTING OUT

In general most landlords are in favour of contracting out of the 1954 act and usually

tenants get something in return for giving up the security of tenure. Contracting out is

rising in England and Wales as illustrated below.

Figure 2

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4 PAST ISSUES

Suzi have not contracted out of the 1954 Act so she will be protected by this act to a

certain extent but not entirely as she breached the covenants in the lease, therefore

landlord can oppose the lease renewal on the relevant grounds.

4.1 DILAPIDATIONS

Smith (2001) stated “the party seeking to render the other liable must prove that the

premises are out of repair”, schedule of dilapidations is not specification of repairs

and the intention of the schedule is to direct the tenant’s attention to the items of

disrepair and to require the tenant to repair and correct the faults (Hollis, 1988).

4.1.1 Section 30 (1) (a)

This section entitles a landlord to oppose an application for a new lease if tenant was

obliged to carry out the repair and maintenance and failed to comply. Basic facts

under this ground are:

i) Tenant must have an obligation in respect to repair and maintenance of

the holding

ii) The holding is in an unsatisfactory state of repair as a direct result of the

breach of tenant’s repairs and maintenance obligations.

iii) Landlord is required to have evidence of the breach and it should be a

substantial breach. Landlord is expected to produce at least an inspection

by the surveyor and an interim schedule of dilapidations.

4.1.2 Schedule of dilapidations

Its purpose is to advise the tenant of those areas which are defective and are in

need of repair in a format that will meet the requirements of the court in case the

matter proceeds to litigation. This schedule is not specifications of repairs, but it is

the schedule of breaches of covenants in the lease. (Hollis, 1988)

4.1.2.1 Checking the Validity

In order to check the validity of the schedule of dilapidation that was served back in

2011, we’ll have to determine the answer to the following questions:

I. What repair is required to be undertaken under terms of the lease?

II. What kind of schedule have been served?

(a) repair notice, or

(b) Interim schedule of dilapidations, or

(c) Terminal schedule of dilapidations

III. What is landlord’s requirement? Forfeiture of the lease to enter the property,

or making sure tenant repairs the property so landlords property is maintained

in a reasonable order

IV. How long has the tenant been given to carry out the repairs? Is it reasonable?

V. Are the items listed on the schedule of dilapidations fair, bearing in mind the

responsibility for repairs as set out in the lease?

VI. Is lack of repair the result of tenant’s failure to maintain the property?

VII. How practical is it to carry out the repairs asked for?

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4.1.3 Suzi’s Dilapidations

In this case Suzi have rectified the dilapidations of the building as soon as it was

brought into her attention, so there are no outstanding repairs. Court considers all

the relevant circumstances and will ask itself; what is the likely consequence if a new

lease is granted? As determined in the case of Lyons v Central Commercial

Properties Ltd (1958) there was no substantial existence of dilapidations, therefore it

is important to stress not any minor breach is justifiable for opposing the renewal of a

commercial lease.

However court will need to consider other circumstances before granting a new

lease, once court establishes the facts in regard to tenant’s past behavior and

performance, it will be able to look at all the circumstances and to consider whether it

will be fair to saddle a landlord with a tenant as in the case of Eichner v Midland

Bank Executor and Trustee Co Ltd 1970 where landlord and tenant had a poor

relationship and they were in constant litigation. It was held it would be unfair to

landlord if tenancy is renewed. There is no mention of a poor landlord and tenant

relationship in Suzi’s case and this can be used to encourage court to practice its

discretion.

4.1.4 Court’s Discretion

In the case of Beard v Williams 1986 it was established when court is exercising its

discretion it will need to consider whether the landlord’s interest is likely to be

prejudiced by the occurrence of the matters relied on in line with section 30(1) of the

Landlord and Tenant Act 1954. Therefore court will need to consider the following

information when exercising its discretion:

i) Nature of Dilapidations

ii) Length of time which dilapidations have existed

iii) The date landlord bring dilapidations into tenant’s attention

iv) Significance and extent of dilapidations

v) Effect of dilapidations on landlord’s reversion

vi) The reasons for breach of covenant

Suzi may persuade the court to exercise its discretion in her favor as she complied

with the schedule of dilapidations 4 years ago and no dilapidations has been

reported since.

On the other hand landlord may argue a schedule of dilapidations has been served

in 2011 and also Suzi had consistent rent arrears and any other underlying issues

such as poor relationship which might have existed, and can persuade the court not

to grant a new lease as it was ruled in the case of Eichner v Midland Bank Executor

and Trustee Co Ltd (1970) where although the tenant have remedied the

dilapidations by date of hearing, court still refused to renew the lease in light of rent

arrears, tenant’s ability to pay rent in the future and the poor landlord and tenant

relationship over the years.

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4.1.5 Judgement

It is unlikely for it to be deemed as a substantial breach and she is more likely to be

given a new lease and court might allow landlord to make reasonable and justified

variations to the lease instead, to state requiring on-time payments of rent.

Alternatively landlord can be compensated for those late payments and can receive

the interest on the rent. (Hollis, 1988)

Suzi can apply to court to get her lease renewed and it is likely for the court to

exercise its discretion.

4.2 RENT ARREARS

Ground 30(1) (b) of the Landlord and Tenant Act 1954 states “the tenant ought not to

be granted a new tenancy in view of his persistent delay in paying rent which has

become due”. (legislation.gov.uk, 2015) Therefore it is essential for landlord to

prove there has been persistent delay, landlord is required to establish a long history

of arrears in order to satisfy the court.

In order to demonstrate the rental arrears, landlord is required to prepare a schedule

of arrears showing:

I. Amount of rent required under terms of the tenancy and amount of arrears

II. Payments made by the tenant and length of delay

III. total rent that has become due from time to time and remained unpaid

IV. Reminders that was sent to the resident and proof of any enforcement

actions that have been taken. This can be proved by written and oral

evidence, however once basic facts have been established under this

ground (ground b), court has a discretion to whether or not to grant a new

lease to the tenant depending on all circumstances and facts of the case.

The onus is on the landlord to persuade the court not to renew the lease and he will

need to provide evidence to do that, on the other hand tenant is obliged to explain

the reasons for past failures and to convince the court it will not happen again. In this

case Suzi paid her rent late for several quarters, it depends on the amount and how

late she was.

Court will have consideration if her turnover was reduced due to an incident i.e. fire,

burglary and etc. which is less likely to happen again in a near future. As in the case

of Hurstfell Ltd v Leicester Square Property Ltd (1988), tenant bought a bankrupt toy

enterprise from a company in liquidation, and judge was satisfied with tenant’s

explanation for past failures. (Lamont et al 2005).

There are no arrears currently outstanding, it would also help if Suzi could show a

good track record of her previous rent payments, which will help the court to look at

the bigger picture.

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It is important to highlight the case of Hazel v Hassan Akhtar (2001), as it suggests

the longer a landlord allows a tenant to pay the rent late without taking any actions

i.e. sending rent arrears letters, or by voicing their complaint about the tenant’s

behaviour, it is less likely for court to treat the tenant as a persistent late payer. So it

is important to find out whether Suzi’s landlord have contacted Suzi for rent arrears

or late payment of rent. If not, Suzi will not be treated as a persistent late payer and

landlord cannot rely on this ground (b). (Practical Conveyancing, 2002)

Section 30(1) (b) clearly states “that the tenant ought not to be granted a new

tenancy in view of his persistent delay in paying rent which has become due”

(legislation.gov.uk, 2014). Therefore this ground will be ineffective if landlord failed

to communicate with Suzi in regard to rent arrears or late payment of rent.

5 PROCEDURAL STEPS

5.1 SECTION 25 – LANDLORD OPPOSING LEASE RENEWAL

A landlord’s notice under section 25 must be served 6 to 12 months prior to end date

of the lease. The notice must state the tenant have 2 months to notify the landlord

on whether to oppose the possession or not. Lease renewals are initiated by

landlord serving a section 25 notice to terminate the tenancy or tenant serving a

section 26 request for a new tenancy, at this point it is important to determine

whether notice was given before/after the 1st June 2004, if it was before that date the

Landlord and Tenant Act 1954 act applies but if not the Regulatory Reform Order

(business tenancies) 2003 applies. (Lamont, et al., 2005)

5.2 SECTION 26 – TENANT’S NOTICE FOR LEASE RENEWAL

A tenant can request a new lease by serving a section 26 notice between 6 to 12

months before the end of the lease, which can be used as a pre-emptive strike to

take the initiative. (Allen, 2015)

6 CONCLUSION

If landlord failed to serve a notice 25 to Suzi to end the tenancy, Suzi can apply for a

new tenancy under section 26. Once Suzi served the s26 notice, landlord have 2

months to oppose the s26 notice by serving a counter notice.

Suzi must apply to court for a new tenancy between 2 to 4 months after serving the

s26 notice. Tenant must also serve his application to court for a new tenancy to the

landlord within 2 months from the date application was issued. The effect of tenant’s

request is to terminate the current tenancy immediately before the start of the new

tenancy. It is important to highlight if Suzi fail to take above steps she loses her right

under this act to apply for a new tenancy and landlord can recover possession of the

premises, therefore it is essential for Suzi to instruct solicitors to act on her behalf.

On the other hand if landlord fails to serve a counter notice within 2 months from the

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date of s26 notice, he loses the right to oppose the grant of a new tenancy. (Male &

Cotter, 1995)

If landlord decides to oppose the renewal of the lease based on dilapidations and

late payment of rent, Suzi must be able to give convincing reasons for her breaches

and give the court an undertaking to avoid breaching the terms of the lease if it is

renewed and must satisfy the court it is very unlikely to happen again on the balance

of probabilities, if she is successful in convincing the court, there is a possibility that

court will exercise its discretion in order to give Suzi a second chance and will grant

her a new tenancy.

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7 SCENARIO 2 - GUARANTEES

Figure 3

8 PREFACE

Since the 1980s there was recessions and a major legislative change, Landlord and

Tenant (covenants) Act 1995 brought major changes. AGA is a concept introduced

by the government, it is a guarantee from the current tenant of the liabilities of the

incoming tenant.

9 LEGISLATION

9.1 PRE-LANDLORD AND TENANT (COVENANTS) ACT 1995

In landlord and tenant covenants act 1995 there are some complicated concepts,

prior to this act the original tenant remained liable to all covenants in the lease for the

duration of the lease i.e. it’s a 20 year lease and he assigned the lease five years

ago.

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Figure 4

So if the current tenant became insolvent the landlord could choose which of the

previous assignees they would like to pursue i.e. Tenant 1 or Tenant 2, as illustrated

in the table above.

9.2 POST- LANDLORD AND TENANT (COVENANTS) ACT 1995

If tenancy is granted after 1st January 1996 the position is governed by this statute.

Section 5 of this act gets rid of the principle of privity of contract. Tenants where

released from their obligations on an assignment, this was not in the favour of

landlords and after this act landlords lost the ability to pursue previous assignees of

their choice. (Garner & Frith, 2013)

Instead, government introduced authorised guarantee agreements and this gives the

landlords some comfort.

When tenant 1 assigns to tenant 2, tenant 1 becomes the guarantor, as illustrated in

the diagram below.

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Figure 5

When tenant 2 assigns to the tenant 3, tenant 1 is no longer a guarantor and tenant

2 will have to guarantee tenant 3. So you always guaranteeing the person coming

after you.

Figure 6

Landlords have automatic rights to ask for AGA, specific provisions must be made in

the lease. Landlord must states all the terms and conditions if tenant wants to assign

the lease.

9.3 CODE OF LEASING

Code of leasing in business premises 2007 in England and Wales states: “AGA

should only be required if a signee is off air lesser financial standing than the current

tenant”, but this doesn’t reflect the market practice.

10 SECURITIES

10.1 RENT DEPOSIT

Very unsuitable for very large sums of money, i.e. a rent deposit of £2m and it is

unsuitable as if there is a banking crisis you have soared through the level of

government protection. And landlord can take from the deposit without tenant having

any say in it, even though tenant can challenge it later. (Brent, 2015)

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10.2 THIRD PARTY GUARANTEES

Third-party guarantees are promised by guarantor to the landlord that if the

tenant fail its obligations set out in the lease. Guarantees are known as

secondary obligations so if the tenant breaches all of the covenants in the lease

the guarantee will fall out as well.

Guarantees are usually given by the parent company or Group Company of the

tenant as in the case of JG.

Guarantees need to be in writing and signed by the guarantors, if you make any

variations to the lease and guarantor is not a party to it, you can no longer hold

on to that guarantee. (Practical Law, 2015)

10.3 AUTHORISED GUARANTEE AGREEMENTS

There are two categories:

i) Corporate group where the tenant is the property holding subsidiary, because all the leases will be placed in one company, the landlord usually takes a guarantee from the major trading company, the one with most assets.

ii) a lease granted to a company that is owned and managed by directors and shareholders, 20 to 30 years ago it was common for tenants to take those types of leases to use directors and shareholders as guarantors but when hard times came they realised not only the business was failing but also their guarantees were being called up on, so they were not generating any income and their assets were being attacked by landlords under the guarantee, and as a result there was a demise in the personal guarantee. (Brent, 2015)

10.3.1 Indemnity

Most guarantees contain an indemnity, this is an obligation to compensate the

landlord by making a financial payment, and this is a primary obligation so if the

tenant discharge from his obligations under the lease, the indemnity remains valid.

From landlord’s point of view they always want the indemnity in the guarantee.

11 CONSENT TO ASSIGNMENT

Jason George Limited (JG) is obliged to have met all the terms and conditions in the

lease before consent is given by the landlord, terms are described in the lease

below:

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Figure 7

Townsend have to give consent to assignment of the lease if those terms have been

met by JG. However, JG is in breach of the lease because he is behind with the rent

payments and JG is also required to pay the legal fees incurred reasonably by

Townsend.

12 AGA

AGA can be incorporated into licence to assign which the document is given by the

Landlord’s solicitor which gives consent to the assignment or it could be a stand-

alone document.

12.1 ISSUES

Landlord and tenants (covenants) act 1995 doesn’t specify whether the tenant’s

guarantor could guarantee the tenant’s obligation in and AGA, or whether or not they

could guarantee the performance of the assignee.

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There are no cases, nothing in the statute and no clear guidance so it became

common practice for landlords to require guarantors to also guarantee the incoming

tenant and the outgoing tenant’s obligations in the AGA, these are known as direct or

repeat guarantees.

But landlord and tenant (covenants) act 1995 made it clear that landlord’s lease

attempting to modify provisions of the act will be invalid even if it is signed for by the

tenant, it states: “any attempts to avoid, modify or frustrate the provisions of the act

are avoid”. (LexisNexis, 2014) So once you have assigned your lease you guarantee

the person coming in and once they have assigned you’re off the hook.

12.2 ANTI-AVOIDANCE PROVISIONS

Anti-avoidance provisions have been considered in good harvest case Good harvest

LLP v Centaur services Limited (2010) where the subtenant wanted to assign the

lease and landlord required the subtenant and guarantor to enter into AGA for the

assignees obligations under the sublease. It was held repeat guarantees were

invalid as they braced and avoidance provisions under their 1995 act. (Foster,

2015)So if you mention in the lease the landlord have the right to ask for it, it is

unlawful and tenant is not obliged to do that.

The case K/S Victoria street v House of Fraser (2011) further confirms the good

harvest case and any contractual agreement or lease which imposes an obligation

frustrates the operation of section 24 (2) of landlord and tenant (covenants) act 1995,

therefore it is invalid under section 25 (1) of the 1995 act.

13 CONCLUSION

Townsend cannot insist on Bollington to guarantee the outgoing tenant (JG) and the

incoming tenant (insurance brokers) as it will be invalid under section 25 of the 1995

act, however Bollington is liable to make a financial payment if JG fails to pay its

arrears and Townsend have the right to pursue Bollington for any breach of

covenants in the current lease with JG. Whilst this issue is outstanding, Townsend

have the right to withhold consent.

JG is also obliged to pay all legal charges of Townsend which have reasonably

incurred. If Bollington pays the liabilities on behalf of JG to Townsend, Bollington

can then take steps to recover the money from JG

Therefore Bollington will only be able to guarantee JG’s obligations in AGA, it will not

be able to guarantee assignees obligations as well.

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Once JG is in line with terms of the lease Townsend cannot withheld consent, and

once lease is assigned to insurance brokers, Bollington is off the hook and JG is the

new guarantor of the insurance brokers after the assignment of the lease.

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14 REFERENCES

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