#3225 - Landlord And Tenant Issues

Commercial Property

Landlord and Tenant issues

The developer is the landlord. His Tenants are those who occupy the various units within the development site.

1. Granting the lease

The Code for Leasing Business Premises in England and Wales 2007

Government created code – to set out the ideal relationship between LL and T and set out appropriate terms
Voluntary only – it is not compulsory to abide by the code. [Guidance only!].
Powerful Tenants [with strong bargaining power] can rely on the code to put them in a good position.
Appendix 3 – p.345

1	Lease Negotiations	What should be included in the lease: rent / term / break clause / security of tenure / rights to assign. LL should promote flexibility
2	Rent Deposit and Guarantees	Amount / how long / interest payments State clearly the conditions for release
3	Length of term, break clause, renewal rights	Length of term = clear Pre-conditions on break clause [rent is paid / give up occupation / no sublease] Encourage open discussion about renewal rights
4.	Rent Review	NO headline rent review clause Alternatives to upward only [e.g. upward / downward with set minimum on initial rent] Allow both LL and T to start the process
5.	Assignment and subletting	Repeats statute – assignment should not be unreasonably withheld LL should not impose any specific circumstances for refusal – e.g. non payment. [this is usually ignored] – exception when it is subsidiary with bad financial standing. AGA should not be a condition to assignment / LL should not have automatic right to AGA Alternatives to AGAs for smaller tenants [e.g. rent deposit deed] Sublet = rent should be set at a market rent Sub-lease should not be on the same terms as the head lease
6.	Service charge	Disclose any known irregular events that will impact future payments LL should observe RICS 2006 Code for service charge
7	Repairs / Alterations and changes
9	Insurance	Rent suspension – if property is damaged by insured / uninsured risk

Client’s requirements

Landlord	Tenant
Clears lease / institutional lease [i.e. get pure profit] Tenant under full repair obligations No security of tenure Restrictions on alienation AGA on assignment Upward rent review No break clause Forfeiture clause Guarantor with adequate liability Restrictions on use if appropriate	Reasonable service charge LL right to enter and inspect limited Security of tenure – to hold over Reasonable alienation provisions AGS only if reasonable Upward / Downward rent review Break clause [esp. if upward only R.review] Limit scope of forfeiture Limit liability of guarantor where possible User should not be too restrictive – as this effects assignment.

INSURANCE:

2007 CODE:

Insurance terms in the lease should be fair and reasonable .
LL should disclose if they are receiving a commission.
Rent suspension should apply if the premises are damaged and it was not Ts fault. There should be options to terminate if rent suspension period expires and there is no repair

Insurance provisions in the lease:
- Clause 5.2: LL covenants to insure the premises
- Clause 5.3.1: obligation for LL to get a competitive quote and insure with a reputable insurer
- 5.3.2: what the insurance must cover
- 5.3.3: What risks are insured see “insured risks” definition – does it include terrorism? [see below]
- 5.4: Tenant covenants to pay the “Insurance Rent” see the percentage that each tenant must pay. [i.e. 15% of the landlord’s insurance cost in providing the insurance against insured risks.
- 5.5: rent suspension [LL can insure against loss of rent for a specified period of 3 years]
- 5.6: reinstatement and termination
Terrorism: Does the insured risk include acts of terrorism? This is very expensive!
- 2007 code: LL should provide appropriate terrorism cover if practical to do so.
- Cover is not automatic
- What should LL and T consider: location / cost / nature of occupier’s business
- Cover can be provided by Government scheme “Pool Re”. Set up in 1993 in response to insurers refusing to cover damage caused by terrorism.
  - If LL insures one of his development – he must ensure all his developments!
  - The scheme uses the definition of an Act of Terrorism contained in the Reinsurance (Acts of Terrorism) Act 1993:

"…acts of persons acting on behalf of, or in connection with, any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s government in the United Kingdom or any other government de jure or de facto."

Responsibility for uninsured loss:
- What does the lease say?
- If tenant is responsible and building is destroyed by terrorism [uninsured] then T could be liable to re-build the building even though the lease is soon to end.
- 2007 CODE: “If whole of premises is damaged by uninsured risk and this prevents occupation – T should be able to terminate unless LL agrees to rebuild at his own cost”.
- 2007 Code: “Rent suspension should apply if the premises are damaged by an uninsured risk other than where caused by a deliberate act of the tenant”
Repairing “inherent defects” =
- What does lease say? [mock – question 8] – what does repair covenant include? Does the Service charge include paying for inherent defects.
- Can T rely on collateral warranties? Have they expired?

2. Liability of the tenant and landlord who assign:

Landlord and Tenant (Covenants) Act 1995

New Lease

Lease GRANTED / RENEWED On / after 1^st January 1996

1995 Act applies

Liability of Tenant who Assigns [T1 T2]

Abolished Privity of contract on assignment [S.5(2)(a) LTCA 1995]. T1 is released from future liability when he lawfully assigns to T2.
Privity of Estate still exists
S.11: not released from liability if T1 assigns without consent [in breach of covenant]
T1 will usually give an “Authorised Guarantee Agreement” – T1 guarantees performance of covenants by his immediate successor in title [T2 only]. S.16

[NB. AGA is not mandatory].

T1 should seek indemnity covenant by his immediate successor.

For non-payment of rent / rent in arrears: S.17(2) LTCA 1995 = If T1 is liable under his AGA Landlord must serve notice within a period of 6 months beginning with the date on which the charge fell due.
S.19 LTCA 1995 : If original T or guarantor pays = claim overriding lease.

Liability of Landlord who Assigns the reversion [L1 L2]

L1 is not automatically released from covenants when he assigns the reversion.
S.6 L1 may be released from covenants if he applies to T.
S.8: LL must give notice to T and T must give his consent.
On sale of the reversion, if a landlord is released from the landlord covenants in the lease, he automatically ceases to benefit from the tenant covenants under the lease

Liability of Asignee [T2] / new landlord:

Assignee [T2 / LL2] is liable for ALL covenants [“touch and concern the land” no longer relevant]. Automatically takes benefit and burden of the covenants. – S.3 LTCA

Old Lease

Before 1^st January 1996

1995 Act does NOT apply

1. Liability of Tenant who assigns [T1 – T2]

Privity of contract doctrine still exists: T1 remains bound by the covenants of the lease for the whole of the contractual term.
Doctrine of Privity of Estate exists: T2 [the assignee] is liable for breaches committed whilst ownership of the lease is vested in him. ONLY liable for covenants which “touch and concern the land”.
Indemnity: The assignee [T2] can indemnify the assignor [T1]

Registered lease: Sch.12 LRA 2002 = implies indemnity covenant when no value has been given for assignment.

Unregistered lease: S.77 LPA 1925 = implies indemnity covenant but ONLY where value has been given for assignment.

2. Liability of Landlord who assigns the reversion [L1-L2]

L1 and T1 contractually bound [privity of contract]. Therefore L1 is liable in damages if he is unable to perform his covenants.
L2 is only liable for period while reversion is vested in him. Only liable for those covenants which touch and concern the land.

2007 Code for leasing business premises:
- AGA should not be a automatic condition of assignment
- The lease should not contain any other specific circumstances for refusal except where there is an issue of financial standing in a group company assignment [avoid company assigning to weaker subsidiary].

Position of T1’s guarantor on assignment:

WHAT does the LEASE say?
For non-payment of rent / rent in arrears by assignee: S.17(3) LTCA 1995 [applies to all leases where tenant remains bound] = If guarantor of T1 is liable under an AGA Landlord must serve notice within a period of 6 months beginning with the date on which the charge fell due.
S.19: If original T or guarantor pays = claim overriding lease [must have paid the fixed charge in full and claim in writing the overriding lease within 12 months of making the payment – S.19(5)(b)
S.24(2): If T1 is released from liability - his guarantor will also be released to the same effect.
Case Law: Liability under AGA =
- Good Harvest v Centaur Services [2010]: Direct guarantee [where Guarantor has to guarantee the obligations of the assignee in the AGA] are invalid. Any direct guarantee from an outgoing tenant’s guarantor to an incoming assignee is therefore unenforceable. The validity of the sub-guarantee [where guarantor is to guarantee the out going tenant’s guarantee] was questioned.
- Victorian Street v House of Fraser [2011]: Confirmed that sub-guarantees would be lawful. Confirmed that direct guarantees were invalid.

Rent Deposit Deed

The Deed will direct the...

#3225 - Landlord And Tenant Issues - Commercial Property

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