Landlord and Tenant Review

Transcription

1 Landlord and Tenant Review 30 June 2009 Hugh Blaza Tom Howell Martin Billings Charlie Seaward Rosie Gibb Edward Jackman

2 Contents Applications for Consent... 1 Tom Howell Early Termination of Head Leases... 4 Martin Billings Insurance... 5 Charlie Seaward Overriding Leases... 8 Rosie Gibb Break Clauses Edward Jackman

3 Applications for Consent Tom Howell 1. Introduction Occupational leases of commercial property are almost always long documents. More than half the space is taken up by obligations on the tenant. Many of them prohibit the tenant from doing what he might otherwise want to do, unless the landlord consents. The most common examples are: The assignment (or transfer) of the lease to a third party, who will become the tenant and directly responsible for payment of the rent to the landlord. The creation of a sublease, whether of all or part of the space, and whether for the whole of the lease term or only a part of it. Carrying out works to the property. Changing the use of the property from that permitted by the lease. These restrictions are particularly important at a time when many businesses are shrinking, leaving them with surplus and expensive leasehold space. 2. Consent to assign or sublet 2.1 Particularly at a time of recession, there are many battles, sometimes played out in the courts, between tenants who are desperate to offload space and landlords who are reluctant to accept a new tenant or a subtenant who appears to be less than satisfactory. 2.2 Some leases contain an absolute bar on assigning or subletting. For example, a short lease might prohibit the creation of subleases. That does not mean that subleases are impossible, but it does mean that the landlord has a complete discretion as to whether to grant permission. 2.3 However, what we will consider here is the more usual situation where the lease requires the consent of the landlord to an assignment or subletting. Where this is the case, and whether or not the lease says so, the landlord cannot unreasonably withhold consent. 2.4 For the last 20 years landlords have had specific legal duties: To grant consent for an assignment or subletting, except where a refusal is reasonable. To notify its decision within a reasonable time. If consent is refused, the landlord has to state the reasons. If consent is to be granted subject to conditions, the landlord must notify those conditions. If the landlord has a mortgage or if there is a superior lease, the landlord must pass on the request for consent to the mortgagee and/or superior landlord. 2.5 When is it reasonable for a landlord to refuse consent, or to impose conditions? The general rule is, very briefly: It is unreasonable to refuse consent on grounds that have nothing whatever to do with the relationship of landlord and tenant of the property. The question is whether or not the landlord s conduct was reasonable, not whether it was right or justifiable. The landlord can only rely on the grounds for refusal which he gave at the time. That means that the communication of a decision to refuse is very important. You have to look at the facts of the particular case although many cases have gone before the courts, they all turn on their own facts and it is dangerous to generalise. -1-

4 2.6 If challenged, it is for the landlord to prove on the balance of probabilities that his refusal was reasonable. If he grants consent, but wishes to impose conditions, he has to be able to demonstrate that the conditions are reasonable. 2.7 What is a reasonable time? Again, it is dangerous to generalise. However, normally the time will be measured in terms of days or weeks rather than months. The period might be affected by actions of the landlord or the tenant after the tenant has requested consent. For example, the landlord may quite properly request further information, and the tenant may or may not respond promptly. Other factors are relevant, for example if there is a particular urgency, or if the proposed transaction is complex. 2.8 The landlord is entitled to be told the true nature of the transaction and to be given sufficient information to enable it to reach a decision. Until this happens the landlord will not be guilty of unreasonable delay. From a tenant s point of view, this means that it is important to make a proper written application for consent, providing all relevant information, as early as possible so that the clock begins to run against the landlord. 2.9 Because of the specific legal duties imposed on a landlord in relation to assignments and subletting, there are legal remedies if he fails to comply with them. From a tenant s perspective, however, what can be done if the landlord is unreasonably refusing or delaying consent? The tenant can: Carry on with the transaction, if the proposed new tenant or subtenant is willing to do so, and be prepared to defend any legal challenge by the landlord. A few years ago, in a case involving Tesco, the landlord successfully applied to the Court for an injunction ordering the surrender of a sublease granted without consent. The landlord also successfully claimed compensation. Apply to the Court for a declaration that the landlord is acting unreasonably. Alternatively, the tenant can claim an injunction requiring the landlord to grant consent. This is risk free, but involves time and expense. Claim compensation. The risk of having to pay compensation is a serious issue for landlords. In some cases for example if a landlord has deliberately withheld consent in order to obtain some benefit (for example an attempt to force the tenant into surrendering the lease) the Court might be prepared to order not just compensation but exemplary damages. The threat of a claim for compensation is often a useful bargaining tool for a tenant Side deals are sometimes agreed, particularly for subleases. For example, the main lease may require a sublease to be at the same rent as the headlease or to include the same tenant s obligations, such as a full repairing covenant. The side deal would deal with the discrepancy between these requirements and the often far softer terms which the tenant and proposed undertenant wish to agree. However, the court stated in the Homebase case some years ago that the landlord is entitled to know about the side deal and to take this into account in making his decision about a subletting. If the landlord is not told, and grants consent, the consent will almost always be invalid. However, in the case of an assignment of a lease, the landlord is not entitled to know the amount of any premium or reverse premium being paid for the assignment. 3. Consent to works 3.1 Commercial leases often restrict the tenant s ability to carry out works to the property. Typically, works affecting the structure or exterior of the building are prohibited, whereas internal non-structural works are permitted with the landlord s consent, which is not to be unreasonably withheld. 3.2 If the lease states that the landlord s consent is required, but does not mention reasonableness, in most cases the law implies that consent cannot be unreasonably withheld. 3.3 What is reasonable depends very much on the individual facts, and not many cases have come before the Courts. However, many of the principles which have been established in the many cases involving applications for consent to assign or sublet will be relevant. For example, if it is unreasonable for a landlord to withhold consent for reasons which have nothing to do with his interest as landlord in the property. -2-

5 3.4 The law does not prevent a landlord from requiring the following as a condition of granting consent: Payment of compensation for any loss in the value of his interest in the property, or any adjoining property, arising from the works. Reimbursement of legal and other expenses in connection with the granting of consent. An obligation by the tenant to reinstate the property at the end of the lease, if this is a reasonable requirement and the works do not add to the letting value. However, in practice many leases specifically entitle a landlord to require reinstatement. 3.5 In certain situations a tenant has the right to carry out improvements, even if the lease prohibits them. The tenant has to follow a procedure involving service of notice on the landlord and there is an opportunity for the landlord to object. The tenant can then apply to the Court for permission to carry out the improvements and the Court can make an order if the work will: Add to the letting value of the property at the end of the lease; Is reasonable and suitable to the character of the property; and Will not diminish the value of any other property of the landlord. The landlord has an opportunity to carry out the work himself and increase the rent. The tenant can claim compensation at the end of the lease to the extent that the improvements add to the rental value. Although all of this seems superficially attractive to a tenant, in practice it is very rarely used. 4. Consent to change of use 4.1 All commercial leases restrict the use to which the property can be put. In some cases there is no reference to a change of use, so if the tenant wishes to change, the landlord has a complete discretion whether to allow this. If the lease states that the use cannot be changed without the consent of the landlord, again the landlord has a discretion and there is no implied duty to be reasonable. 4.2 However, if the lease refers to the landlord s consent for a change of use and if the proposal does not involve structural alterations to the property, the landlord may not demand a payment in exchange for his consent. So the landlord cannot, for example, ask for a rent increase or for the insertion of a break clause. 4.3 There is nothing to prevent the landlord from requiring payment of reasonable compensation for any loss in value of the property or adjoining property, or reimbursement of expenses. 5. Conclusion These are particularly topical issues in a recession. In particular, the tenant may have only one opportunity to offload surplus expensive space, so it is essential to make maximum use of the considerable legal levers available to him. The landlord needs to be equally aware of the legal position, so as to avoid being bullied by the threat of a claim for compensation into granting consent for an assignment or sublease to which he is entitled to object. -3-

6 Early Termination of Head Leases Martin Billings 1. Introduction There are three principal ways by which a lease (referred to in this section as a head lease ) can end early, other than by a contractual break provision: a) Forfeiture b) Surrender c) Disclaimer Under the general law, each of these has different consequences in respect of any sublease granted out of the head lease. 2. Forfeiture Forfeiture of the head lease will automatically determine any sublease granted out of it. The sublease will end but any subtenant will have the right to apply for relief from forfeiture and the Court would have an absolute discretion as to the terms on which it granted relief although, generally, the Court would be expected to take into account the potential prejudice to the landlord s interests which would be caused by allowing an occupier to stay (perhaps in the middle of a specialised building which needed to be decommissioned and refurbished in order to re-let). The landlord would be entitled to make representations that any relief from forfeiture should only be granted on a very temporary basis in order to avoid this prejudice. 3. Surrender Surrender of the head lease occurs by way of a bilateral agreement between the landlord and the tenant under the head lease. The process will always require the landlord s participation. Hence it can be argued that the landlord does not have to accept the proposed surrender and that it would only do so on terms which were acceptable to it at the time. The general law position with regard to a subtenant is that a surrender does not terminate any sublease granted out of the head lease which would continue on the same times as prior to the surrender of the head lease. 4. Disclaimer Disclaimer, being a power given to a liquidator or trustee in bankruptcy to terminate a contract or lease which is onerous from the perspective of the insolvent entity, produces a very odd result with regard to any sublease granted out of a disclaimed head lease. The sublease would automatically end. But the subtenant would retain a bundle of rights. In order to remain in possession, the subtenant would be required to pay the head lease rent and comply with the head lease covenants (even in circumstances where the sublease is only of a part of the building comprised in the disclaimed head lease). Disclaimer also needs to be considered in the context of the head lease having previously been assigned to a third party. Disclaimer by the third party s liquidator would leave the head lease technically still in existence and would leave the party which had assigned the lease to the (now) insolvent entity in the position that it could be required to meet the obligations under any authorised guarantee agreement which it had given on the assignment. This would include meeting the rental liabilities and, potentially, taking a new lease if called upon so to do. -4-

7 Insurance Charlie Seaward 1. Introduction I want to look, briefly, at the provisions in a typical commercial lease which relate to insurance and, more importantly, to reinstatement. 2. Standard lease provisions The standard arrangements are that: 2.1 The Tenant covenants to keep the building in a decent state of repair this may or may not be qualified by a schedule of condition. There may or may not be collateral warranties issued by the original contractor; and 2.2 The Landlord agrees to insure the building and carry out any reinstatement caused by an Insured Risk. He will recover the costs of doing so from the Tenant by way of a service charge. 3. Insured Risks and uninsurable risks 3.1 In times gone by the Landlord s obligations would be covered by wording of a general nature, requiring the Landlord to insure against usual comprehensive commercial risks or something of that nature. In order to tighten this up, tenants advisers started to include specific risks which they wished to be included. Over a period of time this developed into a detailed shopping list of specific risks, now commonly defined in leases as Insured Risks. 3.2 Under this general wording regime, which simply required the Landlord to insure against whatever was usual in the market, the Landlord would not be obligated to insure against a risk in respect of which cover was not available. However, where a detailed list of risks is included the Landlord would, subject to any other wording, be under an obligation to insure against all of those risks even if cover is not available. 3.3 As a result of this a well drafted commercial lease will include a provision that a Landlord is only obliged to insure against those risks in respect of which cover is available on reasonable terms on the open market with a reputable insurer. This is not an unreasonable position for a Landlord to take. No well advised party to a lease is going to covenant to do something which it may not be able to do. 3.4 However, if the Landlord is not going to be responsible for insuring certain risks, the Tenant should be aware of the consequences of agreeing such a provision. For example: A Tenant arrives at its premises on Monday morning. Extensive damage to the building has been caused by flooding, the stock is badly damaged and the building is incapable of occupation and use. It could be subsidence, storm damage or malicious damage The Tenant telephones the Landlord to advise him of the damage, suggests that a loss adjuster needs to be appointed and reminds the Landlord that damage caused by flood is an insured risk under the lease. The Landlord replies that unfortunately when the policy was renewed a few months before, the insurer refused to cover flood damage on the basis of last years weather and an increased flood risk. The Landlord apologises for not advising the Tenant of this but he had been extremely busy and it had simply slipped his mind. As a consequence, flooding was not an insured risk under the lease because it was not available on the open market with a reputable insurer and the Tenant was therefore responsible for reinstating the property at its own cost Whilst the Tenant was on the phone the Landlord noted that the next quarters rent fell due shortly and could the Tenant please send a cheque in good time. The Tenant replies that he has the benefit of a rent cesser for periods when the building cannot be occupied due to damage by an insured risk and the Landlord replies by -5-

8 saying that, as he has already mentioned, this is not an insured risk and the Tenant needs to keep calm and carry on. Before looking at the detail, it would be worth noting that the type of risk in respect of which cover may be withdrawn would include damage caused by flood or storm, subsidence and landslip, terrorism or malicious damage. One imagines that the next call the Tenant makes will be to his lawyer. 4. What should the lease provisions cover? 4.1 In order to avoid this type of conversation, what should a carefully drafted Lease allow for? There is an inherent tension in any relationship where one party owns a building and is responsible for the insurance and another party occupies that building and deals with the maintenance. At some point, the parties will need to agree who has the greater interest and who should ultimately carry the responsibility for the reinstatement of a building if it is damaged by a risk against which insurance is not available. 4.2 I would suggest that the landlord s interest is a long-term interest and that to expect a tenant with a relatively short-term interest to accept liability for reinstatement is not only unrealistic, it may not even be in the landlord s own best interest. For instance, if significant damage was occasioned to a building near the end of a contractual term and the Landlord had been contemplating a re-development of a different type, it would not be in either party s interest for the tenant to be under an obligation to reinstate the old building. 4.3 Looking at specifics, what does the Lease need to say, assuming that the Landlord is not to be responsible for insuring where cover is not available? The Lease should require the Landlord to notify the Tenant as soon as the insurer declines cover and more particularly before the current insurance expires The Tenant should be given an opportunity to look for alternative insurance. Even if the premium is high, the parties may decide that they wish to take out cover in any event If insurance is not available even at a high premium, then in addition to a definition of Insured Risks, there should also be, in the Lease, another category commonly defined as Uninsured Risks. These would be defined as any Insured Risk against which insurance is not available The Tenant s repairing obligation needs to state that the Tenant will not be liable to repair damage caused by an Insured Risk or an Uninsured Risk Where the Landlord insures, the Lease terms will normally require the Landlord to reinstate any damage caused by an Insured Risk. The Lease should also have a provision which requires the Landlord to notify the Tenant within an agreed time period whether the Landlord wishes to treat an Uninsured Risk as though it were an Insured Risk. This would involve the Landlord in carrying out remediation work at its own cost as the cost would not be covered by insurance. It is suggested that if the Landlord agrees to deal with the remediation itself, then the Lease terms would apply as though the damage had been caused by an Insured Risk. In the event that the Landlord decides not to reinstate, the Landlord should agree to give notice to the Tenant of its decision within an agreed time period. Either party should then have the right to determine the Lease The rent cesser provisions should be drafted on the basis that the Tenant will not be required to pay any rent in the event that the premises cannot be occupied as a result of damage caused by an Insured Risk or by an Uninsured Risk There is another related issue which is worth mentioning. Frequently, Leases are now drafted on the basis that the Landlord will not be under an obligation to reinstate the same building as was damaged. It is suggested that the Tenant should obtain a covenant from the Landlord to reinstate the building to the same specification unless the Tenant agrees to a change. It may well be that the Tenant chose the building because it had particular attributes which were important to the Tenant but might not be generally required on the market. -6-

9 4.3.8 In addition, even if a building has been replaced or significantly rebuilt, the rent review provisions should state that the building to be assumed on review is the building that was there at the commencement of the Lease. It would not be reasonable for the Landlord to review the rent on the basis of a new building As a final point, if the Landlord does reinstate, the Tenant should ensure that the terms of the Lease entitle it to collateral warranties from the contractor and other usual parties. -7-

10 Overriding Leases Rosie Gibb 5. Liability to pay fixed sums under section 17, Landlord and Tenant (Covenants) Act Who is liable to pay? When a tenant fails to pay sums due under his lease the landlord can claim these sums from anyone who remains bound. In the case of a new lease this will be any former tenant or guarantor who has entered into an authorised guarantee agreement which is still current. For an old lease it will be any former tenant or guarantor who remains bound by the covenant to pay (either as original tenant or guarantor, or through a direct covenant with the landlord) 1. Note that a former guarantor is liable regardless of whether or not the landlord has first attempted to claim the sums due from the former tenant whose liability he guarantees 2. For the purposes of this note assume that the words former tenant means only those former tenants who are liable to pay and includes any former guarantor who is liable to pay. 5.2 Is it possible to contract out of this liability? Unless otherwise stated, the former tenant is liable to pay all sums due under the lease. However, there are no restrictions on a tenant or guarantor contracting out of ongoing liability for rent or other sums 3. This contracting out can be in whole or in part: for example, the former tenant may remain liable for the rent, but not for any service charge or any interest on the rent. 5.3 How does the landlord claim the amount due? Section 17 limits the landlord s right to recover any fixed charge (see paragraph 5.4 below for the definition of this) payable under the lease unless he follows the correct procedure. He must serve a notice, in the correct form, on the former tenant, stating that the charge is now due and that he intends to recover the specified sum from him (plus any interest he is liable to pay). The notice must be served within six months of the date on which the fixed charge becomes due 4. Note that the purpose of section 17 is simply to protect the tenant against suddenly receiving a claim for many years unpaid rent service of a section 17 notice does not give the landlord any additional recovery rights in respect of those sums: if the former tenant fails to pay under this notice, the landlord will still need to claim against him in the usual way. If there is any chance that the fixed charge may subsequently increase, the landlord cannot recover more than the amount specified in his notice unless he warns the former tenant of the possible increase and serves him with notice of the increased amount within three months of the date on which it is determined 5. Note that if a sum is not a fixed charge, but is nonetheless due under a covenant by which the former tenant is bound, it would appear that the former tenant remains liable to pay this sum, regardless of whether or not a section 17 notice is served on him. However, there is nothing to indicate that a section 17 notice will be invalidated by the inclusion of sums which are not fixed charges (for example, VAT if it is not reserved as rent see paragraph 5.5 below). 1 Landlord and Tenant (Covenants) Act 1995 ( LT(C)A 95 ), s17(1) 2 Cheverell Estates Ltd v Harris [1998] 1 EGLR 27 3 London Diocesan Fund v Phithwa (Avonridge Pty Co Ltd, Pt 20 defendant) [2006] 1 All ER 127 the Court of Appeal had held that the effect of the LT(C)A 95 was to prevent contracting out in new leases, but this was overturned by the House of Lords. It was considered that as the purpose of the Act was to limit a tenant s liability, and that there was nothing in it to indicate that the liability could not be further limited, this remained possible by agreement between the parties, either in the lease or otherwise. 4 LT(C)A 95, ss17(2) and (3) 5 LT(C)A 95, s17(4) -8-

11 5.4 What is a fixed charge? A fixed charge is defined as rent, service charge (as defined by section 18, Landlord and Tenant Act 1985) and any amount payable under a covenant to pay a liquidated sum in the event of a failure to comply 6. Rent is not further defined, but is generally assumed to mean any money reserved as rent in the lease. This means that the majority of sums due under the lease will fall within the definition of fixed charge. The definition of service charge is services, repairs, maintenance, improvements or insurance or the landlord's costs of management. 5.5 Can the landlord recover VAT from the former tenant? The simple answer is yes, unless wording in the lease or an exclusion of liability means he is not liable to do so. VAT payable on rent and other sums is not dealt with in the legislation and there is no case law or guidance available on this point. However, VAT will be a fixed charge if, as is usual in commercial leases, it is reserved as rent. It is unclear whether it could amount to rent even if not reserved in this way. If the VAT due is not a fixed charge, the former tenant will nonetheless be liable to pay it if he remains bound by the covenant to do so, and the landlord will be able to recover it from him regardless of whether he serves a section 17 notice in respect of it. As there is a lack of clarity on this point, a landlord should include any VAT within the section 17 notice to be sure that he is able to recover it. Note that the former tenant will not be entitled to a VAT invoice from the landlord. The landlord s supply is to the current tenant so only the current tenant can (and should) be issued with a VAT invoice. The VAT is being paid on an indemnity basis, so the former tenant cannot recover the amount paid from HMRC; however, the current tenant will have a VAT invoice, so will be able to recover the VAT paid, even though he did not pay it. 5.6 What can the landlord recover if the lease has been varied? The former tenant will not be liable to pay any amount under the lease to the extent that it is referable to a relevant variation which took place after the former tenant assigned the lease 7 (for former guarantors, the relevant time is the assignment by the tenant which he guaranteed 8 ). A variation is a relevant variation if the landlord had, at the time of the variation, an absolute right to refuse to allow it, or would have had an absolute right to refuse it immediately before the assignment by the former tenant Former Tenant s right to an overriding lease 6.1 When does the right to an overriding lease arise? If a section 17 notice is served on the former tenant, and the former tenant makes full payment of the amount demanded, he is entitled to call for an overriding lease. This overriding lease slots in above the existing lease and gives the former tenant or guarantor a direct relationship with the non-paying tenant What if the section 17 notice was not served by the landlord? Be aware that the service of a section 17 notice by any person entitled to the payment of a fixed charge triggers the right to the overriding lease 11. For example, a management company with the right to receive the rent on behalf of the landlord is entitled to serve a section 17 notice on a former tenant. Even through the landlord did not serve the notice, and may not have authorised the management company to serve it, he is still obliged to grant the overriding lease. 6 LT(C)A 95, s17(6) 7 LT(C)A 95, s18(2) 8 LT(C)A 95, s18(3) 9 LT(C)A 95, s18(4) 10 LT(C)A 95, s19(1) 11 LT(C)A 95, s17(6) landlord is defined as any person who has a right to enforce payment of a fixed charge; if the management company has a right to serve a section 17 notice, it follows that the former tenant has a right to claim an overriding lease if he pays all sums due under it. -9-

12 6.3 What if the former tenant pays only a part of the amount due? The entitlement to an overriding lease does not arise if the former tenant or guarantor pays only a part of the amount due 12. There is no guidance as to the position if two different parties together pay the full amount due. However, in the absence of a decision to the contrary it should be assumed that neither will be entitled as neither will have paid the full amount due. 6.4 What if the former tenant pays under an indemnity to an assignor? Where there have been a series of assignments under an old lease, the assignors will usually have sought indemnities from the assignees. For example, a lease is granted to T 1. He assigns the lease to T 2 and requires that T 2 indemnify him for any sums he becomes liable for under the lease. T 2 assigns on to T 3 and obtains an equivalent indemnity. T 3 becomes insolvent and stops paying rent. The landlord serves a section 17 notice on T 1 who pays all of the sums demanded and then claims the whole amount back from T 2. T 2 pays in full, but he is not entitled to an overriding lease as he has not paid the sums due pursuant to the section 17 notice 13 : his payment is pursuant to his indemnity. 6.5 What if the former tenant takes an overriding lease and then serves a section 17 notice on another former tenant? When the former tenant takes an overriding lease he may decide that rather than ending the lease of the defaulting tenant, he will continue to claim the sums due by serving section 17 notices on another former tenant. The right to claim an overriding lease is also available to the second former tenant: his interest slots in between the interests of the defaulting tenant and the first former tenant. It is possible to have a series of overriding leases in place at the same time Procedure for claiming an overriding lease 7.1 How is the claim made? The former tenant must make the claim: to the landlord (even when the section 17 notice was served by a third party); in writing (though there is no prescribed form), specifying the payment by virtue of which he is entitled to the lease; and at the same time, or within 12 months, of making the payment Is it possible to protect the right to an overriding lease? Once a request has been made for an overriding lease it is treated as if it were an estate contract for the purposes of protecting the right to the lease. This means that the tenant is able to place a notice on the landlord s register or to apply to register it as a C(iv) Land Charge as appropriate 16. This implies that if the request is not registered and the landlord sells his interest to someone else, the former tenant will lose the right to be granted the overriding lease. Of course, if the new landlord serves a section 17 notice in respect of further amounts due, the former tenant will then have a new right to claim an overriding lease. 7.3 When must the overriding lease be granted? Following receipt of the notice requesting the overriding lease, the landlord must deliver an overriding lease to the former tenant within a reasonable time from that request. The former tenant must then deliver an executed counterpart to the landlord 17. There is no guidance on what reasonable time means in this context and it will depend on the particular facts and circumstances. The time period should be long enough to enable the landlord to instruct solicitors (and, if necessary, surveyors), to draft the lease, 12 LT(C)A 95, s19(1) states that where a person makes full payment together with any interest payable he can claim an overriding lease. 13 LT(C)A 95, s19(1) 14 LT(C)A 95, s19(11) 15 LT(C)A 95, s19(5) 16 LT(C)A 95, s20(6) 17 LT(C)A 95, s19(6) -10-

13 for the lease to be checked and approved by the former tenant s solicitors and for an engrossment to be prepared. Where third party consent is required to the grant of the overriding lease (see paragraph 7.4 below), a longer period will be reasonable. However, as with grants of landlord s consent, it is likely that, in a straightforward case, a reasonable time will be measured in weeks rather than months 18. If the landlord fails to comply with his duty to grant the lease, either within a reasonable time or at all, he is liable to a claim for breach of statutory duty 19. The former tenant will be able to bring a claim requiring him to grant the lease and will be able to obtain damages. In extreme cases, he may be entitled to exemplary damages (ie over and above the actual loss suffered): in an application for consent case, it was held that exemplary damages may be awarded where the landlord s conduct justifies it 20. Note that if the existing lease has already been determined (for example, by forfeiture or surrender) the former tenant will not be entitled to an overriding lease. The application for an overriding lease does not prevent the landlord from agreeing to a termination of the lease. In addition, the landlord need not grant an overriding lease if he has already granted one and it remains in force, or a request has been made by another former tenant which has not been withdrawn or abandoned (see paragraph 7.7 below) What about consents from mortgagees and superior landlords? Where there is a mortgagee of the landlord s interest, the overriding lease is deemed to be authorised and is binding on the mortgagee, even though his consent for its grant is not obtained. Where the mortgagee is entitled to possession of title documents, the landlord is obliged to deliver the counterpart of the overriding lease to the mortgagee within one month of execution 22. Unfortunately, the LT(C)A 95 does not make any similar provisions for the situation where the landlord is itself a tenant under a lease containing restrictions on the grant of subleases (though it does make it clear that the fact that the overriding lease takes effect subject to the existing lease does not amount to a breach of any covenant against subletting or parting with possession contained in the overriding lease 23 ). There s a good chance that the landlord s own lease will contain a qualified covenant against subletting, in which case it will be necessary to apply to the superior landlord for consent. Alternatively there may be an absolute covenant against subletting, or against a chain of more than one or two subleases, in which case it will be necessary to request a waiver of this covenant. Generally a superior landlord will be very happy to allow the subletting to go ahead: if his own tenant is not receiving rent he may be unable to pay his own rent. The sublease will help to ensure that the rental stream continues. However, there may be times when the superior landlord is not willing to consent and there is no clear guidance as to the position in this situation. Commentators have suggested that if there is a fully qualified covenant against granting further subleases, it may be unreasonable in such circumstances for the superior landlord to withhold consent. In the event that there is an absolute covenant against subletting it is arguable that the obligation on the landlord to grant the overriding lease provides a defence against a claim for forfeiture or damages for breach. However, these suggestions have not been tested so there is no certainty on this point. 7.5 Who is liable for costs? The former tenant is responsible for the landlord s reasonable costs of and incidental to the grant of the lease 24. This will include costs related to the landlord s own time, his solicitor s fees and his surveyor s costs. There are no decisions as to what actually amounts to reasonable costs in these circumstances. However factors to be taken into account in assessing the reasonableness of a solicitor s costs may include: the 18 Go West Ltd v Spigarolo [2003] EWCA Civ LT(C)A 95, s20(3) 20 Design Progression Ltd v Thurloe Properties Ltd [2004] EWHC LT(C)A 95, s19(7) 22 LT(C)A 95, s20(4) 23 LT(C)A 95, s20(5)(a) 24 LT(C)A 95, s19(6)(b)(ii) -11-

14 complexity of the work required; the conduct of the former tenant in agreeing the overriding lease; the hourly rates charged, taking into account where the solicitors are based and whether it was appropriate to instruct these solicitors; and whether the landlord would have been prepared to pay these costs if he was responsible for them. It is impossible to place a figure on this as it will vary so much from case to case. No reference is made to the costs of any third party, such as a superior landlord, but it seems reasonable to assume that the former tenant would also be expected to take responsibility for these. 7.6 What if more than one former tenant applies for an overriding lease? Where a former tenant has already applied for an overriding lease his application will take priority and he will be entitled to the grant of the lease unless he subsequently withdraws or abandons his claim 25. However, if two or more requests are made on the same day then rules apply to determine who made their request first: former tenants take priority over former guarantors; and those whose liability commenced earlier get priority over those whose liability commenced later What if the former tenant changes his mind? A claim for an overriding lease can be withdrawn at any time by sending a written notice to this effect to the landlord 27. The claim is treated as abandoned if the landlord has given the former tenant a written request to take, within a reasonable specified period, all remaining steps before the lease can be granted (for example, executing and returning the lease) and the former tenant fails to do so 28. The abandonment occurs when the specified period expires. If a claim is withdrawn or abandoned the former tenant is liable for the landlord s reasonable costs up until this point Negotiating and agreeing the terms of the overriding lease 8.1 General Subject to the points set out in the remainder of this paragraph, the basic rule is that the overriding lease must be on identical terms to the existing lease, as it operates immediately before the grant of the overriding lease 30. However, the parties can agree whatever terms they want between them 31. As it will often be beneficial to the landlord to grant an overriding lease to a solvent former tenant, it is well worth the former tenant seeing what concessions or amendments he is able to negotiate: if he doesn t like what the landlord is offering, he has no obligation to accept it (though he will, of course, still remain liable for rent and other sums). In particular the former tenant should think carefully about what he is going to want to do with the overriding lease once it has been granted and negotiate wording accordingly, for example to allow an assignment or subletting to a named party without consent and on the basis of a full release from liability. 8.2 Searches and enquiries The former tenant should carry out all of the usual searches and enquiries that he would carry out when taking a lease. Exactly which searches and enquiries the former tenant requires will depend a lot on the particular circumstances: if the former tenant only stopped being tenant very recently, the remaining term is very short and/or the rent is very low, the former tenant may decide that no searches or enquiries are necessary. For 25 LT(C)A 95, s19(7)(b) 26 LT(C)A 95, s19(8) 27 LT(C)A 95, s19(9)(a) 28 LT(C)A 95, s19(9)(b) 29 LT(C)A 95, s19(9) 30 LT(C)A 95, s19(2)(b) 31 LT(C)A 95, s19(2)(b) -12-

15 longer leases at high rents where the former tenant has had no involvement with the property for a number of years, full searches and enquiries will be appropriate. Where the overriding lease is registrable, the former tenant will need to do a priority search prior to completion. 8.3 Supplemental documents and variations The legislation and guidance is silent on the question of whether or not the overriding lease will be subject to any supplemental documents and variations which have been entered into since he assigned the lease. Arguably it will be, as it should be subject to the same covenants of the relevant tenancy, as they have effect immediately before the grant of the lease. The covenants of the tenancy at that point include covenants as varied and as contained in supplemental documents. Furthermore the legislation makes express provision that the former tenant should not have to make any payments under section 17 which are the result of a relevant variation (see paragraph 5.6 above). If a similar exclusion had been intended in respect of the overriding lease, this would presumably have been included. A former tenant who is contemplating taking an overriding lease should therefore ask the landlord for copies of all supplemental documents so that he knows all of the terms before deciding whether or not take apply for an overriding lease. A landlord does not have any obligation to provide this information, but it is likely that he will be happy to do so as he will probably be keen for the former tenant to take an overriding lease. If the landlord refuses to provide the information the former tenant will just need to decide whether to continue with the application in any event. He can change his mind any time up until the grant of the overriding lease, by which time he should hopefully have been able to establish its precise terms. 8.4 Term of the overriding lease The overriding lease must generally be for a term equal to the remainder of the term of the existing lease, plus three days. However, if the landlord has a leasehold interest which expires three days or less after the existing lease, the overriding lease must be for the longest period which will not wholly displace the landlord s reversionary interest 32. The legislation does not make any provisions as to what the commencement date of the overriding lease should be, but working on the usual basis this will be the date of grant unless agreed otherwise. Where the existing lease is a 1954 Act continuation tenancy it is unclear how the length of the term is to be calculated. By defining term in the lease to include any period of statutory continuation or holding over, it is recognised that the landlord retains the ability to claim against former tenants for unpaid sums. He will do so by way of a section 17 notice and, assuming the former tenant pays the full amount due, he will presumably have a right to an overriding lease. However, there is no way to establish when the term under the existing lease will come to an end so it is impossible to come to a satisfactory conclusion about how the term should be defined in the overriding lease. If you find yourself in this situation, you would be best advised to just try and reach a sensible negotiated position. The landlord and/or tenant should be encouraged to serve a notice bringing the existing tenancy to an end. Hopefully the matter can be resolved without the former tenant feeling it necessary to take an overriding lease. However, even if (which is extremely unlikely) the tenant wishes to renew and the landlord is happy to agree to this it will provide a date to which the end of the overriding lease can be linked. 8.5 Personal covenants The overriding lease is not required to reproduce any personal covenants which apply as between the landlord and the current tenant (for example, a personal break right) 33. You may also have a situation where the existing lease contains covenants which were personal as between the landlord and the former tenant (perhaps an agreement that on assignment the former tenant would not have to pay any unpaid service charge, or that 32 LT(C)A 95, s19(2)(a) 33 LT(C)A 95, s19(3) -13-

16 he would pay a reduced rent). A former tenant taking an overriding lease may wish to argue that such personal covenants should be included in the overriding lease, as it was on this basis that he took on the tenant s covenants in the first place. However, the legislation requires that the overriding lease is based on the same covenants as the exiting lease as they have effect immediately before the grant of the lease 34. As the personal covenants in favour of the former tenant fell away when he assigned the lease, they do not have effect immediately before the grant of the overriding lease and the landlord cannot be required to include them. Case law indicates that if a tenant has a personal right in a lease, assigns the lease and the subsequently takes a reassignment, the personal right will no longer be exercisable 35 this is a similar situation. However, whilst there is clearly no right to have the personal covenants reinstated, it would certainly be a point for negotiation for a former tenant. 8.6 Obligations by reference to term commencement Where any right, liability or other matter operates by reference to the commencement of the tenancy, the overriding lease must make it clear that these operate by reference to the commencement of the existing lease, not the overriding lease (for example a rent review to take place five years from the term commencement date) 36. As a consequence of this, there may be some rights or obligations which have been spent by the time that the overriding lease is granted (for example, a break right at the end of the fifth year when the overriding lease is being granted during the seventh year). These rights and obligations should not be reproduced in the overriding lease Required statements The overriding lease must state within it: that it is granted under section 19(2) of the Landlord and Tenant (Covenants) Act ; and whether or not it is a new tenancy for the purposes of section1 of the Landlord and Tenant (Covenants) Act (note that its status as an old or new lease will follow the status of the existing lease 40 ). 8.8 Landlord s title The landlord s title may look very different now as compared to how it looked when the existing lease was granted. For example, it may be subject to additional easements, restrictive covenants or mortgages, all of which exist subject to the terms of the existing lease. In an ideal world the former tenant would want to take the overriding lease subject only to those encumbrances which applied when the existing lease was entered into. The former tenant should therefore require that in the overriding lease he only covenants to observe those encumbrances that were in existence when the existing lease was granted. An agreement to change priorities in this way is ineffective as against the third party with the benefit of the encumbrance: however, the landlord will be unable to enforce against the tenant for breach. By way of example, say the existing lease is of a unit in a shopping centre. When it was granted there were no restrictions on how the property could be used. Subsequently the landlord covenanted with another tenant not to allow the sale of confectionary from any unit in the shopping centre. The tenant under the existing lease would not be bound by this covenant. However, when the overriding lease is granted (assuming that the restrictive covenant has been properly registered) the former tenant taking the new lease will be bound by it, meaning that the third party with the benefit of it can enforce directly 34 LT(C)A 95, s19(2)(b) 35 Max Factor Limited v Wesleyan Assurance Society [1996] 2 EGLR LT(C)A 95, s19(4)(a) 37 LT(C)A 95, s19(4)(b) 38 LT(C)A 95, s20(2)(a) 39 LT(C)A 95, s20(2)(b) 40 LT(C)A 95, s20(1) -14-

17 against the former tenant to prevent the sale of confectionary: this position cannot be changed by agreement between the landlord and the former tenant. If in the overriding lease the former tenant takes subject to all encumbrances existing at the date on which the overriding lease is granted, the landlord will also be able to enforce against the former tenant so if the third party sues the landlord in respect of the breach, the landlord will be able to recover his losses from the former tenant, as tenant under the overriding lease. However, if in the overriding lease the former tenant is subject only to those encumbrances at the date on which the existing lease was granted, the landlord will not be able to enforce against the former tenant. The former tenant should also consider seeking an indemnity from the landlord in respect of any loss that he suffers as a result of a third party enforcing against him directly for example, the loss of revenue from the sale of confectionary if the third party successfully obtains an injunction to prevent this. Note that title issues are not covered in the legislation. However, the clear intention is that the overriding lease should operate on the same terms as the existing lease operates immediately before grant. If the former tenant is bound by the terms of encumbrances which are not binding on the current tenant, the overriding lease will not be on the same terms, so it does not seem unreasonable to require this. However, be aware that landlords may reject the argument and in the absence of any decision on this point it will simply be a matter of negotiation Act Protection No specific reference is made to whether or not the overriding lease should be an excluded tenancy, so it should presumably follow the existing lease. If it is intended that the overriding lease will be contracted out, the necessary notices and declarations will be required before it is entered. The fact that the former tenant will not initially be in occupation for business purposes does not mean that the overriding lease cannot subsequently gain protection: if the existing lease is terminated and the former tenant goes into occupation for its own business purposes, or assigns the overriding lease to someone else who then goes into occupation for business purposes it will gain protection unless the lease has been properly contracted out Post completion requirements The overriding lease is just like any other lease as far as SDLT and Land Registry requirements are concerned. If an SDLT return is required, this must be made within 30 days of the date on which the overriding lease is granted. If the overriding lease is for a term of more than seven years, it must be registered at the Land Registry. The landlord must ensure that he sends any required documents to his mortgagee within one month after completion of the overriding lease, Where the landlord s own interest is leasehold he must also ensure that he makes any notifications as required under the terms of his lease. 9. Is an overriding lease the best option? 9.1 Advantages of taking an overriding lease Without the right to take an overriding the lease, the former tenant has to pay the rent and other sums due, and comply with the lease covenants, but he does not receive any benefit in return. He may well have an indemnity in respect of these sums from the defaulting tenant, but this will be of little use if the defaulting tenant is insolvent. By taking an overriding lease, the former tenant gains some control over the defaulting tenant. By becoming the direct landlord, the former tenant widens his choice of remedies. He will be able to distrain against the defaulting tenant and will be able to forfeit the lease (or agree a surrender) and take back occupation. This will enable him to assign his overriding lease as an occupational lease, to grant a new sublease or to actually reoccupy the property himself. However, if the former tenant wishes to forfeit the lease he needs to ensure that the right to forfeit has not been waived by an act of the landlord: for -15-