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New lease terms

Introduction

When a new is granted what should be its terms? There are specific provisions in the 1954 Act relating to duration (s33) and rent (s34) but what of the other terms? If the lease was granted many years ago can the landlord insist on a new modern lease, and to what extent? The key provision is section 35 of the Landlord and Tenant Act 1954, which is in the following terms:
    (1) The terms of a tenancy granted by order of the court under this Part of this Act (other than terms as to the duration thereof and as to the rent payable thereunder) shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court; and in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances.

    (2) In subsection (1) of this section the reference to all relevant circumstances includes (without prejudice to the generality of that reference) a reference to the operation of the provisions of the Landlord and Tenant (Covenants) Act 1995.

O'May

The leading case on how the court will approach the question of the new terms in a lease is O’May v City of London Real Property Co Ltd [1983] 2 A.C. 726.

Facts

The landlord wanted the new lease to be a “clear lease”; ie a lease under which T would be required to pay a variable service charge to cover all L’s expenses on the building. L was prepared to offer a lower rent. However, this was not the position under the old lease and T did not wish to accept such a lease.

Decision

The House of Lords held that the onus was on L to justify the alteration in the terms of the tenancy and that it had not done so.

Citations

The key citations in that case are probably as follows:
    Lord Hailsham

    “From these sections I deduce three general propositions.
    (1) It is clear from section 34 that, in contrast to the enactments relating to residential property, Parliament did not intend, apart from certain limitations to protect the tenant from the operation of market forces in the determination of rent:
    (2) In contrast to the determination of rent, it is the court and not the market forces which, with one vital qualification, has an almost complete discretion as to the other terms of the tenancy (which, of course, in turn must exercise a decisive influence on the market rent to be ascertained under section 34); and
    (3) In deciding the terms of the new tenancy, as to which its discretion is otherwise not expressly fettered, the court must start by “having regard to” the terms of the current tenancy, which ex hypothesi must have been either originally the subject of agreement between the parties or themselves the result of a previous determination by the court in earlier proceedings for renewal."

    Lord Wilberforce

    “The Act, in the portion (Part II) of it which deals with business tenancies, is in the main a discretionary Act, giving wide powers to the judge to grant and settle the terms on which the business tenant is to have a new lease. This applies particularly to sections 33 and 34, which relate to the duration of the tenancy and the rent. The crucial section, for present purposes, is section 35, which relates to the terms of the tenancy, other than terms as to duration and rent. This section contains a mandatory guideline or direction to “have regard to” the terms of the current tenancy and to all relevant circumstances. The words “have regard to” are elastic: they compel something between an obligation to reproduce existing terms and an unfettered right to substitute others. They impose an onus upon a party seeking to introduce new, or substituted, or modified terms, to justify the change, with reasons appearing sufficient to the court (see Gold v Brighton Corporation [1956] 1 WLR 1291 — on “strong and cogent evidence” per Denning LJ; Cardshops Ltd v Davies & Another [1971] 1 WLR 591, 596 per Widgery LJ.)
    If such reasons are shown, then the court, applying the words “all relevant circumstances”, may consider giving effect to them: there is certainly no intention shown to freeze or, in the metaphor used by learned counsel, to “petrify” the terms of the lease. In some cases, especially where the lease is an old one, many of its terms may be out of date, or unsuitable in relation to the new term to be granted. If so or for other good reasons shown, the court has power to order a modification by changing an existing term or introducing a new one (eg a break clause, cf Adams v Green (unrep) March 20 1978 CA*). Before doing so it will consider any objections by the tenant, and where there is an insoluble conflict, will decide according to fairness and justice.
    …..

    The landlord’s case for a shift of the burdens, as I have indicated, rests upon two broad foundations. The first is that such a shift is, for quite genuine and respectable reasons, in the interest of the landlord. I accept this; I think that it is shown by evidence that in the present and foreseeable state of the property market, a freehold interest in commercial property, at least in London, commands a higher price if let on “clear leases” — ie leases in which the tenants bear all the costs and risks of repairing, maintaining and running the building of which their demised premises form part, so that the rent payable reaches the landlord clear of all expenses and overheads. Thus the landlord demonstrates a genuine interest in departing from the existing terms of the lease. Secondly, the landlord asserts that new leases of property, such as that with which we are concerned, are now granted and accepted by tenants as “clear leases”. This, too, is supported by the evidence. But, in my opinion, though a relevant circumstance it is not decisive. There is no obligation, under section 35 of the Act, to make the new terms conform with market practice, if to do so would be unfair to the tenant. And there is no inherent necessity why the terms on which existing leases are to be renewed should be dictated by those of fresh bargains which tenants may feel themselves obliged to accept. The court has to compare the advantage desired by the landlord with the detriment to be suffered by the tenants and to consider whether any monetary compensation offered against that detriment ought fairly to be imposed upon the tenants in exchange for the acceptance of that detriment. That money is not necessarily fair compensation for a change in existing rights is obvious in itself and is well recognised by the law in relation, for example, to compulsory acquisition and to the granting of damages instead of an injunction.

    There can be no doubt in my opinion that this detriment is real and serious."

Variable service charge imposed

O'May principles applied but decision different

Edwards & Walkden (Norfolk) Ltd v The Mayor & Commonalty & Citizens of the City of London
[2012] EWHC 2527

Summary

A landlord was entitled to a change in lease terms on renewal allowing it to impose a variable service charge. The court considered the leading case on this topic, O'May v City of London Real Property Co Ltd [1983] 2 A.C. 726, applying its principals but coming to a different decision on the facts.

Facts

A number of tenants in a market had leases that were protected under the Landlord and Tenant Act 1954. The landlord provided a number of services including the repair and maintenance of the buildings, the provision of certain staff, some electricity, and some specialist equipment. The leases, granted to one group of tenants, provided for a simple all-inclusive rent.

The leases of other premises provided for a yearly rent and a variable service charge but were subject to a time-limited variation, which stated that the yearly rent would be deemed to include the variable service charge. This was because of a long running dispute between the landlord and the tenants about certain building works. Their previous leases had provided for a variable service charge.

Issue

Whether the landlord was entitled to insert a variable service charge in the new leases. The tenants accepted that the landlord should be recompensed for the cost of providing the services but that an estimate of these costs should be made and the rent adjusted accordingly.

Decision

The High Court allowed the insertion, into the new leases, of a variable service charge provision.

Although certain expired leases only provided for the recovery of an inclusive rent, the background to those leases (the dispute over the renovation works) considerably diminished the weight to be attached to the fact that this was the payment structure in those leases. In addition, the court considered that the change was fair and reasonable for a number of reasons, which included the following:
  • The largest element of the service costs was, in effect, the costs to the tenants of running their businesses and the tenants should directly bear the risks of fluctuations in such costs.
  • Looking at these running costs “..the tenants are better placed than the [landlord] to manage and control such costs, by being able to adapt their behaviour (and that of their employees) to some degree so as to minimise such costs in a way that the [landlord] cannot readily do. The extent to which there may be scope for the tenants to do this will vary depending on the particular service in issue, but I consider that it is likely that the tenants will generally be more sensitive to the costs of provision of these services (such as cleaning) if they can see clearly year by year how such costs are affected by their actions.” (Sales J).
  • The long-term interests of the tenants meant that there was less need to distinguish the respective interests of the landlord and the tenants in maintaining the fabric of the building.
Comment

This is one of few reported decisions where the court has considered the leading case on this topic, O'May v City of London Real Property Co Ltd [1983] 2 A.C. 726. The judge thought that “there are significant differences between this case and the position in O'May.” However he did apply “the guidance in O'May as a whole” and in doing so considered that there were “good and sufficient reasons to justify a change in the payment structure under the new tenancies back to the original structure of a rent and variable service charge which formed part of the early 1980s leases between the parties.” Whilst this is clearly a judgment that is fact specific, there may be instances e.g. where renewal leases are being granted for long terms and/or where the service charge is largely running costs, where the court may well consider it fair and reasonable to pass the risk of fluctuating costs to the tenant. It is also worth noting that the tenants here were being granted 15-year leases unlike the 3-year leases in O’May.


Authorised Guarantee Agreements

Can they be imposed?

Wallis Fashion Group Ltd v CGU Life Assurance Ltd
[2000] 2 EGLR 49
(Neuberger J)

Introduction

As stated above s35(2) says:
    "(2) In subsection (1) of this section the reference to all the relevant circumstances includes (without prejudice to the generality of that reference) as reference to the operation of the provisions of the Landlord and Tenant (Covenants) Act 1995."
Section 19 of the Landlord and Tenant 1927 Act as amended by the 1995 Act states as follows:
    "A qualifying lease is a new tenancy for the purposes of s1 of the 1995 Act other than a residential lease." (s19(1E))
Where there is a qualifying lease L and T may enter into an agreement providing for circumstances in which L may withhold his consent and conditions subject to which consent may be granted (s19(1A)). Section 16 of the 1995 Act deals with authorised guarantee agreements.

Facts:

L wished to include a term in the new lease providing that he could make it a term of any assignment that T would enter into an AGA. 16 out of 18 other tenants had already accepted L's terms. T wanted the words "where reasonable" included, so that L could only make it a condition of the assignment if it was reasonable at the time of the assignment.

Decision:

A landlord can only impose a condition upon the grant of a lease if that condition is reasonable. If it is reasonable to require an AGA it is lawful within s16. A term entitling L to insist upon an AGA on an assignment only where reasonable was inserted in the lease.

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