Tenant's Repair Obligations in Commercial Property Leases: A Case Study on Dilapidations, Exercises of Business

Download Tenant's Repair Obligations in Commercial Property Leases: A Case Study on Dilapidations and more Exercises Business in PDF only on Docsity! Guy Fetherstonhaugh QC Falcon Chambers Dilapidations Topics of the moment A Paper for The White Paper Conference Company Commercial Property Leases Conference 10 October 2017 Guy Fetherstonhaugh QC FALCON CHAMBERS Introduction 1. (a) Leases that impose repairing liability upon tenants create obvious conflicts of interest between landlords, who expect their premises to be returned to them in a fully lettable state, and tenants, who do not expect to have to fund the cost of updated premises which they were never able to enjoy. This conflict has caused disputes over the centuries which show no signs of abating. This paper deals with some of the areas of repairing liability which continue to cause contention: (a) The liability of a head tenant who vacates leaving a subtenant in occupation; (b) Liability for removal of fixtures; (c) Operation of Jervis v Harris clauses; (d) — Liquidated damages clauses for end of term liability. The liability of a head tenant where subtenant remains in occupation When a full repairing lease terminates, with a subtenant remaining in place on a new lease of part or whole, what is the landlord’s position concerning terminal dilapidations under the expired lease? Family Management v Gray (1979) 253 EG 369 concerned two building leases granted in January 1887 for terms of 90 years, of adjoining premises White Paper Commercial Property Leases Conference 2017 Guy Fetherstonhaugh QC Falcon Chambers 10. in South Lambeth Road in London, which, in the words of Shaw LJ “was then a neighbourhood of higher standing and amenity than it is at the present time”. Towards the end of the leases in 1974, the ground floors of each set of premises (a dry cleaner and a delicatessen) were occupied by businesses under full repairing underleases. The premises were in some disrepair. A proper understanding of the chronology of subsequent events is critical to an understanding of the case: (a) in June 1974, that is some six months or so before their respective leases were due to expire, the business subtenants of the shops on the ground floor were served with section 25 notices by the head landlord, Family Management, indicating that it would not object to a renewal of the tenancies under the Landlord and Tenant Act 1954; (b) the subtenants then negotiated new leases for 20 years, again on full repairing terms; (c) no repairs were ever carried out, but in 1976 Family Management took proceedings against the former tenant, Mr Gray, for £6,500 damages for breach of his repairing covenants Evidence was called at trial to the effect that the cost of putting the premises into proper condition on the covenants would have been about £6,000. The court instead awarded damages of £1,600, based upon an annual loss of rent of £100 for each shop, compounded over the new terms. Family Management appealed. The Court of Appeal held, allowing the appeal, that the damage to the head landlord’s reversion was nil or de minimis, because in negotiating their new rents after 1974, the sub-tenants were prevented by s.34 of the 1954 Act from alleging their own default in repairing obligations in order to reduce the rent. Since they had had full repairing obligations to Family Management, their new rents could not have been reduced by reason of dilapidations. This decision has been much used and abused. It is not authority for the proposition that, whenever a head tenancy expires with sub-tenants in occupation, the diminution in the value of the landlord’s reversion will inevitably be nil, thus negating any dilapidations recovery. The limitations of the principle espoused by the Court of Appeal appear in the following passage of the judgment of Shaw LJ (with whom Waller and Megaw LJJ agreed): White Paper Commercial Property Leases Conference 2017 Guy Fetherstonhaugh QC Falcon Chambers (b) 20. 21. 22. 23. price accordingly. The Court of Appeal had no hesitation in rejecting this argument. In the words of Lewison J: . what the judge was required to do was to value the bundle of rights that the landlord actually had on the valuation date. On the valuation date the landlord did not have the benefit of an agreement for a lease with Ryman or even an offer capable of acceptance. Such offers as Ryman had made had been rejected, and in any event were made before the beginning of the hypothetical marketing period. ... If there is an actual special purchaser who exists in reality, no doubt his bid may be taken into account, but that does not justify the invention of a special purchaser.” Liability concerning removal of fixtures It is readily assumed (and often it is correct so to do) that a tenant may remove fixtures installed by it at the end of its lease, but is not bound to do so. However, the precise rights and liabilities concerning fixtures can be altered by the terms of the lease between the parties. It is not unusual to find clauses (a) requiring the tenant to remove its fixtures; or (b) requiring the tenant to remove its fixtures upon notice; or (c) requiring the tenant to not to remove its fixtures. Such provisions trump what may be said to be the general position at common law. The difference in drafting may make a substantial difference in repairing liability at the end of the term (and of course to whether a tenant’s option to determine has been correctly exercised — see for example the decision of Judge Saffman, sitting as a Deputy Judge of the Chancery Division, in Riverside Park Ltd _v NHS Property Services Ltd [2017] L&TR 12.). Whatever the contractual position may be, it will be critical to understand the difference between objects that may be (i) a chattel, (ii) a fixture, or (iii) an irremovable part of the premises. Guidance as to the dividing line between (i) and (ii) was given by the Court of Appeal in TSB Bank Plc v Botham (1997) 73 P & CR D1. More recent thoughts on the dividing line between (ii) and (iii) were offered by Morgan J in Peel Land and Property (Ports No. 3) Ltd v TS Sheerness Steel Ltd [2013] EWHC 1658 (Ch). That case concerned an enormous steel making plant and rolling mill, on a 50 acre site. The plant and machinery were such that their removal would take years, in some cases, cost millions White Paper Commercial Property Leases Conference 2017 Guy Fetherstonhaugh QC Falcon Chambers (©) 24. 25. 26. of pounds, and require the demolition of some of the structures housing them.! Operation of Jervis v Harris clauses In Jervis v Harris [1996] Ch 195, a tenant under a 999 year lease granted in 1947 covenanted to maintain premises in good tenantable repair and condition. The lease authorised the landlord to enter the premises to view the state of repair and to give notice in writing to the tenant of any defects or want of repair, which the tenant was required within three months to make good. In default, the landlord could do the work and recover the costs and expenses from the tenant. Following inspection and service of notice by the landlord the tenant failed to carry out repairs and refused the landlord or his workmen entry. On the trial of preliminary issues the judge declared that the covenants were enforceable and that a claim by the landlord to recover moneys expended on repair was a claim for a debt and not for damages for breach of a covenant, and was therefore enforceable by the landlord without first obtaining the leave of the court under section 1 of the Leasehold Property (Repairs) Act 1938. The tenant appealed. The Court of Appeal held that, where a lease provided by specific covenants for repairs to be carried out by the lessee in default of which the lessor was entitled on notice to enter the property and carry out repairs at the lessee’s expense, a claim by the lessor to recover moneys expended in making good a want of repair arising from the lessee’s breach of the repairing covenant was a claim for debt and not a claim for damages for breach of covenant’; that the doctrine of penalties did not apply to a claim in debt; and that, therefore, the leave of the court under the 1938 Act was not required before the landlord could enforce his claim against the tenant. The decision, if correct, has devastating consequences. ‘In this regard, the landlord in Peel appealed (see the report at [2014] 2 P & CR 8). It did not seek to disturb the findings of Morgan J as to whether the items in question were fixtures. Instead, it appealed against the determination that the tenant’s prima facie right to remove its fixtures during the currency of the term of the lease was not removed or modified by the provisions of the lease. ? Per Millett LJ: “The short answer to the question is that the tenant’s liability to reimburse the landlord for his expenditure on repairs is not a liability in damages for breach of his repairing covenant all. The landlord’s claim sounds in debt not damages; and it is not a claim to compensation for breach of the tenant’s covenant to repair, but for reimbursement of sums actually spent by the landlord in carrying out repairs himself.” White Paper Commercial Property Leases Conference 2017 Guy Fetherstonhaugh QC Falcon Chambers 27. 28. 29. 30. 31. First, it evades the protection which Parliament saw fit to confer upon tenants held at ransom by unscrupulous landlords threatening to sue for damages for dilapidations when the landlords would suffer no actual loss — see section 18(1) of the Landlord and Tenant Act 1927 and the Leasehold Property Repairs Act 1938. Secondly, it also helps to legitimise end of term clauses which require the tenant to pay the landlord the estimated loss of remedial works which the landlord may never carry out — see (d) below. Thirdly, recognising the arguable unfairness of its application, courts adopt a restrictive construction to clauses allowing entry. See for example the judgment of Neuberger J in Amsprop Trading Ltd v Harris Distribution Ltd [1997] 1 WLR 1025: “a provision such [a Jervis v Harris] clause, which gives the landlords substantial powers, and in particular the power to carry out work at the tenant’s expense, should be construed narrowly rather than widely.” Fourthly, it is of little practical use. A landlord will only need to use its JvH powers when its tenant has proved resistant to carrying out repairs — and the landlord should therefore expect opposition: (1) First, the tenant may well challenge the landlord’s notice, which usually has to satisfy certain contractual stipulations; (2) Secondly, the tenant may argue that the work is unnecessary, rendering it imprudent for the landlord to proceed without obtaining court sanction (which would of course defeat the utility of the remedy). (GB) Thirdly, tenants may succeed in preventing the use of JvH powers. In Hammersmith and Fulham LBC v Creska Ltd [2000] L & TR 288, Jacob J refused to grant an injunction requiring the tenant to allow the landlord access to carry out works under such a clause, even though the landlord had complied with it to the letter. (4) Fourthly, even if the landlord does prevail in obtaining entry to carry out works, its troubles are far from over. It may, for example, find that more work is required than was specified in its notice; or it may encounter problems in carrying out the work, the cost of which the tenant will be likely to challenge. In all those circumstances, the practical utility of Jervis v Harris clauses is questionable. White Paper Commercial Property Leases Conference 2017