There are certain inevitabilities in life, one of which is disputes. As a disputes lawyer, this natural propensity to fall out keeps me in business. The variety comes with what people argue about, and in the world of real estate this very much depends upon the state of the market.
In the landlord and tenant context certain themes emerge in a recession. Landlords seek to maximise their returns wherever possible: on rent reviews and in lease renewals; reducing voids by challenging break notices; and taking technical points that had gone out of fashion. For the tenants it is all about cost saving, challenging service charge costs and reducing portfolio expenditure by operating break notices and using the leverage of the threat of empty premises to regear if possible.
These trends are illustrated by three recent cases.
Landlord’s consent
Landlord Protect Ltd v St Anselm Development Co Ltd [2009]
Landlord Protect contracted to buy at auction St Anselm’s leasehold interest in a block of 26 residential flats in Clarges Street London W1. The head landlord’s consent was required to the assignment, such consent not to be unreasonably withheld ‘in the case of a respectable and responsible assignee or sub-tenant being offered’. Landlord Protect had never traded, had no accounts and could provide no accountant or bank references. The director and one of the principal shareholders was prepared to guarantee performance of the assignee’s obligations, but this was to be limited for a period of three years. Landlord Protect commenced proceedings in Central London County Court claiming that the head landlord had unreasonably refused its consent to the assignment and/or imposed unreasonable conditions. In particular, Landlord Protect argued that it was unreasonable for the head landlord to impose a requirement that the assignee provide a guarantee more extensive than that offered. The County Court held that the landlord had not acted unreasonably.
Negotiations continued but the terms of the guarantee to be provided remained contentious. The head landlord sought to provide that the guarantor was to be released on a subsequent assignment but only with the landlord’s consent ‘provided that a reasonable alternative guarantor is provided by the purchaser’. Landlord Protect asked for the guarantor’s automatic release on an assignment with the landlord’s consent.
Under the terms of the auction contract, if landlord’s consent was not achieved by a longstop date either party could serve notice of termination on it. Landlord Protect did just that. St Anselm did not accept that the sale contract had been validly rescinded and asserted that Landlord Protect was in breach of its obligations under the auction contract. A notice to complete was served and when Landlord Protect refused to comply, St Anselm treated it as a repudiatory breach and proceeded to forfeit its deposit. The dispute advanced to the Court of Appeal.
The question before the court was whether the provision allowing the guarantor only to be released on assignment provided that a reasonable alternative security was provided by the assignee was ‘properly required [by the head landlord] under the terms of the lease’.
By s1(6)(b) of the Landlord & Tenant Act 1988 it is for the landlord to show that its refusal was reasonable. This is a question of both fact and law. It was not disputed that the head landlord was entitled to require a guarantor, but rather the issue was whether the requirements as to its terms were reasonable in the circumstances.
The court reiterated the principles set out in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1985] and Straudley Investments Ltd v Mount Eden Land Ltd [1996]. While the lessor was entitled to protection from having its premises occupied in an undesirable way or by an undesirable tenant, it was not entitled to refuse consent on grounds that had nothing to do with the relationship of landlord and tenant, in other words for a collateral purpose. It was not for the landlord to prove that its conclusion was justified, but simply that it was reasonable in all the circumstances.
The court formulated two further propositions:?
- It will normally be reasonable for a landlord to refuse consent or to impose a condition to prevent its contractual rights from being prejudiced by the proposed assignment or sub-lease.
- It will not normally be reasonable for a landlord to seek to impose a condition to increase or enhance its rights.
In short, a landlord cannot normally reasonably require a guarantor of an assignee to take on a liability extending beyond the period during which the term is vested in the assignee. Such a requirement increases or enhances the rights the landlord already enjoys. Furthermore, the guarantor should not have to rely on the landlord acting sensibly. The head landlord had been acting unreasonably and Landlord Protect was entitled to rescind the contract.
Service Charges
Boots UK Ltd v Trafford Centre Ltd [2008]
The Trafford Centre in Manchester is a shopping centre of some renown. According to the witness evidence before the court, it receives approximately 30 million visitors per annum and regular customer surveys estimate that repeat customers account for approximately 94% of visits. The average ‘dwell time’ at the Centre is approximately two hours. The Trafford Centre is designed to be more than a mere shopping centre. It contains one of the largest food courts in the world with over 60 restaurants and offers extensive leisure facilities including a very large cinema and a tenpin bowling alley.
This dispute came before the High Court just before Christmas in 2008. The preliminary issue before the court was the interpretation of the service charge provisions in a lease between the landlord, the Trafford Centre Ltd, and the tenant, Boots UK Ltd.
In the lease ‘promotion’ was defined to mean: ‘Advertising and other forms of promotion of the Centre intended to bring additional custom to the Centre that shall be reasonable and proper but excluding any advertising in respect of letting of any unlet unit.’ The lease provided for the tenant to pay to the landlord a service charge and obliged the landlord to provide certain services. The list of services was not exhaustive and included a proviso that the landlord may in its ‘absolute discretion’ vary and alter or add to the services if it reasonably considers (after a consultation with the tenant) that doing so would be for the general benefit of the tenants in the Centre. The detailed service charge provisions provided that:
‘The service charge is the actual cost reasonably and properly incurred by the landlord in any service charge period in defraying all costs relating and incidental to discharging its obligations… and in providing other services in each case in the interests of good estate management of a high-class shopping centre and the proper enjoyment of the centre by the tenants, occupiers and their visitors and any other costs that the landlord is entitled to include in the service charge.’
In relation to promotion, the lease went on to provide that the landlord was to bear 50% of the cost of promotion in any service charge period, the total cost of which should not exceed 10% of the total service charge net of VAT, management and professional fees.
There were four items provided by the landlord at the Trafford Centre where the parties were in dispute as to their correct treatment under the service charge provisions of the lease: entertainments, Christmas decorations, Santa’s Grotto and an installation known as the Sky Wall, which was a large permanent television screen mounted in the food court. The Sky Wall gave general information about the Centre and details of the various activities on offer. Several entertainers were regularly engaged to perform in designated places in the Centre. There was frequently a jazz band, a string quartet and various other performers, including Barney Bear and a children’s entertainer who patrolled the malls in a car. It was agreed that these attractions did not so much bring people to the Centre in the first place, but encouraged people to remain increasing ‘dwell time’. The Christmas decorations were upmarket, but not particularly distinguished from other shopping centres. For a fee, the Santa’s Grotto provided guests with several additional attractions.
Counsel for the landlord put forward a line of argument that the judge described as ‘a bright line test’. Taking the definition of promotion by reference to defined criteria, counsel drew a line for those items that counsel argued fell within the definition of promotion and those that fell outside the definition. The court felt this ‘in/out test’ was too limiting. By contrast, the tenant’s counsel’s test was what he labelled as an ‘elephant test’. Counsel did not seek to present an all-embracing definition of promotion, but rather argued that it was something that one recognises when one sees it.
The judge agreed with the ‘elephant test’, although he reached a different conclusion on the facts. Applying the ‘elephant test’ to the issues in question, he felt you could distinguish between something that is a promotion and something that fell on the other side of the line that would be of benefit to the Centre, namely an attraction or something considered a service facility or amenity:
‘It seems to me in the context of these service charge provisions seeking to identify cases where the landlord is obliged to contribute 50% and be subject to a cap, [the court] can distinguish between a service, a facility, an amenity or an attraction on one side of the line and a form of promotion on the other.’
The conclusion? The judge ruled that entertainments, Christmas decorations and the Grotto fell into the category of facility, amenity or attraction, but not promotion. The Sky Wall, he also regarded as a facility, amenity or attraction, but subject to the qualification that insofar as there was a cost in relation to providing advertising or a promotion of the Centre on the Sky Wall, then that was a promotion.
Break Notices
Orchard (Developments) Holdings plc v Reuters Ltd [2009]
Orchard (Developments) Holdings Ltd was the landlord of commercial premises in Nottingham let to Reuters, the assignee of a lease. The lease contained a break clause at the end of the fifth or tenth years of the term upon giving six months’ notice in writing. The fifth year of the term break could be operated on 30 January 2006. The last day for service of the notices was therefore 30 July 2005. In July 2005 the parties were in negotiation over a rent review. On 29 July 2005 Reuters tried to send notices by hand and on 30 July 2005 by fax exercising the break. The notices sent by hand were delivered by a process server. They were subsequently found to have been posted in the wrong post box and were therefore ineffective. The faxed copies of the notices were received by Orchard at 5.46pm on 29 July, a Friday, and 11.08am on 30 July, a Saturday. At both these times the offices were closed. Reuters subsequently vacated the premises and handed back the keys to Orchard, which Orchard accepted, albeit under protest. Some 18 months later receipt of the faxes was acknowledged by the landlord’s solicitors both by letter and subsequently by witness statements in the trial before the court. The trial judge at first instance held that the later acknowledgement of the notices retrospectively validated them and thus made them effective to exercise the break.
Under the terms of the lease, notices were required to be in writing. In addition the lease provided that unless the receiving party or its authorised agent acknowledged receipt, a notice would be valid only if sent by hand, registered post or recorded delivery and served on a company’s registered office or in the case of the tenant at the premises and in the case of the landlord at the address shown in the lease or at any address specified in the notice given by that party to other parties.
The Court of Appeal found that it was too late for the landlord to retrospectively validate a notice that was not served in accordance with the specified methods. The requirement in the lease that six months’ prior notice had to be given had to be achieved before the notice period began. There was no obligation to be implied into the lease terms requiring a landlord to acknowledge such a notice within a reasonable time. In any event, in this case the earliest the landlord could have acknowledged the faxes was 1 August 2005 which would, in any event, have been too late. The break was ineffective and the lease continued.
So where does this take us?
Each case turns on its particular facts, but they reflect a larger trend. In a difficult market, occupiers should expect to be challenged by landlords that are anxious to preserve their rental income, and require additional assurances on assignment. Traditionally, weaker assignee covenants have required guarantees and/or rent deposits. In a difficult market, is it really productive for a landlord to push for a guarantee on unreasonable terms and in the process end up with an empty unit?
Similarly, where premises are hard to re-let and the landlord has to take on empty rates liability, they require strict compliance with the conditions attached to the exercise of breaks. The House of Lords decision in Mannai Investment Co Ltd v Eagle Star Assurance [1997] marked the start of the trend allowing notices to be saved in spite of deficiencies. Although it is not the panacea that some might argue for, in a buoyant real estate market, a more flexible approach was definitely adopted. This is no longer the case where tenants are few and far between. Expect a more analytical approach to the exercise of notices – their form, their service and full and correct compliance with any conditions precedent, for instance compliance with repairing covenants and payment of rent. There are many traps for the unwary. Expect to be challenged in the case of error.
Tenants are increasingly challenging service charge demands. Portfolios are audited, specialist service charge consultants identify (often correctly) items that should not be service charge items, and tenants are prepared to challenge aggressively knowing that the landlord is less willing to offend its occupier for fear of losing it.
By Caroline DeLaney, partner and head of real estate disputes, CMS Cameron McKenna LLP.
E-mail: caroline.delaney@cms-cmck.com.
