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Monday, 28 March 2011

Is It Ever Too Late For Your Landlord To Trigger A Rent Review? Don’t Bury Your Head In The Sand!


If you are a business tenant, can it ever be too late for your landlord to review the rent payable under your business lease?

The issue has recently come to light in a commercial context in East London, as this report in the Estates Gazette shows.

When a landlord seeks to implement a rent review long after the last review date has been and gone, this can be a nasty surprise for any business tenant.

Your business will have become used to paying rent at a certain rate and the fact that your landlord seems to have ignored the last review date may lead you to believe either that it has been overlooked or that the landlord has chosen to forego a review.

However, unless there is an express term in your lease making “time of the essence” on rent reviews, your landlord will not necessarily lose its right to trigger a rent review from the distant past – and take you back to the future (albeit without the stainless steel sports car from Belfast).

Where the lease makes time “of the essence”

If time is made “of the essence” in a contract, it means that if the contract says that something must be done by a particular time and you do not do it by that time, then you lose the right to do it.

So if your lease does make time of the essence on rent reviews (which is possible, but would be unusual) then your landlord will have lost its right to implement a review where the deadline has passed.

Where the lease does not make time “of the essence”

Common law presumes that time is not “of the essence” in rent review clauses. Time will only be “of the essence” therefore if the lease says it is.

It is unusual nowadays for open market rent review clauses to make time of the essence. That is because landlords do not want to lose their right to implement a review by narrowly missing a review date.

But it also means that potentially the ability to review the rent stays alive for a long time.

A late review, where time was not of the essence in the lease, went to court just over a year ago in Bello v Ideal View [2009] EWHC 2808 (QB). It concerned a residential lease, but the wording was similar to the wording found in most commercial leases where there is an open market rent review.

In that case, the lease provided for a rent of £60 per annum to be reviewed in 1994. Mr Bello purchased the lease in 2005. When the freehold was purchased by Ideal in 2006, no review had taken place. Ideal sought to implement the 1994 review and invoked the arbitration provisions in the lease to settle the rent.

Mr Bello did not respond constructively to any communications on the review and did not get involved in the arbitration. The arbitrator increased the rent to £1,700 per annum. The lease provided, as is usually the case, that on the next rent day not only would the rent now be payable at the new higher rate, but that the tenant also had to pay an amount equal to the difference between the old rent and the new rent for the period since the review date, in this case 1994.

That’s a big expense to be landed with.

Commercial leases also usually provide for the difference between the old rent and the new rent to be paid following a review. Usually they even go a step further and require interest to be paid on that money as well (at base rate but sometimes higher).

The court in Bello v Ideal View  decided that the simple fact of the landlord’s delay, without more, did not mean the landlord had lost its right to review the rent.

But that does not necessarily mean all is lost if you are a tenant in this position.

To succeed as a tenant you have to be able to show that your landlord has either done something to waive the review or that is has done something, which you rely on, which means it is “estopped” or prevented from reviewing the rent.

To be able to prove that, you would need to have evidence of some kind of representation or conduct by your landlord, and that you had relied upon it as meaning the rent review would not be implemented.

And to be able to argue anything, it’s a good idea to turn up to the arbitration and get involved constructively. What appears to have been fatal to Mr Bello’s case is that he didn’t participate in the arbitration and hoped the problem would just go away.

It is common for commercial leases to provide for rent to be settled on review, in the absence of agreement, either by arbitration or by an expert.

What Bello v Ideal View demonstrates is that if you are faced with a late rent review, you must look for evidence of waver or estoppel if you can. In any case you should get involved, with your advisors, in the arbitration process to argue your case.

If determination of the rent is by an expert rather than by arbitration, you must use any powers given to you in the lease to make your representations to the expert.

Your landlord might still succeed in implementing the late review if you cannot produce any evidence that helps you, but it’s worth a try.

If you bury your head in the sand and hope the nightmare just goes away, it won’t. It will just get a lot worse and could be very expensive.

Tuesday, 22 March 2011

Break Notices – If You Get It Wrong You’ll Get It Right Next Time



Here’s another foray into the crystal maze that is the crazy world of the lease break clause.

If you are a tenant and your lease gives you the right to terminate your lease, it should be quite straightforward. You serve the notice and then leave.






“Simples” as a certain variety of irritating TV mongoose might have it.





But, as my previous posts on break clauses have demonstrated, it’s not always that easy and getting it wrong can be a very costly mistake.

Lease Break Clauses – What Can Possibly Go Wrong? explains many of the common pitfalls.

Breaking news – Don’t Get Caught In The Landlord’s Web describes a recent break notice mix-up that ended up in court because a landlord’s agent intervened.

Or you might change your mind and wish you’d never served darn break notice in the first place and want to turn back time – see Lease Break Clauses – What If You Change Your Mind?

Here’s another possible scenario I haven’t already covered.

What if you serve a break notice, then realise you might have got it wrong?

You are still within the time limit for serving the break notice.

Can you have another go and serve another one?

If you do, what if the original break notice was actually right in the first place?

This might appear to be the nightmare of a paranoid lunatic, but it’s actually quite a common situation and there’s usually a way of dealing with it.

If you, or your advisor, have doubts about the validity of the first notice, then you can serve a second notice and mark it “without prejudice to the validity of the first notice”.

By using these words you are making clear that you are relying on the first notice but, if that notice is found to be invalid, you will rely on the second notice.

You must make clear what notices you are relying on and in what priority. To avoid invalidating the notice, this should be dealt with in a covering letter accompanying the notice, rather than in the notice itself.

As I have said on many occasions before, given the importance of break notices, you should always take professional advice when you decide you want to terminate your lease and you should ask your advisor to prepare and serve the notice on your behalf.

And if at first you don’t succeed, provided you’re still within the notice period, as the late Gerry Rafferty once sang – if you get it wrong, you’ll get it right next time (next time).

Wednesday, 16 March 2011

Shadow Boxing - Can You Lose Your Right To Light?


The right to light is not just a planning issue, but is something that has also long been enshrined in our land law.

Can it be taken away?

In my post Let There Be Light – Developers, Skyscrapers & The Theory Of Everything I explained how a right to light is more than just a personal right - it is an easement, permanently benefitting the land that enjoys the right and permanently binding the land over which it is exercised.

But, unless it has been formally granted by a deed, it normally takes 20 years for a building to acquire a right to light through its original windows. That is called acquiring the right by “prescription”.

If you are the lucky owner of a building with windows that have received natural daylight for 20 years or more then you are entitled to forbid any construction or other obstruction that would deprive you of that illumination. Your neighbours cannot build anything that would block the light without your permission.

But what if your building has not yet acquired those rights, and there are no deeds giving you rights to light? Can a developer do anything to prevent you from acquiring a light easement by prescription?

In some circumstances, yes.

A developer might be able to use the Light Obstruction Notice (“LON”) procedure (a creation of the Right of Light Act 1959).

Here is a link to a useful flowchart produced by Nabarro which explains the procedure, and when it is available, in more detail.

In short, it allows the developer to apply to the Lands Tribunal for a certificate for registration of a LON. A separate application is required for each building.

The developer must apply before a right to light has been enjoyed by a neighbouring building for 19 years. There’s a fast track emergency procedure if any of the adjoining buildings are near to 19 years and 1 day old.

The application must include details of everyone with an interest in the affected building (which includes freeholders, leaseholders and mortgagees in possession). The Tribunal will direct the developer to serve a notice on all those persons.

The Tribunal will then issue a LON certificate, which is registered by the local authority in the Local Land Charges Register (so it will show up in any local searches).

There then follows a period of 12 months from that registration during which, as a neighbour, your right to light is deemed to be interrupted, by a ghost from a possible future.

It’s as though a virtual building has appeared in a parallel legal universe. It’s not actually blocking your light, because it’s...erm... not there, but the law (tiptoeing into the crazy world of quantum physics) pretends it is there.

The LON is an alternative for the developer to the less subtle practice of actually building a screen (useful in some situations, but less so in built-up areas) or even starting the development itself, which would of course be risky.

So how do you fight a shadow?

You can, but you have to act quickly, and it will involve quite a lot of hassle.

You might be able to reach an agreement with the developer if you can show that you do have rights to light. If you can clearly demonstrate your rights, this will be worth a try.

Otherwise, anyone who has an interest in the affected building must challenge the LON within 12 months of its registration by issuing proceedings in court, and then serving those proceedings within 4 months.

You will only be successful in those proceedings if you can prove your building has enjoyed light for 20 years before registration of the LON certificate.

If you are unsuccessful, then the developer can build, depending on what planning permission it can obtain.

What if you have more pressing things to worry about than shadow boxing?

If you do nothing, then your building’s prescriptive rights will be lost at the end of the 12 months. Not entirely, however - you will be back to a prescriptive year zero. The clock simply starts ticking again, so if nothing gets built then 20 years later, your building will have reacquired its prescriptive rights!

That’s not an ideal strategy though if you are concerned more about the here and now. In any case, a future developer would be able to start the whole process again (by that time probably via the medium of Web 5 and some intergalactic avatar...unless we have regressed and developers have gone back to putting up pieces of plywood instead).

One thing is clear, if you receive a LON notice and you think you might have grounds to object (and you want to object) you should waste no time and take professional advice.

Monday, 14 March 2011

Subletting In A Falling Market – How To Escape The “Passing Rent” Trap



What can you do if your lease doesn't allow you to sublet your premises at a rent which is less than the rent you are required to pay under your lease, sometimes called the “passing” rent?*

This is a subject I touched on in my post How to Sublet Your Premises etc. It’s a common problem nowadays so I’m going to look at it in more detail here.

In a difficult market like today’s, it might be impossible to find someone willing to pay rent at the level you had to agree to back in the boom.

You might however find someone who is keen to move into your premises (or part of them), and who is prepared to pay a lower rent which reflects the current market (the “market rent”).

What you can’t do – side letters and collateral agreements

People used to try and get round this problem by concealing from their landlord the real bargain they had struck with their subtenant. 

The tenant would grant a sublease at passing rent and show it to their landlord, but at the same time enter into a side letter or collateral agreement with the subtenant saying they would really be charging them less than the passing rent.

That practice was effectively outlawed as long ago as 2002 by the Court of Appeal (in a case called Allied Dunbar plc v Homebase Ltd [2002] EWCA Civ 666) and is no longer a viable option.

So what can you do?

Waiver

You could ask your landlord to waive the restriction.

An open and honest approach might work and you might be able to persuade your landlord of the advantages of allowing the subletting to go ahead.

For example, you might be in a difficult financial position where subletting, even at a discount, is the only real alternative to defaulting on your rent or becoming insolvent, and it might therefore be better for the landlord, if it's pragmatic, to agree to this rather than be left with empty premises (and potentially an empty rates burden).

Or you might be lucky and your landlord is one of the enlightened organisations who signed a BPF declaration issued on 20 April 2005 saying they would generally be willing to agree to waive passing rent conditions to permit subletting at market rent.

The declaration said “we wish this to become standard policy for the commercial property industry and would call on other owners and investors to follow suit”.

That approach has since been reflected in the Code for Leasing of Business Premises 2007.

You can view the list of signatories to the declaration on the BPF website

It includes twenty of the largest property owners in the UK, including British Land, Capital & Regional PLC, The Crown, Grosvenor, Hammerson and Land Securities.

There are some exceptions however where even the signatories to the BPF declaration will not agree to a waiver, which are:-

·         Where the landlord is prevented by an existing contractual arrangement, such as a provider of finance

·         Where the landlord is prevented by a superior lease

·         Where it can be shown in the original lease negotiation or renegotiation that some value was given in exchange for the tenant agreeing not to sublet at below passing rent (for example in sale and leasebacks)

·         Where the rent at the last review was agreed at a lower level because of the existence of this provision

·         Where the tenant has refused the landlord’s request to vary the lease removing the restriction on subletting below the passing rent.

But if your landlord does not support the declaration, it might refuse to waive the condition.

What can you do if waiver is not an option?

Reverse Premium

Where your lease allows it, you might be able to set up a reverse premium, either payment of a lump sum to your subtenant or, more likely, the setting up of a fund out of which you pay some money back to your subtenant on rent payment days to offset some of the rent they have to pay to you under their sublease.

A case came before the Court of Appeal in 2004 (NCR Ltd v Riverland Portfolio No 1 Ltd [2004] EWHC 921 (Ch)) where the sublease rent equalled the passing rent, but as part of the deal the tenant placed a sum of money in an escrow account in the subtenant’s name but held by the tenant’s solicitors, which released periodic payments to the subtenant equal to the difference between the passing rent and the rent actually agreed between the tenant and the subtenant.

The Court decided this was allowed.

You need to check that your lease does not prohibit reverse premiums. If it's silent on the point, then it's allowed.

However, there are some obvious drawbacks to this approach.

You have to be able to come up with the money and, even if you can, you have to be willing to tie the money up for the duration of the sublease, which might be quite a long time.

For many tenants, where funds are tight, which might be the reason why they are subletting their premises in the first place, this method will simply not be feasible.

Indemnity

Another possibility is to set up an indemnity for your subtenant from a third party.

If you're part of a corporate group you might be able to get another group company or your parent company to give that indemnity.

This would basically be a collateral agreement for the third party to pay the subtenant the difference between the passing rent and the rent the subtenant is willing to pay.

A word of warning though.

This method hasn't yet been tested in the courts and so there is a risk it may be found to be unlawful*.

Third party indemnities were considered in passing by the court in Crestford Ltd v Tesco Stores Ltd [2005] EWHC 805 (Ch). It was not the main point at issue in that case, but comments were made by the judge that such indemnities would be regarded differently from the kind of side arrangements outlawed by the Allied Dunbar case.

Many commentators therefore see this as a practical solution in some circumstances, although they all have to caveat that advice with the warning I have given that, until it's properly tested in court, this method is at risk of being found unlawful*.

Subletting in a falling market can be a tricky business. It’s hard enough at the moment to find someone who is willing to pay even the market rent, never mind rent at the levels being agreed in the mad old days when we were being persuaded by supposed financial geniuses that the laws of financial gravity had been rewritten.

When you want to sublet you need to check the terms of your lease very carefully and take professional advice.

*UPDATE April 2013

As this post has found its way back into the "Popular Posts" column I should add a warning that it was written two years ago. I'll have a look and see whether their have been any more recent cases on the points raised above, but in the meantime you have been warned! 

Wednesday, 2 March 2011

Breaking News – Don’t Get Caught In The Landlord’s Web - More Break Clause Mix-Up



Another month another case on break notices.


However, in an age when more and more tenants are looking to get out of property they no longer need or can no longer afford, it’s a topic that runs and runs as it’s all too easy for tenants to get it wrong, for landlords to get it wrong, and in the most recent case, for landlords’ managing agents to get it wrong.


The tenant was able to end its lease on 1 March 2010 as long as it had first given its landlord six months' notice in writing (and paid rent and other sums due up to the break date).

In October 2008, the original landlord had transferred its interest in the property to MW Trustees who held the property on trust for two pension funds. The tenant was told about this and this was not contested at the trial.

The landlord’s transfer was duly registered at the Land Registry and a rent demand was issued to the tenant in the name of the new landlord.

However, when the tenant came to serve its break notice, it made a mistake and served it on the previous landlord.

This is because, although the tenant as a company knew about the change of landlord, its Chief Financial Officer, who was entrusted with serving the notice, did not.

Nevertheless, the notice did actually reach the current landlord.

The current landlord’s managing agent then sent an email to the tenant, copied to the current landlord, saying they accepted the break notice served on the former landlord and confirming that they were happy for the tenant to break the Lease.

The agent went on to ask for a new break notice to be served on the current landlord.

No new notice was served.

The landlord subsequently struggled to find a new tenant and so tried to argue that the managing agent’s email required a further notice to be sent in order to operate the break clause and that, because that further notice wasn’t served, the break was never exercised.

The tenant argued that the request for a further notice was only a formality and that the original break notice had already been accepted by the wording used in the managing agent’s email.

The tenant won.

The Judge decided that the managing agent’s email had the effect of accepting that the original notice had terminated the Lease. This meant the landlord had lost its right to argue that serving the original notice on the wrong person had prevented the break operating and the landlord could not deny the validity of the original notice.

The tenant basically got away with it on this occasion thanks to the landlord’s managing agents saying they accepted the original break notice.

So the warning for landlords is to make sure you instruct your managing agents not to accept notices on your behalf without clear and express instructions to do so in each case.

However, the Judge did also give a warning to tenants.

The Judge said that a landlord is under no duty to tell a tenant that he believes a notice has not been validly served.

In this case, the best thing the landlord could have done was to have simply acknowledged receipt of the notice and said nothing else. Then the landlord would have been able to challenge the validity of the notice at a later date if, as in this case, it had wished to do so.

By saying nothing, the landlord could have caught the tenant in its web.

The case therefore underlines the importance of making sure you know who the current landlord is before serving your notice and making sure the person who is actually tasked with serving the notice has that information.

So apologies for revisiting the thorny subject of break clauses again, but given the opportunities that abound for messing these things up, I bet it won’t be the last we hear on the subject.

Tuesday, 1 March 2011

How To Sublet Your Premises – Can You Do It? Can Your Landlord Stop You? How Do You Do It?



Why sublet?

You are a tenant with too much space, perhaps because of the recession.

You don’t have a break clause in your lease, or you’ve missed it and the lease stretches ahead for a long time.

You want to get out of the premises altogether, but you cannot find anyone to take an assignment of your lease who will be acceptable to your landlord or who passes the assignment tests set out in your lease.

Or you just want to offload your surplus space, but stay in the remainder of it.

Solution?

Consider subletting either all or part of your premises.

Is subletting allowed?

First check your lease carefully. Subletting will usually be dealt with in a specific clause, sometimes called “alienation” or “dealings”.

If your lease doesn’t say anything at all about subletting, then it is allowed and your landlord’s consent is not required.  However, check if there is a covenant against “parting with possession”, as that would also prevent subletting.

If there is an absolute ban on subletting, you will only be able to sublet if your landlord agrees.  Where there is an absolute ban, your landlord has an absolute discretion, doesn’t have to be reasonable, and can impose any conditions it wants.

Can you sublet the whole of your premises?

Most commercial leases will allow subletting of the whole premises.

However, they usually provide that you first have to get your landlord’s written consent to do so.

Your lease will usually go on to say that your landlord’s consent must not be unreasonably withheld, but even if it doesn’t, if your lease says your landlord’s consent must be obtained, the law implies that that consent cannot be unreasonably withheld.

The consent process will usually involve you entering into a formal licence to sublet (often called a “licence to underlet”) with your landlord.

It is quite common for leases to specify that any sublease must be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 (1954 Act), sometimes called “contracting out”, so that your subtenant will not get rights to renew its sublease at the end of the term. This is a sensible precaution for a landlord as it avoids the possibility of your subtenant renewing its sublease at the end of the term and becoming a direct tenant of your landlord where you have not renewed your own lease.

Contracting out is a straightforward process.

Can you sublet only part of your premises?

This can be more difficult.

If your lease prohibits subletting of part, then the answer is no, unless you can persuade your landlord to vary the lease and allow it, which is bound to come at a price.

If your lease says you can sublet part, again it will most probably require that you first get your landlord’s written consent (and the comments made above on this apply equally here).

It is more likely with subletting of part that your lease will require the sublease to be contracted out.

You will also have to agree with your subtenant what the rent for the sublet space will be, as it will be a portion of the rent you are paying. I make some further comments on rent below.

What about just sharing your premises?

Normally leases don’t allow sharing, but it might be an option for you if you are part of a corporate group and your lease says you can share your premises with other members of your group.

Group sharing provisions normally don’t require you to get your landlord’s consent, but that you just keep your landlord informed in writing.

What rent must be paid under the sublease?

This has been a controversial issue over the years. Commercial leases used to say that the rent payable under a sublease must not be less than the rent payable under the lease, sometimes called the “passing” rent.

There are still many leases in existence that say just that, and if yours does then in the sublease you have to set a rent equal to the passing rent, or a proper proportion of it in a sublease of part.

It can be difficult to find a subtenant willing to pay that much in a market where rents have fallen since your rent was set or reviewed under your lease. There may be ways round this, and various devices have been tried over the years (some of which have been ruled unlawful) but that is outside the scope of this post. [ See now my later post Subletting in a Falling Market - How to Escape the Passing Rent Trap.]

It is more common in newer leases to find instead a requirement that the rent payable under the sublease must be not less than the “open market” rent for the sublet premises, rather than the passing rent.

If that is what your lease says, then it will be more helpful to you in a falling market as it allows you to agree with your subtenant a rent less than the rent you are paying but one which is nevertheless a market rent for the time.

Of course, that leaves you having to pay the shortfall to your landlord out of your own money. But it’s better than nothing!

When is it reasonable for your landlord say no, you can’t sublet?

The law doesn’t allow your landlord to set out in your lease what will or will not be a reasonable ground for your landlord to refuse consent to sublet. This is different from assignments, where your landlord can specify tests that must first be satisfied before an assignment takes place.

Your landlord will still have you, the tenant, on the hook as a direct covenant if things go wrong, and so the financial status of the subtenant should be less of a concern to your landlord than the financial status of an assignee would be.

If you are in financial difficulty, it might even improve your landlord’s position if it has a subtenant. For example, if you were ever in arrears with your rent, Section 6 of the Law of Distress Amendment Act 1908 allows your landlord to serve notice on your subtenant requiring it to pay all future and outstanding rent direct to your landlord until those arrears have been paid in full.

However, if the covenant strength of your proposed subtenant is poor then, although this is less significant than on an assignment, it might still be reasonable for your landlord to refuse consent on this ground.

If your landlord has reasonable grounds for thinking your subtenant will commit substantial breaches of covenant, then this might entitle your landlord to say no, but this has not been tested in the courts.

Your landlord might also be entitled to say no if rent to be paid by your subtenant does not satisfy the relevant lease requirements as explained above.

What can and what must your landlord do when you apply for consent to sublet?

Where your lease allows you to sublet, subject to getting your landlord’s consent, the Landlord and Tenant Act 1988 (the 1988 Act) imposes obligations on your landlord:-

·         To respond within a reasonable time
·         To give its decision in writing
·         To consent unless it is reasonable not to do so
·         Not to impose unreasonable conditions
·         To specify any conditions subject to which consent is given
·         Where consent is refused, to give the reasons
·         To pass on the application to anyone else (e.g. a superior landlord) whose consent is required.

It is for your landlord to show that it has acted reasonably.  If consent is withheld or delayed unreasonably, you as tenant (but not your subtenant) have a statutory claim for damages.

Generally as a rule of thumb your landlord ought to respond to your request to sublet within 28 days, however this is not a statutory period and circumstances may mean that this is an unreasonably long time for your landlord to take.

Can your landlord demand a solicitor’s undertaking to have its costs paid before doing anything?

It is usually reasonable for a landlord (or its legal advisor) to ask for an undertaking for its reasonable costs to be paid. However, your landlord or its advisors should not postpone dealing with your application while waiting for the undertaking.  Any delay might mean your landlord is in breach of its obligation to respond promptly under the 1988 Act.

Can your landlord demand payment for its consent to sublet?

Other than reasonable legal and other fees, your landlord cannot normally demand a payment for consent to sublet.  The two exceptions are:-

·         If there is a ban on subletting in the lease, in which case your landlord has an absolute discretion whether to allow it and can name its price; or
·         If your lease excludes section 144 Law of Property Act 1925 (but that’s rare).

What should the sublease say?

If you are subletting the whole of your premises, the sublease will simply pass on all your obligations under your lease to your subtenant (except payment of rent, which will be specific to the sublease).

Subletting part of your premises is more complicated because your advisor cannot simply replicate the obligations under your lease but will have to adapt them to the area being sublet.

Your advisor will also have to create rights for your subtenant over the space you are keeping (eg access), and corresponding rights for you over the sublet space.

A plan will be attached to the sublease clearly showing the sublet space and the space you are keeping. If the sublease is for 7 years or more then it must be registered at the Land Registry and the plan will have to satisfy the Land Registry’s strict requirements.

In subleases of whole or part, the term of the sublease (how long it lasts) must not be the same length as or longer than the term of your lease. If you want the sublease to last for the remainder of your own lease term, you will have to ensure it ends at least a couple of days before your own lease ends.

Anything else you should think about?

Remember, even if you have granted a sublease of all your premises, you are still the one who is directly responsible to your landlord for the performance of your lease obligations. You therefore have to make sure your subtenant abides by the terms of its sublease.

You might want to try and secure a rent deposit or guarantee from your subtenant to give you more protection.

The above is only a general outline. You should always take professional advice when you want to sublet.