Practice Notes on Business Tenancies

Jill Morgan

• Publisher: Routledge-Cavendish
• Year: 2013
• ISBN:
  9781135346232
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

This book provides invaluable practical guidance to the grant, renewal, assignment and surrender of business leases. The procedures involved are explained clearly and concisely, with each constituent part of a commercial lease being examined, and useful hints given on drafting.

The book covers key case law and legislation, the latest information concerning time limits and court fees, the VAT consequences for the letting of business premises, rent reviews and statutory renewals. The book also summarises and offers practical analysis of the Landlord and Tenant (Covenants) Act 1995.

1 Basic Information

1.1 Introduction

This book provides a guide to various practical aspects of business leases, focusing on their grant, renewal and assignment. Such matters constitute an important part of the work of the commercial conveyancer, but also feature frequently in the daily life of a general practice lawyer. Although this book refers more often to solicitors, it is appreciated that licensed conveyancers and legal executives may also be involved in this kind of commercial work. The term ‘solicitor’ should, therefore, strictly for the purpose of this book, be regarded as also applying to licensed conveyancers and legal executives.

Owing to constraints of space, knowledge of basic conveyancing procedures must be assumed. Readers who are unfamiliar with the conveyancing process should read Coates, RM, Conveyancing, Practice Notes series, Cavendish Publishing. They may also find helpful Brand, CM, Planning Law, Practice Notes series, Cavendish Publishing.

1.2 Sources

1.2.1 Statutes

Security of tenure for business tenants is governed by Part II of the Landlord and Tenant Act 1954 (the 1954 Act), as amended by the Law of Property Act 1969. If a tenancy falls within the 1954 Act, the tenant has:

• a prima facie right to the grant of a new tenancy on the expiration of the present tenancy; and
• the right to compensation for disturbance if the application for renewal is unsuccessful because of grounds (e), (f) or (g) of s 30(1).

A business tenant may also have the right to compensation for improvements under the Landlord and Tenant Act 1927.

Other important statutes affecting business tenancies include the Law of Property Act 1925, the Landlord and Tenant Act 1988, the Law of Property (Miscellaneous Provisions) Act 1989, the Landlord and Tenant (Covenants) Act 1995 (which modified the law relating to privity of contract and the terms on which landlords can grant consent to assignments) and the Contracts (Rights of Third Parties) Act 1999.

1.2.2 Delegated legislation

As with residential landlord and tenant law, delegated legislation deals mainly with forms and procedure and the most important are:

• Landlord and Tenant (Determination of Rateable Value Procedure) Rules 1954 (SI 1954/1255);
• Landlord and Tenant Act 1954, Part II (Notices) (Amendment) Regulations 1989 (SI 1989/1548);
• Landlord and Tenant Act 1954 (Appropriate Multiplier) Order 1990 (SI 1990/363);
• Landlord and Tenant (Covenants) Act 1995 (Notices) Regulations 1995 (SI 1995/2964);
• High Court and County Courts Jurisdiction Order 1991 (SI 1991/724);
• Rules of the Supreme Court (Revision) 1965 (SI 1965/1776);
• County Court Rules 1981 (SI 1981/1687);
• Civil Procedure Rules 1998 (SI 1998/3132 L 17).

1.2.3 Case law

The decisions of the courts provide an important source in this area and, in addition to the major law reports, specialist reports such as those found weekly in the Estates Gazette are essential reading. This is particularly important with regard to matters such as rent reviews and dilapidations.

1.3 Code of Practice

Following a consultative exercise on commercial leases carried out by the Government in 1994, a Code of Practice (drawn up by various bodies involved in the commercial property market) was introduced in December 1995. The objectives set for the Code by the Government were framed to:

• improve practice in the business relationships between landlords, tenants and their advisers, particularly when the grant of a lease is being negotiated and at rent review;
• encourage greater flexibility and choice through improved awareness of the alternative terms and conditions, which may be negotiable;
• promote greater openness and disclosure in the property market so that negotiations and the resolution of disputes, particularly concerning rent review, are conducted with the benefit of more complete and accurate information;
• ensure that businesses know more about how the market in commercial leases operates.

Recently published research, carried out by the University of Reading for the Department of the Environment, Transport and the Regions (DETR), has shown that the Code has proved to be of limited value: those who encounter it are the more informed tenants who already have a good understanding of the leasing process. Other tenants are not being made aware of the Code by landlords and their advisors, and unrepresented tenants have virtually no means of discovering its existence. The report concludes that it may be necessary to consider a move from a voluntary to a mandatory regime. There is a related code on service charges.

Because both codes are of particular relevance to small businesses, they should be read and noted by all practitioners operating in this field:

• Commercial Property Leases in England and Wales: Code of Practice, available from:
  RICS Books
  Surveyor Court
  Westwood Way
  Coventry CV4 8JE
  
  Tel: [phone].
  Website: www.ricsbooks.org

• Service Charges in Commercial Properties: A Guide to Good Practice, available from:
  The Property Managers’ Association
  c/o Accountability PR Ltd
  401 The Fruit and Wool Exchange
  Brushfield Street
  London E1 6EL

• Monitoring the Code of Practice for Commercial Leases, available from:
  Department of the Environment, Transport and the Regions
  Publications Sales Centre
  Unit 21
  Goldthorpe Industrial Estate
  Goldthorpe
  Rotherham S63 9BL
  
  Tel: [phone]
  Website: www.detr.gov.uk

1.4 When to have a contract

1.4.1 Formalities

Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contract for the sale or other disposition of an interest in land (which will include the grant or assignment of a lease):

• must be in writing; and
• must incorporate all the terms which the parties have expressly agreed in one document (or in each document where contracts are exchanged);
• may incorporate terms by reference to some other document;
• must be signed by or on behalf of all parties (or, where contracts are exchanged, one of the documents incorporating the terms, but not necessarily the same one).

Section 2 does not apply to leases of three years or less falling within s 54(2) of the Law of Property Act 1925 (see 1.5.1).

Particular attention should be paid to the requirement that all agreed terms are incorporated in the contract because the omission of a term will render the whole contract invalid. The use of side letters, to vary or qualify the terms of the agreement, should be avoided.

In the light of s 2, it is now difficult to create a contract to grant a lease inadvertently. Strictly, therefore, conveyancers need no longer use the words ‘subject to contract and lease’ in their letters. However, they may prefer to do so in their pre-exchange correspondence so as to prevent the creation of an express agreed term whose absence from a formal contract may invalidate it and to preclude any valid claim that a representation has been made binding by way of estoppel.

1.4.2 Grant of a lease

It is unusual for the parties to enter into a formal contract prior to a lease, unless there are special reasons. Thus, no lease may be possible until some event has occurred, such as obtaining planning permission for proposed alterations, or the head landlord’s consent to the underletting. Alternatively, the premises may not yet have been built and an agreement is necessary to regulate the manner of their construction. In such circumstances, the precise form of the lease should be resolved and attached to the agreement prior to exchange of contracts, rather than to create potential uncertainty by providing that the lease will be for a certain term of years and rent and otherwise subject to the ‘usual covenants’. It is apparent that these usual covenants can vary in each particular case (see Chester v Buckingham Travel Ltd [1981] 1 WLR 96).

1.4.3 Assignment

It is standard practice to enter into a formal contract prior to legal completion of the assignment. The contract may be conditional upon the landlord’s licence to assign being granted (see Coates, above, with regard to the drafting of the contract).

1.4.4 Surrender

Where there is to be a straightforward surrender of a lease, there is little point in having an agreement prior to the deed although, if there is to be one (as with a grant and assignment), it must be comply with the Law of Property (Miscellaneous Provisions) Act 1989. Sometimes, a lease will require that the tenant shall offer to surrender the lease in certain circumstances (for example, before seeking consent to an assignment). However, an agreement to surrender a lease protected by the 1954 Act would be void under s 38(1) (Bocardo SA v S and M Hotels Ltd [1980] 1 WLR 17). The court may, on the joint application of the landlord and tenant (but not, it seems, before commencement of the lease), authorise an agreement to surrender a business lease (s 38(4)).

1.5 The need for a deed

1.5.1 Grant

A deed must be used to create a legal lease for a term exceeding three years (s 52(1) of the LPA 1925). However, a lease for not more than three years, taking effect in possession at the best rent reasonably obtainable without taking a fine, may be merely in writing or even oral (s 54(2)). Because of their duration, business leases are invariably created by deed.

Assignment

To pass a legal estate, an assignment of a lease must always be by deed (s 52(1) of the LPA 1925).

1.5.2 Surrender

An express surrender of a legal lease should always be by deed (s 52(1) of the LPA 1925). However, informal surrenders by operation of law are also effective and have been common in practice (for example, where the old lease has been superseded by a new one granted to the same tenant, or where the parties have wished to save stamp duty by not having a stampable deed. But see 1.9.3 for changes made by the Finance Act 2000).

1.6 When to deduce title

1.6.1 Grant of a lease

On the grant of a sub-lease out of an unregistered lease, the lease out of which it is to be derived and, where appropriate, all dispositions under which the lease has been held during the last 15 years must be proved. On the grant of a lease of unregistered land, the intending tenant has no automatic right to investigate the landlord’s title to the freehold (s 44(2) of the LPA 1925).

Moreover, s 110 of the Land Registration Act 1925 does not apply where the superior title is registered, which means that an intending tenant cannot demand copies of the title. However, the register is a public document and the intending tenant can buy official copies of the freehold title and all superior leasehold titles from HM Land Registry without the authority of the registered proprietor. The open register avoids the s 110 problem for title details, but the Land Registry do not have a copy of every registered lease. Therefore, the tenant should also raise written inquiries of the landlord and inspect the premises to satisfy himself that there are no overriding interests affecting the interest which he is taking in the premises.

The tenant should insist in all cases on superior titles being proved, though the landlord may wish to resist this, particularly if the term is relatively short.

The Standard Conditions of Sale (3rd edn, SC) and the Standard Commercial Property Conditions (1st edn, SCPC) provide that, on the grant of a new lease for more than 21 years, the landlord is to deduce a title which will enable the tenant to register the lease at HM Land Registry with absolute title (SC, SCPC 8.2.4). In these circumstances, the freehold title will have to be deduced. The contract should be checked to ensure that (a) it is drawn up on the basis of the 3rd edn of the Standard Conditions/1st edn of the Standard Commercial Property Conditions, and (b) no attempt has been made in the special conditions of that contract to limit or exclude SC, SCPC 8.2.4. Otherwise, where there is a contract, the tenant’s solicitor should add appropriate special conditions to improve the tenant’s position.

The risks involved in not obtaining proof of superior titles are:

• the landlord may not have a good title and have no legal right to grant a lease;
• there may be a mortgage precluding leasing and the mortgagee’s consent will be needed;
• there may be third party rights such as restrictive covenants and easements adversely affecting the premises.

If the tenant’s solicitor is unable to satisfy himself that his client’s user will be permitted, an express warranty should be required from the landlord to the effect that the proposed user will be permitted and, provided that the tenant complies with the terms of the lease, there will be no breach of any restrictions affecting the premises.

1.6.2 Assignment

If the title is unregistered, the assignor must prove the lease and all dispositions under which it has been held during the last 15 years. If title is registered, the assignor proves its immediate title in the usual way by office copy entries of the register of title and filed plan and a copy of the lease (see s 110 of the Land Registration Act 1925). The assignee’s solicitor should always consider the need for a special condition to gain additional rights to investigate superior titles.

1.6.3 Surrender

There is rarely a contract and there are no rules as to what title each party must ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Preface
• 1 Basic Information
• 2 Time Limits
• 3 Privity of Contract: The 1995 and 1999 Acts
• 4 Statutory Renewal: Pt II of the Landlord and Tenant Act 1954
• 5 Rent Review
• 6 Drafting the Lease
• 7 Procedural Checklists
• 8 Landlord’s Consent
• 9 Precedents
• 10 Further Reading