Landlord and tenant update

Citation

Nathanson, N. (2000), "Landlord and tenant update", Journal of Property Investment & Finance, Vol. 18 No. 4. https://doi.org/10.1108/jpif.2000.11218dab.001

Landlord and tenant update

Landlord and tenant update

Nabarro Nathanson

The year 1999 saw tenants win some important victories in resisting landlords' claims under repairing covenants. Tables were turned, however, in a significant House of Lords victory for landlords in resisting tenants' claims for sound insulation works to be carried out, brought under covenants for quiet enjoyment. Likewise, landlords came out on top in a series of cases on the reasonableness of the refusal of landlords' consent.

This year also saw the predicted spate of claims for repayment of money paid under a mistake of law, following the House of Lords decision last year in Kleinwort Benson. A number of insolvency cases have also clarified hitherto unclear points relating to insolvent tenants.

The following are, arguably (we hasten to add!), the ten most important cases of 1999 in the landlord and tenant area.

Repair

(1) London Borough of Hammersmith v. Creska Limited

Landlords' euphoria following the blank cheque written to them by the Court of Appeal in Jervis v. Harris has been dampened by this case which has established that there may be circumstances when a landlord's right to enter and carry out repairs at the tenant's cost will be denied.

Creska are landlords of a building of which the Borough are tenants. The lease contains a repairing covenant which includes the obligation to repair underfloor heating. The underfloor heating system in the ground floor of the building failed but the tenants refused to repair.

The lease contains a Jervis v. Harris clause allowing the landlord, in default of the tenant carrying out notified repair works, to enter upon the premises and carry out the repairs at the expense of the tenant.

The landlord indicated to the tenant that it intended to do just that. The tenant refused the landlord access. The tenant argued that if repairs were carried out in the ground floor of the building, the tenant's mainframe computer would have to be moved, at enormous and disproportionate expense and disruption to the tenant in performing its public office. The tenant instead offered an undertaking to carry out the necessary repairs at the expiry of the lease in 2003 and to provide a sum of money to be held as security for the cost of the repairs.

The landlord, however, claimed that the breach adversely affected the value of its reversion and applied for an injunction to restrain the tenant from obstructing its entry.

Mr Justice Jacob held that where a party has entered into a contractual obligation freely, it will normally be just and convenient to enforce that obligation by way of an injunction and only in very special circumstances would the court refuse to do so.

However, in this case, the harm to the landlord if the repairs were not done would easily be compensated by the tenant's offer of financial security for the cost of the works. Conversely, the harm to the tenant, should the tenant be forced to allow the repairs, would be severe and disproportionate. All that "just so that some underfloor electrical heating, which is not currently wanted, can be mended."

The oppression to the tenant far outweighed the small harm to the landlord and accordingly, the "special circumstances" existed. Jacob J exercised his discretion to grant the landlord damages in lieu of an injunction.

How often will tenants now argue oppression?

(2) Scottish Mutual Assurance Plc v. Jardine Public Relations Ltd

This case limits the ability of landlords to carry out repairs and recover the cost by way of the service charge. It also potentially limits the work necessary by way of repair in some leases.

The landlord granted the tenant a three year lease of premises on the top floor of an office building without security of tenure. Under the lease, the tenant was required to contribute a fair proportion towards expenditure reasonably and properly incurred by the landlord including repairing the roof.

During the term, short-term roof repairs were carried out. However, towards the end of the term, further repairs were needed. Five months before the end of the lease, the landlord commenced comprehensive long term roof repairs which were completed two days before the end of the lease costing approximately £69,000, and claimed the appropriate proportion from the tenant.

The tenant claimed that the costs were not "reasonably and properly incurred" as they related to long-term works which were unnecessary to remedy the problem during the short remainder of the term and the benefit of which the tenant would not enjoy.

Also, it was discovered that a prospective tenant of another of the floors had indicated to the landlord that it would only take a lease if long-term repairs to the roof were carried out.

The court held that this was the landlord's true motivation for carrying out the repairs, rather than the desire to comply with its repairing obligations in full. It found that there was no pressing need to carry out the long-term repairs prior to the expiry of the tenant's lease. The repairs went beyond what was required for the performance of the landlord's obligations to the tenant under the short term lease but were more appropriate to comply with obligations under a long lease. Accordingly, they were not "reasonably and properly" incurred.

The court also found as a fall back that the proportion of the cost claimed from the tenant was not a "fair proportion". Accordingly, the landlord was only entitled to recover from the tenant a proportion of the costs equating to the estimated cost of carrying out short-term repairs.

Quiet enjoyment

(3) Southwark London Borough Council v. Mills; and Baxter v. Camden London Borough Council (No.2)

Whilst (in the words of Lord Millett) the flats were not quiet and the tenants were not enjoying them, the House of Lords has put an end to the contention that noise from the ordinary use of adjoining flats constructed in accordance with regulations then prevailing can amount to a breach of the landlord's covenant for quiet enjoyment.

Tenants in blocks of council flats complained that, due to a lack of sound insulation between flats, they could hear the everyday sounds of their neighbours' lives, including televisions, babies crying, cooking, cleaning and other activities. This caused tension and distress.

The tenants brought actions against their landlords for breach of the covenant for quiet enjoyment and for nuisance in attempts to force the landlords to install sound insulation.

The House of Lords held that the tenants took the premises in the physical condition in which they found them. The lack of sound insulation was an inherent structural defect for which the landlord assumed no responsibility. The covenant for quiet enjoyment could not be used to create an obligation to improve the premises by curing a structural defect which the landlord would not otherwise be obliged to remedy.

As to nuisance, this could only be found to exist where the occupier of nearby premises was carrying on an activity which amounted to an unreasonable interference with the use and enjoyment of neighbouring land. As the neighbours in this case were using their flats for normal residential purposes, they could not be committing a nuisance. If the neighbours were not committing a nuisance, the landlords could not be liable for authorising them to commit a nuisance.

Landlords' consent

The following three cases have reinjected some reason into the courts' approach to "reasonableness" by affirming a landlord's ability to protect his own interests when considering tenants' applications for assignment or change of use.

(4) Sportoffer Ltd v. Erewash Borough Council

The council granted a 99 year building lease with a user clause prohibiting use of the premises otherwise than as a squash club except with the written consent of the landlord, such consent not to be unreasonably withheld. As built, the premises consisted of ten squash courts, a gym, saunas, jacuzzis, a sunbed room, a games room, a sports shop and a bar. The number of squash courts was reduced to seven in order to create an enlarged gym and a dance floor.

Later the tenant made three applications for the council's consent including consent for further alterations involving the loss of four further squash courts to allow for the enlargement of the other facilities and the provision of a swimming pool, and for the council's consent for a change of use in so far as such consent was necessitated by the proposed alterations.

While consent to the alterations was granted, consent was refused to the change of use on the ground that this would be detrimental to the operation of two of the council's municipal fitness centres in the vicinity. The tenant contended that this was an unreasonable ground on which to withhold consent.

Lloyd J held that a reasonable landlord might well fear the threat of competition to his operations on other land and the refusal of consent was therefore reasonable.

(5) Ashworth Frazer Ltd v. Gloucester City Council

The Council had let premises for a term of 114 years. The tenant proposed to assign the lease to an assignee who proposed to use the premises for a use outside the permitted use (for which the assignee had already obtained planning permission).

The council refused consent to the assignment on the ground that the proposed use would be in breach of the user covenant. The tenant contended in an application for determination of the case on a preliminary point of law that pursuant to the Court of Appeal decision in Killick v. Second Covent Garden Property Co Ltd, an apprehension of a future breach of the user covenant is not a proper ground on which to refuse consent. The reasoning in Killick was that an assignment in such circumstances would not inevitably lead to a breach of the user covenant because the effect of the assignment would simply be to substitute the assignee into the shoes of the tenant who would become subject to the user covenant and the landlord's remedies in case of a breach.

The court declined to apply the principle established in Killick and held that withholding consent might be reasonable where the landlord apprehends that the proposed assignee intends to use the premises for an undesirable purpose. It saw no reason why that principle should be ousted by the fact that the undesirable purpose was also prohibited by the terms of the lease (as was the effect of the Killick decision).

Accordingly, the fact that the user proposed by the assignee would be in breach of the lease did not in itself render the council's objection to the proposed assignment unreasonable. The case would therefore proceed to trial.

(6) Moss Bros Plc v. CSC Properties Ltd

The landlord of a shopping centre was held reasonably to have refused consent to an assignment and change of use on the commonly used grounds of estate management and tenant-mix.

Moss Bros. were granted a lease of a unit in the Metro Centre, Gateshead. It contained a covenant not to use the premises otherwise than for the sale of fashion and ancillary uses, or for the sale of such articles as the landlord shall have approved in writing, such approval not to be unreasonably withheld "if in the reasonable opinion of the landlord the grant of such approval will be consistent with the principles of good estate management, having regard in principle to the distribution of retail trade within the Metro Centre".

The lease was a new lease for the purposes of the Landlord and Tenant (Covenants) Act 1995. It therefore could, and did, make provision for when landlord's consent would be deemed to be withheld reasonably. This included where the use to which the proposed assignee intended to put the premises was unsuitable for the premises and/or the development, whether on estate management grounds or otherwise.

Moss Bros. applied for the landlord's consent to an assignment of the lease to Game Stores plc and for a change of use authorising the sale of computer games, computer software and ancillary items. The landlord refused consent to both applications on the grounds that the proposed use of the premises was unsuitable on estate management grounds and/or was inconsistent with the landlord's tenant-mix policy for the relevant part of the shopping centre. The landlord argued that its tenant-mix policy involved promoting fashion retailers for the part of the centre in which the unit was located.

The tenant argued that if such a tenant-mix policy existed (which it denied), it was an unreasonable policy and therefore the refusal of consent was unreasonable.

Neuberger J found, as a matter of fact, that the landlord did have the tenant-mix policy claimed even though it was unwritten and even though there might have been other more important policies. He found that the policy of concentrating certain types of shops in one part of a shopping centre so as to promote comparison shopping and with the intention of increasing the attraction of a part of the centre for customers might be a legitimate aim of an estate management policy.

Neuberger J concluded that the landlord's tenant-mix policy was reasonable and consent had been refused reasonably.

Mistake

(7) Nurdin & Peacock Plc v. DB Ramsden & Co.

This is the first of a flood of property related claims which will inevitably follow the new ability to recover payments made under a mistake of law, as established in Kleinwort Benson v. Lincoln City Council.

The initial annual rent under a lease was £207,683, but in the fourth and fifth years, the tenant was required to pay an additional £59,338. There was provision for an upward only rent review in 1995 but no such review took place. Pursuant to the terms of the lease, the tenant's liability then reverted to the initial figure of £207,683. However, the landlord continued to demand the higher amount which the tenant continued to pay, unaware that the lease provided for the lower amount only to be paid if the rent review did not take place.

In 1997, the tenant became aware of its liability to pay only the reduced rent. However, its solicitor advised to continue to pay the higher amount until the dispute was resolved and advised that the tenant would be entitled to recover the overpayment of rent if those proceedings were successful.

The tenant claimed that it was entitled to recover the overpayment of rent made pursuant to the solicitor's advice, even though that advice was wrong, because the payment had been made under a mistake of law, namely the belief that it would be entitled to recover the overpayment.

Neuberger J held that all the overpayments were recoverable. The overpayments made prior to realising that the terms of the lease provided otherwise were made under a mistake of fact and were recoverable under established law.

The payment made following the realisation that it was not due was made under a mistaken understanding of the law, namely that the payment would be recoverable if the matter was resolved in court proceedings in the tenant's favour. It mattered not whether the tenant mistakenly believed itself liable to make the payment or it mistakenly believed it could recover the payment.

(8) Universities Superannuation Scheme Ltd v. Marks & Spencer Plc

This case relates to mistakes of fact rather than law, and involves underpayments rather than overpayments. Nevertheless, it illustrates the recent willingness of the courts to reopen past transactions in order to do justice between the parties.

Marks & Spencer holds a lease of a shop in the Telford Town Shopping Centre. The lease provides that Marks & Spencer's proportion of the service charge for the centre is to be calculated by reference to the rateable value of the premises as a proportion of the aggregate rateable value of the properties in the town centre benefiting from the services, and is to be certified in writing by the landlord.

For two years the landlord's managing agents miscalculated the rateable value applicable for the premises and arrived at a rateable value of £500,000 too low. Their annual service charge certificates for those years were therefore much lower than they should have been. Upon realising the mistake, the landlord brought proceedings against Marks & Spencer for recovery of the balance.

Marks & Spencer claimed that their obligation to pay service charges for any year was satisfied by the payment of the amount specified in the annual certificate.

The Court of Appeal held that the answer depended entirely on the construction of the relevant provisions of the lease. So far as the context and language of the service charge provisions would allow, they should be given an effect that fulfils rather than defeats their evident purpose i.e. the reimbursement of the landlord for his expenses by the tenant.

In this case, the contractual obligation of the tenant was to pay the service charges calculated in accordance with the terms of the lease. Payment of a lesser sum which was incorrectly calculated was not a performance by the tenant of its contractual obligation. Amongst other things, the lease did not expressly or impliedly provide that the landlord's annual certificate was final and conclusive.

Insolvency

Two insolvency cases have determined some useful points in respect of tenants in liquidation and administration respectively.

(9) Re Park Air Services Plc: Christopher Moran Holdings Ltd v. Bairstow

The tenant held a 25 year lease from 1989 with upward only rent reviews. As a result of the decline in the property market, the passing rent at the time of the first rent review was more than four times the open market value of the premises. In 1994 the company entered into a members voluntary liquidation and the liquidators disclaimed the lease. The landlord submitted a proof of debt for its losses which was rejected by the liquidators.

A number of issues arose as to the calculation of a landlord's damages upon disclaimer which were determined by the House of Lords as follows: the landlord's claim is not for future rent but for statutory compensation for the landlord's loss as a result of the disclaimer. That compensation should be calculated as the difference between the amount receivable by the landlord in respect of rent and other sums due for the residue of the disclaimed lease and the amount the landlord would be likely to receive in rent and other sums on relettings following disclaimer. That amount should then be discounted to allow for accelerated receipt of moneys which had not yet fallen due at the date of the disclaimer (in this case, at the rate of 8.5 per cent per annum).

(10) Re Lomax Leisure Ltd

Both this case and its predecessor, Clarence Cafe Ltd v. Comchester Finance, have determined beyond doubt, at least at High Court level, that a landlord is not precluded by Sections 10 or 11 of the Insolvency Act 1986 from forfeiting by peaceable re-entry the lease of a company in administration or in respect of which an administration petition had been presented.