The Landlord and Tenant Act 1954 (the Act) allows business tenants’ leases to continue after the fixed term expiry date. Either party can then apply to court for a new lease to be entered into. The parties will negotiate the new terms but if they are unable to reach agreement the court can decide.
In order to effectively negotiate the terms of the new lease it is important to have in mind the legal principles that the court will consider if the terms of the renewed lease are not agreed between the parties.
The legal basis on which the terms, other than rent and duration, are determined by the court is governed by section 35 of the Act. This states that “…..
in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances”.
In O’May v City of London Real Property Co Ltd [1983] 2 AC 726, (
O’May) the House of Lords laid down general principles on the court’s exercise of its discretion pursuant to section 35 of the Act.
The O’May principles
- The starting point is the terms of the original lease;
- The burden of persuading the court to change the terms of the original lease sits with the party proposing the change;
- The change in terms must be fair and reasonable in all of the circumstances;
- In considering the proposed change, the court should take into account the comparatively weak negotiating position of a sitting tenant requiring renewal, particularly in conditions of scarcity, and the general purpose of the Act which is to protect the business interests of the tenant so far as they are affected by the approaching termination of the current lease.
- The court will consider whether the detriment suffered by the non-proposing party can be compensated in monetary terms.
- The court retains a wide discretion.
However, while the courts have considered and exercised their discretion under section 35 of the Act on several occasions, areas of uncertainty remain.
Updating a term to take account of legislative updates (e.g., changes to the Use Classes Order) would likely amount to reasonable modernisation. It is less clear whether other lease updates (e.g. the inclusion of uninsured risk provisions or clauses specific to new environmental legislation, such as energy performance certificates or minimum energy efficiency regulations) would be ordered by a court even if they are now market standard in new leases. It should be noted, however, that market practice can be evidence of what is usually considered fair and reasonable by landlords and tenants (Edwards & Walkden (Norfolk) Ltd v City of London [2012] EWHC 2527 (Ch)).
Relevant industry standards and, in particular, the Code for Leasing Business Premises in England and Wales 2020 (2020 Code) may also provide a persuasive factor. In Edwards & Walkden, in relation to the inclusion of a term relating to rent and service charges, the Code of Practice issued by the Royal Institution of Chartered Surveyors entitled Service Charges in Commercial Property (2nd ed, 2011) was referred to by Sales J as evidence that the proposed term was fair and reasonable. As an aside, it should be noted that the 2020 Code is a RICS “practice statement” which means that parts of it (relating to heads of terms and negotiations) are mandatory for RICS members/regulated firms. The remaining parts are “good practice”. The RICS requires that the good practice requirements should also be followed save in “exceptional” circumstances and, though members may depart from the good practice requirements, the RICS may require them to “justify their decisions”.
Changing times: pandemic and green lease terms
The worldwide COVID-19 pandemic has prompted more recent significant changes in lease drafting. As a result the courts are having to consider whether to order lease terms that were simply not anticipated prior to March 2020.
Existing leases that are coming up for renewal now may not contain rent suspension terms in the event that the property is unable to open due to a pandemic. Such terms are starting to be included in some leases entered into post March 2020. The courts are therefore having to consider whether to include the terms within renewal leases.
Pandemic terms
On 2 July 2021, District Judge Jenkins sitting in the County Court at Brentford handed down judgment in Poundland Limited v Toplain Limited (unreported) (
Poundland), an unopposed lease renewal concerning a Poundland store in Twickenham.
This case considered the question as to whether rent suspension terms will be ordered in renewal leases. The tenant requested a 50% reduction in rent and service charge where, broadly speaking, it was unable to open due to a lockdown. The parties were unable to agree on the principle of the inclusion of a rent suspension term. The term was not in the existing lease so the tenant had the burden of satisfying the court that the inclusion of the new term was fair and reasonable. DJ Jenkins declined to introduce such a term, following the guidance in O’May. He found that it would not be fair and reasonable “
to impose on the landlord a sharing of the risk in circumstances over which the [landlord] would have no control whilst the [tenant] may have some by reference to reliefs or schemes that might be available to them by the government”. The tenant’s proposed suspensions of compliance with other obligations, and of the right to forfeit, were also rejected by DJ Jenkins.
Green lease terms
With the UK aiming to achieve Net Zero by 2050, the past few years have seen the introduction of a variety of reforms, policies and initiatives to achieve this objective. Green lease terms have become prevalent over the past ten years, so that many leases coming up for renewal now will not have included them.
From 1 April 2018 landlords of non-domestic private rented property have, subject to certain exemptions, been prohibited from granting a new or renewal tenancy unless they have made all the relevant energy efficiency improvements for the property: regulations 27 and 29 of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (
SI 2015/962). The aforementioned regulations brought into force Minimum Energy Efficiency Standards (MEES Regulations).
From 1 April 2023 landlords who continue to rent such sub-standard properties even under a continuing tenancy will be liable to be fined up to a maximum of £150,000.
It is, therefore, extremely beneficial to landlords to review whether the terms of their existing and new leases will give them sufficient rights to carry out necessary works; and will protect them from acts or omissions of their tenants which might place them in breach of the MEES Regulations.
The courts are aware of the burden imposed on landlords by the existing MEES Regulations. However, whilst more landlords seek to improve the energy efficiency of their properties, the case of Clipper Logistics Plc v Scottish Equitable Plc (unreported,
County Court at Sheffield, 7 March 2022) (
Clipper) suggests that the court may not allow landlords’ to share their green liability where to do so would impose additional burdens on tenants. In Clipper the County Court had the opportunity to consider the scope of section 35 of the Act to include modernising provisions which seek to protect the landlord from risks associated with the MEES Regulations, an example of so called "green lease" terms.
In Clipper the court was required to determine whether the following ‘green lease’ terms proposed by the landlord should be included in a renewal lease.
- Prohibition on alterations that would result in a sub-standard Energy Performance Certificate (EPC) rating
- An indemnity for the cost of a new EPC if the tenant makes alterations
- An obligation to maintain the current EPC rating and to carry out remedial works to restore the EPC if it fails to do so
Having considered the landlord’s proposed green lease terms, the judge held:
"I entirely accept that it is reasonable for the Defendant to wish to have protection against the undoubtedly adverse consequences for it which an energy rating below ‘E’ would or could bring. I am not persuaded, however, that there is any reasonable need for all of the new clauses which the Defendant proposes in order that sufficient protection is in this respect afforded to it.”
The court’s starting position was that it is the landlord’s responsibility to comply with energy efficiency regulations. It acknowledged that, without any mechanism to regulate the tenant’s actions, a landlord could be “
placed in breach of the regulations through no fault of their own”. However, given the current provisions of the lease, it did not consider all of the proposed clauses to be necessary. Following O’May principles the court decided:
- The existing prohibitions in the lease on alterations were sufficient to protect the landlord from tenant acts that could damage the EPC rating of the property.
- The indemnity would place too significant a burden on the tenant
- The requirement of the tenant to “return the premises to the Landlord with the same EPC rating as it has as the date of this Lease” was a fair and reasonable addition to protect the landlord from inaction by the tenant over a 10 year term and this change reflected the coming into force of the MEES Regulations 2018.
It should be noted that Poundland and
Clipper were County Court decisions and so whilst the decisions may be indicative of the approach the courts are likely to take going forward, it does not act so as to bind them.
Practice considerations
The question of what is “
fair and reasonable” requires the court to look beyond the original lease. It is clear from the cases that the courts are prepared to exercise their discretion to authorise departures from existing lease terms in the interests of justice and fairness. However, the court will consider the implications of all of the relevant circumstances and a departure from existing terms may not be justified if it results in an unreasonable change to the commercial position of the parties. The cases indicate that while the court will give consideration to changing practices and external forces the court will give primacy to the commercial bargain struck between the parties and be unlikely to give effect to any new term which is particularly burdensome on either party.
For more information, please
contact Patrick Griffin on 0113 247 3800 or by emailing patrick.griffin@legalstudio.co.uk
The above article is not intended to be legal advice. Every case is fact specific and requires advice tailored to the issues arising in that particular case.