Ownership

Contents

1. Leasehold property

2. The lease 2.1 Rent 2.2 Alterations and improvements 2.3 User 2.4 Alienation 2.5 Repairs 2.6 Rent reviews

3. Break clauses

4. Lease expiry

Summary

© The College of Estate Management 2001

Paper 3705V3-1

Ownership – leasehold

Ownership – leasehold Paper 3705

1 Leasehold property

An occupier who does not own the freehold title to the property he occupies will generally be in possession under the terms of a lease.

There are other bases of occupation, such as licence, agreement for lease and trespass. Trespass is unlikely to be relevant to a facilities manager in his role of organising his company’s occupation, though it might be relevant as far as managing vacant accommodation is concerned.

Licence or agreement for a lease tend to be the result of special circumstances, such as the need for immediate occupation or for a very short period of occupation. These documents can be used to allow two parties to make a binding agreement which might have to be subject to unresolved matters – such as planning issues, the construction or improvement of the premises, alterations, gaining vacant possession, funding arrangements, references, or even acquisition of the property. Each party would then be in a position to rescind the letting if the outstanding matter was not concluded.

This paper seeks to develop three issues – the three types of leases, the statutory protection of tenants and the general lease terms – and to look at the practical aspects as far as the facilities manager is concerned.

Accordingly we shall be looking at the lease and in particular the following elements:

1. Rent 2. User

3. Alterations 4. Alienation

5. Repairs 6. Rent reviews

7. Break clauses 8. Lease expiry.


2 The lease

Each lease is unique; even in a multi-let property the leases for individual suites will vary. There are a number of reasons for this:

� The leases will have been granted at different times and the clauses amended to reflect changes in statute and case law.

� There may be a change of landlord during the letting period and the new landlord may decide to alter certain terms of the lease to reflect his views on the property.

� The bargaining position of the landlord and individual tenants will vary. A landlord’s attitude towards a FT-100 company requesting certain clauses to be changed will be different from his attitude towards a small, private company requesting similar changes.

� The landlord’s perception of the building may change. For instance, he may decide to redevelop the building in the next five years and will therefore grant shorter leases or leases with break clauses for redevelopment.

It is important to distinguish between a licence and a lease. A lease when granted confers on the occupier an interest in that property. A licence merely grants a personal permission to occupy the property, but no interest in it.

Distinguishing between a lease and a licence can be very difficult, but the impact of the arrangement being one and not the other is substantial. Some consequences are:

� Security of tenure applies to leases only, in particular the Landlord and Tenant Act 1954.

� A lease can be transferred, a licence is generally personal.

� A licence will not bind a third party, such as a purchaser.

The primary test for determining whether it is a licence or a lease rests on the question as to whether the occupier has exclusive possession. If exclusive possession is not given then it is a licence. To complicate matters further, there have been cases where it has been held that although there is exclusive possession the arrangement is a licence (Street v Mountford [1985] AC 809).

Different landlords and solicitors will have different standard forms of leases, which they will then adopt, or should adopt, for a particular property. Not only will the wording of the clauses vary, but the layout may be radically altered. Some solicitors adopt the format seen with the specimen lease in this module; others break the document down into a short set of clauses in the main document, but then put all the relevant details in various schedules attached to the lease. There is no right way; the only requirement is that the document should work for the property.

There will still be cases, however, where the lease that is created cannot operate for the property in question. This may be the fault of the solicitor who has not complied with instructions, but generally it is because the instructions are at fault and the person who has instructed the solicitor has not checked the final document.


Specimen lease Please refer to the specimen lease (Paper 3474) provided with these papers to serve as an example.

This splits the lease clauses into distinct parts and uses a set of particulars for the lease as a form of summary. It is essential to remember that a lease must be read as a whole. The ‘text’ relating to, say, the payment of rent will not all be together, and clauses will impact upon each other.

For example, rent payment is covered by the following:

The specimen lease is for a part building occupancy; accordingly it includes service charge provisions. At 40 pages it is a short document for a multi-let property. For ‘complicated sites’ such a lease could run to 150 pages and be supported by a set of landlord’s regulations.

Note: This specimen lease should not be used for any property you are dealing with. You should consult a solicitor about granting any lease or licence on a property and not try to cut corners.

2.1 Rent The lease governs the whole relationship between landlord and tenant, but the most important part is the payment of rent. For a landlord this is the raison d’être of his ownership of property, as it provides the return on his investment. Without the rent, his investment becomes a liability. For this reason a landlord will be most sensitive to the timing of rent payments.

Rent provision The previous section identified the wide range of clauses that affect the rent payment. Clause 1.27 of the specimen lease defines the yearly rent, whilst Clause 3.1 sets out the payment. This split is to ensure that the definition of what is payable will always cover any increased rent due to a rent review.

Due dates Under a modern lease, rent will normally be due quarterly in advance and on the usual quarter days of 25 March, 24 June, 29 September and 25 December. There is a number of alternative due dates and periods, and the lease will need to be checked to ensure that the details are correct. Clause 3.1 of the specimen lease adopts the modern quarter days.

A common misconception is that rent is only due when it is demanded. This is not the case: rent is due on the due date whether demanded or not. If rent is not paid on the due date, a landlord can commence action on that date. Thus for rent due on 25 March, a landlord will be able to commence action on the 25th itself, and in particular he will be able to send the bailiff in on that day in exercise of the right of distraint.

Lease particularsSection 1: Definitions

Section 3: Demise and rentSection 4: Tenant covenants – Clause 4.1

Section 7: ForfeitureSection 9: Surety obligations

Section 10: Rent review


There is general confusion on this point. Many people will look at the lease and see a number of clauses that deal with rent payments. One of the clauses will cover the interest provisions for late payment, which will generally be along the following lines:

‘. . . interest will be payable at 5 percent above National Westminster Bank plc Base Rate if unpaid for seven days, to be calculated from the due date, if unpaid’.

In the specimen lease this is set out in Clause 1.20 (the prescribed rate), Clause 4.1 (payment of interest), and Clause 7 (forfeiture).

This does not mean that interest does not have to be paid until 1 April (in our example), but only that the landlord cannot charge interest unless the monies are still outstanding on the 1st. He will be able to charge from the 25th once the 1st has passed.

Another clause will deal with the events that will allow a landlord to take proceedings for possession, often after 14 days. Again this only covers a certain set of circumstances: the landlord might still be able to make peaceable entry before the expiry of the 14 days, as the clause usually covers court action only. The essential point is that the lease has to be read as an entity, not as separate, unconnected clauses.

Landlord’s actions for recovery of rent Why should the rent be left unpaid? Unless there is a valid dispute with the landlord it should be paid. Even if the dispute can be substantiated, the tenant will be in a stronger position if the rent is paid into an escrow account held by the solicitors. In most cases rent does not get paid because of incompetence, either to set up appropriate systems or to deal with paperwork when it is received.

1. Demands and letters. Most landlords will issue rent demands and reminder letters before commencing any proceedings. The time allowed by landlords between the date when monies are due and the issuing of reminders, and then action, has continued to shorten during the economic recession. The shorter the period, the less the risk to the landlord of being unable to recover rent through the insolvency of a tenant.

2. Bailiffs. This is probably the cheapest and most effective course of action for a landlord. As mentioned above, a bailiff can make his first visit to a property on the date the rent is due. Thus a landlord will be minimising the delay in obtaining payment – an important consideration when the tenant might be of dubious financial standing. The costs incurred by the landlord are quite small, and often he will be able to recover all the monies from the tenant under threat of losing goods and chattels – a remedy known as ‘distraint’ or distress for rent. The law covering this subject area is historic, sparse and far from comprehensive, but is generally in the favour of the landlord. The repeal of distraint as a means of debt collection has continually been considered, but has never progressed far.

One reason why the bailiff is such an effective technique is that it is a very public method of collecting rent. He will call during trading hours when staff, customers and clients may be present, and the news that the tenant is having difficulties will soon reach suppliers etc. Thus the tenant’s creditworthiness can be harmed by the bailiff’s arrival, even if the rent is paid immediately.


If the bailiff is not paid on the first visit, he will take ‘walking possession’ of goods on the premises and allow the tenant so many days to pay. Failure to do so will allow the bailiff to return, remove the goods and sell them. If goods are removed after walking possession has been taken, the tenant is punishable by damages fixed at twice the value of goods distrained on.

3. Legal action. Three routes are available when solicitors have been instructed:

� Letters before action. Simply further demands including the threat of

legal action. Many demands may be issued before the solicitor is instructed, and the benefit is dubious, yet it is still a route that solicitors will take.

� Writ for arrears. In this case the writ only seeks the payment of rent, and is issued in the court appropriate to the size of debt. As rent is clearly defined in the lease, there are few grounds for contesting that it is properly due. An early judgement can therefore usually be obtained, as a tenant has no defence to non-payment. Once judgement is obtained, it will need to be enforced. This will rest with the Court Sheriff and can lead to the winding-up of a company or the bankrupting of an individual.

� Writ for arrears and possession. A similar process, but varying in that the landlord is also trying to get the premises back. This method was not widely used in the poor property market of the early 1990s with its large amount of over-rented property. Where a landlord has property let well below market value, or there is a redevelopment opportunity, he has a powerful tool for improving his position by reletting or redevelopment.

4. Peaceable possession. This is perhaps the most radical step for a landlord, and has an immediate impact. The action is usually taken outside normal working hours, dawn being the favoured time. The emphasis must be on peaceable, as any use of force, linked with objection by the tenant, will invalidate the action. A locksmith will gain entry and the premises will then be secured, preventing anyone gaining access.

Again, failure to comply with the exclusion can lead to the imposition of damages as a penalty. Until the liability is discharged, the tenant will be unable to gain access. If the debt is not paid and hence possession not recovered for six months or more, there is a general presumption that the tenant will be unable to recover possession at all.

It should be stressed that this is not a hard and fast rule, merely a general legal acceptance of the position, and will be liable to challenge.

As a mechanism, this tends to be used at times of a very strong property market with the focus on under-rented property or those with development opportunities.

All of these actions can be halted if rent is correctly paid. Systems should be put in place to make payment on or before the due date – ideally by use of standing orders or the like for all standard payments. A few days of lost interest is negligible compared with the arrival of a writ on a chief executive’s desk or the arrival of a bailiff at the same time as a client.


The advice of a solicitor on the exact lease provisions must be sought when dealing with any action by a landlord – and promptly: the longer the delay, the greater the harm to the company.

The facilities manager who has surplus accommodation to dispose of may become involved in managing property in the role of landlord, which will include the collection of rent. Acting as landlord, he will need to ensure prompt payment, and the routes outlined above can then be applied.

It is important to remember that a tenant who is late in paying rent is generally doing so because of cash flow difficulties, so the quicker the rent is paid, the lower the risk of default. But always check with your professional advisers first on any proposed course of action.

Insurance and service charges Insurance payments are generally reserved as additional rent. The exceptions tend to be older leases. If insurance is reserved as rent, then a landlord is able to use the same measures for recovery as for normal rent. The tenant can only deflect the demand for payment if there is an error, either in the valuation of the demise or in the premium charged. If a tenant believes that this is the case, he will have to substantiate it at the time of the demand – ideally by providing an alternative quote from a reputable insurance company, or a valuation from a building surveyor. In both cases it is worth considering paying the landlord on the lower figure, as this will bring pressure to bear on him to deal with the matter quickly.

Similarly, a service charge is usually reserved as rent, notionally providing the landlord with the same options for recovery. However, the landlord is generally in a weaker position here. Service charges are not fixed in a lease but vary from year to year. This means that they are more likely to be disputed, and generally the courts will give the benefit of any doubt to the tenant in such a matter. Bailiffs will take instructions on service charges but will withdraw if there is any doubt cast on the figures, and with it the distraint action.

It is important that the budget and balancing figures for a service charge are properly checked upon receipt and not left for a long period unanswered. Equally, if the facilities manager is acting as landlord, he must ensure that all the figures submitted are correct and that a full and proper explanation is provided.

The simplest approach is to include the budget service charge in the standing order covering rent. The facilities manager will then have to check two sets of figures during the year: the budget and the balancing statements. The only additional cheques that must then be produced are for the service charge balance and the insurance premium. It is important for the facilities manager, in the role of landlord, to try to develop a relationship with tenants to minimise the disputes and friction between landlord and tenant.


2.2 Alterations and improvements As with so many areas of landlord and tenant law, you must look at what the lease states and how this is affected by statute and case law.

Statute and the lease The principal statute is the Landlord and Tenant Act 1927, which does not refer to alterations but deals with improvements. The principal provision is s.19(2) which provides that:

� Consent for alterations cannot be unreasonably withheld if the lease allows for alterations by consent.

� Improvements to property authorised by the landlord may be compensatable at the end of the lease.

The specimen lease covers the subject in three clauses: 4.9 – the alterations provision; 4.18 – the position on planning applications; and 4.8 – the need to yield up at the end of the lease.

Clause 4.9 is a fairly open clause for a multi-let property.

First, it prohibits demolition and works that affect the external appearance of the property. This is to prevent tenants changing the appearance of a property by, say, putting in tinted glass which would contrast with the rest of the property. If the effect was great enough it could reduce the property’s capital value and/or saleability.

Secondly, Clause 4.9 allows internal, non-structural work with consent. This allows the tenant to install demountable partitions. Indeed, a number of leases exempt a tenant from having to seek landlord’s consent to their installation; but this relaxation cannot apply in the case of a multi-let building. The landlord will probably be the relevant competent party for compliance with the terms of the Fire Certificate, and any changes to the internal layout may affect the certificate. If the tenant has the whole of a building, then the responsibility rests with him, not with the landlord.

The second part of the alterations clause sets out some of the procedural aspects for the tenant’s application for consent.

Clause 4.18 (the planning clause) is the second point of control by a landlord. Clause 4.18.1 prohibits a tenant from making a planning application without approval. This will arise for certain categories of work or changes of use.

Clause 4.8 is the third point of control. It contains the yield-up provisions, which give the landlord the right to have the property reinstated to its original condition.

2.3 User The user clause in a lease will generally fall into one of three categories:

� Open � Qualified � Restricted.

The Landlord and Tenant Act 1927 covers the landlord’s control of the user clause. This Act provides that where the lease requires landlord’s consent, no premium or increased rent may be charged. It does, however, allow the landlord to recover his costs and any diminution in value of the property that may result. Usually the tenant’s solicitor will ensure there is a clause in the lease providing that the landlord’s consent cannot be unreasonably withheld.


The more restrictive the user clause, the more difficult it will be for a tenant to dispose of his interest, by either assignment or subletting. However, the benefit of the restrictive user to the tenant will generally be to reduce the rent at review and renewal compared with identical premises, but with a wider user clause.

The Use Classes Orders set out in the Town and Country Planning legislation are often used as a shorthand by solicitors. The order may cover a number of definitions and be seen as a safe way of defining the user. This is not necessarily the case, however, as once the relevant Order is referred to, it will always be fixed to that clause. Thus reference to offices in Class II of the 1973 Order did not change to Class B1 of the 1987 Order when that replaced the old Class II of 1973.

Lease provisions The specimen lease deals with use in Clause 4.14. The specimen allows a number of scenarios to be developed, but, as usual for lease provision, it not only tells you what can be carried out in the property, but it specifically excludes certain categories. Modern leases will exclude, for example, hairdressing, funeral parlours etc; older leases will cover more exotic uses such as blood-boiling, tallow-making, hoof-rendering – uses which are virtually extinct today.

One overriding element in many leases of commercial property is the prohibition on people sleeping in the property, with its suggestion of residential use. This stems from the risk of the person claiming some form of protection under the Rent Acts.

2.4 Alienation Alienation is the process whereby a tenant ‘disposes’ of his direct interest in the property but retains a residual liability for the lease. The extent of that liability differs according to the two methods of disposal:

� Assignment � Subletting.

Each, which has its own benefits and disadvantages, is covered below. First, however, a note about general covenants.

General covenants It is usual to find a covenant against assignment and subletting in a lease. This covenant might be an absolute bar; for example:

‘. . . not to assign, sublet or part with possession of the premises’.

Or the covenant might be a qualified one, subject to consent; for example:

‘. . . not to assign or sublet without the consent of the landlord’.

Modern leases usually have a qualified covenant. Absolute covenants will rarely be accepted by tenants, except for very short term leases, and it is rare for a landlord to grant a lease preventing alienation, as this will adversely affect the rent at review.

Under the provisions of the Landlord and Tenant Act 1927, consent under a qualified clause cannot be unreasonably withheld. This was bolstered by the Landlord and Tenant Act 1988, which provides that a tenant can seek damages if consent to an assignment is unreasonably withheld or delayed by the landlord.


Clause 4.12 of the specimen lease deals with alienation. This clause follows the general principle set out above, in that it prohibits parting with possession before referring to specific exclusions of the prohibition.

1 Assignment Lease terms Clauses 4.12.2 to 4.12.6 of the specimen lease deal with assignment. These clauses allow the tenant to assign the whole of the premises but provide that the landlord can refuse consent in certain circumstances. It should be noted that the terms of clause 4.12.5(a) are very broad. Any assignee who did not improve the covenant strength of the lease could be rejected by the landlord.

In these circumstances a tenant could argue that the landlord was unreasonable in the way in which he dealt with the matter. He may wish to take the landlord to court to challenge the grounds of refusal and to claim that the incoming tenant would not diminish the reversionary value. However, the immediate benefit to the tenant will be limited: the prospective assignee is unlikely to wait for the matter to be determined, as it is likely to take at least a year to get to court.

Clause 4.12.6 deals with the elements arising from the Landlord and Tenant (Covenants) Act 1995.

2 Subletting In contrast to the assignment of a lease, with a subletting the original tenant remains in control. A new interest is created (‘the subtenant’) and the original tenant becomes a landlord while remaining a tenant under the original lease. The subtenant then pays rent to the original tenant, in the latter’s role as landlord, and the original tenant pays rent to his landlord. Clearly the original tenant is more involved in dealing with the property than in the case of assignment, in terms of rent payments, collection, and the general management of the property. Lease clause Clause 4.12 has a number of interesting provisions regarding subletting.

First, the subtenant is required to covenant directly with the superior landlord to perform the covenants of the head lease. In essence, the subtenant is saying that he will comply with the sublease and the head lease. The intention is that the superior landlord can then enforce covenants against the subtenant if problems arise with the tenant.

Second, the terms of the sublease require the rent to be the higher of that under the lease and the open market value. This protects the landlord against a potential drop in rent if the immediate lessee becomes insolvent, and helps him maintain a valuation of the property that might be higher than the actual value.

Third, Clause 4.12.10(a) requires the sublease to be excluded from the provisions of the Landlord and Tenant Act 1954 (ss.24–28) – sections that allow a tenant to obtain renewal of the lease. By seeking to exclude these sections, the landlord provides himself with a stronger negotiating position at expiry. If the subtenant is deprived of the protection of the 1954 Act, the tenant will not have protection either, because one of the 1954 Act’s essential requirements for protection is that the tenant under the lease should be in occupation.


2.5 Repairs There are two types of repairing provisions in leases:

� FRI: Full repairing and insuring. � IRI: Internal repairing and insuring.

Variations do exist and occasionally you may come across leases which put very little onus on the tenant to repair. In the main, however, leases granted over the last 20–30 years put the liability for repair on the tenant’s shoulders. Indeed, most leases are FRI in nature, even if the responsibility for repair for parts of the property rests with the landlord, since the landlord usually recovers all his costs from the tenants in the service charge.

The underlying premise of the repairing obligation is that the tenant will maintain the property in the condition in which it was let, although he may have to put it into good repair to begin with. Whether this is a fair approach is open to debate, but it underpins the investment value of property and is therefore a very important area. There has been a substantial amount of case law on the subject and some of the more important points are raised below.

The repairing provisions in a lease, which will be drafted in a variety of ways, contain clauses dealing with:

� Extent of the tenant’s responsibility – generally the whole property demise or just the interior.

� Standard of repair.

� Delivering up of the property at the end of the term.

� Details of redecoration and the frequency with which it is to be carried out.

� Landlord’s right to inspect and carry out the works if the tenant fails to do so.

� Tenant’s liability to pay landlord’s costs in the preparation of a Schedule of Dilapidations, detailing the condition of the premises.

These individual elements are considered in more detail below.

Legal parameters Where the demise is the entire property, the major difference between the FRI and the IRI repairing provision is:

� The FRI lease will include responsibility for the total, including the exterior and structure.

� The IRI lease, as its name implies, will be limited to the interior and the landlord will probably be responsible for the exterior and structure.

There are many combinations of responsibility, however, and it should not automatically be assumed that because the tenant is not responsible for the exterior, the landlord is; the lease may be silent on the point and no one will be liable.


If the tenant is wholly responsible, the burden imposed can be very great. The only limit is that the tenant will not have to provide something that is totally different. However, even here there is a caveat following the decision in Ravenseft Properties Ltd v Davstone Holdings Ltd (1980). In this case the tenant was found to be responsible for the repair of what was an inherent defect, rectification of which would produce an improvement to the property. The wording of the repairing covenant can also place the tenant under an obligation to put the property into repair, as well as maintain it in upgraded condition to the end of the lease.

Standard of repair The standard of repair required will depend upon the exact wording of the lease clauses. The property may be subject to a schedule of condition which will specify its exact condition at the time of granting the lease. This schedule may be used as the basis upon which either the landlord or the tenant is to undertake the appropriate works to deal with the defects specified; or it may limit the extent of tenant liability.

Clause 4.4 of the specimen lease covers the repairing obligations. Here the tenant is to covenant to put as well as keep the property in good repair. This is a positive obligation to get the property into repair.

Deliver up The delivering up of the property at the expiry of the lease is generally geared to dilapidations, an issue which is examined in more detail elsewhere. The yield-up provisions are in Clause 4.8.

Redecoration Redecoration can be the subject of lengthy lease clauses, especially if the property forms part of a prestigious building such as a shopping centre. The landlord may try to impose on the tenant detailed requirements for colour schemes for the interior and exterior. The redecoration clause will generally define the cycle of redecoration for the interior and, if the tenant is responsible, the exterior.

Older leases tended to adopt a five-yearly cycle for the exterior and a seven-yearly cycle for the interior. Modern leases tend to shorten the dates, particularly the internal cycle. Modern buildings have less exterior paintwork, with windows of aluminium or plastic, and the only areas that need attention are in exposed places, such as the tank housing or fire escapes. The interior, on the other hand, has become a more attractive environment, generally at the expense of durability of finishes. The effects of wear and tear are that much greater on the interior, and cycles of three years are not unknown, especially for the ‘common areas’.

The specimen lease is for a multi-let property and Clause 4.5 covers only the interior, with a three-year redecoration cycle.

Landlord’s remedies The lease will allow the landlord to enter to inspect the premises on reasonable notice. In most cases this will be a relatively informal approach, becoming more formal if the landlord has reason to suspect that the terms of the lease are being breached.

The landlord’s ability to enforce the repairing covenants often rests on whether he can enter the premises and carry out the work himself. Having done the work, the landlord will then seek to recover his costs from the tenant in the same way as for rent.


The most radical step the landlord can take is to seek possession of the property through action for forfeiture. In this he is fettered by s.146 of the Law of Property Act 1925. This provides that, before any action for forfeiture, the landlord must serve notice specifying the breach and providing the tenant with a reasonable period of time in which to carry out the works. The emphasis is on ‘reasonable’: if a reasonable period is not allowed, the notice will be invalidated. The facilities manager who receives such a notice should seek the advice of a building surveyor and solicitor straight away. However, the notice should provide sufficient time for him to deal with the repairs before the expiry of the time limit, assuming due diligence, and he should have had advance warning of the landlord’s actions by the inspections that have been carried out.

Under the Leasehold Property (Repairs) Act 1938, where a lease for a term of seven years or more has still got three or more years to expiry, the landlord is restricted in his rights to forfeit or to sue for damages; (this does not apply to internal repairing or decorating clauses).

One option for a landlord is to enter the premises and carry out the repairs himself. This must be expressly provided for in the lease, which is the case for most modern leases. The procedure is to serve notice on the tenant giving a reasonable time for the repairs to be undertaken. If the tenant fails to do the work the landlord can then enter, carry out the repairs and recover the cost from the tenant.

Where the lease specifies that the money is recoverable as a debt, the landlord can then sue for the work as a debt, not as a breach of the repairing obligation. In this way the landlord is able to circumvent the constraints of the 1938 Act. The case that determined this approach was Jervis v Harris (1996) 2 WLR 220, CA.

Landlord’s repairs The final area to consider under repairs is the effect of the landlord carrying out repairs in a multi-let property.

Where the tenant does not have responsibility, it is usual for the landlord to maintain the areas excluded from the tenant’s liability, although, as mentioned earlier, the lease must be explicit for a party to have a liability.

In multi-let buildings the landlord is often responsible for the fabric and structure of the building, together with the internal common areas. Where there is a consistent expenditure, such as for the cleaning and maintenance of staircases, the cost of the work will be met by the tenants via their contributions to a service charge. If the expenditure is more irregular, the recovery of costs might similarly be irregular. From a tenant’s point of view this is not ideal: most tenants are better able to deal with regular payments than with widely varying rates. The use of sinking funds has developed to even out the cash flow of running a property.

In Clause 11.1 of the specimen lease, the landlord covenants with the tenant to keep the common parts in good repair if the tenant has paid the service charge.


2.6 Rent reviews An investor, by definition, is prepared to pay a capital sum in exchange for income and for capital and income growth. In the case of property, the income is the rent paid by the occupier for the use of the property. For the tenant this is just part of his overall ‘production costs’.

As part of his investment the investor will want to see his return at least remain in line with the value of money. In other words, he does not want to see the rent payable become less valuable due to inflation, and ideally he wants to see the return exceed the level of inflation and, with it, standard interest rates.

Rent reviews were introduced in the 1960s to reflect the high levels of inflation and the erosion of the return to the investor. The mechanism that has developed in the UK is to fix the rent at the review dates with reference to the market value of the property at that time. The creation of this hypothetical scenario has resulted in a considerable amount of case law, as the parties to the lease have sought to maximise/minimise the effects of the review.

The body of information to be understood is substantial, and it is not the intention in this paper to examine the subject in detail. However, the facilities manager needs to know about certain elements of the subject so that he can make the appropriate response to events, as a wrong action can lead to a costly mistake that could last for the rest of the lease term. These areas are:

� Notices � Review timetable � Third party referrals � Instructing specialists.

Notices The terms of review clauses in leases vary considerably, from three or four lines to pages of instructions for assessing the value, which may include a whole lease that is to be valued. Likewise, notice provisions of leases also vary in detail. Some leases do not even provide for a notice mechanism. Others may include a detailed timetable and specify the form that notices and counter-notices are to take. There is no standard format: leases on the same property granted at the same time can have minor but significant differences.

Increasingly leases require the landlord to serve a notice to initiate the review process. This notice may include the amount of new rent that the landlord is seeking; it may require a counter-notice; and there may be a timetable to meet if the review is to be opposed. The specimen lease does not require the service of a notice.

There can be no generalisation on the subject because no clause is the same. However, the House of Lords in United Scientific Holdings Limited v Burnley Borough Council (1974) determined that the presumption for a rent review was that ‘time is not of the essence’. In other words, failure to adhere to a timetable for the review does not defeat the review. This presumption does not apply, however, if there is a contraindication in the lease, or if there is a presumption in the surrounding circumstances, or if there is an interrelationship with other lease clauses. The most common example of the last is a break clause linked to the settlement of the review itself.


Assumptions The review provision often refers to the terms of a hypothetical lease. This is to prevent problems arising when surveyors have to look at all the terms of the actual lease. Clauses 10.2–10.4 of the specimen lease cover this.

Review timetable The lease may or may not set out the timetable for dealing with the review – which, as we have seen in the section above, can vary in length and complexity. Most leases do not have a strict timetable that makes the review time of the essence of the contract. However, many have a timetable for the mechanics of the review – such as the earliest date when the landlord can serve a notice on the tenant, whether the notice has to include the new rent, or whether the tenant has to serve a counter-notice, and the form of that counter-notice.

The solicitor and surveyor will need to advise on the timetable of the review to ensure compliance with the requirements. Again, having advance notice of an impending review will give the professional team the opportunity of looking at the options and the wording of the review clause at leisure, rather than in response to a last-minute notification of the review and the counter-notice time. This greater awareness will benefit not only the professional team but also the facilities manager, who will appear in control of the event. By programming the review procedure early, the surveyor will be able to provide a prior estimate of the rental level likely to be set, which has obvious advantages for budgeting of costs for properties.

The specimen lease follows the modern trend of not setting a fixed timescale for individual events, to avoid problems when the timetable is not being adhered to.

Third party referrals If negotiations between surveyors fail to resolve the review, the rent review clause will invariably provide a procedure for a third party to determine the rent. The two options that exist are arbitrator and independent expert.

The procedure for the appointment of the third party is generally set out in the review clause. The most common approach, if the parties are unable to agree on a suitable person, is to refer the matter to the President of the Royal Institution of Chartered Surveyors. The lease will specify directly or indirectly the type of third party to be appointed, and the President will then choose a suitable member from the panel of experts in that particular field.

The parties may object to a particular third party because of perceived conflicts of interest or queries over his competence. The person invited must declare any perceived conflict, as any subsequent disclosure of an interest could lead to litigation by the parties to set aside an award.

What is the difference between the two options?

An expert will have specialised knowledge of the type of property and its location. He will be able to determine from his own knowledge the value attributable to the property. In the main, an expert will take submissions from the surveyors acting to bring to his attention any relevant facts which will affect the rental value.

An arbitrator will probably have significant experience in the locality and for the type of property in question, but this is not essential. The principal difference is that the arbitrator has to hear the parties and must make his judgement based on the evidence put before him by the parties. He must not use any other information. In that respect the arbitrator acts in a quasi-judicial manner.


Which is the best approach? The difference between the two has narrowed in recent years. There are arguments that the expert will be anticipating the future trend of the market and will be more up to date than an arbitrator, who has to rely on evidence of completed deals rather than the ‘tone’ of the market.

The specimen lease covers this in Clause 10.5. As you will see, the wording gives the drafter the option of expert or arbitrator, depending upon instructions from the surveyor who will be negotiating the original lease terms.

The provisions of the Arbitration Act 1996 resolve a number of problems, including:

1. The appointment of a further arbitrator, if the appointed one becomes infirm or dies.

2. The determination by the courts of questions of law that might arise.

3. Compelling witnesses by subpoena to give evidence.

4. Award of costs.

5. Control of misconduct or unfairness.

The Arbitration Act also allowed a challenge to be made for serious irregularity within 28 days of the award and enables appeal on a point of law.

Instructing specialists The subject of rent reviews is very specialised and it is important to choose the right specialist to act on the company’s behalf. One individual will not necessarily deal with all reviews, as the surveyor’s expertise, for example, might be restricted to one location or one type of property. The rule of ‘horses for courses’ applies here, as it does elsewhere.

Generally the best means of identifying a suitable surveyor to act is by personal recommendation, and as many views as possible should be sought.

Similarly, the role of the solicitor is important. If the review clause is complex and/or the amount of money involved is great, a specialist solicitor or barrister will be needed: and again personal recommendation is essential.

The fees the professional team charge will depend upon the market conditions at the time. During the recession of the early 1990s the level of fees charged by surveyors fell dramatically as the amount of available review work fell away. Legal fees were not affected to the same extent, and the costs of counsel probably increased during the same period. The correct level depends upon the level of expertise required.

When the review has been settled, it will need to be documented by a rent review memorandum, which will be prepared by the landlord’s solicitors and, when signed, attached to the lease.

A final point to bear in mind is that modern leases tend to include provision for the landlord to charge interest on any catch-up rent if the review is settled after the review date. This may be 2–4 percent above base rate. It is there to discourage tenants from delaying the review process in order to hold on to the backdated rent for as long as possible. The inclusion or exclusion of a clause of this type will be instrumental in determining the rent review tactics.

Full consideration is given to the subject in The Handbook of Rent Reviews, published by Sweet & Maxwell, which is the definitive book on the subject.


3 Break clauses

Break options tend to be linked to redevelopment proposals by the landlord, or are optional breaks for the tenant. The latter became more common during the recession, although the benefit to a tenant of a break option tends to be an increase in rental value.

In many ways a break clause has to operate on the same basis as the normal procedure for the service of notices under the 1954 Act. If a landlord is exercising his break option for redevelopment or refurbishment, he must serve the notice in the form specified in the lease, but must also comply with the 1954 Act procedure. He will have to serve a s.25 notice objecting to renewal. The landlord will have to prove his case in court if the tenant does not accept that the notices are valid.

There is still uncertainty as to whether a tenant will have to serve a s.26 notice on the landlord to operate a break option. This has not been the case in the past, but the validity of the approach has been questioned. An important point mentioned in the section on rent reviews was the linking of rent reviews and break options, which can make the review time of the essence. Whilst break options at the time of review have certain advantages, it is simpler to keep the two separate to avoid any problems.

It is important to consider the wording of the break clause, not only to avoid the problem of the linking to the rent review, but also to ensure that the wording will actually allow the break to operate. The wording of the break can be very open or very restrictive. The former approach requires little more than the notice to be correctly served within the prescribed timetable for it to be valid. The latter will include payment of all monies, often even though the sums have not been demanded, and most difficult of all is compliance with the repairing obligation. In such cases the tenant has to undertake works to put the premises into repair but the landlord has not had to agree or disagree to the specification – it becomes very difficult to ensure full compliance and breaks have been held to be invalid because of this ‘failure’. Recent cases do seem to suggest a change here in that the courts are regarding silence or acts to frustrate the break as inequitable.


4 Lease expiry

Under the normal law of contract, a lease ends on the expiry date and the tenant must give up possession. However, protection is given to business tenants in England and Wales by the Landlord and Tenant Act 1954 (as amended). Under s.24, a business lease continues on the old terms unless brought to an end by a formal notice. This gives the tenant the opportunity to claim a new lease, provided that the procedure is observed and the parties have not contracted out of the Act by agreement of the County Court when the lease was granted.

There are a number of qualifying parameters that must be met for a tenant to be allowed to renew. The landlord is able to raise certain grounds of objection, including persistent late payment of rent and breaches of lease obligations, but more commonly that he needs the premises for refurbishment or redevelopment. In each case it is for the landlord to prove his case.

The case law on lease renewals is extensive and for a detailed grasp of the subject you are referred to Sweet & Maxwell’s Handbook of Business Tenancies. The facilities manager generally does not need a detailed knowledge of the subject, just a grasp of the salient points. However, if the brief for the facilities manager includes property and there is considerable activity, a full understanding will be needed.

Increasingly, with changes to the length of leases and increased flexibility, landlords have sought to limit the effect of such changes on them. Following the decision in O’May and Others v City of London Real Property Co Ltd (1980), lease terms for a lease with rights of renewal under the Landlord and Tenant Act 1954 will be perpetuated in new leases. Where ss.24 to 28 of the 1954 Act are excluded when a tenancy is granted, a tenant will have no rights of renewal. To do this, a court order is needed at the time the lease is granted, and care is needed to ensure matters are dealt with in the correct order. However, once excluded at the time of expiry, the landlord is not impeded in his rights of regaining possession or in ‘holding the tenant to ransom’.

The renewal process can be a complex one and expensive in terms of professional fees and management time. It should be remembered, however, that it will determine the costs and operation of a property, often for 25 years.


Summary

This paper has only scratched the surface of the subject. However, this should not be a disincentive to understand it. There are some areas with which a facilities manager is likely to deal on a daily basis and for which he will need a clear understanding of the issues. Others, such as lease renewals and rent reviews, occur less frequently and the facilities manager’s involvement is likely to be considerably less. However, he must grasp the essential points of these less frequent events. Perhaps the two most important are: be prepared and decide in advance on the team who will work with you on the matter. Equally, the more mundane matters can have a major effect on less frequent events, such as reviews.

SELF-ASSESSMENT QUESTIONS

1. What effects may flow from late payment of rent?

2. In what circumstances can a landlord prevent a tenant from improving or altering the premises held on a lease?

3. Identify three categories of user clause. Which would you advocate when letting surplus space?

4. Identify two types of restriction on alienation.

5. How full is a full repairing obligation?

Ownership

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