Sometimes a tenant wishes to occupy what are currently two adjoining premises but to trade from them as one unit. Where the tenant has two separate leases there are a number of issues the landlord should consider to protect his position.

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Issues for landlords to consider where the same tenant occupies two adjoining units

Sometimes a tenant wishes to occupy what are currently two adjoining premises but to trade from them as one unit. Where the tenant has two separate leases there are a number of issues the landlord should consider to protect his position.

  • Who will be responsible for taking down the party wall and who will pay for it?

These will be commercial matters for the parties. However where the tenant already occupies one of the units under an existing lease it may be more practical for the tenant to undertake these works. However if in such circumstances the landlord undertakes the works he should ensure that the tenant will not take action for breach of his quiet enjoyment covenant (in the existing lease) during the period of the works.

The parties will also need to agree who will pay for the works and how they will be treated on review. Whilst the normal position would be to take into account any works paid for by the landlord here the position is often different (see below).

  • When will the tenant be required to reinstate the party wall?

Care must be taken to ensure that in any circumstance where the units will not be in the same occupation the leases are drafted to oblige the tenant to reinstate the dividing wall, and separate any services. This will arise where the lease of one unit is being assigned without the other being simultaneously assigned to the same party. The same is true on an underletting.

Also on determination of either lease the tenant should also be required to reinstate the dividing wall. Circumstances where this will arise are:

Where the tenant exercises its break option in one of the leases (a prudent landlord would make reinstatement of the wall a pre-condition to exercising the break). The parties will also need to agree what will happen if the landlord exercises a break option in only one of the leases;

On forfeiture of one lease (where there will need to be a covenant in the remaining lease requiring the works to be reinstated and a self help remedy allowing the landlord to carry out the required works in default of the tenant doing so (obviously at the tenant's cost));

On expiry of the term in the first lease to expire.
  • Watch for assignment

Landlords need to bear in mind the fact that there are two separate leases when imposing restrictions on assignment. It is possible that both leases will be assigned at the same time to a third party. Therefore, for example, if the landlord wants to include a specific financial test in each lease then the landlord should use the aggregate rent in both leases rather than looking at each lease separately

  • How will the arrangements be treated for the purposes of rent review?

There are a number of factors to consider:

Are the two units to be reviewed separately or as one? Another possibility is for them to be reviewed both ways and the new rent to be whichever produces the higher figure. However this is particularly onerous on the tenant and a discount may be applied to take account of this;

If the units are to be reviewed separately there will need to be an assumption that there is a dividing wall. This means (contrary to the usual position) that even if the landlord paid for removal of the wall at its own cost the works will be disregarded on review;

Any additional references in the lease in relation to the reinstatement of the wall or any unusual alienation provisions (as referred to above) will need to be disregarded to avoid the tenant arguing that the lease provisions are more onerous than in a "standard" lease.
  • What if one lease is already in place?

To properly protect the landlord the provisions referred to above need to be included in both leases. If both leases are granted simultaneously this will be straightforward. However where one lease is already in place the existing lease will need to be varied at the same time as granting the second lease.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 26/05/2005.