2001 - A Tenant´s Year?

2002 looks set to be a year of important legislative changes for real estate with the enactment of a new Land Registration Act, a much awaited Commonhold Act, reforming legislation for the Landlord and Tenant Act 1954 and a DTLR review of planning use classes – but what happened in 2001? OK, not a year for legal milestones, but there have been a number of developments in the landlord and tenant arena which mark an apparent pro-tenant trend. Government-led initiatives included a consultation on a landlord’s right to levy distress, an investigation into upward-only rent reviews, draft legislation for landlord and tenant reform and a new Insolvency Act. The decisions in a number of key cases also illustrate the growing importance of human rights in dealings between landlord and tenant.

In May 2001 the Government issued a consultation paper outlining its proposals to reform the remedy of distress. Following the basic premise that the common law right to seize goods and sell them no longer belongs in our modern rights-based society, the proposal is that distress will be abolished for residential properties and significantly curtailed in the commercial sector making it more accessible and fairer for tenants. This came in the wake of Fuller v Happy Shopper Markets, where the tenant successfully sued its landlord for wrongful exercise of the remedy when it had seized goods and sold them in respect of arrears against which the tenant had a right of set-off. In this case, distress was described as an "ancient (and perhaps anachronistic) self-help remedy" which "involves a serious interference with the right of the tenant, under…the European Convention on Human Rights". The Judge concluded: "The human rights implications of levying distress must be in the forefront of the mind of the landlord before he takes this step, and he must fully satisfy himself that taking this action is in accordance with the law".

The Insolvency Act 2000 was enacted (in part) this year. It enables small companies to use the Company Voluntary Arrangement scheme and the associated moratorium (preventing landlords from taking action against their tenants for a limited period) and it has clarified the position as regards forfeiture by peaceable re-entry during the Administration process. Prior to the Act, a landlord could still exercise its right to peaceable re-entry during a corporate tenant’s moratorium, subject to the possibility of the court granting relief from forfeiture. Given that the aim of the Administration procedure is to provide a breathing space and prevent creditors from taking action to frustrate the process, it was questionable that a landlord should be in a privileged position as against other creditors. The effect of the Insolvency Act is that they no longer are. In addition, the use of peaceable re-entry has been criticised in the context of human rights. While it is an arrangement agreed in contract, the courts may yet decide that such a remedy is a violation of the European Convention on Human Rights. A landlord’s remedies will then be limited to a claim for arrears or for possession through the courts.

Also in the spotlight, is the implied duty in all leases that the landlord shall not do anything which substantially deprives the tenant from the benefit of the lease or which "changes the deal". In Oceanic Village v Shirayama Shokusan Ltd the landlord sought to set up kiosks outside the County Hall building to sell competing merchandise (to avoid the contractual restriction on sale of such goods in the building). Despite the accepted authorities that letting for a competing business does not of itself derogate from the grant, in the particular context of this lease the Judge concluded that this would amount to derogation. In Platt v London Underground, when London Underground closed an exit to one of its stations, a tenant of one of its kiosks within the station adjacent to that exit sued for damages for loss of passing trade. The Judge rejected the landlord’s argument that the express terms of the lease allowed it to act in this way, accepting the view in Petra Investments limited v Jeffrey Rogers plc, that the principle of non-derogation always leaves a tenant with an irreducible minimum which the express terms of the lease cannot take away.

Repair – who pays?

The extent to which a landlord can recover the costs of replacement and improvement of its building and plant (following the Credit Suisse v Beegas case in 1994) was tested in Fluor Daniel Properties Ltd v Shortlands Investments. The issue was whether the landlord was entitled to spend £1.5m on repairs to an air conditioning plant which was in good working order but beyond its expected lifespan. Despite similar wording to Beegas in the repairing covenant extending permitted works to those going beyond repair, it was held it could not. Even though it is for the covenantor to choose the mode of performance he still has to act reasonably and take account of what, given the length of the tenant’s leases, it would be reasonable to pay.

And so to reasonableness – and some good news for landlords

The very recent decision in Ashworth Frazer v Gloucester City Council raised the question of whether or not the landlord acted reasonably when refusing consent to an assignment of part of the premises based on the view that the proposed assignees intended use would be in breach of the user clause. The landlord’s position was bold given the long established Killick v Second Covent Garden Property Co Ltd [1973], which provides that to refuse consent to an assignment on this basis was necessarily unreasonable. The House of Lords unanimously overturned Killick. It was held that the reasonableness of a refusal of consent is always a question of fact to be decided on the particular circumstances; furthermore it is reasonable for a landlord to wish to avoid potential litigation against an incoming assignee. The decision may not mean that it will always be reasonable to refuse consent on the basis that the proposed assignee proposes to act in breach of covenant, but the view was expressed that it will now rarely be right to hold that a landlord is acting unreasonably when refusing consent to an assignment where he reasonably believes that the assignee is going to breach the user covenant.

What to look forward to ...?

• The New Year will bring revised draft legislation for reform of the 1954 Act landlord and tenant procedures: a mixed bag of proposals to simplify the procedure for contracting out of the Act’s security and to ensure that renewal can be achieved without strict timetables depriving tenants of their rights. In this context rent is again addressed with a proposed "fairer" interim rent procedure.
• We mentioned earlier the Government’s threat to ban upward-only rent reviews. This is now on ice following a recommendation from the BPF and British Retail Consortium that there should be a voluntary code under which landlords should offer flexible terms and set out the financial impact of different review patterns. The Government has withdrawn its threat to issue legislation to force their preferred approach but are continuing to put pressure on the industry to address the issues.
• A warning note to us all – look out for the Regulatory Reform Bill, also set to become operative in 2002. Why is this relevant to real estate? It enables the Government to enact legislation on a fast track following consultation and many of the proposed reforms discussed above are to be enacted in this way. There is now limited time available to assess new proposals and influence the changes.

"© Herbert Smith 2002

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