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Commercial landlord and tenant round-up 2020: Key decisions despite Covid chaos

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02/12/2020


This article was written for, and published in, the Property Law Journal which can be read here.

Much of the practice of the specialist property litigator will have been dominated, during 2020, with getting to grips with the Coronavirus Act 2020 and the Corporate Insolvency and Governance Act 2020; with keeping on top of changing guidance and timescales in respect of forbearance measures; and with overcoming the practical challenges arising from the pandemic, such as the witnessing and execution of documents, effecting service, conducting virtual court hearings, and the like.  Add to all that the facts that, during times of economic uncertainty, many businesses struggle to meet financial and repairing lease liabilities and/or seek to divest themselves of surplus properties, and seems likely that many commercial landlords, tenants, agents and advisors will have had a very busy, and potentially a very stressful, year.

Despite such difficulties, 2020 has seen a number of important decisions.  Walker Morris’ dedicated real estate litigators Martin McKeague, David Manda and Lewis Couth highlight some of the key cases to note.

Duval v Randolph Crescent: Supreme Court clarity on the enforcement of leasehold covenants

During the UK’s first national lockdown the Supreme Court published its decision in Duval v 11 – 13 Randolph Crescent Ltd  [2020] UKSC 18 – a case of particular importance for landlords of multi-let buildings.

Covenants containing absolute prohibitions against carrying out certain acts or works are common in leases of residential multi-let buildings and appear, albeit more rarely, in some commercial developments. The same prohibitions are generally mirrored in all leases within the development and they are effective because of a landlord’s obligation to enforce against anyone in breach at the request of other tenants.  Such covenants can be essential for good estate management and can preserve property and investment values.  However, landlords often nevertheless choose to license or waive breaches of such covenants, as that can be commercially advantageous and it can foster good landlord and tenant relationships.

The Duval v Randolph Crescent case concerned the working of such covenants and, in particular, a landlord’s ability to consent to or waive breaches so as to deal with its premises as it sees fit.  The case involved residential long leases containing: an absolute prohibition against carrying out structural works to walls within or enclosing individual flats; and a landlord’s covenant that all leases in the building will contain the same prohibition and will be enforced at the request of any other tenant.

One of the tenants applied for permission to carry out works which would breach the prohibition and the landlord wanted to grant consent. However another tenant, Duval, objected.  Duval argued that the landlord was precluded from consenting to the works as that would prevent it from complying with its covenant to enforce.

The County Court agreed with Duval; the High Court agreed with the landlord; and, in 2018, the Court of Appeal allowed Duval’s appeal.

Key to the Court of Appeal’s decision was the fact that, whilst the practicalities of block management and commercial common sense are relevant, the starting point in a dispute of this type is the wording of the lease itself (Arnold v Britton [2015] UKSC 36).  Here, the wording of the landlord’s covenant did not expressly preclude a landlord from licensing or waiving a breach of a tenant covenant/prohibition, but there was the question whether that could be implied.  The Court of Appeal considered authority on the test for implying terms (M&S v BNP Paribas [2015] UKSC 72) and the line of cases in which the courts have consistently held that where an obligor undertakes a contingent obligation, he must not put it out of his power to comply with the obligation if and when the contingency arises.  It concluded that implying a term that a landlord could not license or waive a breach of the relevant prohibition was necessary (“[i]t would not give practical or commercial content to the obligation if the landlord had carte blanche to vary or modify the covenants; or to authorise what would otherwise be a breach of them” para 27).  The Court of Appeal therefore held that to permit or waive a breach of the tenant’s absolute prohibition would amount to a breach of the landlord’s covenant, which would open up the landlord to a damages claim.

Permission was granted, however, for the landlord to appeal to the Supreme Court.

In May 2020, the Supreme Court unanimously dismissed the appeal and confirmed:

  • The starting point is to construe the terms of the particular lease in the content of the particular case.
  • Certain aspects will be highly relevant. For example, here, the leases in question were long-term contracts and were acquired for a substantial premium.  The parties would have appreciated that, over the lifetime of the lease it would inevitably be necessary for works to be carried out.  The parties would have understood that routine improvements and modifications would be unlikely to impinge on other occupants or adversely affect the wider building and that it would be sensible for the landlord to be able to permit such works from time to time.  In addition, the parties must have appreciated the desirability of the landlord playing an active role in managing the building and fulfilling its obligations under each lease.
  • If a landlord licensed a tenant to carry out alterations despite an absolute prohibition, then the landlord would be in breach of its obligation to enforce lease covenants at the request of another tenant in the building.

In terms of practical advice, landlords should review their leases of multi-let buildings and ensure that they are aware of the particular terms of, and any procedures relating to, any tenant prohibitions. Where any such prohibitions are absolute (that is, where they are not expressly qualified as being subject to landlord’s consent), landlords may be well-advised to avoid granting consent to prohibited acts/works, or at the very least to carefully assess the risk of inciting potentially costly damages claims from other tenants.  It follows that, wherever possible on the grant of any new leases, landlords may wish to ensure that tenant prohibitions are expressly made subject to landlord’s consent.  In addition, landlords and their managing agents should also increasingly be alive to the risk of tenants simply carrying out prohibited acts or works without even asking for permission (and therefore entirely without the landlord’s oversight or control) – something which may be an unintended consequence of the Court of Appeal’s and Supreme Court’s decisions.

Sara & Hossein v Blacks Outdoor: Common drafting underpins contentious service charge case

2020 has seen some significant to-ing and fro-ing in the Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd service charge dispute, with the decision of the Court of Appeal having been published as recently as 13 November.  The case is of significant concern to commercial landlords, tenants and practitioners, not only because service charges are a perennially contentious area, but also because lease in question contained drafting which is commonly encountered in modern commercial leases.

The tenant had covenanted to pay a fair and reasonable proportion of the total service cost.  At the end of each service charge year the landlord had to provide the tenant with a certificate of the amount payable by the tenant.  The lease stated that the landlord’s certificate was conclusive (in the absence of manifest error or fraud) and that the tenant was prohibited from any right to set-off or counter-claim.  For two years the landlord provided certificates but the tenant failed to pay.  When the landlord issued a court claim for the service charge, the tenant defended and counter-claimed, alleging that some of the works done were unnecessary and/or outside the landlord’s repair obligations.

Earlier in the year, in a very tenant-friendly decision, the High Court found that the landlord’s certificate was conclusive as to the amount of costs incurred by the landlord, but that it was not conclusive as to whether those costs fell within the scope of the tenant’s service charge liability.  The High Court also decided that the ‘no set-off/counterclaim’ provision meant that the tenant could not withhold payment of service charge properly due, but that if there was a dispute as to service charge liability per se, then the operation of the provision depended on the outcome of that dispute.

The High Court judge had read the relevant provision (i.e. that the landlord’s certificate was “conclusive as to the total cost and the sum payable by the Tenant”) as comprising two separate elements: (1) the amount of the total cost; and (2) the sum payable by the tenant.  She had then decided that the certificate was only conclusive as to the former.  The judge had also thought that the existence of an expert determination dispute resolution mechanism within the service charge provisions was inconsistent with the landlord’s certificate being conclusive overall.

On 13 November, however, the Court of Appeal unanimously reversed that decision. It did not consider the judge’s reading to be in line with the ordinary meaning of the language used.  In accordance with the law on the correct interpretation of contracts and on the implication of terms, the Court of Appeal said that, to separate out the provision and the conclusivity of the landlord’s certificate into separate elements would require express words to that effect or a necessary implication, neither of which were present here.

Confirming that the function of contractual construction is not to save a party from an imprudent term, the Court of Appeal quoted Lord Neuberger in Arnold v Britton (ibid): “The purpose of interpretation is to identify what the parties have agreed, not what the court thinks they should have agreed“.  In delivering this landlord-friendly decision the Court of Appeal also gave a stark warning to tenants to consider very carefully before agreeing a lease in these terms, particularly where the amount of service charge is not capped.  That, of course, is all very well when it comes to future lease negotiations, but it may well be that this decision – involving, as it does, service charge wording which is very common in existing commercial leases – places a significant burden on many tenants.  That may be felt particularly keenly by those who are already facing financial difficulties in the post-Covid economic climate.

As at the date of writing it is not yet known whether this decision will be appealed again.  If permission to appeal is sought and granted, this case is likely to be a key decision to look out for in 2021.

Capitol Park Leeds v Global Radio Services: Break case highlights new risk area for departing tenants

Challenges facing the high street and the office sector as a result of the pandemic and the dramatic increase in home-working are contributing to increasing numbers of businesses exercising break options, with a view to bringing about early termination of leasehold liabilities.  Once the decision has been made to bring a commercial lease to an end, the failure to serve a valid break notice can have drastic consequences, as the business may lose the opportunity to break the lease and may therefore remain liable and tied into the property with long-term, unwanted commitments. The position is complicated by the fact that many lease break options are notoriously fraught with legal and technical traps for the unwary.  Tenants are unlikely to welcome the High Court’s decision in the very recent case of Capitol Park Leeds plc v Global Radio Services Ltd [2020] EWHC 2750 (Ch), which seems to represent a potential new risk in delivering-up vacant possession in the context of exercising an option to determine a lease.

Valid exercise of the tenant’s break option was conditional upon delivery up, on the break date, of vacant possession.  (A very common condition.)  However the case differed from existing authorities on what it means to give vacant possession, because it did not centre on items that had been left behind by the tenant – rather it was concerned with the fact that the tenant had stripped out various items and had handed back an empty shell.

The tenant accepted that it may have handed back the property in a state which did not comply fully with its repairing obligations, but it argued that it had nevertheless given vacant possession, and had therefore complied with the break condition.  The landlord referred to the definition of ‘Premises’ within the lease, however, and maintained that, without the stripped-out elements, the tenant had not given back ‘the Premises’, or vacant possession thereof, at all – it had actually given back substantially less.

The High Court undertook a contractual interpretation exercise to determine what exactly it would mean to give back vacant possession of the ‘Premises’ (as defined) in light of the terms of the particular lease.

The lease defined the ‘Premises’ as “including all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings, and all additions and improvements made to the Premises…“.

The High Court therefore ultimately agreed with the landlord.  It held that, in handing back a fully stripped-out property, the tenant had not delivered up vacant possession as it was obliged by the lease to do.  Instead, the tenant had handed back a “dysfunctional and unoccupiable” building.

Consequently, the break was invalid and, in the absence of another option for early termination, the lease will now continue until the expiry of its term in 2025 (albeit we understand that leave to appeal this decision to the Court of Appeal has been granted, so this case will be ‘one to watch’).

To fully understand how it should hand back a building, a tenant should read its covenant to deliver up vacant possession alongside the definition of the premises within the particular lease, as the High Court has now confirmed that it may be possible for a tenant to fall foul of its obligation to deliver up vacant possession by clearing out too much from a property, as well as by clearing out too little.  A departing tenant should, of course, also consider any obligation to deliver up vacant possession alongside other relevant lease covenants, such as the repair obligations and any reinstatement provisions.

Exercise of any break option – especially a break option which is at all conditional on the tenant’s compliance with any covenants or obligations; and especially any ‘once and for all’ break option (as opposed to a ‘rolling’ break) – should be treated with caution.  It is likely be prudent for any tenant considering an early departure from leasehold premises to take specialist legal and surveying advice as part of its overall exit strategy.

Injunctions against ‘persons unknown’

Whilst not necessarily confined to the commercial landlord and tenant arena, the line of cases concerning the obtaining of injunctions against ‘persons unknown’ cannot fail to be relevant for all land owners and occupiers, and must bear mention in any landlord and tenant round-up for 2020.

Building upon principles and procedures highlighted in a number of cases heard in 2019 and very early 2020, the Court of Appeal set out, in March 2020 in the Canada Goose case ([2020] EWCA Civ 303), the following authoritative guidelines applicable to applications for injunctions against persons unknown:

  • Persons unknown defendants must be people who have not been identified but are capable of being identified and served with proceedings, if necessary by alternative service such as can reasonably be expected to bring the proceedings to their attention. In principle, such persons include both anonymous defendants who are identifiable at the time the proceedings commence and also newcomers, that is to say people who in the future will join the protest and fall within the specific description of the persons unknown.
  • The persons unknown must be defined in the originating injunction application by reference to their conduct which is alleged to be unlawful.
  • Interim injunctive relief may only be granted if there is a sufficiently real and imminent risk of a tort being committed to justify quia timet (i.e. anticipatory/pre-emptive) relief.
  • As in the case of the originating process itself, the defendants subject to the interim injunction must, in the continuation application, be individually named if known and identified or, if not, must be capable of being identified and served.
  • The prohibited acts must correspond to the threatened tort. They may include lawful conduct if, and only to the extent that, there is no other proportionate means of protecting the claimant’s rights.
  • The terms of the injunction must be sufficiently clear and precise as to enable persons potentially affected to know what they must not do. The prohibited acts must not, therefore, be described in terms of a legal cause of action, such as trespass or harassment or nuisance.  They may be defined by reference to the defendant’s intention if that is strictly necessary to correspond to the threatened tort and done in non-technical language which a defendant is capable of understanding and the intention is capable of proof without undue complexity.  (It is better practice, however, to formulate the injunction without reference to intention if the prohibited act can be described in ordinary language without doing so.)
  • The interim injunction should have clear geographical and temporal limits. It must be time limited because it is not a final injunction.
  • A final injunction cannot be granted in a protester case against persons unknown who are not parties at the date of the final order – that is to say newcomers who have not by that time committed the prohibited acts and so do not fall within the description of the persons unknown and who have not been served with the claim form. That does not mean to say that there is no scope for making persons unknown subject to a final injunction. That is perfectly legitimate provided the persons unknown are confined to those anonymous defendants who are identifiable (for example, from CCTV or body cameras or otherwise) as having committed the relevant unlawful acts prior to the date of the final order, and who have been served.

At first instance, the High Court had refused to continue an injunction, which had previously been granted on an interim basis, against animal welfare protestors outside Canada Goose’s Regent Street store.  The High Court held that the terms of the proposed injunction, and the class of persons unknown against whom it was sought, were too wide. The court was therefore concerned that the proposed injunction would interfere with lawful protest and would impact innocent persons. The retailer also fell short procedurally, in that it had failed to properly serve the claim form, as well as the interim injunction order. Any one such error might prompt a court to refuse an injunction.

In dismissing Canada Goose’s appeal against that decision, the Court of Appeal provided helpful guidance for claimants seeking to obtain injunctions against persons unknown and confirmed that, in many cases, it may not be appropriate to use the private jurisdiction of the civil courts to permanently control public demonstrations and disruption by a fluctuating body of potential defendants.  The case was a cautionary reminder that the courts will not take the granting of an injunction against persons unknown lightly – not even where an earlier interim injunction has been ordered.

Finally, hot on the heels of Canada Goose (and for the sake of completeness), additional, practical guidance associated with injunctions against persons unknown was provided in Birmingham City Council v Afsar [2020] EWHC 864 (QB), which clarified that a final injunction cannot be granted against a transient, mobile class of people); and Secretary of State for Transport (HS2) v Cuciurean [2020] EWHC 2614 (Ch), which provided guidance on the service requirements for a contempt application following a breach of a persons unknown injunction.

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