Any conditions attached to a lease break clause must have been satisfied before one can successfully break a lease. As seen in various cases, such conditions will be strictly construed.

NYK Logistics (UK) Ltd v Ibrend Estates BV (2011)

The lease permitted the tenant to terminate it on giving the landlord not less than six months’ previous written notice, provided that the tenant paid all the rent up to the break date and delivered up vacant possession of the property on the break date. The break clause also provided for the landlord to waive the conditions if they had not been satisfied, though it was not obliged to do so.

The tenant served a valid break notice. The tenant wanted to do the repairs itself to control the quality and costs, and to avoid a dilapidations claim for damages in excess of its own costs in doing the repairs.

On 1 April 2009, the surveyors for the landlord and tenant attended a site meeting where it was agreed that, although the tenant had substantially completed its repairing and decorating obligations, there were some outstanding matters. The landlord’s surveyor found that the tenant had emptied the property of its fixtures, fittings, furniture and stock, save for a small quantity of items that would fit into a small van.

On 2 April 2009, the tenant’s surveyor emailed the landlord’s surveyor stating that there were a number of relatively minor defects and proposed that the tenant:

1. Pay a security guard for the property for a further week, during which time the tenant’s workmen would be able to deal with these items – the property was in an area that suffered from vandalism and theft.

2. Would not pay rent or rates, but would hand over the keys on the break date so that the landlord would have full access.

On 3 April, the tenant’s surveyor chased the landlord’s surveyor and its agent to make arrangements for the handover of the keys and with regard to its proposals, but received no response.

On 6 April, the tenant’s workmen entered the property to carry out the remaining repairs, where they remained until 9 April. The tenant had arranged security for the property until 10 April 2009.

On 7 April, the tenant emailed the landlord’s agent about the keys as it wanted to know what to do with them. The landlord’s agent subsequently spoke with one of the tenant’s representatives who informed him that there was some minor repairs and cleaning that were in the process of being completed. The landlord informed the tenant that he would send someone round to collect the keys on 8 April.

On 8 April, nobody came to collect the keys on behalf of the landlord. However, the landlord’s agent went to the property and spoke to the tenant’s security guard, but did not go in: the security guard was cautious about granting the agent access and the agent did not insist on its right of entry.

On 9 April, after having received legal advice, the landlord’s agent contacted the tenant to inform it that the conditions of the break clause had not been satisfied.

The landlord sought a declaration that the lease had continued after the break date and claimed payment of the rent due, which in fact had been paid on a without prejudice basis. The landlord argued that the tenant had failed to provide vacant possession because it had:

1. Maintained security at the property after the break date and had allegedly prevented its agent from entering the property on 8 April;

2. Retained a small quantity of its equipment in the property after the break date; and

3. Retained its workmen in the property from 6 to 9 April for its own purposes (i.e. to complete the repairs required by the schedule of dilapidations.)

The tenant counterclaimed and:

1. Denied that the lease had continued and claimed repayment of the rent.; and

2. Alternatively argued that the landlord had waived the requirement to comply with the conditions in the break clause on the grounds that the landlord’s agent’s statement on 7 April that he would send someone round to collect the keys was consistent only with the landlord acknowledging that the lease had been terminated. The landlord was only entitled to the keys on termination of the lease and, consequently, it must have accepted that vacant possession had been given.

County Court decision

The County Court judge held that the tenant had not terminated the lease and there had been no waiver. The tenant appealed.  

Court of Appeal decision

The Court of Appeal found in favour of the landlord.

To satisfy the vacant possession condition, vacant possession had to be given to the landlord by midnight on the break date. The Court stated that the concept of “vacant possession” meant that:

1. The property must be empty of people;

2. The landlord must able to assume and enjoy immediate and exclusive possession, occupation and control of the property.; and

3. The property must be empty of chattels, although this obligation would only be breached if what was left substantially prevented or interfered with the enjoyment of the right of possession of a substantial part of the property.

The tenant knew that its proposal to extend its occupation required the landlord’s agreement. The tenant should have moved everyone and everything out by the break date and then with the landlord’s permission return to the premises to complete the outstanding works.  The tenant had done nothing to demonstrate that it was giving up possession. Although it had offered to return the keys, it had not done so and as such the tenant maintained control of the premises.

The Court also held that the tenant was not entitled to award itself an extension of time for the giving of possession, even though there were concerns about vandalism, as these were rightly the landlord’s problem from the break date. In addition the court decided that the tenant wanted to complete the repairs for its own benefit to avoid a subsequent dilapidations claim rather than it being a condition of the break clause.

The Court found that the landlord had not waived the lease. The landlord’s agent only stated that he would arrange for the keys to be collected, but failed to do so following its solicitors’ advice. The Court stated that if the landlord’s agent had accepted the keys, there may have been a surrender of the lease by operation of law, but that did not happen. The landlord’s agent’s words were not sufficient to end the lease.

Comment

The landlord had no new tenant lined up for the premises and despite the fact that the landlord’s interests were not affected by the tenant’s behaviour, the Court held that the tenant remained in possession for its own purposes. The sensible action to take would have been to have left the premises, return the keys and arrange with the landlord to go back in and carry out the works.

This is a further reminder, if one was needed, that break clause conditions are strictly construed. The tenant was required to pay the rent for the remaining term, but such additional cost could have been avoided by taking early legal advice.

As a general reminder of the law, the LTCA introduced the concept of authorised guarantee agreements (AGAs) in connection with the assignment of new leases. An AGA must be entered into pursuant to a lawfully imposed condition of the landlord’s consent to the assignment. To be lawful, a condition imposed by a landlord must be either of the following:

1. The subject of an agreement under section 19(1A) of the Landlord and Tenant Act 1927 (LTA); or.

2. Reasonable under the general rules of reasonableness.

Any agreement which excludes, modifies or frustrates the operation of the LTCA is void. AGAs are an exception, provided they comply with all of the requirements of section 16 of the LTCA.

The Good Harvest Decision:

A subtenant assigned his sublease. In accordance with the terms of the sublease, as a condition of the landlord’s consent to the assignment, the subtenant and the subtenant’s guarantor entered into an AGA under which both guaranteed the assignee’s obligations under the sublease. The High Court held that:

1. Only the subtenant (not the subtenant’s guarantor) could give a guarantee for the assignee. The guarantee could only be in the form of an AGA;

2. The requirement by the landlord that the subtenant’s guarantor should guarantee the obligations of the assignee, was void under section 25 of the LTCA; and

3. The guarantee given by the subtenant’s guarantor for the assignee was similarly void.

Comment:

The decision in K/S Victoria Street confirms the decision in Good Harvest, in that any agreement which requires the tenant’s guarantor to guarantee the assignee’s obligations will be void under section 25 of the LTCA. K/S Victoria Street does not deal with the other issues that Good Harvest left unanswered, namely:

1. Whether a voluntary guarantee given by the tenant’s guarantor, guaranteeing the assignee’s obligations, would also be void; and

2. Whether a guarantee, given by the tenant’s guarantor, guaranteeing the tenant’s obligations under an AGA, also falls foul of section 25 of the LTCA.

An appeal in K/S Victoria Street is due to be heard later this year, once a number of other preliminary issues have been heard.

The LRHUDA 1993 defines the common parts as including the structure and exterior of the building or part and any common facilities within it.

The Facts:

Cadogan and another v Panagopoulos and another (2010) EWCA Civ 1259 involved a  property which was subject to a headlease, and was divided into five flats held on subleases and a basement which was divided into a storage area and a caretaker’s flat.

In the subleases, three of the subtenants had a right to the services of a caretaker and two of them had a right to require a resident caretaker (living in the caretaker’s flat).

In April 2006, three of the five qualifying subtenants (the purchasers) gave notice exercising their right to acquire the freehold of the property. The owner of the property served a counter notice and, in October 2006, the purchasers applied to the Leasehold Valuation Tribunal (LVT) to determine the terms of the purchase.

In March 2007, the owner gave notice that it intended to grant a lease of the caretaker’s flat to a third party, the validity of which was challenged by the purchasers. The owner and the purchasers then agreed terms for the purchase of the property on alternative bases, according to whether the intended grant of the lease of the caretaker’s flat was, or was not, void.

In March 2008, the owner granted a long lease of the caretaker’s flat to the third party. The purchasers argued that under section 19 of the LRHUDA 1993, the lease of the flat was void.

The High Court agreed and held that the purchasers were entitled to buy the caretaker’s flat on the grounds that it was a “common part” within the meaning of the LRHUDA 1993. The owner appealed to the Court of Appeal.

The Decision:

The Court of Appeal found in favour of the purchasers on the basis of the following:

1. Was the caretaker’s flat a common part? The court decided that the word “common”  was anything shared between the property and other parts of the development or it was anything that benefited or was a concern to the other occupiers. The common benefit was primarily the caretaker’s services for which a resident caretaker would require a flat, rather than the use of the flat. This could be regarded as a “common facility” within the LRHUDA 1993. The fact that the purchasers had no right over the flat did not prevent it from being a common part.

2. Was it reasonably necessary to buy the caretaker’s flat? The court decided that it was necessary otherwise they would not be able to use it to accommodate a caretaker.

Comment:

This case shows that the courts are willing to use a common sense approach to interpreting the LRHUDA 1993, so as to give effect to the principles allowing qualifying tenants to acquire the freehold of their property and any other common parts or facilities which are used in common, such as the services of a caretaker. Although in this particular case the qualifying tenants had a right to use the common facilities (i.e. the services of a caretaker), the court did not set out whether such a legal right was necessary to include such common facilities within an enfranchisement claim.

Facts

Three properties were originally constructed as large houses on two separate leases. Both leases described the properties as “a messuage or dwelling house”. One lease required use only as 16 residential flatlets with a residential caretaker, while the other restricted the use to that of a single family residence or high class furnished property for up to twenty occupiers. At the time of the enfranchisement claim, the properties were being used for short term tourist and business visitors’ accommodation. The tenant had sublet to an associated company which ran the short term lettings business from the properties. It was unclear when the conversion works were carried out.

The landlord challenged the tenant’s enfranchisement claim on the basis of the following grounds:

1. Each property was not a house within the LRA; and

2. The underleases were part of a sham arrangement

Decision

The County Court found in favour of the tenant on the basis that:

1. the properties were adapted, or designed for living in, and although they had been adapted from the original design, the adaption was “for living in”.
2. the tenant had sublet the properties to the associated company, which occupied them for its business. The protection of the Landlord and Tenant Act 1954 (“LTA) did not apply since the undertenant company was not in occupation. The Commonhold Leasehold Reform Act 2002 excludes a tenant from being able to enfranchise where the tenant had the protection of the LTA and as such the tenant was entitled to enfranchise.

On the landlord’s appeal of ground one only, the Court of Appeal held: 

• That the properties were “designed for living in” as they were constructed as a house for single occupation. However Lord Neuberger confirmed that where a property had been “designed for living in” but subsequently adapted for another use (unless it was readapted for living in), it would not be a house for the purposes of the LRA. This addressed the gap left by the previous case of Boss Holdings Limited v Grosvernor West End Properties and others (2008) which had found that “designed” meant the original purpose for which the property was designed, not its use at the time of the enfranchisement claim. The literal interpretation of the LRA indicated that “designed” and “adapted” were alternative requirements;
• Lord Neuberger considered the effect of the conversion works which provided mainly self-contained units of accommodation. Even if the current use of the properties was not for living in, that did not mean that they were not adapted for living in. To establish if the property had been adapted for living in the Court would:
  • look at the effect of the works which altered the building not the furnishings;
  • consider how the building was adapted and not why;
  • not look at the intention of the person carrying out the works, so far as the intended use was concerned, although the Court may consider the actual or intended use of the building; and
  • not look at the use of the building at the time of the claim.
• Lord Neuberger thought that the works had been carried out before the leases were granted. If the works had been carried out during the term of the leases, then the landlord would have been able to produce a permission to carry out the works. Such evidence was not available and therefore given the user covenants in the leases, even if the subjective purpose for which the works of adaption were carried out, and the use to which the building was then put, was relevant, that purpose was for “living in”. 
•  Each of the properties was a house reasonably so called. The factors that should be considered were the external and internal appearance of the house and the permitted use of the properties under the leases. The previous case of Grosvernor Estates Limited v Prospect Estates Limited (2008) placed too much significance on the user covenant in a lease. Essentially, reference had to be made to the physical appearance so that a property built as a house which was internally converted into offices would “reasonably be called” a house, even though it was not used for residential purposes, and even if it was not permitted to be used for that purpose.

Comment

This case is one of a number of cases on what constitutes a house for the purposes of leasehold enfranchisement. Lord Neuberger considered the above cases in detail and clarified a number of points, but it is clear that he considers the LRA has gone beyond what was originally intended by Parliament. Following the findings of various cases and the revisions introduced by the Commonhold Leasehold Reform Act 2002, it is now possible for commercial tenants to enfranchise where for example the properties are empty or are substantially commercial. This seems to go far beyond what was originally intended ( i.e. assisting residential tenants who occupy a property as their main residence to acquire the freehold or a lease extension.)

The consultation asked for feedback on a number of issues, including:

• Whether tenants should contribute towards CRC costs incurred by landlords in relation to the energy used within the tenant’s premises, or in the common parts;
• How CRC costs should be apportioned between different tenants;
• If CRC costs are not passed on to tenants, how landlords and tenants could be encouraged to work together to reduce carbon emissions;
• Whether tenants should provide landlords with the money to buy allowances in respect of carbon emissions, or whether landlords should buy the allowances and charge tenants retrospectively; and
• What should happen if either the landlord or the tenant changes.

If the consultation showed that a consensus could be found, the Working Party intended to create standard clauses for use in commercial leases, which would help reduce the time it takes to grant or review leases, or to agree documentation for the sale and purchase of properties that are subject to occupation leases.

A summary of the responses received during the consultation was published on 7 July 2010. However, after evaluating the responses, the Working Party concluded that there was insufficient consensus on how to address CRC issues in leases, meaning there was little point in creating standard clauses.

However, due to a number of the responses calling for additional guidance on the options open to landlords and tenants, the Working Party has decided to publish a new version of The Carbon Reduction Commitment: A Guide for Landlords and Tenants (originally published in June 2009) in the next few weeks. This updated guidance will outline the CRC issues that need to be considered when drafting leases; set out the different methods by which landlords and tenants could share the costs and rewards of the CRC; and summarise the advantages and disadvantages of each method.

The new leases must be used for all shared ownership leases granted on or after 6 April 2010 for homes built with funding from the HCA (unless an earlier contract requires the use of a different form of lease). The new leases replace the model leases published in September 2009, which should be used until 5 April 2010.

The HCA believes the lease will not only simplify and speed up the home buying process but, at a time of financial caution, will assure existing lenders of shared ownership mortgages. As economic conditions improve, the revised lease should help to encourage new lenders into the shared ownership market.

The lease has been developed in conjunction with the Departrment for Communities and Local Government, the Council for Mortgage Lenders, the National Housing Federation and a number of leading mortgage lenders and providers of affordable housing. The new leases have been amended to:

• Extend the level of protection given to mortgagees of shared ownership properties;
• Update the layout and language of the leases;
• Clarify the provisions relating to alienation, rent review, making good damage to common parts and frustration in the event of damage or destruction.

The lease can be adapted by housing providers and lenders to suit individual situations, but there are fundamental clauses that must be included in any new lease. The fundamental clauses cover alienation, mortgagee protection, ‘staircasing’ provisions, protected area ‘staircasing’ provisions (where appropriate), rent review, service charge provisions (where appropriate) and right of first refusal. The landlord must also give the leaseholder a document entitled “Key Information for Shared Owners”, which sets out the main terms of the lease.