The Practical Lawyer

Landlord and tenant – commercial

Dilapidations – or improvements?

Dilapidations are becoming increasingly important, as Ls try to squeeze as much as they can out of departing Ts. In response, many Ts could be making more use of the laws on improvements (and the obligation of L to compensate T for improvements carried out before the last three years of the term).

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Break clause – withdrawal?

There can be unexpected complications when withdrawing a break notice.

For instance, suppose T serves a break notice. Subsequently, but still before the break date, T decides it still needs the premises (or agrees a lower rent with L). Clearly, T cannot withdraw the break unilaterally, but if agreement can be reached with L then they might both agree that the break notice is withdrawn and both parties are to proceed as if it had not been served. Unfortunately, the situation will not be as simply as that. Even if L and T agree to treat the break notice as withdrawn, it is still effective, and their conduct is deemed to create a new tenancy on the expiry of the break notice!

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Break clause – pitfalls

We all know that great care must be taken when exercising a break clause. Any pre-condition must be strictly complied with. In practice, that is often not the case (and there are many reported cases of solicitors referring to the wrong parties, or the wrong dates). So, a reminder of the main pitfalls:

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CRC – energy efficiency

The CRC Energy Efficiency Scheme starts to come into operation this month. It is an extremely complex scheme, but in general terms it will affect businesses with a total annual electricity bill of £500,000 or more (2008 prices). Such organisations have to keep records of energy emissions, with the idea being that the more CO2 that they emit, then the more allowances they will have to buy.

One particular problem arises in relation to multi-let buildings, where L is responsible for the supply of energy to the building, and thus L’s energy performance will be affected by the activities of its Ts (with a financial impact for L). Bear in mind that the energy emissions of an entire group of companies may be needed to be taken into account. We then get the problem of whether Ts of an office building should have to pay towards allowances that are being charged because of the industrial use of other Ts in L’s portfolio! At the present time, it is fair to say that these issues have not been resolved and no-one really seems sure of the best way to tackle such problems. What does seem clear, however, is that it may not be easy for Ls to pass on net CRC costs to their Ts, if only because the typical outgoings clause, or service charge clause, does probably not cover costs incurred under CRC (and it is doubtful that the cost of purchasing allowances will be regarded as a ‘tax’). In the short term, the sums involved are likely to be fairly trivial, but they may rise substantially when Phase 2 of CRC is introduced in 2013.

At the present time, there is little one can do other than be aware of the potential issues that lie ahead. In the long term, the obvious way to avoid CRC charges is to reduce carbon emissions. More prosaically, the best advice for Ls may be to install separate electricity supplies to each tenanted area of its properties (so T becomes the person ‘responsible for the energy supplies’). Source: Olswang.


AGA – sub-guarantee

We have seen that if T assigns, then T’s guarantor cannot also guarantee the assignee. But, what about the more common situation where the guarantor does not guarantee the assignee, but merely guarantees T’s continuing obligations in the AGA (ie he is guaranteeing the AGA, rather than the lease)? This is generally referred to as a sub-guarantee and is very widely used.

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AGA – no repeat guarantee

There has been a very important High Court decision on Authorised Guarantee Agreements (AGAs) and guarantors. The end result is that it is no longer possible for L to insist that T’s guarantor also becomes the assignee’s guarantor. This means that a repeat guarantee provided on assignment by the assignor’s guarantor will be void and unenforceable.

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Rent arrears – notice to sub-T

If T gets into financial difficulties, L should consider whether there is a sub-T. If so, then L can serve a notice on sub-T under s6 Law of Distress (Amendment) Act 1908. That notice would state that the head-T has failed to pay its rent to L, and that the sub-T has to therefore pay all future rent direct to L until the arrears have been paid.

It is often forgotten that this remedy exists. It applies whenever there is a sub-T and the effect of the notice is to create an L&T relationship between the L and sub-T, which allows L to take direct action against sub-T if there is a default in paying the rent to L. The only drawback is that the remedy only covers rent once it has fallen due. Accordingly, further notices need to be served each time subsequent arrears accrue.


Rent deposit – assignment of reversion

Suppose L has a charge over a rent deposit (ie money is given to L to deposit in a separate account in L’s bank, but the money is declared as belonging to T, and is charged by T to L). If L then assigns its reversion, and the new L moves the rent deposit money into an account at its new bank, is it necessary for there to be a new charge in favour of the new holder of the reversion? In practice, this rarely happens and assignee Ls will simply open the new deposit account, and will not bother to take a new charge nor register it at Companies House.

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T in administration – rent?

The High Court has held that if T is in administration, and the administrators use any part of the property, then the whole of the rent will be an administration expense (ie the rent will rank ahead of sums due to preferential and other unsecured creditors).

For instance, suppose rent is due in advance on the usual quarter days. The administrators are using part of the premises on 25 March 2010, but vacate on 1 April 2010. The administrators are liable for the full quarter’s rent (even though they only occupied for one week, and even though they only used part of the premises). In summary:

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Virtual assignments – valid

The CA has upheld the validity of virtual assignments. In its view, a virtual assignment will not be in breach of a covenant that says T is not to:

  • make a declaration of trust;
  • create an under-lease;
  • grant a legal assignment;
  • share or part with possession.
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