PROPERTY JOURNAL

Recent cases flag up potential issues for 2023

A round-up of relevant English court cases from last year suggests that green leases, rent arrears and fit-out periods could be flashpoints for landlords and tenants in the year ahead

Author:

  • Paul Tonkin
  • Lucy Redman

21 April 2023

Photo of the exterior of the High Court in London

Over the past year, the courts have been dealing with the increased emphasis on sustainability and the continued ramifications of the pandemic for landlords and tenants, as well as perennial concerns such as the determination of open-market rents.

A closer look at the case law can give the property sector an idea of the issues that are likely to lead to legal action in the short and medium term.

Tenant deemed responsible for EPC rating

From 1 April this year, it is unlawful to continue letting a substandard property under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, also referred to as the Minimum Energy Efficiency Standards (MEES) regulations. Substandard properties are those with an energy performance certificate (EPC) rating of F or G.

Clipper Logistics Plc v Scottish Equitable Plc, an unreported case from Sheffield county court in March 2022, concerned an uncontested lease renewal under the Landlord and Tenant Act 1954. The existing lease stipulated that the tenant needed landlord consent – not to be unreasonably withheld – to carry out any alterations. 

The landlord proposed that the renewal lease should include new alteration covenants preventing the tenant from making any changes to the property that would render it a substandard property. If it did, it would be obliged to restore the property to an agreed EPC rating and pay for a new certificate. The tenant did not agree to this change, so it fell to the county court to determine whether the landlord's proposed terms were fair.

The court refused to impose additional restrictions on the right to carry out alterations; the existing clause already required the landlord's consent, not to be unreasonably withheld. However, the court did include a clause requiring the tenant to return the premises with the same EPC rating as it had at the date of the lease.

Landlords now need to pay increased attention to complying with the MEES regulations, with any proposed tenant alterations subject to greater scrutiny. For the time being at least, it appears the courts will not be quick to impose additional restrictions on tenants. 

Related article

What impact will new minimum EPC requirements have?

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Landlords litigate over lockdown rent arrangements

Courts are also dealing with the fallout from the pandemic, which has led to a rise in tenant rent defaults in the retail and leisure sectors in particular. This has prompted some landlords to take legal action to recover what rents they can.

Oceanfill Ltd v Nuffield Health Wellbeing Ltd & Anor [2022] EWHC 2178 (Ch) concerned a restructuring plan by health club operator Virgin Active, the tenant under various leases – including a gym in Leeds. The former tenant of the Leeds lease was Nuffield, who had entered into an authorised guarantee agreement (AGA) with the landlord – Oceanfill. The restructuring plan compromised the rent, and as a result Oceanfill couldn't recover any arrears from Virgin Active. It therefore sought to pursue Nuffield, under the AGA. 

Nuffield argued that it was not liable under the agreement for various reasons. First, it maintained that the restructuring plan had varied the lease, effectively reducing the rent to nil. It also argued that as Virgin and Nuffield were joint debtors, when the former was released from its obligations it was too. Finally, Nuffield argued that, as any claim under an AGA would result in a ricochet claim by Nuffield against Virgin, any such claim must also have been excluded.

The High Court decided that Nuffield remained liable for the rent under the AGA; the restructuring plan had not varied the lease, and instead operated as a compromise between Oceanfill and Virgin only. The AGA's terms expressly survived any variations or compromises between the landlord and tenant, so Nuffield remained liable.

Nuffield was thus not released from its obligations as a joint debtor, which would only have occurred when the landlord had voluntarily released Virgin from its obligations and not when such release was imposed by a restructuring plan. 

Finally, the court rejected the ricochet argument. The restructuring plan was very detailed, and could have restricted claims against guarantors but did not do so. 

This helpfully clarified the effect of restructuring plans on leases, and it reassured landlords that, for now, they retain rights against guarantors. However, it leaves the door open for restructuring plans to broaden their scope. 

Hush Brasseries v RLUKREF Nominees (UK) One Ltd & Anor [2022] EWHC 3018 (Ch) meanwhile involved a tenant's option to renew a lease, which could be terminated by the landlord if the tenant fell into arrears. 

The tenant went into arrears during the pandemic, but due to the restrictions of the Coronavirus Act 2020 the landlord could not forfeit the lease so it terminated the option instead. The tenant paid the arrears and sought relief from forfeiture to reinstate the option. 

The High Court considered it could only grant relief from forfeiture if the option created an interest in the property itself and the termination provision in the option secured that right.

The court decided that, as the option constituted an interest in land at the point it was granted that was registrable against the landlord's title then it was a proprietary interest. The landlord's right to terminate the option for non-payment of rent also mirrored a forfeiture provision in a lease and amounted to security for performance. On that basis, the court granted relief from forfeiture and reinstated the option.

Court offers different judgments on rent-free periods

A longer-standing issue has been the provision or otherwise of a rent-free period at the beginning of a lease, to enable the tenant to fit out a property. Where a new lease is granted under the 1954 Act and the landlord and tenant cannot agree the rent, the court must decide the open-market rate reasonably payable from day one. However, should the rent be reduced to reflect the fact that, in the open market, tenants would also be given such a fit-out period? 

The county courts have historically taken different approaches to this, with recent case law allowing such periods. This point was considered again in two cases last year, with differing outcomes. 

In HPUT Trustee No 1 v Boots UK, an unreported case from 2021, the central London county court did not allow a rent-free period on the basis that the 1954 Act is carefully drafted, and does not refer to such periods. 

The primary position should be a so-called presumption of reality and for rent to be reasonably payable. In practice, this means a rent-free period should not be granted for fitting-out works that would not in reality be carried out. Whether or not inducements such as rent-free periods will be offered depends on the circumstances of the particular market and, for this lease, there would have been no need to offer them. 

Finally, although under the 1954 Act the tenant's occupation must be disregarded in calculating the rent, the purpose of that requirement is to negate any overbid from a sitting tenant and does not imply a need to assume fitting-out works. 

In Old Street Retail Trustee (Jersey) 1 Ltd v GB Healthcare, an unreported case from late last year, the central London county court took a different approach, and allowed a rent-free period.

The focus was on comparable properties, rather than the property that was the subject of claim. If leases of comparable properties would include a rent-free period but the subject property would not then an adjustment will need to be made; otherwise, they would not be comparing like with like. The court considered this is what the presumption of reality – and the disregard of occupation – requires.

The disparity between these two recent cases from the same court leaves the legal position unclear. This may well lead to arguments between landlords and tenants about the hypothetical open-market rent payable, and the inducements that would be offered. Further disputes on this point are likely this year, and a High Court judgment bringing some much-needed clarity would be welcomed. 

 

Paul Tonkin is a partner at Hogan Lovells International LLP

Contact Paul: Email

Lucy Redman is a senior knowledge lawyer in the real-estate disputes team at Hogan Lovells International LLP

Contact Lucy: Email

Related competencies include: Landlord and tenant, Leasing and letting, Legal/regulatory compliance

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