Delyth Williams
Since the last business tenancies update appeared in Estates Gazette at (1987) 281 EG 295, several cases have reached the law reports on the operation of the Landlord and Tenant Act 1954 Part II which are of significance for the practitioner. These cases have dealt not only with the more common practical issues but also with some of the more diverse areas of business tenancy law.
Does the 1954 Act apply?
The 1954 Act protects only the tenant of business premises, so that the question of the application of the rule in Street v Mountford [5] 1 EGLR 128; (1985) 274 EG 821 is of particular importance. In that case the House of Lords held that a person who occupied with exclusive possession for a term at a rent was a tenant. While the interpretation of this decision has been considered on numerous occasions in the field of residential premises it has recently been considered in the context of commercial premises as well. In Dresden Estates Ltd v Collinson [1987] 1 EGLR 45; (1987) 281 EG 1321 the respondent was a builder and scaffolder and occupied a workshop and store under an agreement which throughout described itself as a licence, emphasised that exclusive possession was not conferred and further provided that (in clause 4(b)):
It is agreed between the Licensors and the Licensees as follows:
(a) this Licence is personal to the Licensees and the Licensees shall not transfer this interest in the same in any manner whatsoever.
(b) this Licence confers no exclusive right for the Licensees to use and occupy the Premises and the Licensors shall be entitled from time to time on giving the Required Notice to require the Licensees to transfer this occupation to other premises within the Licensor’s adjoining property.
(c) this Licence does not constitute any tenancy or lease of the Premises.
The agreement also contained a number of provisions normally found in tenancies and included an express grant of a limited right to the owners to enter for the purpose of carrying out any work that was deemed to be necessary by the licensors. The county court judge was of the opinion that the agreement constituted a tenancy. The Court of Appeal held that, considering the agreement as a whole, the indications were in favour of a licence and, in particular, the provision by which the occupier could be required to move to other premises was wholly inconsistent with a right to exclusive possession during the continuance of the agreement. While exclusive possession was one of the more important factors, the decisive consideration was the intention of the parties. Further, the decision in Street v Mountford was a decision in regard to residential premises, and the suggested restriction of the inquiry to whether the occupier was a tenant or a lodger had no application to business premises, where there is no such person as a lodger.
Whether the occupiers of “shop space” had exclusive possession was one of the questions at issue in Smith v Northside Developments Ltd [7] 2 EGLR 151; (1987) 283 EG 1211. In this case the appellants were initially co-occupiers, with a third party, of the shop space. After a time, the third party left and the appellants occupied the whole of the space (paying double the previous weekly amount), but there was no agreement in writing to this effect. The legal basis of the occupation became a critical issue when the appellants were given notice to leave. The appellants claimed that they had not merely taken over the space previously occupied by the third party but had obtained an exclusive right of occupation which was good against the whole world. The Court of Appeal held that there was no evidence indicating an agreement for exclusive possession, as there was merely an arrangement to have a replacement for the departed third party.
In Dellneed Ltd v Chin [7] 1 EGLR 75; (1986) 281 EG 531, when the premises in question had been rebuilt following a serious fire, the tenant (who was a well-known restaurateur and had previously used the premises as a restaurant) let a company, D Ltd, into occupation under a management agreement called a “Mai Toi” agreement. The agreement, under which a well-established restaurant allows a young and inexperienced man to operate a restaurant business on his own account under supervision, provided that nothing in the management agreement should be construed as creating a legal demise and that “this agreement confers no tenancy”. The main issue was whether this document between the tenant and the restaurant operator created a tenancy. Millett J held that the agreement created a tenancy within the rule in Street v Mountford (supra), as there was exclusive possession of the restaurant for a term at a rent. The transaction was a commercial one from the outset. D Ltd had exclusive possession of the premises, paid a weekly rent, was under a duty to repair and prohibited from redecorating, altering or changing the name of the premises. All these factors clearly pointed to the agreement being a tenancy.
The “tenant” was held not to fulfil one of the fundamental conditions of section 23(1) of the 1954 Act in Nozari-Zadeh v Pearl Assurance plc [7] 2 EGLR 91; (1987) 283 EG 457, where the premises were used as a restaurant and the tenant made an application for the grant of a new tenancy. The landlords opposed the grant of a new tenancy on the grounds in section 30(1)(a) and (b) of the 1954 Act but subsequently applied to strike out the tenant’s claim on the ground that he had not occupied the premises as required by section 23(1). The county court judge found that the premises had been occupied as a restaurant by a series of companies which had been incorporated and, after a short time, wound up. The tenant himself took only a minor part in the running of the restaurant although holding shares in the business. In the last of the companies the tenant held 99 out of 100 shares.
It was submitted that at least the last two companies were the alter ego of the tenant and that occupation by them could be regarded as occupation by him for the purposes of the 1954 Act.
The Court of Appeal held that the county court judge had been correct in holding that the alter ego contention was unsustainable. As the business carried on by the companies was not the same as the business carried on by the tenant or applicant, he did not fulfil the fundamental condition of section 23(1). It is to be noted that in Cristina v Seear [5] 2 EGLR 128; (1985) 275 EG 898 the business premises were occupied by a company of which the tenants owned all the shares and they contended that the company was a mere vehicle or alter ego through which the business was carried on by them. The Court of Appeal held they were not entitled to apply for a new tenancy.
Notices and time-limits
The successful operation of the 1954 Act’s procedures is dependent upon compliance with that Act’s time-limits as well as the time-limits set by the rules of the court. In Bar v Pathwood Investments Ltd [7] 1 EGLR 90; (1987) 282 EG 1538 the main question was the operation of the time-limit under section 29(3) for the making of an application for a new tenancy. In this case the application was made within the time-limit but covered only part of the holding. The tenancy actually comprised a ground-floor shop (with basement storage area), a ground-floor studio and three flats on the first, second and third floors. The tenant occupied the shop and basement storage area for her business of a ladies’ boutique as well as the ground-floor studio and first-floor flat as her home. The second- and third-floor flats were sublet to persons who had no connection with her business. The tenant’s originating application was made within time but referred only to the “ground-floor shop premises at 32 Rosslyn Hill, Hampstead”. Subsequently, but outside the section 29(3) time-limit, the description was amended to “shop and premises situate at 32 Rosslyn Hill, Hampstead”. The landlords opposed the amendment. The Court of Appeal held that there was power under County Court Rules 1981 Ord 15 to amend an originating application and that the court would exercise the discretion which the county court judge had failed to exercise.
In Morris v Patel [7] 1 EGLR 75; (1987) 281 EG 419 the tenant sought leave to appeal and an extension of time for appealing from a decision of a county court judge. The county court judge had dismissed an application by the tenant for a declaration that the notice served on him, under the 1954 Act, purporting to terminate his business tenancy was invalid. The landlord’s notice had been in the old Form 7, Appendix 1 to the Landlord and Tenant (Notices) Regulations 1969 instead of the new Form 1 in Schedule 2 to the Landlord and Tenant Act 1954 Part II (Notices) Regulations 1983. The new form differed in several ways including a large and prominently printed box warning the recipient of the notice to act quickly and, in case of doubt, to obtain advice immediately. The Court of Appeal held the absence of the printed box had no adverse consequences in the present case as the tenant obtained advice and took the appropriate steps. The old form was substantially to the like effect as the new one. In the circumstances, leave to appeal would be refused.
The standing of a section 25 notice which purporting to apply only to part of the demised premises was considered in Moss v Mobil Oil Co Ltd [8] 06 EG 109. In this case, by a lease of September 1983, Mobil demised to Mr Moss two service stations (F and T) with both being described together as “the Premises”. Mr M agreed to take a “Minimum Load” of fuel annually. The lease contained a rider to the effect that all the covenants, agreements and conditions of the lease should be read and construed as if separate and independent leases had been entered into in respect of each of the demised premises and not as one demise. Mobil served a section 25 notice in respect of F service station only and the tenant contended that the notice was invalid because it purported to determine the tenancy in respect of part only of the demised premises. The Court of Appeal held that it was settled law that a section 25 notice which purports to apply only to part of the demised premises is invalid but, in this case, the rider to the lease had the effect of severing the demise so as to make it two leases — one in respect of each service station. In the event, therefore, the section 25 notice was valid.
In Herongrove Ltd v Wates City of London Properties plc [7] NPC 119 a lease of office premises also included the demise of storage premises and car-parking spaces. The landlord’s section 25 notice stated that it related to the ninth floor of the office premises (which was in fact correct) but did not refer to the storage premises or the car-parking spaces. The tenants contended that the section 25 notice was invalid or, alternatively, that a new tenancy should be granted. Harman J held that the test was whether a reasonably minded tenant receiving the notice would understand that it was intended to relate to all of the premises demised or whether he might be misled into thinking that it was intended to relate to part only. On the facts the learned judge held that a reasonably minded tenant might be in doubt, so that the section 25 notice was invalid.
New lease terms and interim rent
In Charles Follett Ltd v Cabtell Investments Ltd [7] 2 EGLR 88; (1987) 283 EG 195 the tenant company, F Ltd, occupied premises under a 14-year lease at a rent of £13,500, the rent having been the subject of a review after seven years. F Ltd served a notice, under section 26 of the 1954 Act, and requested a further term of 14 years at the same rent with a review after seven years. In response, the landlord company, C Ltd, proposed a term of 10 years at a rent of £25,000 with a review after five years. C Ltd issued a summons for an interim rent to be fixed. Against this background, the parties negotiated, though the negotiations failed.
Three years later, the tenant’s surveyor reported that the market rent was now £57,000. This caused F Ltd to reconsider their proposals: the company decided to attempt to keep their options open and hence requested a new term of one year only at a rent of £57,500. For their part, C Ltd formed the view that the rent should be £125,000 for a 10-year term with the review as originally proposed. Mr T L G Cullen QC (sitting as a deputy judge) held that it was reasonable to order a new tenancy for 10 years but to give the tenant an option to break. The break clause to be included would allow the tenant to break by giving notice to do so within the first month of the new lease, the lease to terminate six months thereafter. As the new lease would commence some four months after the court’s decision, this gave the tenant a total of 11 months in which to vacate. Having considered evidence of the market rent and allowing for deductions arising from some disadvantageous physical characteristics, the new rent would be £106,000. The rent for the property, on the basis of a hypothetical tenancy from year to year, was £80,000 and this figure was the basis for fixing the interim rent. Given the dramatic difference between this figure and the current rent, a substantial reduction would be made of 50%. The interim rent was thus £40,000. The court had to exercise a discretion to determine whether it was unjust to require the tenant to pay the interim rent. As the tenant had been led to believe that the landlord would not seek a rent in excess of £25,000, the court would accept an undertaking from the tenant to pay rent at this figure in respect of the period during which negotiations were in progress. Thereafter, the interim rent of £40,000 was payable. A rent review clause would be included, providing for upward revision only as in the present lease, that time would be of the essence and that improvements should be disregarded in accordance with a formula agreed by the parties. The Court of Appeal was of the opinion that the reduction of 50% to arrive at the interim rent, although probably a larger reduction than other members of the judiciary might have approved, could not be faulted as incorrect in principle. The course taken by the judge in accepting the undertaking to pay £25,000 pa for a period of two years and nine months was not a proper exercise of the discretion under section 24A. The only choice open was to continue the old rent of £13,500 pa or replace it by £40,000 pa.
The criticism of a county court judge’s method of determining a section 34 rent was rejected by the Court of Appeal in Oriani v Dorita Properties Ltd [7] 1 EGLR 88; (1987) 282 EG 1001, where the premises in question were located in the East Precinct of St George’s Walk, Croydon, and the agreed valuation approach was by means of a zone A valuation method. The East Precinct (which was a less favoured area than the West Precinct) was the source of the evidence of open market lettings (and prospective lettings) adduced by the landlord. The tenants relied upon evidence from nine renewals of leases in the West Precinct and two rent reviews. The county court judge added together the zone A equivalent figures of the nine renewal transactions relied on by the tenants (but with a 20% reduction on account of the difference between the East and West Precincts) and the two open market lettings put forward by the landlords and divided by 11. On appeal, the landlords contended, inter alia, that by describing the figure arrived at as “the fair and reasonable rent”, the county court judge had not been determining an open market rent as required by the 1954 Act. The Court of Appeal held that the criticisms of the county court judge’s decision would be rejected since, although her words “the fair and reasonable rent” were unhappily chosen, what she meant was that her figure was a fair and reasonable assessment of the open market rent. However, the county court judge had erred in that the figures relating to the nine comparables in the West Precinct had not been adjusted for increases in market rents down to April 1986 when the application was heard.
An application for a new tenancy and the landlords’ application for an interim rent under section 24A were considered in Woodbridge v Westminster Press Ltd [7] 2 EGLR 97; (1987) 284 EG 60, where the building in question was at the end of its useful life and was subject to serious structural defects. The lease in question had been for a term of 21 years from 1963 at a rent of £4,250 for the first seven years and rising to £5,000 during the residue of the term. In addition, the tenants had to contribute (by way of additional rent) “a fair proportion” (to be assessed by the landlords’ surveyor) of the cost of keeping the structure in good repair and there was also a covenant by the tenants to keep the interior in good repair. The physical condition of the structure had deteriorated in an alarming way before the trial and temporary propping became necessary. His Honour Judge Paul Baker QC (sitting as a High Court judge) decided that the tenants were liable to bear one half of the cost of these strengthening support measures so far as taking place during the currency of the lease (as continued by the 1954 Act). Both parties agreed that the new lease should be short and he accepted the tenants’ proposal for a term of nine months as against the landlords’ argument for a shorter period. The determination of the rent was facilitated by the agreement of the parties that a particular “comparable” was relevant. The learned judge held that a rent of £29,000 (on an annual basis) would be determined, after taking account of necessary modifications in the repairing obligations and making a discount of 45% for a nine-month term as contrasted with a seven-year-term comparable. Taking into account all the circumstances, the deputy judge determined an interim rent of £20,500.
The terms of the new lease were also in question in Peter Millett & Sons Ltd v Salisbury Handbags Ltd [7] 2 EGLR 104; (1987) 284 EG 784, which concerned an application for a new tenancy of a groundfloor and basement premises in Oxford Street, London. The tenants wanted a term of 14 years but agreed that a shorter term might be appropriate, while the landlords wanted a six months’ term. In the section 25 notice, the landlords alleged delay in paying rent, but this ground was not relied on and no other ground of opposition to a new tenancy was stated. Somewhat late in the day, the landlords contended that possession was required for a subsidiary company, but the evidence of “intention” was found to be quite sketchy. Mr John Mowbray QC (sitting as a deputy judge) held that the landlords should be given an opportunity to establish a genuine and workable intention to trade through the subsidiary. In the circumstances, a three-year term was granted with a landlord’s break clause. The break clause was exercisable by six months’ notice (expiring at any time) but only if a company in the same group as the landlords (as defined in the Landlord and Tenant Act 1954 Part II) intended to occupy the shop premises for the purposes of a business to be carried on by that company.
Finally, in Leslie & Godwin Investments Ltd v Prudential Assurance Co Ltd [7] 2 EGLR 95; (1987) 283 EG 1565 the lease (which related to a part of a building) contained a break clause entitling the landlords to terminate the tenancy on the ground of the intention to demolish and redevelop in section 30(1)(f) of the 1954 Act. In the originating summons the tenants proposed a five-year term at a rent of £7,150 pa with other terms being as in the previous lease. During negotiations, a rent of £9,500 was agreed “subject to contract” but, in the absence of a binding agreement, a master gave directions with a view to the trial of the summons. The landlords appealed to the judge but, at the hearing, they conceded that they were prepared to submit to an order on the terms of the originating summons. However, the tenants sought to amend the summons to obtain more extensive concessions (including a rent of less than £7,150 pa, relief from service charge and an amendment of the break clause). The landlords were anxious for a settlement and wished to be able to operate the break clause and were willing to agree to the payment of no rent at all and to concessions on the service charge. They were not willing to amend the break clause. Hoffmann J held that the landlords’ proposals represented the maximum which the tenants could possibly obtain by way of the terms of a new lease.
Grounds of opposition
In A Levy & Son Ltd v Martin Brent Developments Ltd [7] 2 EGLR 93; (1987) 283 EG 646 the question before Mr Julian Jeffs QC (sitting as a deputy judge) was whether the landlords had demonstrated their intention to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises etc and that they could not reasonably do so without obtaining possession of the holding. The tenants, who occupied a menswear shop, had been served with a section 25 notice in which the landlords stated that they would oppose the grant of a new tenancy under section 30(1)(f) of the 1954 Act. The landlords had planning permission to develop the site comprising the subject premises and three other shop units. The learned judge held that while there had been certain changes of circumstances, and a revision of the original planning permission, the details of the development scheme and the availability of the necessary finance had all been satisfactorily demonstrated at the date of the hearing. The preliminary point was therefore decided in favour of the landlords.
Whether the landlord’s intention to carry out development had been established was also the question at issue in Capocci v Goble [7] 2 EGLR 102; (1987) 284 EG 230. In this case the site was used as a cold storage and garage for vehicles in connection with the tenant’s ice-cream business and the landlord opposed the grant of a new tenancy on the ground that she intended to develop the site by the construction of 10 residential flats. The evidence showed that outline planning permission had been obtained and it was unlikely that there would be any problem about obtaining approval.
There was also evidence that a bank was willing to fund the project. The main challenge was that no agreement had been made with a developer or building contractor. The Court of Appeal held that it was clear from the evidence that a small development company (who had already carried out a similar development in the same town) had approached the landlord and were keen to carry out the development in question and it was probable that an agreement would be reached between them and the landlord. The Court of Appeal was of the opinion that the county court judge was justified in concluding that the landlord had established the ground under section 30(1)(f). They concluded that a reasonable man, looking at all the circumstances objectively, could not come to any other conclusion than that the landlord had a reasonable prospect of achieving his objectives.
Miscellaneous matters
The question of the compensation to be paid to the tenant under section 37 of the 1954 Act was considered in Department of the Environment v Royal Insurance plc [7] 1 EGLR 83; (1986) 282 EG 208, where the demised office premises were held by the Secretary of State for the Environment by a lease dated June 21 1972 for a term of 14 years from August 23 1971. However, by the agreement of the landlords, the tenant had been allowed into occupation on August 25 1971 in order to undertake fitting-out works to the subject premises. On September 11 1984 the landlord served a section 25 notice on the tenant purporting to terminate the tenancy on August 23 1985. The tenant applied to the court for a new tenancy but the application was withdrawn. The parties agreed that compensation was payable to the tenant under section 37 of the 1954 Act, but the tenant claimed double compensation on the grounds in section 37(2) and (3) of the 1954 Act. Falconer J held that the tenant was entitled only to the single rate of compensation, as the 14-year period was calculated from the date when the tenant entered into actual occupation, namely August 25 1971. The tenant had been in occupation for 13 years and 364 days and the de minimis rule did not apply in such a case.
In Essexcrest Ltd v Evenlex Ltd [8] 01 EG 56, solicitors acting respectively for Evenlex and Essexcrest were negotiating for the grant of a tenancy of business premises in Bolton. It was agreed that the protection conferred by sections 24 to 28 of the Landlord and Tenant Act 1954 should be excluded and it was recognised that this would require an order of the county court under section 38(4)(a) of the 1954 Act. On December 29 1982 a lease was executed. It contained a clause agreeing to exclude the relevant provisions of the Act “Having been authorised to do so by an order of [blank] County Court made on [blank] 1983…”
Subsequently, the parties to the lease made a joint application to the county court for an exclusion order, which was duly granted on January 24 1983. The landlords endorsed the order on the counterpart, but the tenants did not endorse it on the lease, and no steps were taken to re-execute the lease.
At the end of the term, the tenants issued an application for a new tenancy and the landlords applied to strike it out on the ground that the 1954 Act had been excluded. The Court of Appeal held that the provisions of the 1954 Act had not been excluded, as the wording of section 38(4)(a) of the 1954 Act showed that the order of the court had to be obtained before the tenancy was granted.