John Furber QC and Vivien King discuss why difficult lease clauses are drafted in the way that they are and recommend some improvements
Anyone considering the meaning and effect of provisions in a lease will sometimes wonder “why did the draftsman do it that way?” After identifying some provisions which cause difficulty, Wilberforce Chambers and Malcolm Hollis sought some answers. A select number of experienced real estate solicitors and support lawyers were invited to consider various issues over drinks during several meetings. These were valuable discussions and both organisations are grateful to those who joined in them. This is a brief report, which may lead to further discussions elsewhere directed towards improving and clarifying lease provisions. The topics are discussed in the order in which they arose.
The demised premises
The definition of what is demised should surely be the starting point for the draftsman. It is particularly important where leases are granted of parts of buildings and it may need to be considered in relation to rent reviews and claims for dilapidations and service charges as well.
- Is any part of the exterior of the building demised?
- What is the relationship between the demise and the common parts?
- How do the mechanical and electrical systems operate?
Although the description of the demise given in the lease might be elaborate, the draftsman is not usually given the opportunity to inspect the subject property in the company of the client or a surveyor, to understand fully what is required.
The client may not want to pay for this, but it is perhaps a false economy. Inspection and understanding should come first, rather than provision of possibly misleading plans followed by use of a standard precedent.
Demised premises
Disputes concerning the extent of “the demised premises” arise often. Draftsmen should therefore take care and possibly visit the premises before finalising drafting.
Ward LJ and Rix LJ in Spring House (Freehold) Ltd v Mount Cook Land Ltd [2001] EWCA Civ 1833; [2001] PLSCS 264 states: “Whilst not referring to Alice in Wonderland, both counsel seem to be agreed that in the same lease, indeed in the same clause of the lease, the word ‘premises’ may bear one meaning at one time and another at another time.
“In our judgment it is clear that ‘premises’ is a chameleon-like word which takes its meaning from its context. Since it can mean almost anything the task of the court is to give the word the meaning which it most naturally bears in its context and as reasonably understood by the commercial men who entered into the agreement.”
Statutory requirements
It is common for leases to contain very widely drafted obligations to comply with “statutory requirements”, usually imposed on the tenant.
- What is intended?
- Is the obligation restricted to requirements arising out of the tenant’s actual mode of occupation of the premises?
- How should it be taken into account when making the valuation assumptions to be used on any rent review?
It would be much better to define more closely what the tenant must or must not do, for example, in relation to fire precautions.
However, the draftsman will prefer to use a standard precedent and hope for the best, once again risking the costs that may arise if there is uncertainty as to what either party to the lease must do.
It may be sufficient to state that one or other party must ensure that the demised premises are in a state whereby they are fit for occupation for any use permitted by the lease in accordance with all current statutory requirements. This specific provision will ensure that the premises are fit for purpose.
Recovery of costs of repairs
It is conventional to include a provision whereby the landlord can recover as a debt the cost of repairs carried out during the currency of the lease that the tenant has failed to do, in breach of obligations – thus avoiding the restrictions imposed by the Leasehold Property (Repairs) Act 1938 (in accordance with Jervis v Harris [1996] 1 EGLR 78.)
- How often are works carried out pursuant to such a provision?
- Why are such provisions not extended to include the cost of repairs carried out after the end of the lease?
It is likely that such works are not carried out often and extending the provision would possibly avoid the restrictions on the recovery of damages imposed by section 18 of the Landlord and Tenant Act 1927, which is potentially a very useful remedy.
Landlords are not primarily interested in carrying out works to repair dilapidated premises in accordance with the tenant’s obligations (initially perhaps at their own expense) but are more often interested in obtaining whatever financial settlement is available from the tenant at the end of the lease. Thus a possibly useful change to drafting practice is not apparently being pursued.
Tenant’s break clauses
It is well established that a tenant’s break clause, which requires compliance with the tenant’s obligations as a condition of the effective exercise of the break, must be strictly construed and thus is virtually worthless.
A tenant will almost invariably be in minor breach of some obligation, for example, relating to the state of repair of the premises.
Similarly, a break clause that requires “reasonable”, “substantial” or “material” compliance with the tenant’s covenants invites disputes as the effective exercise of the right to break. There cannot be any certainty as to whether there has been such compliance and there will be doubt – probably to the detriment of both parties – as to whether a lease has effectively been determined.
As the landlord can and will retain the ability to claim damages for loss suffered by any breach of covenant on the termination of a lease by exercise of a right to break, there is no reason why these break rights should ever be qualified.
Qualification of break rights has commonly been applied in the past, often simply in reliance on precedents and an unwillingness to contemplate consequences. A tenant should insist on this commercially important right being unqualified, if it is to be granted at all, as otherwise it may well be rendered worthless. An established but arguably unjustified practice appears to provide the reason.
Absolute compliance
Why do tenants accept break clauses requiring absolute compliance?
Kerr LJ in Bass Holdings Ltd v Morton Music Ltd [1987] 1 EGLR 214 states: “First, it must be accepted that absolute and precise compliance by the tenant with every single covenant throughout the period of the lease prior to the operative date is virtually impossible of attainment. If this were required as a condition precedent, then the option would in practice be worthless or merely at the mercy of the landlord.”
Compliance with building regulations
It is desirable to state expressly that when repairs are required to be done by either party to the lease they should be done in compliance with current building regulations.
This would be so whether the repairs were to be done by a tenant or by a landlord (in the latter case, with the costs being recoverable by way of a service charge).
Such clarification of the extent of the obligation helps avoid arguments as to whether any works done should properly be characterised as improvements, rather than repairs – although an obligation to repair should require performance in accordance with lawful requirements. However, landlords are reluctant to describe their obligations in this extended manner, even though to do so might in the end be commercially desirable for them.
Dispute resolution
Proceedings through the courts are now commonly regarded as providing an unsatisfactory means for resolving landlord and tenant disputes. This is on account of the amount of time taken, the expense and uncertainty as to the expertise of the judge.
However, save in the case of provisions relating to rent review, the draftsman often pays little attention to methods of dispute resolution. While there should not be any attempt generally to exclude the jurisdiction of the court, more thought ought to be given to the procedures to be used in determining specific types of dispute.
For example, should disputes relating to repairs be referred to an arbitrator (whether a surveyor or lawyer) with professional expertise and experience rather than to a judge of unknown qualities? Would such a procedure be more expeditious? Once again, a reluctance to engage with issues of this sort and a preference for the use of standard forms is hindering better drafting.
The path ahead
Those who attended the discussions were interested in all the above issues and keen to discuss them. However, the same conclusion was always arrived at. The draftsman does not decide the terms, the wording or the intended effect of the landlord and tenant covenants. These are proposed by a landlord client who is usually resistant to changes in standard provisions and unwilling to incur costs in exploration of possible improvements in drafting.
The client wants a lease at an agreed rent to be drafted and agreed as soon and as cheaply as possible and apparently is not much concerned about trying to change and improve current practice. This is entirely understandable, but is arguably not in the long-term interest of the property industry.
John Furber QC is a barrister at Wilberforce Chambers and Vivien King is a consultant to Malcolm Hollis LLP
