Suzanne Gill explores the issues arising from current leasing trends revealed in the latest IPD UK Lease Events Review
The IPD’s UK Lease Events Review (November 2014) records that for the best part of two decades now, the general direction of travel has been towards shorter lease terms. About half of lease expiries leave landlords with a vacancy. There are differences between sectors and regions, but the theme is similar. What are the critical issues arising from these trends for landlords, tenants and their advisers?
Dilapidations
The state of a property’s repair at the end of a lease is often a source of dispute between landlords and their tenants. At common law, the landlord can claim damages equal to the cost of putting the property in the state in which it ought to have been left according to the terms of the lease. The Landlord and Tenant Act 1927 caps the landlord’s claim at the level of any diminution in value of the landlord’s interest. However, tenants should also be alert to:
- landlord’s redevelopment plans;
- requests for replacement of one item with a similar one of newer design; and
- refurbishment aimed at a new letting that goes beyond the tenant’s repair liabilities.
All of these can be used to negotiate down or eliminate a dilapidations claim.
Timing
Parties who agree to renew their lease should allow long enough for the legal process. If the lease is contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954, a tenant who stays in place after the end of the lease while a new lease is being negotiated is only a tenant at will: Barclays Wealth Trustees (Jersey) Ltd and another v Erimus Housing Ltd [2014] EWCA Civ 303; [2014] PLSCS 94. This creates uncertainty for both landlord and tenant. It also means that the party with the weaker bargaining position is in a still worse position after the lease expires, as the other can walk away from the property or serve a notice to quit at any time. Aim for a reversionary lease in these circumstances: a lease completed and dated now, with a right to occupation that takes effect only when the current lease has ended.
Rent
The UK’s system of upward-only rent reviews makes it likely that rents will only be at open-market levels when the tenant has the opportunity to renew or vacate. During a 1954 Act lease renewal either party can apply for an interim rent to be awarded. The interim rent will normally be the same rent as the renewal lease, but when rent levels change substantially during the renewal process, the court has discretion to determine a different rent: section 24C(2) of the 1954 Act. In MacWilliams v Clough [2014] PLSCS 58 the renewal took five years, during which time the market rent for those types of premises in that area had fallen by 40%. The interim rent was awarded at the (higher) market level at the time of the lease expiry, and the renewed lease was at the new market rent. MacWilliams was a good result for a landlord of regional offices during the depths of the recession. Keep an eye on changing rents and use them to your clients’ advantage.
Double rent
If a tenant should leave but doesn’t, a very old law might help the landlord. A landlord can claim double the yearly value of the premises from a tenant if he has demanded possession and the tenant wilfully continues to occupy them.
To achieve this, first the landlord must have given notice in writing to deliver up possession: it is likely that a notice to quit will satisfy this requirement. Then the landlord should serve a notice under the Landlord and Tenant Act 1730 either before or as soon as possible after the contractual term expires. Any entitlement to double rent begins from the date the demand or notice is given, not the final date of the term, so advisers need to act promptly.
The tenant can only defend a claim under the 1730 Act if he genuinely believes he has the right to remain in the premises. There are pitfalls for the unwary here, so use experienced solicitors to make the most of this Act.
VAT
Difficulties over highly conditional break clauses or vacant possession for redevelopment are sometimes resolved by a deed of surrender. This provides certainty to both parties. A premium paid for a surrender is subject to VAT if the party receiving the payment has opted to waive the exemption from VAT. Tenants paying money to their landlord (a reverse premium) should be told that dilapidations payments made after the term has expired are considered by HMRC to be damages for wants of repair and outside the scope of VAT. Tenants’ advisers need to make sure that any payment to the landlord is correctly apportioned between a reverse premium and dilapidations liability.
Some of the issues triggered when a lease ends are obvious to everyone. Others are more subtle. An astute adviser will be able to make the most of his client’s position, whatever the circumstances.
Future-proofing premises
The Energy Act 2013 will make it unlawful to let premises that do not meet minimum energy efficiency standards from April 2018. The consultations on the Act highlighted properties that had an energy performance certificate at the lowest two levels, F and G, as being unlikely to meet the standards. Until the regulations are published, it is unknown whether properties rated E or higher will be compliant with the Energy Act. On renewal, the parties should agree who will be liable for carrying out any works required to meet energy efficiency standards and who will pay for those works.
Suzanne Gill is a partner at Wedlake Bell
