by Professor J E Adams
Those elements of disregard in a rent review formula which relate to tenant’s improvements, tenant’s occupation and goodwill are still frequently catered for by the incorporation of section 34 of the Landlord and Tenant Act 1954. More than 10 years ago, Christopher Priday drew attention to some of the dangers in his 1980 Blundell Memorial Lecture (1980) 255 EG 229, but one still meets it in new draft leases as well as having to deal with it in existing leases. This article discusses the possible drawbacks for lessors and lessees of relying on the statutory wording in preference to express wording.
The amended section
First of all, if incorporation is effected, it is wise to ensure that it is made clear that it is the section as amended in 1970 (pursuant to section 1 of the Law of Property Act 1969), which is incorporated.
Failure to do so proved disastrous in Brett v Brett Essex Golf Club Ltd [6] 1 EGLR 154, where the absence of words such as “amended” and a reference to paras (a), (b) and (c) of section 34 instead of to those paras of section 34(1) caused the Court of Appeal to hold that a 1978 lease (replacing a 1973 lease) had meant to refer to the unamended version. So the benefit of the 1970 amendments, designed to overcome Re Wonderland, Cleethorpes [1965] AC 58 by allowing disregard of tenant’s improvements dating back up to 21 years before the lease came up for renewal, was lost. The writer has never understood why section 17(2)(a) and section 23(3) of the Interpretation Act 1978 did not “save the day”; nevertheless the decision stands and must be taken fully into account.
Five possible meanings
Assuming that the problem of incorporating the amended section has been solved, the first difficulty is to calculate the 21-year period for disregard.
In the amended section the relevant period is 21 years before the date of application for the new tenancy. That makes sense in the context of a renewal, and it has the benefit of being a date that the tenant can control, unlike, say, the hearing date of the application.
What date have the parties to a rent review incorporating the section intended to set as the datum point, from which the 21 years is to be calculated? At least five “translations” are possible. Is the equivalent date to be the date of the landlord’s trigger notice or other initiating step? Is it to be the review date (or indeed each review date)? Is it, if different, the valuation for the review date?
The most likely of these three is the second, but it does not provide the closest analogy to the statute. The first suggestion does that, because it is the equivalent of “teeing off” most comparable to issuing proceedings. If it is objected that the trigger or other notice may be served late, after the review date, then it must be acknowledged that the date of application may also well be long after termination of the earlier lease. If it is said that, in a small number of cases, the lessor could manipulate the date of service by waiting for the expiry of 21 years so as to negate the disregard, the same may also be true in respect of the timing of a section 25 notice (but not, of course, a section 26 notice).
The case for the valuation date not only rests on the benefit of practicality but also bears resemblance to the renewal position where, technically speaking, the new rent should be fixed at the level it will be 19 weeks after the court order (see section 64 of the Act and the judgment of Judge Finlay QC in Lovely & Orchard Services Ltd v Daejan Investments (Grove Hall) Ltd (1977) 246 EG 651).
The fourth worrying possibility is that no equivalent date can be ascertained, so the provision fails for uncertainty and none of the three incorporated disregards operate. The writer knows of no reported case where this has been argued, but feels it cannot be wholly discounted. The result would be no more extreme than those in Brett’s case or Ponsford v HMS Aerosols Ltd (1978) 247 EG 1171.
The rolling period approach
The fifth possibility is that the 21-year period does not run to a date related to the reviews at all, but remains fixed to the commencement of the lease. Again, that is what happens on renewal in that the adjustment by way of disregard relates only to the initial rent and later disregards depend on the wording of the review in the new lease (which may be based on the section itself!). Thus, the disregard will not apply to the opening rent when the lease is newly negotiated, but the start date of the term becomes significant at later reviews.
Express disregard of improvements is commonly restricted to a period 21 years before the review date. However, the statutory disregard measures backwards from a date related to the start of the process of obtaining a new lease and this provides some basis for relating the period of disregard resulting from using section 34 to the start of the lease. If the disregard period for rent reviews is so fixed, the rent effect of tenant’s improvements will fall to be disregarded, at successive reviews, when they are up to 26, 31, 36 or even 41 years old.
Many landlords might regard that result as almost bizarre, quite apart from the progressive problems of valuation, but it is not an interpretation to be brushed aside.
Christopher Priday in his 1980 Blundell Memorial Lecture discussed the incorporation of section 34 in relation to a new lease on renewal; he saw the 21-year period in that context as relating to the start of the lease but as not being effective at each review date. That is the exact opposite of the construction advanced above and does produce an absolute 21-year “life” for improvements, which he criticised as contrary to what the Act intended. He thus supports the result, just criticised as “bizarre”, of lengthening periods of disregard. The alternative (the second listed above) of a rolling period may well have been taken for granted in many reviews, but sooner or later some landlord or some tenant will have sufficient at stake to take the point and the issue will have to be decided.
No disregard for subtenant’s works or pre-lease works
Further problems arise even if none of the above difficulties exists and the court relates all three disregards to the date of the relevant review, or some date close to it. They arise because the statutory wording omits provisions that frequently appear in express review formulae. Thus, subtenant’s improvements are not catered for in section 34, nor do they need to be. An unfortunate tenant who sublets may therefore find himself having to allow the disregard to his own tenant on the sublease review, but unable to claim a similar reduction in the head rent review.
The same disadvantage would apply, or at least might apply (see Hambros Bank Executor & Trustee Co Ltd v Superdrug Stores ltd [5] 1 EGLR 99 and Euston Centre Properties Ltd v H&J Wilson Ltd (1981) 262 EG 1079), for voluntary work by the tenant before the grant of the lease, another area of difficulty now normally covered in the full wording of express disregards, but not in section 34.
Statutory improvements not disregarded
Other aspects of the wording of section 34(1) and (2) provide departure from the usual wording of express review provisions which work to the tenant’s disadvantage. First, the disregard applies only to improvements “otherwise than in pursuance of an obligation to his immediate landlord”. So the trap of not disregarding improvements under statutory obligations where there is a blanket covenant to observe all such obligations will be sprung, as it was in Forte & Co Ltd v General Accident Life Assurance Ltd [6] 2 EGLR 115. At least some express review formulae avoid that, eg the RICS/Law Society Model Forms of 1985.
The need for continuous occupation
More worrying, the statutory disregard requires continuity of the application of the Act since completion of the improvement. Application of the Act in turn requires occupation for the purposes of the business carried on. So, if tenant A effects substantial but voluntary improvements and then, pending sale of the lease, closes down business for some weeks or months (or in theory only for, perhaps, a few days), there is a period before tenant B occupies, possibly on payment of a substantial premium to reflect A’s improvements, when the thread of application of the Act is broken. Even if A occupies until completion date, B may not move in straight away; builders or shopfitters may not arrive the next day — and the disregard is rendered inapplicable.
In the light of Hillil Property & Investment Co Ltd v Naraine Pharmacy Ltd (1979) 252 EG 1013 it cannot be said that this risk is fanciful. It is a risk not associated with the usual form of express rent review disregard. The model forms, for example, do not call for continuity of occupation or of business succession but require only that the landlord shall not have had vacant possession since the work was done.
Tenants under disregards incorporating section 34 must often hope that landlords are not vigilant enough to monitor the issue of occupation/non-occupation and not hard-headed enough to rely on it at later review(s). The well-advised purchaser of the residue of a lease incorporating section 34 just by reference should at least seek a covenant from the current tenant to continue to occupy till the date of completion, with an indemnity for non-compliance.
Conclusion
Any one or more of the above considerations, make it advisable to eschew the easy solution of incorporating section 34 by reference and to spell out the exact words of disregard.
