A landlord of commercial property has a number of options where a tenant has allowed the property to fall into disrepair.
Typically a landlord may wait until the end of the lease term before addressing the state of the property, especially where the tenant pays rent without issue. In many instances, the landlord will serve a schedule of dilapidations on the tenant in advance of lease expiry. This usually triggers discussions over the extent of the disrepair and how that will be remedied.
However, there may be circumstances where the landlord wants to act during the term, even where a significant period of time remains until the premises are due for yield-up (see box). For example, the landlord may want to take action to preserve the value of the investment or potentially even consider forfeiture, obtaining vacant possession and re-letting the property on improved terms.
Taking such action during the term is all the more likely where a landlord is considering a sale of the reversion and looking to extract the maximum amount of value from the interest. Therefore, faced with a property in a significant state of disrepair, potentially occupied by a tenant on terms well below market potential, a landlord may not want to wait.
While dependent on the exact wording of the lease, if the tenant is in breach of its repairing obligation, the landlord will have a number of options if faced with a property in significant disrepair during the term.
Self-help
Most modern leases contain a Jervis v Harris clause (see [1996] 1 EGLR 78). This “self-help” mechanism allows a landlord to enter the property and carry out remedial work, recovering the cost from the tenant as a debt (therefore side-stepping statutory limitations on claims in damages for disrepair).
However, a landlord must exercise this right with great care, given the risk of a claim against the landlord for trespass if not exercised correctly.
Furthermore, this inevitably places an onerous burden on the landlord to undertake the work and fund it in the first instance. A landlord may instead look to compel a tenant to carry out the work.
Specific performance
The court can require the specific performance of a repairing covenant by the tenant but usually only grant specific performance if it is just and equitable in all the circumstances.
For example, the court may consider specific performance in the unlikely event that a landlord does not have an express right to forfeit, and where damages would not be an adequate remedy. Given its discretionary nature and other options available, landlords rarely rely on this remedy.
Forfeiture
If the landlord cannot compel the tenant to carry out the work, or the self-help remedy is not appropriate, the landlord may choose to initiate forfeiture proceedings – provided that there is an express right to do so in the lease.
If, as would be expected, the lease contains an express right of forfeiture for breach, the landlord may threaten it (possibly in conjunction with the threat of damages). This alone may prompt remedial action from the tenant.
However, instigating forfeiture proceedings is an irrevocable step that requires careful consideration. A successful action may leave the landlord with an empty property in a state of disrepair which, in a depressed market, may be difficult to re-let. Alternatively, in a buoyant market, an empty property may benefit the landlord, presenting a desirable opportunity to re-let. In all circumstances, landlords should note that forfeiture is subject to a number of important procedural restrictions and rights to relief.
Section 146 notice
A landlord cannot exercise a right of re-entry or forfeiture without first serving a valid notice under section 146 of the Law of Property Act 1925 (the “1925 Act”).
In the notice, the landlord must specify the breach complained of and then give the tenant a reasonable time to remedy the alleged breach of repair.
1938 Act counter-notice
With a few discreet exceptions, the Leasehold Property (Repairs) Act 1938 (the “1938 Act”) will apply where the tenant has a lease of at least seven years, with three or more years left until expiry. If it applies, the landlord must serve a section 146 notice that refers to the tenant’s right to serve a counter-notice claiming the benefit of the 1938 Act.
If the tenant serves a counter-notice within 28 days of the notice, the landlord cannot forfeit the lease without leave of the court. If the tenant does not serve a counter-notice, the landlord can progress proceedings without further regard to the requirements of the 1938 Act.
To obtain the court’s consent, the landlord must prove, on the balance of probabilities, at least one of the five grounds set out in section 1(5) of the 1938 Act. One such ground is where the immediate remedying of the breach is necessary to “prevent substantial diminution in the value of the landlord’s reversion” or that the reversion “has already been substantially diminished by the breach” (section 1(5)(a)).
Under section 1(5)(e) the court has a discretion to grant leave if “special circumstances render it just and equitable that leave should be given”. However, it is thought that the court will take a strict approach to the existence of “special circumstances”. See, for example, Hughes LJ in Agricullo v Yorkshire Housing Ltd [2010] EWCA Civ 299; [2010] PLSCS 78: “The cases in which leave is to be granted in special circumstances ought, on principle, to be ones in which something out of the ordinary occurs to justify the immediate commencement of proceedings.”
If it applies, the 1938 Act is a further hurdle that a landlord must satisfy before bringing forfeiture proceedings. If the tenant contests, the potential for delay and further expense (for example, the need for expert evidence) may discourage even the most determined landlord.
Furthermore, under section 1(6) of the 1938 Act, in granting or refusing leave, the court may impose such terms and conditions “as it may think fit”. For example, the court might grant leave, but on the condition that the landlord does not initiate proceedings if the tenant has remedied the work within a specified period of time.
In addition, even if the landlord proves one or more of the grounds, the court has an overriding discretion to refuse leave to forfeit.
Right to relief
In addition, a tenant has a right to seek relief from forfeiture under the 1925 Act.
For a landlord this creates further uncertainty: will the tenant seek relief, how long will proceedings take, what are the cost implications and will the tenant succeed?
Damages
The landlord may also make a claim for damages during the term, potentially in conjunction with a forfeiture action.
However, there are restrictions on a landlord’s claim:
l If the 1938 Act applies, the landlord cannot bring an action for damages unless the landlord first serves a section 146 notice, allowing the tenant to claim the benefit of the 1938 Act in the same manner as above. If the tenant claims the benefit of the 1938 Act, the landlord must first seek leave as above, establishing one of the five grounds in section 1(5).
l Under section 18(1) of the Landlord and Tenant Act 1927, damages cannot exceed the diminution in value of the landlord’s reversion caused by the breach.
As with ground (a) of section 1(5) of the 1938 Act, the court assesses diminution or substantial diminution subject to the lease, rather than with vacant possession, at the date when the tenant’s yield-up obligations arise. In such circumstances, it is difficult for an expert valuer to estimate the value of the reversion, and establish such diminution: there may be a significant time left to run on the lease, and the hypothetical purchaser will have the benefit of the tenant’s continuing repairing obligations during the remainder of the lease.
For these reasons, a landlord will more typically make a claim in damages for breach of repairing covenant after expiry, and indeed, may struggle to prove ground (a) in the middle of the lease term.
Various options
A landlord of commercial property has a number of options if, during the term of the lease, its tenant has allowed the property to fall into disrepair.
The landlord may simply wait until lease expiry and enforce the tenant’s repairing or yield-up covenant by way of a dilapidations claim.
However, if the landlord wants to enforce a repairing covenant during the term, the choice of remedy will depend on what the landlord wants to achieve. Does the landlord want the repair work done? Is the landlord prepared to accept vacant possession? Each option presents its own hurdles.
In particular, if the landlord wants to claim damages or forfeit, it must be able to overcome the requirements of the 1938 Act if applicable. This may be both a procedural and a practical challenge.
Why act?
In contemplating whether to act on disrepair during the term of a lease, a landlord may consider the following:
• If the property has fallen into a significant state of disrepair, are immediate repairs required to preserve the value of the investment?
• Can the landlord re-let easily, potentially on more favourable terms, or would forfeiture present an opportunity to refurbish/upgrade the premises? If so, a landlord may not fear the irrevocability of forfeiture.
• Is the disrepair such that there is potential liability under the Defective Premises Act 1972? If so, a landlord may have a duty to a third party as a result of the tenant’s failure to repair.
• At the end of the term, the need for significant remedial work and extensive negotiation may delay an opportunity to market and re-let.
• There is greater leverage in negotiating during the term, given that the tenant continues to have an interest in the property.
• The financial position of the tenant may change before its yield-up obligations arise.
Ed Glass is an associate solicitor at Bristows LLP and Jeff Hardman is a barrister (third-six pupil at Arden Chambers)
