It may be hard to believe that the Law of Property Act 1922 (the 1922 Act) contains provisions that are still relevant today. But, tucked away in schedule 15, landlords and tenants will find provisions that are still in force, which convert perpetually renewable leases into terms for 2,000 years containing break rights exercisable only by the tenant. Landlords have no statutory right to terminate such leases themselves, or to increase rents in line with market rents.
What makes a lease perpetually renewable in the first place? The courts could have confined perpetual renewability to cases in which a landlord covenants to renew a lease “for ever”. But cases going back to the 18th century demonstrate that a landlord can create a perpetually renewable lease without intending to do so.
Take, for example, Northchurch Estates Ltd v Daniels [1946] 148 EG 385, where the court ruled that a lease for a year containing a clause giving the tenant a right to renew at the end of the term “on identical terms and conditions” meant that the lease for the second term should include an identical provision, enabling the tenant to call for a third term, and so on. Therefore, the tenant could go on renewing the tenancy ad infinitum and, as a result, had a perpetually renewable lease.
Option to renew
Section 145 of the 1922 Act converts perpetually renewable leases into 2,000-year terms. But few landlords would entertain the idea of granting such a lengthy lease at a static rent – and Palo Alto Ltd v Alnor Estates Ltd [2018] UKUT 231 (TCC) reminds us how easy it is to be caught out. The litigation concerned a unit in Stockport, which was let to a tenant at a rent of £3,120 per annum. The landlord had explained to the tenant that it could have a short and simple lease for one year, with an option to renew, but that a lease for a term of more than three years would have to be drafted by solicitors.
The tenant opted not to involve solicitors and the parties signed a short two-page tenancy agreement, which was not drafted by a lawyer. It stated: “The tenancy is granted for a period of one year with an option to renew at the end of the term for a further one year on the same provisos and agreements as are herein contained including the option to renew such tenancy for a term of one year at the end thereof.” The words in italics were inserted by the tenant, who took leases of three further units in the building on the same terms, and brought a test case in relation to one of the units claiming to be the proprietor of a 2,000-year lease.
The First-tier Tribunal (FTT) accepted that the lease was perpetually renewable and rejected the landlord’s suggestion that the parties had both been mistaken about the effect of the amendment to the lease. But the judge did uphold the landlord’s application for rectification on the ground that the landlord had made a unilateral mistake.
The landlord had accepted the tenant’s amendment to the draft lease in the mistaken belief that the tenant would have the right to renew on two occasions, rather than one, so that it could stay in the premises for up to three years. And it had encumbered its title with a 2,000-year lease instead. Consequently, the FTT rectified the lease to restrict the number of renewals and limit the term to three years.
Unilateral mistake
In the Upper Tribunal (Lands Chamber), the tenant argued that the lease should not have been rectified for unilateral mistake because it had not acted dishonestly. It had simply returned the draft lease to the landlord without making any representations or explaining the effect of the wording that it was seeking to introduce.
The judge did not find the authorities easy to reconcile. But, in the end, the judge took the view, on the basis of Thomas Bates Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 EGLR 91, that claimants do not need to establish dishonesty or sharp practice on the part of a defendant in cases where the defendant had actually known that the claimant was making a mistake (as opposed to cases in which knowledge of the mistake can only be inferred). And, in this case, the tenant had known that the landlord was making a mistake.
If dishonesty were to be a precondition of rectification for unilateral mistake, the landlord would still have succeeded. The tenant had set a trap for the landlord when it amended the draft lease. It understood the effect of the wording that it supplied. It knew that it did not reflect the landlord’s intentions and that the landlord would not have accepted the amendment had it been properly explained. This amounted to dishonesty and it would be inequitable to refuse to rectify the lease.
Avoidance action
The landlord will be relieved by the decision – but rectification will not necessarily be available in every such case. Is it not time to replace the provisions in the 1922 Act with an alternative that would avoid imposing such a disastrous encumbrance on a landlord’s title – perhaps by limiting the number of renewals available in such circumstances?
Meanwhile, draftsmen would be well advised to exclude the tenant’s option to renew from the provisions to be contained in any future lease or to limit the number of renewals available to the tenant to avoid nightmares caused by the grant of a perpetually renewable lease.
Key points
■ The Law of Property Act 1922 converts perpetually renewable leases into 2,000-year terms
■ Landlords have no statutory right to terminate such leases, or to make rental increases in line with market rents
■ There may be an antidote in cases involving mutual or unilateral mistakes, but it would be preferable if such problems were never to arise
Allyson Colby is a property law consultant
