When parties create the relationship of landlord and tenant, the terms of their relationship are decided exclusively by reference to their lease. Neither party will be permitted to prove that some aspect of their relationship is governed by a previous oral or written agreement that contradicts the lease. This principle is important because both parties’s rights and interests are transferable, so that the lease can govern the relationship between parties who acquire their interests in ignorance of what took place before the lease was granted.
Practitioners might have expected the decision in Business Environment Bow Lane Ltd v Deanwater Estates Ltd [2006] EWHC 3363 (Ch) to favour the incoming landlord, which had bought a freehold reversion in ignorance of a previous promise that the landlord would not serve a terminal schedule of dilapidations on the tenant.
The parties agreed that the lease did not prohibit the landlord from doing so nor from pursuing a claim for damages for disrepair after the expiry of the lease, because the amendments to the tenant’s repairing obligations were not sufficiently robust to preclude such claims. However, the solicitor acting for the incoming landlord had noticed that the repairing covenants were unusual and had specifically enquired whether a terminal schedule of dilapidations had been served. The outgoing landlord confirmed that nothing had been, or would be, done about this because it understood that it did not have the right to serve a terminal schedule of dilapidations under the lease. When asked why, it replied that the tenant believed that this was the case, without offering any further information about the discussions that took place before the lease was granted, and informed the incoming landlord that it must rely upon its own interpretation of the lease.
The judge admitted that it was a very close call but decided that the incoming landord had been advised that it may be unable to serve a terminal schedule of dilapidations on the tenant. The judge ruled that the incoming landlord had taken a risk because it had failed to put any questions to, or to raise the matter with, the tenant before acquiring the freehold reversion. Therefore, it would not be unjust to rule that the original parties had made a contract, which was collateral to the lease, that exonerated the tenant from all liability for terminal dilapidations under the lease.
The decision puts buyers in an awkward position if they are placed on notice that rights under a lease may not be as extensive as they seem. Should the buyer verify the position with the other party to the lease, at the risk of alienating the seller, breaching confidentiality and possibly jeopardising any future bargaining position? Should the buyer take a risk and proceed with the purchase anyway, or negotiate a reduction in the price to reflect the risks involved?
Allyson Colby is a property law consultant
