As the saying goes, better the devil you know.
Landlords and tenants need to be aware that commercial leases contain implied terms that are not expressly written down.
Leases set out the obligations on the part of both the landlord and the tenant (and sometimes other parties, such as guarantors) and for this reason they are often lengthy documents. Despite this, parties are also bound by terms that are implied into leases by the common law (law made by judges) and by Acts of Parliament. Even where the parties agree that they do not want implied terms to apply to a tenancy, not all of them can be excluded.
This article looks at some of these terms, and at some other terms which the parties might assume are implied but which, in fact, are not.
SHOULD I STAY OR SHOULD I GO?
Business tenants have a right to security of tenure. This means that they have the right to remain in occupation of their premises at the end of the lease term, and a coexistent right to a new lease unless the landlord can establish one of the statutory grounds for recovering possession of the property. These rights do not need to be stated in the lease because they are conferred on the tenant by Part II of the Landlord and Tenant Act 1954 (‘the 1954 Act’).
However, these rights are often excluded from a tenancy, with the tenant’s agreement.
REPAIR
Leases invariably set out the repairing obligations of the tenant and (sometimes) also those of the landlord. With the cost of works potentially being very high, this is an area of law that often leads to disputes between the parties, particularly at the end of the lease.
The nature and extent of each party’s obligations can usually be understood from the ordinary meaning of the words used in the lease but certain additional terms may surprise some tenants.
For example, tenants often assume that they cannot be obliged to put a property into any better condition than it was at the start of their lease. However, if a lease says that the tenant must ‘keep’ the property in repair, the starting point is that this imposes an additional obligation on the tenant first to ‘put’ the property into repair if it is not already in a state of repair at the beginning of the lease.
Depending on the actual state of the property, it could be very costly for a tenant to comply with this implied obligation. If the property is old, or in poor condition, tenants should seek to limit their repairing obligations by reference to a photographic schedule of condition. This is a series of photographs which are attached to the lease, often accompanied by a description of any defects, with a statement in the lease that the tenant will not be required to give the property back to the landlord at the end of the term in any better state of repair than is shown in the photographs.
ALTERATIONS
If a landlord wants to control what alterations the tenant may carry out at the property (and it will usually wish to do so), restrictions must be expressly included in the lease, as there is no implied obligation on the tenant not to alter the property during its period of possession.
However, even where restrictions are expressly imposed, the Landlord and Tenant Act 1927 (‘the LTA 1927’) gives tenants some additional rights, including: -
1. Landlord may not unreasonably withhold consent
Where the lease states that alterations may not be carried out without the landlord’s consent, section 19(2) of the LTA 1927 adds a proviso (which cannot be excluded by agreement) that such consent cannot be unreasonably withheld in the case of alterations that amount to improvements. Whether an alteration is an ‘improvement’ is looked at from the point of view of the tenant, and as a result, most tenants' alterations will be improvements. The improvement does not need to be one which adds to the letting value of the property.
However, as a quid pro quo, the landlord may require, as a condition of giving its consent, any of the following -
a) in the case of an improvement which does not add to the letting value of the property, an undertaking by the tenant (where it would be reasonable to request one) to reinstate the property to the condition it was in before the improvement was made,
b) payment of a reasonable sum reflecting any diminution in the value of the property or any neighbouring property belonging to the landlord, and
c) payment of any legal or other expenses properly incurred in connection with giving consent.
There will be very few occasions when the landlord will be able to show that it is being reasonable in withholding its consent. Arguments that the improvements would adversely affect the value of the landlord’s reversion do not constitute reasonable grounds for withholding consent. In such cases, the landlord should require the tenant to pay reasonable compensation to cover the fall in value (as it is allowed to do, see (a) above).
2. Section 3 of the LTA 1927 gives a tenant the right, in certain circumstances, to carry out alterations even if the lease absolutely prohibits it. This is another example of an implied right that cannot be excluded by agreement. If the landlord objects to a tenant’s proposals, then the tenant may apply to the court for consent. The court may authorise the works if they -
- Will add to the letting value of the property at the end of the tenancy;
- Are reasonable and in keeping with the character of the property; and
- Will not diminish the value of any other property which belongs to the landlord or to any superior landlord.
The 1927 Act has its origins in a time when leases ran for longer terms but business tenants did not have security of tenure, which was not granted until 1954. If a tenant proposed making significant alterations to its premises in order to accommodate its business, and the alterations were such that they would add value to the premises, it was considered just and equitable for the tenant to be allowed to make the alterations (subject to the conditions outlined above) regardless of what the lease said, and to receive compensation on expiry of the lease to reflect that added value.
The compensation provisions are quite complex and there are procedural steps that the tenant must observe in order to exercise its rights under section 3 so a tenant whose lease does not expressly permit alterations should seek legal advice when relying on these rights.
3. Additionally, a tenant may be permitted to carry out works to accommodate employees or customers with disabilities under the Equality Act 2010.
IMPLIED FINANCIAL TERMS: HITTING LANDLORDS WHERE IT HURTS
Both landlords and tenants should note the following implied terms: -
- Unless the lease states that all sums payable are exclusive of VAT, they are deemed to be inclusive of VAT, leaving the landlord out of pocket if it has elected to charge VAT on the sums it receives under the lease;
- Without an express provision prohibiting the tenant from making deductions from rent, in some circumstances the common law allows a tenant to do so; and
- Without an express statement that any rent will be reviewed on an upwards-only basis, in a falling market the rent following a review may be lower than the previous rent, something very few landlords are prepared to accept.
If you would like a solicitor to prepare a lease for you or to advise you upon your obligations in relation to a lease that has been produced to you, please contact [javascript protected email address] for advice.
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