SQE1: PROPERTY PRACTICE

Topic 16. Leases

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Learning Content

◗ The Legal Requirements for the Formation of a Lease

◗ Leases Granted on or after 1st January 1996
◗ Leases Granted on or after 1st January 1996

1. The Three essential elements of a lease

According to the House of Lords case of Street v Mountford [1985] UKHL 4, a

lease is the grant of a right to the exclusive possession of land for a determinate
term less than that which the grantor himself has in the land. This definition
identifies three essential elements:

• exclusive possession
• determinate term
• term less than that of grantor

Let us look at each of these now:

Exclusive possession

Exclusive possession is an essential ingredient of a lease; without exclusive

possession there can be no lease. Exclusive possession is the right to use
premises to the exclusion of all others, including the landlord himself.
If the occupier has no right to exclusive possession of the premises then his right
to use the premises cannot amount to a lease, although it may be some lesser
right, such as a licence or possibly an easement. However, the fact that a person
had been given exclusive possession is not conclusive proof that he has a lease,
for it is also possible to have a licence or certain other rights in land, without
exclusive possession.

Although exclusive possession normally gives the tenant the right to exclude
everyone else, including the landlord, from the premises, the lease may reserve
the right for the landlord to enter the premises on certain occasions, e.g., to
inspect the state of repair of the property. Such a right must be exercised at
reasonable hours and in a reasonable manner and does not prevent the tenant
having exclusive possession, though a right for the landlord to come and go as he
pleases without the tenant’s permission would have this effect.
Thus in Appah v Parncliffe Investments Ltd [1964] 1WLR 1064, in which the
‘landlord’ had reserved the right to come into the premises as and when he chose
to empty meters and change linen, the arrangement was held to be a licence,
since the occupier did not have exclusive possession.

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Determinate term

The commencement of the period must be certain in a lease. Normally, if no

mention is made in the agreement, it will be deemed to start immediately
(Furness v Bond (1888) 4 TLR 457). If, however, one has only an agreement for a
future lease, it will be void unless it is clear at what date the lease is to start,
either from an express term in the contract or by inference (Harvey v Pratt [1965]
1 WLR 1025).

A landlord will sometimes wish to permit the use of his property for an uncertain
period. This was the position with wartime lettings, where leases were made ‘for
the duration of the war’ but were held to be invalid because they did not create a
term for a certain period. (Lace v Chantler [1944] KB 368).

One way of satisfying the parties’ wish to avoid being held to a fixed period is by
granting a lease for a certain term but with a provision for earlier determination
on the occurrence of a certain event. Thus, during the war a lease could have
been granted for 10 years, with a provision for determination if the war ended
earlier, and this would satisfy the rule in Lace v Chantler. It is also acceptable for a
periodic tenancy to restrict the landlord’s right to give notice, unless for a
specified purpose, during a prescribed period.

The requirement that the maximum duration of the lease must be certain means
the grant of a lease ‘for T’s life’ or ‘until T marries’ would not, under the general
rules, be capable of amounting to a legal estate, because it is not granted for a
certain period. However, it used to be common for such leases to be granted and
therefore the draftsmen of the property legislation provided a saving provision
for such cases.

Term less than that of grantor

An owner in fee simple is able to grant a lease of his property for any term
because the fee simple is itself effectively perpetual. Thus, there is nothing to
prevent a fee simple owner granting a lease to a tenant for 9,000 years. In fact,
99-year leases are common and 999-year leases, though hardly frequent, are to
be found in practice.

While there can only be one fee simple estate in one piece of land, there can be
more than one term of years. A tenant may grant a lease of the premises (a
sublease) to a subtenant if this sublease will last for a shorter period than the
original lease (the head lease). The subtenant may also grant a further lease of
the same premises (an under lease) to an undertenant if the under-lease is for a
shorter period than the sublease. Thus, if L, the fee simple owner, grants T a 99-
year lease of a property on 1 January 1980, T may grant a sublease to S for any
shorter period (e.g., 25 years) and S may grant an under lease to U for any period

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shorter than the sublease (e.g. a monthly tenancy).

Underleases

An underlease is a lease that is not granted by a freehold owner but by a person

who is, himself, a tenant. So, it is a lease which is granted out of another lease.
The parties referred to in this article are the landlord (meaning the freehold
owner), the tenant (meaning the tenant under the existing lease or 'headlease'
granted by the freehold owner) and the undertenant (meaning the tenant under
the underlease, which is the lease granted out of the headlease).

Undertenants are usually required to covenant directly with the landlord to

comply with the underlease covenants. Sometimes underleases also require
compliance with covenants contained in the headlease. Caution is needed before
agreeing to this, as it effectively incorporates the terms of the headlease into the
underlease. If the repairing obligations in the headlease were to be incorporated
into the underlease in this way, it could allow the landlord to pursue the
undertenant for dilapidations in respect of the whole of the headlease term. It is
vital that such exposure is limited.

Even if the headlease obligations are not passed on to an undertenant, they still
need to know what is in the headlease and what the tenant can or must do. What
if the underlease lets only the internal shell of a property and the structure falls
into disrepair? Can the tenant effect repair? Is this the responsibility of the
landlord? The underlease should oblige the tenant to comply with its own
obligations, and enforce the landlord's obligations, in the headlease.

An undertenant should ensure that the tenant is obliged to pass on any notices
that it receives in relation to the headlease and to notify the undertenant it of
any variations to the headlease. Either could affect the undertenant's security or
liabilities.

The underlease must expire before the headlease. If the underlease term is equal
to or greater than the headlease then this will usually result in the assignment of
the headlease to the undertenant, which is not what the parties intend.

If the headlease is forfeited because the tenant has breached its terms, the
underlease will end automatically. The undertenant can apply for relief from
forfeiture but the court has a wide discretion as to the terms upon which this
might be granted. It may impose an obligation on the undertenant to pay the
tenant's arrears as a condition of relief. Complications arise when the
undertenant occupies only part of the premises comprised in the headlease.

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As an alternative, a tenant may be able to agree with the landlord that if the
headlease is forfeited and the underlease falls away, the landlord will grant a new
lease to the undertenant.

If the tenant is wound up and the headlease is disclaimed, the undertenant can
stay in occupation for the underlease term but only if it complies with the
headlease obligations, including payment of the headlease rent. Expert advice
should be sought to protect the undertenant's position if this occurs.

If the headlease is terminated by break notice then, again the underlease will end
at the same time as the headlease. Undertenants must be careful to review the
headlease for any break options and take advice to protect their interest.
Tenants often take leases without legal advice. This is unwise but entering an
underlease without legal advice is even more hazardous. Potential undertenants
should seek proper legal advice prior to entering an underlease to ensure that:

• they are not liable for anything more onerous that the provisions of the
underlease;
• they are aware of the implications of the headlease ending early; and
• safeguards are put in place if possible, to protect their interests.

2. Licences in property law

In many cases, an individual or business needs to occupy a property that they do

not otherwise own or have a legal right of occupation in. This permission is called
a ‘licence’.

A licence is different to a lease: leases tend to be for relatively long periods of

time, whereas the licensee usually needs a short-term occupation of the
property. Licences, unlike leases, do not usually create or grant any legal interest
in the land for the licensee. Licences operate to allow the licensee to use the
property for a specific purpose for a defined time period.

Once granted, a licence makes it lawful for a property to be used by a person who
is not the legal owner – but they will not have the right to have exclusive
possession of the property. Without a licence, there is no right to occupy the
property.

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The grant of licences

A licence may be express or implied. For instance, an everyday-life example of an

implied licence arises when a shopkeeper invites customers to enter the premises
to do business.

Express licences govern specific situations where permission has been expressly
granted to an individual, for example, where a property owner invites guests to
dinner or to stay in a room on their property. The licence governs only the
specified period of the stay, and any re-entry after that period without further
permission may constitute trespass. An individual cannot grant a licence to
themselves, nor to themselves jointly with another. It can only be granted by a
property owner who is different from the licensee.

The effect of a licence

A licence gives minimal rights to the licensee. Therefore, they usually have no
interest in the land and the licence does not create an interest in the land – it
simply prevents the licensee from being a trespasser in law. However, the law is
still evolving, and the courts are moving towards accepting that in some cases, a
license does create an interest in land.

Where the licence is contractual (i.e., granted under a contract), the licence may
specify certain rights given to the licensee. Sometimes, it can be difficult to
determine whether a person is a contractual licensee or a lessee. The question
can usually be resolved by looking at the substantive terms of the agreement
rather than the ‘label’ given to the permission, and the terminology used.

Contractual licences

Where a licence is granted by a contract, the right to occupy is usually described

as a contractual licence.

A contractual licence may be revocable or irrevocable in accordance with the

terms of the contract between the parties, and their intentions when signing it. If
the revocation of a licence is a breach of contract, the licensee may recover
damages for the breach. Further, the rights under a contractual licence may or
may not be assignable to a third party, depending on the terms of the contract.

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Revocation of licences

The law relating to the revocation of licences has been a difficult area in recent
years, with the courts interpreting the law in different ways. In general, the
licences could be revoked through giving notice of revocation to the licensee
allowing them a reasonable time to leave the property. The concept of
reasonable time is flexible; however, the period specified should not be
oppressive.

There are some exceptions to the rule. For example, if the licence is coupled with
a proprietary interest (e.g., an interest in the land), then the licensor cannot
revoke it. However, if there is no proprietary interest, there may be equitable
remedies available to ensure fairness – e.g., if the licensor cannot lawfully revoke
the licence, they may be able to obtain an injunction against the licensee.

Once the licence has been revoked, if the licensee leaves the property and then
re-enters – their re-entry constitutes trespass. This is so even if the revocation of
the licence was unlawful.

Irrevocable licences

There are licences which cannot be revoked. A licence may be irrevocable for
several reasons, including because the terms of the contractual licence make it
such. Alternatively, it may not be able to be revoked based on estoppel, e.g., the
licensee has spent money on improving the property because he was given to
understand he would be able to remain in the property for longer.

Effect of a licence on the land

Since a licence does not create a formal interest in land, it is not binding upon a
successor in title (e.g., a property purchased) unless there is a ‘constructive trust’.
Therefore, in principle if the property is sold to another the interest under a
licence does not pass with it. A constructive trust may arise where the seller has
implied that the property is subject to the licence.

3. Leases granted on or after 1st January 1996

Leases that are granted on or after 1st of January 1996 come under the Landlord
and Tenant (Covenants) Act of 1995. Under the provisions of the Act, the original
landlord or the person who originally granted the lease shall be bound by all the
covenants in the lease when the tenant remains as a tenant.

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When he lawfully assigns the lease or sub-lets the property, he is released from
future liabilities occurring in the lease covenants unless he has agreed to enter an
‘authorised guarantee agreement’ or AGA. This is an agreement that is entered
by the outgoing tenant with his landlord. He guarantees that the immediate
successor in title shall perform all the lease covenants. A tenant is obliged to
enter an AGA only when:

a) The lease is for a commercial property, where both parties have agreed in
the contract that an AGA shall be provided in the case of an assignment.
However, this condition cannot be agreed in advance in the case of a
residential property lease.

b) When the landlord requires under the law that the provisions of the AGA
are a condition of giving consent to an assignment. It is the decision of the
court as to whether a condition has been lawfully imposed in a particular
case.

The guarantee provided by the AGA only extends to performance of covenants by

the immediate tenant and not to those who come subsequently. However, they
shall remain liable for any breach that was done before the date of assignment.

Subsequent assignees are bound by all covenants mentioned in the lease, except
those that are mentioned as ‘personal’ and said to be applicable to the original
tenant. Although, subsequent assignees shall remain liable for any breach that
was committed before the date of assignment, they shall not be liable for
breaches that are committed after the tenancy ends. But if he has given an AGA,
he shall be held accountable for the performance of a covenant by his immediate
successor.

It should be noted that the provisions for automatic release do not apply if the
assignment itself was made in breach of a covenant in the lease, nor is it
applicable when it occurs by an operation of law, i.e., on the death of the tenant
where the lease passes on to the immediate family. Also, when an assignee
remains liable through an AGA, he should seek an indemnity covenant from the
successor of the title. This should be given expressly.

As for performance of covenants by the original landlord, he is not automatically

released from his covenants when he sells the reversion. Automatic release,
however, applies to the person who is the tenant for the time being and seeking
to be released from future liability before or within four weeks of the date of the
assignment of the reversion.

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4. Leases granted before 1st January 1996

Liability of tenants

The Landlord and Tenants (Covenants) Act of 1995 does not apply to leases that
were granted before 1st January 1996. The underlying principle guiding this
thought is that the original tenant shall remain bound by the covenants for the
whole of the contractual term. Unless the landlord expressly releases the original
tenant from the covenant, he remains liable even after assigning it to a successor.

Thus, it can be clearly seen that the original tenant shall be held liable for any
breach of covenant during the term of his tenancy, irrespective of the fact that
the breach was conducted by a subsequent successor.

All succeeding assignees shall also be liable for any breach that was committed
when the ownership of lease vests with them, in respect of covenants that ‘touch
and concern’ the land. To the uninitiated, touch and concern refers to covenants
that are entered between parties as landowners, instead of being mere
individuals. This provision adheres to the doctrine of privity of estate.

This gives the landlord an opportunity to seek redress from the original tenant or
the particular assignee who has committed a breach. He cannot sue both but can
choose whom to sue. This is of utmost importance when the tenant in question is
facing untold financial difficulties and is not worth suing. But, if the original
landlord passes the reversion, the right to sue passes to the person who transfers
that reversion; because all rights attached to the reversion pass to the transferee
including the right to sue for an existing breach of covenant.

Thus, it can be deduced that an assignee will have to indemnify his assignor with
respect to the breach of a covenant committed after the date of assignment. This
is done irrespective of the fact that the assignor has parted with the lease or not.
When a registered lease is transferred, the indemnity is covered under Sc12 para
20 to the LRA 2002, even if no value was given to the assignment. In the case of
unregistered land, there shall be no valuable consideration for the assignment,
but an express indemnity shall be required by the assignor. As per Standard
Conditions 4.6.4 and SCPC 6.6.4 the transfer deed should contain an express
provision of indemnity covenant unless it is implied by law.

If the terms of the lease provide that any further assignment of lease requires the
permission of the original landlord, he can under some circumstances, insist that
the assignee enter a direct contractual relationship with him. This is usually
contained in the same document where the landlord provides his consent to the
assignment; also called licence to assign.

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This is one way of ensuring that the subsequent assignee has the same liability as
the original tenant.

Liability of landlords

The doctrine of privity of contract dictates that the original landlord shall remain
bound to the original tenant throughout the term of the lease. And when he is
unable to do so (either through his own act or by default), he shall be liable for
damages to the tenant. This was the gist of the decision in the case of Eagon v
Dent [1965] 2All ER 335. The facts of the case are that the landlord sold a
reversion to a third party. The original tenant who could not exercise an
unregistered option against the buyer of the reversion recovered damages from
the landlord for a breach of covenant.

Besides the original landlord, subsequent transferee of reversions shall also be

liable in respect of breach of covenants that touch and concern the land which
are committed while the reversion is vested in them. This is again under the
doctrine of privity of estate.

Default notices – liability of former tenants

Thus, former tenants can remain liable for breach of covenants made by
assignees in the case of assignments that take place before the 1st of January
1996. With respect to leases that are given on or after that date, the assignee can
be made liable if the outgoing tenant has given an AGA. To protect former
tenants from arrears of rent, s.17 of the Landlord and Tenants (Covenants) Act
provides that the landlord can claim rent arrears only when he has served a
‘default notice’ on the former tenant. This notice should be served within six
months of the amount falling due. The landlord cannot pursue when notice is not
served. This also applies to leases that are created before and after the Landlord
and Tenant (Covenants) Act came into force.

Liability between head-landlord and sub-tenant

The doctrine of privity of estate does not apply in the case of relationship
between the head-landlord and the sub-tenant. But a contractual relationship
shall exist between them if the head-landlord has entered a direct covenant with
the sub-tenant. The sub-tenant shall also be liable for any restrictive covenant
mentioned in the head-lease of which the sub-tenant has notice when he took on
the sublease. When a sub-tenant breaches a covenant in the head-lease, the
head-landlord has the right to forfeit the head-lease, thereby ending, the sub-
lease as well.

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This applies irrespective of any direct liability arising from a contract.

Sharing occupation - Breach of covenant?

Case Example: Mean Fiddler Holdings Ltd v Islington Borough Council [2003]
EWCA Civ 160

Question: Was there a sharing of occupation in breach of the lease?

The user clause provided that the tenant was not to use the property or any part
of it ‘otherwise than as a licensed snooker and social club together with a
restaurant discotheque and bar on the ground floor’.

The alienation clause provided that the tenant was no to ‘share the possession of
occupation of part only of the Property nor permit nor suffer any other person
company or firm to occupy or share the occupation of the Property or any part of
parts thereof whether as a licensee or otherwise’.

T operated the venue by offering the club to external promoters who on their
own account would stage club nights, taking full responsibility for admission
revenues, advertising, and administration burden. The promoters and artists
were admitted one hour before the nightclub opened to prepare and set up. They
were not provided with keys nor did they have access to any private parts of the
club. The judge held that there was no breach of covenant and the Court of
Appeal agreed.

‘.. this is one of those questions ... sometimes described as one of mixed fact and
law, where there is no precise test... In my view, the starting point here was the
nature of the permitted use, which involved such things as a social club, a
discotheque, and a restaurant... It involved the admission of the public ..[the
judge] was entitled to treat the fact that the respondent in this case remained
'exclusively responsible for everything concerned with the property as opposed to
the event' as being indicative of the fact that it had not shared occupation.’
(Carnwath LJ at paras 31-35)

‘This was a question of interpretation of a contract, and therefore a question of

law... The test, in my opinion, is whether the promoter ... is operating a separate
business on the premises from that carried on by the tenant... If, on the other
hand, the tenant is carrying on a business and the promoter participates in that
business under the tenant's supervision and control, I would not say that the
promoter is sharing the occupation of the property. There would simply be one
business run by the tenant and the promoter is participating in it.’ (Sir Christopher
Staughton at paras 39 to 41).

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Sharing possession

Case example: Akici v LR Butlin Ltd [2005] EWCA Civ 1296

The covenant in the lease was in the following terms:

Not to ... part with possession of a part of the demised premises nor to share
possession of the whole or any part of the demised premises nor to part with
possession of the whole of the demised premises (except as hereinafter
permitted) all of which are expressly prohibited.

It was held that there is a distinction between possession and occupation so that
the covenant would only be breached if T parted with, or shared possession, but
was not infringed if T merely parted with, or shared, occupation:

Neuberger LJ: ... it is perfectly possible for a lessee to permit a company, in which
he has an interest, to occupy the demised premises for the purpose of its
business, without parting with possession of those premises to that company.

In fact, T had shared possession with a limited liability company, and that
represented a breach of the covenant. The "elusive nature of the distinction"
between sharing occupation and sharing possession; or between sharing
possession or parting with possession was difficult to assess. The question boiled
down to this:

"Did Mr Akici retain possession in himself alone and merely permit the company
to occupy the premises or did the company share possession with Mr Akici?"
(Neuberger LJ at para 44)

The company ran a takeaway pizza business from the premises. In coming to the
conclusion that there had been a sharing of possession the following factors were
relevant: the company enjoyed a degree of control over the premises that
amounted to its having possession (albeit non-exclusive); the business was a
relatively intensive one involving employees, all of whom were employed by the
company; both the tenant and at least one of the employees of the company had
a key; the company paid the rent directly to the landlord; and although at the
relevant time the tenant did not have a direct interest in the company there was
‘little doubt that there was something of value to Mr Akici in this arrangement’.

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Unlawful subletting - Order to restore

Case example: Crestfort Limited v Tesco Stores Limited [2005] EWHC 805 (Ch);
[2005] 37 EG 148.

Summary: L managed to obtain an order requiring a sub-tenant to surrender the

property to the tenant that had been sublet in breach of covenant.

Facts: The lease required any underlease to be on like terms to that of the lease:
Any permitted Underlease shall be granted subject to like covenants and
conditions as are herein contained except as to the rent thereby reserved and the
length of the term thereby granted."

The headlease contained a standard form full repairing covenant. The sublease
included a repairing covenant, but it was subject to the limitation that the
subtenant was not required to put the premises into any better state of repair
and condition than as at the date of the Underlease as evidenced by a schedule
of condition that was attached.

The property was in a bad state of disrepair and a schedule of dilapidations had
been served on T. L sought an injunction requiring that the underlease be
surrendered. T sought a declaration that L had unreasonably refused consent to
sublet so that it was free to do so without consent. (The reason given in fact had
nothing to do with repair. T was in breach of an insurance obligation contained in
the licence to assign under which T had taken the tenancy).

Decision: Held

(1) The sub-lease was not in like terms to the head lease. Lightman J:

The term ‘like’ does not import ‘identical’ covenants, as is imported by the term
‘same’: it imports similarity in substance without the need of similarity in form,
detail, or wording. Tesco plainly failed to include the ‘like’ covenant in respect of
repairs in the Underlease. The limitation by reference to the schedule of
condition was substantial and meaningful: it was necessitated by the continuing
default by Tesco to comply with its repairing covenant in the Lease.

(2) The requirement that the sublease be on like terms was a condition
precedent to the ability to ask for consent to assignment. As the sublease did
not satisfy the condition the question of reasonableness of Ls refusal did not
arise (Allied Dunbar applied).

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Accordingly, by reason of the absence of a like repairing covenant in the

Underlease the condition precedent to the existence of any obligation on the part
of the Landlords to consider the application for consent to the grant of the
Underlease to Magspeed was never satisfied. Tesco at all times therefore
remained subject to an absolute obligation not to underlet and the Landlords at
no time were under any obligation to consider Tesco's application for consent to
underlet, section 1 of the Landlord and Tenant Act 1988 had no application and
the grant of the Underlease to Magspeed constituted a breach of covenant by
Tesco.

(3) It was possible to grant a mandatory injunction against the sub-tenant

requiring it to give up the sub-lease because by agreeing to take the sublease it
had committed the tort of wrongful interference with a contract. It was right to
grant the injunction because the interference had been done knowingly and
intentionally in the financial interests of T and the subtenant. Lightman J at paras
69 and 70:

The Landlords have accordingly in my judgment established that Tesco knowingly

in breach of contract granted, and Magspeed tortiously accepted, the
Underlease. In the circumstances in the absence of any equitable defence and
any plea that its grant would be oppressive (and there is none pleaded,
established or maintained) the Landlords are prima facie entitled to mandatory
orders for surrender of the Underlease and should not be required to accept
damages in its place.

The Landlords in justice should be granted the mandatory order which they seek,
and the grant of any lesser relief would be inadequate, for interference with their
rights was knowing and deliberate to serve the Defendants' financial interests.

(4) The judge also awarded L damages against both T and the subtenant, to be
assessed by reference to the sum L might reasonably have demanded at the date
of the breach of covenant, or commission of the tort, for relaxing the alienation
covenant so as to permit the underletting. However, I’m not quite sure why the
judge considered that damages should be awarded given that he granted an
injunction and damages are usually awarded on the basis suggested in lieu of an
injunction. He simply said this at para 75.

Tesco then took the point that the experts in their joint report contemplate the
award of damages in lieu of and not in addition to an injunction. This is correct,
but the failure to contemplate the eventuality of an award of damages in addition
should not preclude such an award unless to make such an award would occasion
injustice to the Defendants. It has not been suggested that the award would
occasion any injustice. No injustice can be occasioned so long as the Defendants
are afforded the protection which they are afforded by this judgment.

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Assignment of reversion

Personal obligations of landlord

Case example: BHP Great Britain Petroleum Ltd v Chesterfield Properties Ltd
[2001] EWCA Civ 179 (HL refused leave to appeal: [2002] 1 WLR 1449)

Where a landlord assigns the reversion in premises, he may apply to be released

from the landlord covenants of the tenancy by serving a notice on the tenant
under s8 of the 1995 Act. However, an obligation that is personal to the original
landlord is not a landlord covenant.

In this case the original landlord agreed to refurbish a building. In the agreement
there was a personal obligation to remedy defective works. The agreement also
provided that following completion of the works a lease would be granted, which
was what occurred. As the obligation to do the works was a personal one the
original landlord could not escape liability by serving a s8 notice when it assigned
the reversion.

Continuing liability of tenant to landlord where no s8 release

Case example: Wembley National Stadium Ltd v Wembley (London) Ltd [2007]
EWHC 756 (Ch)

Facts: In 1999, the first defendant (as landlord) granted a lease of Wembley
stadium to the tenant (claimant) for 125 years. The consideration included a
premium and an obligation by the tenant to pay service charge.
In 2001, the 1st defendant transferred the freehold to the 2nd - 5th defendants
("Gideon"). The transfer of the freehold stated that Gideon held the freehold as
nominee and trustee for the 1st defendant absolutely.
In 2006, the 1st defendant sought service charges in the sum of £660,831 from
the tenant. The tenant argued that it was not liable to pay the monies on the
basis that:

The freehold assignment transferred the benefit of the tenant's covenants to

Gideon; alternatively, Section 3 of the Landlord and Tenant (Covenants) Act 1995
meant that Gideon alone was entitled to the benefit of the tenant's covenants.
The 1st defendant sought a declaration that it was entitled to the benefit of the
tenant's covenants.

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Decision: The court granted a declaration in favour of the 1st defendant.

The court held that it was plain from s6(2) of the Landlord and Tenant
(Covenants) Act 1995 that the 1st defendant remained bound by the burden of
the landlord's covenants in the lease, unless and until released as provided under
the Act. Section 6(2) states:

‘6 (2) If the landlord assigns the reversion in the whole of the premises of which he
is the landlord,
(a) he may apply to be released from the landlord covenants of the tenancy in
accordance with section 8.
and (b) if he is so released from all those covenants, he ceases to be entitled to
the benefit of the tenant covenants of the tenancy as from the assignment.’

It was clear that at no time had the 1st defendant obtained such a release, so
that whether alone or with Gideon, if necessary, joined as a defendant, he was
entitled to enforce the tenant's covenants in the lease, and to all rents and profits
due under the lease.

Contracting out - s25

Case example: London Diocesan Fund v Avonridge Property Company Limited

[2005] UKHL 70

Facts: T had a headlease of 7 shop units (for a term of 99 Years). T granted sub-
leases to the sub-tenants. T then assigned the headlease to a third party who
disappeared. The assignee failed to pay the rent and the head landlord forfeited.
T obtained relief from forfeiture but suffered various losses and detriments as a
result of the forfeiture. The sub-tenants sued T under the covenant for quiet
enjoyment. Ts answer to the claim was that there was a term in the sub-leases
stating that T would not be liable under the covenant after it had disposed of the
property. The sub-tenants argued that such a clause would get round the release
provisions in sections 6 to 8 of the Landlord and Tenant (Covenants) Act 1995 and
so was contrary to the anti-avoidance provision in s25(1).

Decision: Held

The argument was rejected by the HL. Lord Nicholls:

‘13. sections 6 to 8 of the Act provide a landlord with a means which may result in
his being released from the landlord covenants but will not necessarily do so. If
the landlord assigns the whole of the premises of which he is landlord, he may
apply to be released from the landlord covenants of the tenancy. A landlord
covenant is a covenant falling to be complied with by the landlord of the premises

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demised by a tenancy. An application for release is made by the landlord serving

an appropriate notice on the tenant requesting a release of the landlord covenant
wholly or in part. Where the landlord makes such an application the covenant is
released to the requested extent if the tenant consents, or if he fails to object, or if
he does object but the court decides it is reasonable for the covenant to be
released: section 8.’

Thus, a release could be obtained by sections 6 to 8 but that did not prevent the
landlord and tenant from agreeing any other mechanism for release as a term of
the agreement. And any such term does not 'frustrate the operation' of sections
6 to 8 of the Act so as to fall foul of s25. Lord Nicholls:

‘16. Sections 5 to 8 are relieving provisions. They are intended to benefit tenants,
or landlords, as the case may be. That is their purpose. That is how they are
meant to operate. These sections introduced a means, which cannot be ousted,
whereby in certain circumstances, without the agreement of the other party, a
tenant or landlord can be released from a liability he has assumed. The object of
the legislation was that on lawful assignment of a tenancy or reversion, and
irrespective of the terms of the tenancy, the tenant or the landlord should have an
exit route from his future liabilities. This route should be available in accordance
with the statutory provisions.’

‘17. Thus, the mischief at which the statute was aimed was the absence in
practice of any such exit route. Consistently with this the legislation was not
intended to close any other exit route already open to the parties: in particular,
that by agreement their liability could be curtailed from the outset or later
released or waived.’

T's case was not overburdened with merit. Indeed, on their face the transactions
have the appearance of a scam. However, that did not assist the sub-tenants.
Lord Nicholls:

‘8. Thus, the overall position was that Avonridge received premiums from the
subtenants totalling altogether £458,500 in exchange for subleases which from
their inception were essentially valueless. They were valueless because by its
own act of assignment to a worthless assignee Avonridge could at any time put
the subleases in jeopardy of forfeiture. Avonridge could do this without incurring
any liability either to the head lessor or to the subtenants. From the outset it was
in Avonridge's financial interest to take this course as soon as possible. Avonridge
lost no time in doing so’.

‘32. In a period of less than two months [Avondridge] acquired the head lease of
seven shop units, granted six under-leases at premiums which gave it a profit of
the order of £200,000, and then sold the head lease (for £50,000) to Mr Phithwa.
Mr Phithwa himself made a profit of over £20,000 (by granting a seventh under-

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lease at a premium) and then disappeared without ever paying any rent under the
head lease. The unfortunate subtenants have had to pay a heavy price to avoid
forfeiture (unless and except so far as they may have been able to pass on that
burden to their solicitors).’

The House of Lords therefore had much sympathy with the sub-tenants, but it did
not help them in the case. This was because the Act did not, on its proper
construction, assist them. In any event, the defect in their interests was apparent
from the outset. Lord Nicholls:

‘21. Nor do the events in this case exemplify a loophole in the Act Parliament
cannot have intended. The risks involved were not obscure or concealed. They
were evident on the face of the subleases. The sublessees were to pay up-front a
capitalised rent for the whole term of the subleases. But clause 6 enabled
Avonridge to shake off all its landlord obligations at will. Any competent
conveyancer would, or should, have warned the sublessees of the risks, clearly
and forcefully.’

Guarantees

Effect of s25 of the 1995 Act

Case example: K/S Victoria Street v House of Fraser (Stores Management)

Limited [2011] EWCA Civ 904

Summary: This decision clarifies some of the confusion as to the ability of an

existing guarantor to guarantee an incoming tenant, following the decision of
Newey J in Good Harvest Partnership LLP v Centaur Services Limited [2010] EWHC
330 (Ch). The Court of Appeal has made it clear that:

‘The assignor’s guarantor cannot guarantee the assignee’s obligations under the
lease – even voluntarily – such a guarantee will be invalid.
The assignor’s guarantor can guarantee the assignor’s AGA.’

Facts: In a complex sale and leaseback transaction, K/S Victoria Street (“K/S”)
agreed to buy a department store in Wolverhampton from House of Fraser
(Stores Management) Ltd (“Management”), a wholly owned subsidiary of House
of Fraser plc (“HofF”).

As part of the agreement K/S were to then grant a lease back to Management
(for tax reasons), and Management were then to assign the lease within three
months to a more satisfactory subsidiary of HofF, and in default the lease was to
be assigned to a specific subsidiary – House of Fraser (Stores) Ltd (“Stores”).
HofF was the guarantor of the lease to Management, and the agreement

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provided that on assignment, HofF would stand as surety of the assignee’s

obligations.

The lease was completed with HofF as guarantor, and the lease contained a
clause (3.15(F)) that stated:

‘Notwithstanding the provisions of this clause where the Tenant is [Management]

or any other Group Company of [HoF] consent shall not be required to an
assignment of the whole to another Group Company of [HoF] provided [HoF] acts
as surety to the assignee Group Company.’

The onward assignment to Stores was not completed, HofF and Management
maintaining that the provision for HofF’s guarantee was unenforceable. K/S
sought specific performance of the agreement.

Issue: The Court of Appeal was asked to consider two questions:

Was the requirement in the agreement, for HofF to stand as guarantor for Stores,
void under section 25(1) of the Landlord and Tenant (Covenants) Act 1995?
If the lease was assigned from Management to Stores, could Stores insist on
reassigning it to Management under clause 3.15(F) of the lease?

Decision: The Court of Appeal held that the agreement that HofF stand as
guarantor for Stores, having stood as guarantor for Management was void and
unenforceable under the 1995 Act:

Section 5(2)(a) of the 1995 Act releases the assignor (Management) from its
obligations under the lease on a valid assignment to an assignee (Stores)
Section 24(2) of the 1995 Act releases the assignor’s guarantor (HofF) “.to the
same extent as the [assignor] is released from the tenant covenant..”
Section 25(1)(a) of the 1995 Act makes it clear that any provision that ‘frustrates’
the operation of section 24(2) of the Act is void: that includes any provision that
requires the assignor’s guarantor to take on a liability that it would otherwise be
released from under the Act.

As a result, any contractual arrangement (in an agreement, lease, licence etc)

which imposes such an obligation, is void; and K/S cannot insist that HofF act as a
guarantor for Stores; but it could insist on specific performance of the separate
clause in the agreement which required an assignment to Stores. (This ruling was
not challenged by the defendants in the Court of Appeal.)

Citation: Lord Neuberger MR at para 21:

‘If a landlord could (a) when granting a tenancy, impose an obligation on the
tenant's guarantor to guarantee the liability of the assignee in the event of an
assignment, and (b) on an assignment by a tenant, enforce that obligation, it

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would, as a matter of ordinary language, "frustrate" the operation of section

24(2). If it were, otherwise, it would mean, for instance, that a landlord, when
granting a tenancy, could require a guarantor of the tenant's liabilities, on every
assignment of the tenancy, to guarantee the liability of each successive assignee.
Such an obligation ("a renewal obligation") would plainly be wholly contrary to
the purpose of section 24(2), as it would enable a well-advised landlord to ensure
that any guarantor was in precisely the position in which it would have been
before 1995 Act came into force.’

Additional points

In view of the uncertainty arising from the Good Harvest decision, the Court of
Appeal went on to consider:

(1) Whether any guarantee offered by the assignor’s guarantor was always
void? The court held that, although it was not commercially attractive and
inhibited the parties’ contractual freedom, nonetheless s25(1) of the 1995
Act required that interpretation. In part the court rejected the ability freely
to offer a guarantee because of the possibility of argument at a later date
as to whether such offer had been made voluntarily or as a result of
landlord pressure, and in part that section 25(1) is concerned with the
"effect" of an agreement and not the purpose behind it.

(2) Whether the assignor’s guarantor can guarantee the assignor’s AGA? The
Court of Appeal has confirmed that the tenant's guarantor can validly
guarantee that tenant's liability under an AGA.

(3) Finally, the court looked at whether the assignor’s guarantor could act as
guarantor for subsequent assignees even if it could not validly act as
guarantor for the immediate assignee. It concluded that this would not be
void under s25(1)(a) of the 1995 Act, as it would not have the effect of
frustrating the release of both assignor and assignor’s guarantor on the
first assignment.

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Guarantor’s liability under lease

Consent order

Case example: Lee v Sommer [2015] EWHC 3889

Summary: The landlord failed to serve notice on the guarantor under s17 of the
1995 Act. Notwithstanding that fact the guarantor agreed to a consent order for
payment of sums under the guarantee on the tenant’s default.

When the failure to serve the s17 notice was spotted by new solicitors the
guarantor applied to have the consent order set aside.

The attempt failed. It was held that the consent order did not fall foul of the anti-
avoidance provisions in s25. As a settlement agreement, it was a genuine
compromise of litigation between the parties concerning the recovery of sums
under the guarantee.

Assignment to guarantor

Precluded by s25

Case example: EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch)

Summary: An assignment by a tenant to its guarantor is void. It breaches the

anti-avoidance provisions in s25. As a result, any such assignment does not vest
the lease in the guarantor and both tenant and guarantor remain bound by their
obligations.

Relevant statutory provisions

In outline, for leases granted on or after 1 January 1996, the Landlord and Tenant
(Covenants) Act 1995 provides that where the lease has been assigned in
accordance with the terms of the lease:
The assignor is released from its obligations under the Act (s5)
The assignor’s guarantor is also release “to the same extent” (s24)
The assignor can be required to enter into an authorised guarantee agreement
guaranteeing the performance of the tenant covenants by the assignee (s16)
There is no equivalent of s16 for the assignor’s guarantors.

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There is a strong anti-avoidance provision (s25)

Facts: The landlord (L) of retail premises let them to a tenant (T) for
approximately 25 years. T’s obligations under the lease were guaranteed by G
(G).

T went into administration and L granted a licence to assign from T to G, and the
deed of assignment was completed on the same date. Also, on that date G
underlet the premises.

Shortly thereafter, G claimed that although the assignment and underlease were
valid, L could not enforce the tenant’s covenants against G relying on the
judgment in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011]
EWCA Civ 904 – see above, in which Lord Neuberger said:

‘[a] lease could not be assigned to the guarantor, even where both tenant and
guarantor wanted it. Lord Nicholls said in Avonridge [2005] 1 WLR 3956 (see
above), para 16, that section 5 was "intended to benefit … tenants … . That is [its]
purpose. That is how [it is] meant to operate." So, too, section 24(2) is meant to
benefit guarantors. It can therefore be argued that, where the assignor and the
guarantor who want the guarantor to guarantee an assignee, or who want the
lease to be assigned to the guarantor, such a renewal, or such an assignment,
would not "frustrate the operation of any provision of [the 1995 Act]’.

T was subsequently dissolved and, L argued, the lease was now vested in the
Crown as bona vacantia.

Issues: Whether the Landlord and Tenant Covenants Act 1995 prevents a tenant’s
guarantor becoming the assignee of the lease?
If it does, is any such assignment that takes place void, or does the lease vest at
law leaving the tenant covenants in the lease, post assignment, void and
unenforceable?

Decision: The High Court (Amanda Tipples QC) found for the landlord. The Act
prevented an assignment to a Guarantor and the purported assignment was void.
The Court considered, in some detail, the comments of:
The House of Lords in Avonridge Property Co Ltd v London Diocesan Fund [2005]
UKHL 70 as to the ‘the mischief at which [the Act] is aimed [ie] the continuation
of liability long after [assignment]” and the need to regard of s25 of the 1995 Act
as a “comprehensive anti-avoidance provision’;

The High Court in Good Harvest Partnership LLP v Centaur Services Ltd [2010]
EWHC 330 (Ch), that a guarantee given by the assignor’s guarantor for the
assignee is void; and

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The Court of Appeal in K/S Victoria Street, that an assigning tenant’s guarantor
cannot be required to guarantee the assignee.

The Court went on to conclude that the 1995 Act prevents a tenant assigning to
its guarantor. This was because the ‘whole thrust of the Act’ is to prevent the ‘re-
assumption or renewal of liabilities, whether on the tenant or the guarantor…the
guarantor cannot as a result of assignment by the tenant to it of the tenancy re-
assume those very same, or essentially the same, liabilities as tenant’.

The argument that the Act allows the assigning tenant’s guarantor to be released
as guarantor and then resume liability as tenant on an assignment to it failed as
‘in practical terms … there is no release at all for [the guarantor] in respect of its
liabilities under tenant covenants’. In other words, the guarantor is bound to the
same extent upon assignment as it was before assignment, and accordingly such
an assignment is caught by section 25.

The guarantor’s argument that the lease was valid, but the covenants void and
unenforceable as a result of such an assignment was “unbalanced as well as
'emasculated and unworkable’".

The Judge commented “the fact that such a conclusion is unattractively limiting
and commercially unrealistic is neither here nor there”.

As the lease remained vested in T notwithstanding the assignment, G’s liability

under the guarantee remained intact. That was the case even though the tenant
had gone into liquidation and the lease vested in the Crown bona vacantia.

Comment: This is the first case where Lord Neuberger’s obiter comments in K/S
Victoria Street - see above - have been followed and provides useful clarification
of the impact of T assigning to T’s guarantor.

Recovery from original tenant

Notices under s17 of the 1995 Act - outstanding rent review

Case example: Scottish & Newcastle plc v Raguz [2008] UKHL 65

Summary: Where there is an unresolved rent review, the ‘fixed charge’ for the
purposes of serving notices under s17 of the Landlord and Tenant (Covenants)
Act 1995 is the pre-review rent, i.e., the rent due and payable on each rent
payment day.

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The additional rent (payable after the completion of the review) is a new and
separate fixed charge that becomes ‘due’ under s17(2) on the date of
determination of the review.

It is not therefore necessary to serve s17 ‘wait and see’ notices within 6 months
of each original rent payment date for the undetermined portion of the reviewed
rent, as envisaged by the Court of Appeal.

The Forms:

Form 1: The first notice is more straightforward and is referred to in s17(2), which
states that the:

‘former tenant shall not be liable under .. the covenant to pay any amount in
respect of any fixed charge payable under the covenant unless, within the period
of six months beginning with the date when the charge becomes due, the landlord
serves on the former tenant a notice informing him - (a) that the charge is now
due; and (b) that in respect of the charge the landlord intends to recover from the
former tenant such amount as is specified in the notice ..’.

Form 2: The second notice is referred to in s17(4) and is designed to deal with the
situation where the liability is subsequently determined to be for a great amount
than the sum referred to in the Form 1 notice.

It assumes service of the first notice under s17(2) and then a further notice under
subsection (4) when the greater amount is subsequently determined. An obvious
example is where there is an undetermined rent review at the time of service of
the Form 1 notice. So far as is relevant, sub-section (4) states:

"(4) Where the landlord has duly served a notice under subsection (2) .. the
amount which the former tenant ... is liable to pay in respect of the fixed charge in
question shall not exceed the amount specified in the notice unless-

(a) his liability in respect of the charge is subsequently determined to be for a

greater amount.

(b) the notice informed him of the possibility that that liability would be so
determined,

(c) within the period of three months beginning with the date of the
determination, the landlord serves on him a further notice informing him that
the landlord intends to recover that greater amount from him ..."

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The Form 1 notice contains a paragraph that envisages the possibility of the
service a second notice and states as follows:

‘There is a possibility that your liability in respect of the fixed charge(s) detailed in
the schedule will subsequently be determined for a greater amount. (See Note 4
below.)’

That note states:

‘Delete this paragraph if not applicable. If applicable (for example, where there is
an outstanding rent review ...) a further notice must be served on the former
tenant ... within three (3) months beginning with the date on which the greater
amount is determined.’

The issue: The issue before the courts was whether a landlord:

May simply wait until the rent is determined after the rent review and then only
serve a Form 1 notice: or
Must serve a Form 1 notice at the normal rent payment date (advising that there
are no arrears but that the review is ongoing) and then serve a Form 2 notice
after the rent review has been completed (as envisaged by paragraph 4 of the
notice and the note).
The trial judge and the Court of Appeal held that the latter applied. They said that
protective s17(2) notices should be served on the original tenant within six
months of the rent payment dates, even though on those dates the tenant was
not in arrears and the rent review was still undetermined, and even though
serving such protective notices may prove ‘a burden on landlords and could seem
pointless and inconvenient for original tenants’ (Lord Justice Lloyd, para 35).

House of Lords: The House of Lords overturned the decision of the Court of
Appeal by a 3:2 majority. Lord Scott of Foscote, giving the main judgement, said
that in his view s17 contemplated a sum that had become payable but was
unpaid, for the recovery of which an action could be brought against the current
tenant. Where there was an uncompleted rent review, the rent that became due
and payable on each payment day was the pre-review rent. That was the ‘fixed
charge’ ‘now due’ for s17 purposes.

The additional rent over the period from the rent review date until the
determination of the revised rent was a new and separate fixed charge that
became ‘due’ for s17(2) purposes on the date of the determination. Form 1
contained provisions supporting that construction but also provisions that
seemed inconsistent with it. In Lord Scott’s view, the draftsman responsible for
paragraph 4 had not thought through the implications of his assumption that the
additional rent would be part of the ‘fixed charge’ due on each payment date.

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Lord Scott added that he was not dissuaded from this decision by:

‘… the argument that the absence of earlier notice to the original tenant of his
accruing potential liability in respect of the additional rent would fail to give the
original tenant the protection that the 1995 Act intended …’

Because:

‘Every original tenant can be expected to know from the contents of the lease that
he entered into that the lease contains provision for periodic rent reviews and will
know that there will almost invariably be an interval before the revised rent is
determined. An original tenant would expect to be put on notice of any default by
the current tenant in paying the rent as it falls due for payment and of the
amount of the default but would not, surely, expect to be given notice of what is
contained in the lease and available for anyone to read. The original tenant would
surely not expect to be given notice of a process under which nothing is yet due
and in respect of which there is no default on the part of the current tenant.’ (para
44)

Lord Hoffmann, concurring with Lord Scott remarked that the view of the Court
of Appeal:

‘… produces some remarkably silly consequences. For example, as the judge

pointed out, whenever there is an overdue rent review, a landlord who wishes to
preserve his rights against a former tenant will have to serve a notice saying that
nothing is presently unpaid and that he does not intend to recover anything from
the former tenant, but that his liability may be determined to be for a greater
amount. It is hard to believe that Parliament intended this to happen.’ (para 10)

Assignment of Lease – Licence to Assign

If you have a tenant and they wish to assign their lease, then this is likely to be a
detailed action just like any other property transaction. You will almost certainly
require the landlord’s written permission to the assignment. This is called a
licence to assign. The landlord will require his legal costs (and perhaps
additionally his surveyor’s costs for advising on the acceptability of the assignee
or other details of the transaction) to be paid by his tenant. The total costs
involved on an assignment can be significant. In order to mitigate the risk of a
tenant having to pay a large legal bill only to find that the assignment does not
proceed, an assignor may wish to stipulate that the assignee pays or contributes
towards the landlord’s costs, so it is quite common for an assignee’s solicitor to
be required to undertake to pay all or part of those costs.

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Underletting (whole or part)

Underlettings can involve more legal work than applies to assignments,

potentially resulting in higher fees. The headlease will usually contain restrictions
or even a complete prohibition on underletting the whole (or a part) of the
premises. If underletting (of the whole or part) is permissible with the landlord’s
consent, cost considerations will apply. Clearly if the client wishes to underlet
part then this may be the only viable way forward if the landlord wishes to
mitigate their rent bill under the headlease. If the client wishes to get out of their
lease by underletting, they may wish to consider exercising any break clause or
finding an assignee rather than an underlessee.

Licence to change user

The lease almost certainly contains restrictions as to what the premises may be
used for. If a tenant wishes to change the use, then a licence to change user or
perhaps a deed of variation will be required. The tenant is usually responsible for
the landlord’s costs unless there is some other commercial quid pro quo.

Anything can be agreed by negotiation but generally the landlord has the upper
hand.

Licence to alter

A tenant may wish to make alterations to the premises. The lease will more likely
than not contain a clause setting out the conditions for this to happen. The
landlord may wish to control what works are carried out in order to preserve the
structural integrity of the building. On the other hand, if a tenant with a longish
lease is willing to spend money on improving the premises this may be welcome
news to the landlord. A tenant can become entitled to compensation for
improvements in certain circumstances. Generally, where a landlord is asked to
consent to alterations to the premises, he will require a detailed drawing and
specification, might appoint a surveyor to check everything and expect all his
costs to be paid by the tenant.

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Deed of variation

Sometimes the parties will agree to vary the terms of the lease. This is a matter of
negotiation. Neither party will have the right to vary the lease unilaterally.

Termination of a lease

In summary, leases may terminate in the following ways:

• Disclaimer

Disclaimer occurs in cases of insolvency. A tenant’s liquidator or trustee in

bankruptcy may disclaim a lease if it is considered to give rise to a liability to pay
money or perform any onerous act or if the property is not readily saleable
(pursuant to insolvency statute law). A disclaimer extinguishes the lease and
releases the tenant from any further liability.

• Enlargement

This is extremely rare. A lease granted for over 300 years, with at least 200 years
to run, may be “enlarged” by a tenant into a freehold estate, under the Law of
Property Act 1925 (section 153).

• Exercising a ‘break clause’

Break clauses are usually found in leases of commercial (as opposed to

residential) premises and provide for either party to determine the lease at one
or more intervals before the expiry of the term (e.g., at 3 yearly intervals or at a
fixed date).

• Expiry of the term (effluxion of time)

A lease expires automatically when its term expires (i.e., a lease of a term of 4
years expires at the end of the 4 years from the start of the term) save in specific
cases where a tenant has “security of tenure” (which will not be covered here).

• Forfeiture

The right to forfeit a lease in the event of a tenant’s breach of covenant is usually
expressly provided for in the lease.

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The exercise of the right is generally subject to restrictions implied in the law (e.g.
in the case of breach of repairing covenants in a commercial lease).

• Frustration

This is rare. A lease may be discharged by frustration. It occurs where the

frustrating event brings about a sufficiently fundamental change in circumstances
as to justify treating the lease as at an end.

• Leasehold and enfranchisement

Certain statutory provisions enable a tenant to purchase the freehold reversion

(and thereby merge the lease bringing it to an end). This is “leasehold
enfranchisement” and arises under the Leasehold Reform Act 1967 (applicable to
houses let as low rents for over 21 years) and other statutes.

• Merger

If a tenant acquires the landlord’s freehold interest, the lease “merges” into the
freehold and is extinguished.

• Notice to quit

A periodic tenancy (as opposed to a lease for a fixed term) may be terminated by
notice to quit served by either party. The notice must be served and provide for
termination on a date at the end of one of those periods for which rent is
payable. For example, a monthly periodic tenancy is terminable on one month’s
notice. In residential premises there are additional statutory restrictions for the
Notice to be enforceable.

• Repudiatory breach

This is rare. Where circumstances are extreme, the court may rule that a breach
of a fundamental provision in a lease entitles the innocent party either landlord
or tenant to the lease to treat the lease as terminated (in addition being able to
sue for damages).

• Statutory termination

In some cases, a specific statutory provision will operate to terminate a lease e.g.
under certain laws relating to residential property.

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• Surrender

A surrender can be by deed or be implied (by operation of law) for example by

the tenant removing all their possessions and vacating the property and returning
the keys to the landlord. Any surrender is only effective if it is accepted by the
landlord. If not, the lease continues.

Of these various ways, simple expiry of the term is most common, closely
followed by exercise of break options, notices to quit, surrenders by the tenant
or forfeiture by the landlord.

Royal Institution of Chartered Surveyors Code for Leasing Business Premises

RICS launched a new Code for leasing business premises (1st Edition February
2020). The Code will be effective from 1 September 2020 and will take effect as
an RICS Professional Statement. The full Code can be viewed on the RICS
website. Key provisions of the Code are set out below.

The objectives of the 2020 Code are stated as improving the quality and fairness
of negotiations on lease terms and promoting the use of comprehensive heads of
terms to make the legal drafting process more efficient.

The 2020 Code takes the form of an RICS Professional Statement, and
accordingly, whilst the Code is similar in content and form to the 2007 Code for
Leasing Business Premises, unlike the previous 2007 Code, compliance with the
2020 Code will be mandatory for RICS members. The 2020 Code will apply to
most business premises let for a period of more than six months (except for
premises only used for housing plant and equipment or advertising media).

The Code sets out the following mandatory requirements for RICS members
when entering a lease of business premises:

Negotiations: Lease negotiations must be approached in a constructive and

collaborative manner.

Unrepresented parties: Any party not represented by an RICS member or other

property professional must be advised of the existence of the Code and its
supplemental guide and must be recommended to obtain professional advice.

Heads of terms: Transaction terms must be recorded in writing, subject to

contract and must summarise, as a minimum, the following:

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• Identity and extent of the premises (to be shown on a Land Registry

compliant plan if registerable) together with any special rights to be
granted.

• Length of term including details of any renewal or break rights and

whether the Landlord and Tenant Act 1954 will apply or be excluded.

• Guarantor or rent deposit requirements.

• Amount of rent, any rent-free period, frequency of rent payments and

frequency and basis of any rent review.

• Liability for payment of service charge and insurance premiums business

rates and VAT.

• Ability to assign, sublet, charge or share the premises.

• Repairing obligations, permitted use, alterations and reinstatement

obligations.

• Conditions of the letting, such as subject to survey, board approval or

planning permission.

The mandatory requirements will also apply to lease renewals and lease
extensions except for any terms that are stated to follow the tenant’s existing
lease subject to reasonable modernisation. Negotiations should aim to produce
letting terms that achieve a fair balance between the parties having regard to
their respective commercial interests. The landlord, or its’ letting agent where
relevant, will be responsible for ensuring that heads of terms complying with the
above provisions are in place before the initial draft lease is circulated. An
optional template heads of terms is set out as an appendix to the Code together
with a checklist against which non template heads of terms may be checked.

The remaining provisions of the 2020 Code, set out in Part 3, are not mandatory
but, instead, set out good practice and include matters to consider when
negotiating heads of terms and the lease itself.

Whilst it is recognised that there may be "exceptional circumstances in which it is

appropriate to depart from these provisions" RICS members that do so may be
required to justify their decisions and actions. It is therefore probable that, in
time, tenants will look to the provisions of Part 3 as standard terms for
commercial lettings.

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Key points of ‘good practice’ are set out below:

• Premises: The identity of the premises should be clearly defined, a lease

plan should be provided and the tenant should be granted all necessary
rights for the intended use of the premises (such as car parking and where
necessary rights to run data cabling).
• Length of term, renewal rights and break rights: The length of term and
any break provisions should be stated. The tenant should be notified with
sufficient time to take professional advice as to the implications of
excluding the 1954 Act (where relevant). Unless the parties have agreed
stricter terms in the heads of terms, any tenant's break should be
conditional only on vacant possession and the payment of basic rent up to
the break date and any advance payments of rent, service charge or
insurance rent for the period after the break takes effect should be repaid
to the tenant.
• Rent deposits and guarantees: Rent deposit provisions should state
whether the deposit is security for the rent, or all of the tenant's
obligations under the lease and should set out the circumstances in which
the deposit will be returned to the tenant with any interest accrued.
• Rent and rent review: Leases should allow either party to start the rent
review process. Tenants should be made aware of the method or formula
for review where appropriate to allow time to take professional advice
and the review should not result in a "headline rent". If a review is index
linked the formula for review should not be designed to give a
disproportionate increase outside of any agreed cap or collars.
• Service charges, insurance costs and other outgoings: Landlords should
disclose known irregular events that may have a significant impact on the
amount of future service charge. Landlords should have regard to the
provisions of the RICS professional statement Service Charges in
Commercial Property.
• Assigning, subletting, charging and sharing: Leases should contain
standard provisions for assignment of whole, underletting of whole or
part (where appropriate) charging and sharing with group companies.
• Repairs: Repairing obligations should be appropriate to the length of the
lease and the condition of the premises.
• Change of use, alterations and fit out: Controls on alterations and change
of use should be ‘no more restrictive than are necessary to protect the
value of the premises and any adjoining or neighbouring premises of the
landlord’. Where reinstatement of alterations is required this should be
stated in the heads of terms.
• Insurance and damage: Where the landlord insures, full terrorism cover
should be provided (where available on reasonable terms) and the lease
should make adequate provision for damage caused by both insured and
uninsured risks.

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• Management and operational performance: Provision should be made to

encourage co-operation between the parties to a lease to improve
operational efficiencies and share available data. This may include ‘green’
provisions such as those set out in the BBP Green Lease Toolkit.
• Energy Performance Certificates: Leases should state which party is
responsible for obtaining any EPC that may be needed during the lease
term and the landlord should be required to act reasonably if it reserves
the right to choose the EPC assessor that the tenant is to use.
• Landlord's title: Where there is a superior lease that prevents the
landlord from complying fully with the Code the landlord should comply
with the terms of the superior lease but, if challenged explain the position
to the tenant.

Part 4 of the 2020 Code includes Appendix A comprising the template heads of
terms and checklist mentioned above and Appendix B a non-mandatory
supplemental guide for landlords and tenants including a checklist of occupancy
costs intended to assist occupiers particularly those that may not be familiar with
standard lease terms and terminology.

A full copy of the 2020 Code can be accessed here:

[Link]
standards/real-estate/code-for-leasing-business-premises-1st-edition/

Security of tenure under a business lease

A Landlord of commercial property who wishes to grant a new lease to a business

tenant should bear in mind that the grant of a new business lease to a tenant
occupying the property (even if it’s only part of the property), will fall within the
provisions of the Landlord and Tenant Act 1954; unless the Act is specifically
excluded. In fact, a business tenant can be afforded security of tenure without
even signing a lease – simply by occupying the property. The Act in broad terms
gives protection to business tenants, allowing the tenant to stay in the property
at the end of the term and giving them the right to apply for the grant of a new
business lease on the same terms (save for rent which will be increased or
decreased according to the open market rent on renewal). This is known as
security of tenure.

Grounds for refusing a new business tenancy

The Landlord only has a limited number of grounds to refuse to grant a new lease
to the business tenant and those grounds must be evidenced. The two most
common grounds are: -

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• where the landlord requires the property back either for development
purposes, or to occupy himself; and
• where the tenant has a history of non-payment of rent, or not
complying with the lease obligations.

A landlord may be happy to grant security of tenure to a tenant, for example if

the property is a long-term income earning asset. However, as a tenancy granted
on these terms will be renewable it is important that the lease is expertly drafted
to ensure it stands the test of time.

Avoiding security of tenure

There cannot be a grant of a business lease without giving the tenant security of
tenure by contracting out of the Act and serving the tenant with a ‘health
warning’ notice in the prescribed form. This warns the tenant they are giving up
important legal rights. The tenant must then complete a simple declaration or a
statutory declaration, depending on when the tenant is to start the tenancy. We
must also ensure the declaration is valid. If contracted out, the lease will
determine on the expiry of the lease term. This gives the Landlord greater
flexibility and the tenant no security to stay at the end of the term.

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