Commercial property updaye - May 2011 

Property Bulletin

This month we look at two recent cases that affect the relationship of Landlord & Tenant relating to problems with enforcing the costs of repairs and whether a guarantor or so guarantees the liability of the tenant under an authorised guarantee agreement.

1. Landlord & Tenant repairing obligations

Most commercial leases contain a standard clause requiring the tenant who is in default of his obligations in the lease to pay the landlord’s costs.  A typical clause would read “on demand, and on an indemnity basis, the fees, costs and expenses charged incurred or payable by the Landlord and its advisors or bailiffs in connection with any steps taken in contemplation of or in relation to any proceedings under Section 146 or 147 of the Law of Property Act 1925 or the leasehold property (repairs) Act 1938 including the preparation and services of all notices and even if forfeiture is avoided (unless it is avoided by relief by the court)”

If a landlord wishes to enforce the repairing obligations in a lease against a defaulting tenant, The Leasehold Property (Repairs) Act 1938 (“the 1938 Act”) applies to certain leases where the lease is for a term of not less than 7 years of which there are at least 3 years unexpired.  In those circumstances the 1938 Act requires that before any action in the court is taken by the landlord, the landlord has to serve a notice under Section 146 of the Law of Property Act 1925 and bring to the attention of the tenant the fact that he can claim the benefit of the 1938 Act.  The 1938 Act will give the tenant the benefit of protecting the lease from being forfeited or an award of damages without an order of the court.  In this case the landlord served the usual notice requiring repairs to be carried out and because the 1938 Act applied gave the appropriate notice to the tenant. The tenant duly took advantage of the Act and served the appropriate counter notice meaning that the landlord could not forfeit the lease or claim damages without leave of the court.  What happened next was a fairly typical situation in which the landlord and the tenant entered into negotiations about the nature and extent of the repairs required. After some negotiation, these terms were agreed and the works which the landlord and tenant agreed were necessary were drawn up into a schedule of works. The tenant then put the repairs in hand. The landlord then applied to the tenant for his costs relating to the matter relying upon the clause referred to above.  The tenant refused to pay and the landlord issued proceedings to recover the legal and surveyors costs which he had incurred relating to the works and their supervision.  The tenant argued that the clause in the lease did not extend to costs incurred after service of the tenant’s counter notice under the 1938 Act because action by way of forfeiture or a claim from damages was then prevented without the leave of the court and no such leave had been sought or obtained.  The Court of Appeal took the view that the landlord’s costs in this case did not constitute steps taken “in or in contemplation of or in relation to any proceedings under Section 146” under the lease clause.  The landlord was therefore left to pay his own costs.  This is a surprising result given the fact that the courts encourage the parties to do what they did here namely to negotiate a settlement of claims rather than to go to court, but in this case, the landlord suffered considerable loss even though the tenant was admittedly in breach of its repairing obligation and even though he had tried to settle the matter with the tenant without resorting to court.

I have re-drafted my lease clauses in the light of that decision, but even though, where these circumstances arise again it may be advisable for the landlord to commence proceedings and obtain leave of the court, even if the proceedings are subsequently stayed to enable the parties to negotiate.  This may protect the landlord’s position in costs.

2.  Guarantors

In all leases entered into before the 1st January 1996 the tenant remains liable under the lease covenants for the whole of the term of the lease notwithstanding the fact that he may have assigned it and indeed it may have been assigned several times.  The Landlord and Tenant (Covenants) Act 1995 (”the 1995 Act”) changed all that and essentially provided that in all leases entered into on or after the 1st January 1996 once the tenant had assigned the lease he was released from liability under it save where the landlord lawfully required (and almost all landlords do) the tenant to give what is known as an authorised guarantee agreement (AGA).  When an AGA is given, the tenant remains liable for the covenants in the lease in respect of his immediate assignee (“T2”).  What is the position therefore of a guarantor of the original tenant (“T1”) who also is willing to be a guarantor when the tenant assigns the lease to T2.  Section 24 of the 1995 Act provides that when the tenant is by virtue of the Act released from the tenant covenants in the lease, any third party (the guarantor) is released to the same extent as the tenant is released.  The academic view was that in those circumstances the guarantor however still remained liable to the extent that T1 was liable to T2 under the AGA.  However, in two recent cases the court has held to the contrary. In Good Harvest Partnership LLP v. Sentor Services Limited the high court held that the guarantee of the guarantor was void by virtue of Section 25 of the 1995 Act, even though the guarantor had voluntary given a guarantee. This case was due to go to the court of appeal but was settled shortly before it did so.  The case was then affirmed by a subsequent case of Victoria Street v. House of Fraser (Stores Management) Limited in which the case followed the decision in the Good Harvest case. The latter case however is the subject of a hearing by the Court of Appeal which is coming up shortly.  Watch this space for further details.  In the meantime, if you are a landlord and the tenant wishes to assign the lease and has a guarantor and you are concerned about the covenant strength of the assignee, then you can refuse licence to assign on the basis that the guarantor will not also guarantee the AGA which T1 will give to T2.  This may be extremely inconvenient however for all of the parties. The only other alternative is to find a separate guarantor if one is available. As soon as the Court of Appeal hearing has been given we will update on the latest position.