Summary
In the absence of agreement, the terms of any new lease to be granted under the provisions of Part II of the Landlord and Tenant Act 1954 are to be determined by the court in accordance with sections 32 to 35 of that 1954.
The cases show that:
- New ancillary rights may be added where they were enjoyed as part of the original lease but not so as to increase the holding
- Changes to service charge terms may reflect commercial necessity in line with the new RICS Service Charge Code
- User covenants will not be changed to confer collateral advantages
Introduction
The parties may wish to revise the terms of their lease on renewal. The reasons for doing so are many and varied and the proposals for change may come from landlords and tenants alike. However, the courts do not have an entirely free hand in deciding what the terms of the new lease should be. The starting point is O’May v City of London Real Property Co Ltd [1983] 2 AC 726, which decided that the existing terms should form the basis of the new lease unless there is good reason to depart from them. The court’s discretion should not generally be used to change the commercial parameters of the relationship.
Ancillary rights
One area where the landlord or tenant may look to make changes is in the scope of the rights granted by the lease. Of particular note on the operation of section 35 is the case of Picture Warehouse Ltd v Cornhill Investments Ltd [2008] EWHC 45 (QB), which concerned the grant of such rights.
The tenant had obtained from the landlord a separate letter of assurance that its customers could park a maximum of two vehicles on the forecourt of the building for up to 30 minutes. The limited nature of this right reflected an ongoing dispute between the landlord and the local planning authority. On renewal the tenant sought a term that it should have an express right to park two vehicles on the forecourt. That argument was rejected by the County Court judge and by Jack J on appeal. The decision drew on the decisions in G Orlik (Meat Products) Ltd v Hastings & Thanet BS (1974) 29 P&CR 126 and J Murphy & Sons Ltd v Railtrack Plc [2002] 2 EGLR 48 which established that a claimant is not entitled to the enlargement of the holding on renewal.
In Picture Warehouse Ltd Jack J took the view that, in theory, it may be possible to include a right in the new lease that had been conferred outside the original lease, provided that it was a right granted and enjoyed with the demise under the original lease.
Service charges
Historically, service charge terms have provided fertile ground for dispute under section 35. O’May was such a case. The House of Lords and the Court of Appeal recognised that the imposition on the tenant of an obligation to meet the costs of structural repairs and repairs to the exterior and common parts of the building where none previously existed would impose a wholly new burden which a reduction in rent would not compensate. The landlord’s proposals were rejected.
In contrast, in Amarjee v Barrowfen Properties Ltd [1993] 2 EGLR 133 the landlord was successful in arguing for the inclusion of a provision requiring the tenant to contribute to the upkeep of the entire parade of shops where, under the original oral tenancy, he had previously had no such liability. A distinction was drawn with O’May, where the original lease had been in writing whereas in Amarjee the tenancy was oral. It is not clear why that should be a valid distinction for the purposes of section 35. What the court is required to consider are the terms of the original lease and “all relevant circumstances”.
The special circumstances needed to introduce a change were found recently by the Court of Appeal in Edwards & Walkden (Norfolk) v Corporation of London [2013] 1 P & CR 10. It was common ground between the landlord and the tenants of Smithfield Market that the landlord was entitled to recover all costs of running the market (including the cost of repairs) from the tenants. The question was whether that was to be done by means of an all-inclusive rent or a variable service charge. The immediately preceding lease had levied a fixed rent but this was found to have been a temporary measure. The landlord wished to change to a variable service charge. Given the intended temporary nature of the fixed rent Sales J decided that the fairer solution was to order the grant of a new lease containing a variable service charge.
The role of the new RICS Service Charge Code was also considered in Edwards & Walkden where the evidence of current market practice in the use of variable service charges was relevant to the terms which should be adopted.
User covenants
User Covenants are another area ripe for controversy, not least because of their potential effect on the rent payable under the lease. This may, paradoxically, lead to the tenant arguing for a more restrictive covenant whilst the landlord wishes to take a more liberal approach.
In Charles Clements (London) Ltd v Rank City Wall Ltd [1978] 1 EGLR 47 The court rejected the landlord’s proposal for a new user covenant that would have made the lease more easily assignable but at the cost of a higher rent as an attempt to secure a collateral advantage. The boot was on the other foot in Aldwych Club v Copthall Property Co (1962) 185 EG 219. The tenant sought a variation to prohibit absolutely a change of use. This would have had the effect of driving down the rent and, once again, was rejected by the court as an attempt to secure a collateral advantage.
Conclusion
On renewal the courts are generally reluctant to change the commercial terms on which landlord and tenant have dealt, particularly where that would confer a collateral advantage. A change in terms needs good reason and solid evidence. It is clear that the new RICS Codes of Practice may provide that evidence in appropriate cases.