Case update – Warnings for Landlords

March 5, 2014

Two recent Court of Appeal decisions provide important reminders to landlords to pay close attention to the detail of their leases in order to avoid being unable to rely on key provisions when the time comes.

The first case concerns the release of a guarantor from all of its obligations under a lease and the second relates to the prevention of tenants from removing tenant’s fixtures from a property.

Topland Portfolio No.1 Limited v Smiths News Trading Limited [2014] EWCA Civ 18.

  • Topland Limited leased commercial premises to Payless DIY Limited with a guarantee provided by Smiths News Trading Limited.
  • Payless became insolvent and so Topland brought a claim against Smiths for the accrued arrears and required a new lease to be entered into for the remainder of the term of Payless’ lease.
  • Smiths successfully argued that it had in fact been released from its liabilities as guarantor under the lease because it had not been joined in as party to a licence for alterations which had been granted by the Topland’s predecessor to Payless. 
  • The Court of Appeal confirmed that the licence for alterations in question amounted to a variation of the lease because it permitted structural works which were prohibited by the alterations provisions of the lease.
  • The Court stated that as the variation would have led to an increase in Payless’ obligations under the lease, and therefore Smiths’ obligations as guarantor should Payless have been found to be in breach, Smiths should have been consulted and provided its own consent to the grant of the licence.
  • The failure to do so therefore amounted to a discharge of the guarantee and Smiths was therefore not liable to pay the arrears or enter into a new lease.

Landlords that benefit from a guarantee must keep in mind the principle that failure to include the guarantor in any consent to an increase in the tenant’s, and therefore the guarantor’s, obligations under a lease could lead to a full release of the guarantor from the guarantee, leaving the landlord with nowhere to turn for remedy of breaches of the lease by the tenant. If in doubt, a guarantor should always be called upon to enter into any document supplemental to the lease (for example licence for alterations or deed of variation) by way of confirmation that the guarantee extends to the tenant’s obligations under that supplemental document.

Peel Land and Property (Ports No.3) Limited v TS Sheerness Steel Limited [2014] EWCA Civ 100.

  • In general, tenant’s fixtures belong to a landlord as part of a property at the end of a term unless the tenant exercises its right to remove them. A lease can modify or exclude the right for a tenant to do so.
  • In this case the tenant was assigned a lease in which the original tenant had agreed to build a fully equipped steel making plant and rolling mill. The lease restricted the tenant from making any alteration or improvement to the premises other than in connection with their use for the purpose of steel making and rolling and ancillary operations.
  • The tenant then wanted to remove and sell large parts of the steel making plant on the basis that they were removable fixtures and chattels belonging to the tenant.
  • The landlord disagreed and said that to remove the plant would be a breach of the alterations covenant as it would not be associated with the use of the premises. It argued that the restriction on alterations amounted to a restriction on the removal of tenant’s fixtures.
  • The Court of Appeal (overturning the High Court’s earlier ruling) agreed with the landlord, holding that:
    • A restriction in a lease on a tenant’s legal right to remove fixtures must be stated clearly. 
    • In the event that the relevant contractual provision is ambiguous then interpretation should take into account that tenants should generally be allowed to remove their trade fixtures.
    • However in this case the ‘premises’ was the new building and the landlord and tenant’s fixtures from time to time forming part of the premises and therefore the restriction on alterations or improvement to the premises overrode the tenant’s default right to remove the fixtures.
    • The tenant was therefore prohibited from removing any tenant’s fixtures during the term of the lease.

Although this case was ruled in the landlord’s favour, it is a reminder that all agreed terms, including restrictions on tenants, should be stated very clearly in a lease from the outset to avoid the possibility of or potential for dispute or even interpretation by the courts. The detail of the drafting of the lease in this case led to the tenant being prevented from selling its fixtures, as was the landlord’s preference, but otherwise the default position and general presumption would have gone against the landlord and the tenant would have been rightfully able to sell its fixtures.

 

 


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