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8 mistakes that commercial landlords commonly make

Michael Duncan, one of Ashfords’ SIPP and SSAS property litigation specialists, regularly advises commercial landlords on disputes that they have with their tenants. Based on his experience, there are a number of flashpoints within the life-cycle of a lease where disputes commonly arise. Many of these disputes are avoidable, provided certain steps are taken (or avoided). What follows are some key points that all landlords should bear in mind when managing their commercial properties.

1. Allowing a prospective tenant into a property without documenting the basis of their occupation

Tenants will often ask to occupy premises e.g. to carry out their fit-out before a lease has been granted and it can be tempting to let them in.

However, what if they cause damage to the property? What if they cause loss to third parties? What if they come to harm because of the condition of the premises?

Further, if tenants are allowed to remain in the premises for a long enough period of time and there is no documentary basis to their occupation, they could acquire rights under the Landlord and Tenant Act 1954 (“the 54 Act”) making it difficult for the landlord to recover possession.

It is advisable to grant a licence or tenancy at will, if the tenant is going to occupy before completion of the lease.

2. Not responding properly, or quickly enough, to tenant requests to assign, sub-let or alter

Most leases, where the landlord’s consent is required before assignments, sub-lettings and alterations, include a provision which states that the landlord’s consent is “not to be unreasonably withheld or delayed”. If the lease simply declares that landlord’s consent is required before any assignment or sub-letting, statute implies an additional term which says that the landlord’s consent cannot be unreasonably withheld.

Whether consent is unreasonably withheld or not will always involve a consideration of all the relevant circumstances - so there is no particular hard and fast rule as to what is reasonable or not. However, generally, if it is a sensible commercial reason, relating to the landlord’s business or property interests, it will be considered reasonable. If the lease says explicitly that consent will be withheld in certain circumstances, and those circumstances occur, withholding consent pursuant to those particulars circumstances is not unreasonable.

There is slightly more prescriptive case law on what constitutes unreasonable delay. In most cases, any delay more than a couple of weeks is likely to be considered unreasonable. If the tenant can show that there is real urgency behind its request – e.g. it will lose potential a sub-tenant – a response within a couple of days (or less) could be considered reasonable.

It is OK however to ask for more information and, provided the request is reasonable, this would ‘stop the clock’. Upon receipt of the further information, the landlord has a duty to proceed promptly in giving its decision. Furthermore, conditional consent is OK – provided the conditions are reasonable. Getting this wrong can lead to potentially significant liability, e.g. if a decision is unreasonably delayed and the tenant loses the opportunity to gain significant revenue from a sub-letting or assignment.

3. Invalid service of notices under the lease

Nearly all leases contain provisions relating to the service (i.e. delivery) of notices. Case law suggests that where express notice provisions have not been complied with it is very difficult to subsequently rely on the notices that have been served, i.e. they are likely to be deemed invalid.

In the case of break notices, there are extremely significant consequences when notices are not served correctly, e.g. the opportunity to break the lease might be lost.

Notice provisions in a lease may specify an address, mode of service, addressee, etc. These have to be considered in conjunction with the relevant clause being operated, which may stipulate a timescale by when the notice has to be served – e.g. a break clause that is effective provided 6 months’ notice is given. Sometimes the provisions are ambiguous, making it necessary to serve multiple notices to ensure that all potential interpretations of the lease are covered.

This issue is worth bearing in mind in relation to notices that are served on the landlord as well i.e. has the tenant served correctly? If not, this could be to the landlord’s advantage – e.g. leaving the tenant on the hook for future rent – so it is worth taking advice.

4. Not properly managing the service charge

Service charges are a fertile ground for disputes with tenants. Usually they relate to either (a) service charges not being paid or (b) the landlord not providing the services that it should be. Often the two are connected and can result in an ‘unvirtuous circle’ – i.e. tenant stops paying, landlord reduces some services, other tenants stop paying, etc. The best way to keep on top of this as a landlord is to communicate often, clearly and openly in relation to the charges. Also, if a tenant is in arrears, do not let the arrears get out of hand, as this again can trigger the unvirtuous circle.

5. Inadvertently waiving the right to forfeit the lease

Most leases will contain a provision that allows the landlord to forfeit the lease if the tenant breaches any, or some, of the covenants. Even if there are no specific forfeiture provisions, there is a general common law right allowing landlords to forfeit in the event that rent is unpaid.

Before the right to forfeit can be exercised, in cases other than non-payment of rent, a “section 146 notice” has to be served on the tenant and the tenant given an opportunity to remedy the breach. However, whether the tenant’s breach is non-payment of rent or otherwise, it is possible for the landlord to inadvertently waive the right to forfeit, i.e. lose it as a remedy. Waiver happens, if after becoming aware of the breach, the landlord does something which affirms the continuation of the tenancy, or the ongoing existence of the landlord and tenant relationship.

Waiver occurs most commonly via the acceptance of rent. For example, the tenant is paying monthly and is 6 months in arrears – it then pays the most recent month’s rent. Unless the landlord either rejects the payment, or makes it clear that the payment is being used to cover some of the historic arrears, this could be construed as acceptance that the landlord and tenant relationship is continuing.

6. Allowing the tenant to occupy the property after expiry of the lease without documenting the basis of their occupation

The issue here is where a landlord has a tenant whose lease was “contracted out” of the 54 Act and they become periodic tenants – i.e. they carry on occupying and paying rent after expiry of the lease.

Periodic tenants automatically have the protection of the 54 Act; therefore, if the landlord subsequently wanted to evict the tenant then it would need a statutory reason, e.g. the landlord wanted to redevelop the premises or occupy it themselves.

This does not mean a landlord has to make every tenant leave the premises when their lease comes to an end. However, it is advisable to inform a tenant in writing that they only have a tenancy at will, until such time as a new lease is entered into.

7. Dilapidations – not making a claim / scuppering a potential claim

At the end of a lease the tenant has an obligation to yield the premises up in accordance with the covenants in the lease. This means that there should be no outstanding breaches of covenant when the lease comes to an end.

The property should be in repair – to whatever the standard is required by the lease. The tenant should also have removed their belongings and any other particular obligations must also have been complied with – e.g. particular reinstatement or decoration provisions. If the tenant has not done any of these things, the landlord is entitled to make a claim for “dilapidations”. Depending on the size and condition of the property, a dilapidations claim could be for significant sum of money. However, unless the tenant has left the property in immaculate condition, there will almost always be a potential dilapidations claim.

To make a claim, a surveyor should be instructed to examine the property and prepare a dilapidations schedule. This should then be served on the tenant, prior to or very soon after lease expiry. Late claims make disputes more likely and can also make it easier for tenants to rely on the two statutory defences: (1) the value of the property is not diminished by reason of the disrepair; and (2) the repairs would be rendered obsolete by reason of intended redevelopment of the property.

8. Disposing of a departed tenant’s belongings without following due process

If a landlord has a tenant that it has had to evict, or a tenant has left in a hurry, they may find that the premises is full of items – some of which may be valuable, some may not. The law says that if a person come into possession of somebody else’s belongings, they have an obligation to hold onto them for a reasonable amount of time and to give the other person a chance to collect them.

However, landlords have in the past been known to simply throw out everything that the tenants have left behind. Usually, this happens when the items that are left appear like junk and/or the landlord has no use for it. The problem is that claims often then arise where the tenant alleges that it had some valuable documents, or some Rolex watches, tucked away in one of the draws or boxes, and that they are now out of pocket.

Best practice is then to write to the tenant and inform them that their belongings will be held at the premises for X days for collection, following which they will be disposed of. It is also wise to photograph and itemise the contents insofar as possible, to avoid disputes later down the line as to what was actually in the property, or what condition the items were in. If the items have value, the landlord should try and sell them (there are clearance companies that will accept them) and then hold on to the money, which should then be paid to the tenant. Often however the items that are left have no real commercial value, which is why the tenant left them in the first place.

If you require any advice on any of the above issues, please don’t hesitate to contact a member of Ashfords’ Property Litigation team.

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