In this Alert, we conclude our examination of some of the key landlord and tenant cases of 2006 that held particular significance for commercial landlords and tenants.

Earl Cadogan v Escada AG [2006] EWHC 78 (Ch)

This case illustrates the necessity for good drafting of rent review provisions and highlights the danger of agreements that fail to give effect to the parties’ intentions. A tenant took a lease comprising two separate units with the intention of creating a single “flagship” retail store. It agreed to remove the entrance to one of the units and the separate staircase in that unit to first floor level. It was also obliged to create a new staircase within the re-configured unit to the first floor.

A dispute arose over what assumptions were to be made about the physical state of the premises at rent review. As drafted, the lease provided that all works undertaken by the tenant would be disregarded, with the exception of the new staircase created by the tenant. Crucially, there was no instruction that the premises were to be treated as a single unit at review. This was important because if the premises were to be reviewed as two units, a lower valuation would result.

The landlord argued that, for the purposes of the rent review, the lease should be construed as including an assumption that the premises comprised a single unit with the old staircase removed and a new staircase installed (ie the shop in the form it actually took at the date of the review). On the other hand, the tenant maintained that the lease should be interpreted literally and the premises should be assumed to be in the form they took at the date the lease was agreed (ie as two separate units, including the original staircase but also adding the new staircase.)

The High Court held that the lease had to be interpreted in accordance with business common sense, having regard to the commercial intentions of the parties. However, this did not mean that the court could re-write the parties’ express words in order to make the contract commercially sensible. It decided that the wording of the clause was so clear, albeit commercially unrealistic, that it could not construe the contract to have anything other than its literal meaning and it should therefore be assumed that the premises did comprise two separate units. This decision underlines the need for careful and unequivocal drafting of rent review provisions. The courts will not interpret an agreement to give it commercial good sense, simply because a strict reading will produce a nonsensical result.

Edlington Properties Ltd v J H Fenner & Co Ltd [2006] EWCA Civ 403

It is settled law that, unless precluded by the lease, a tenant is entitled to “set off” a claim for damages arising from a breach by the landlord of a term of an agreement for lease or the lease itself, against its liability for rent. However, in this case the Court of Appeal was asked to determine whether a tenant was entitled to set off a damages claim arising from a breach by its former landlord against rent it owed to the current landlord. The tenant (Fenner) agreed to take a 25-year lease of factory premises from the Welsh Development Agency (WDA), which WDA was to build pursuant to the agreement. Once it had been constructed and the lease had been granted, WDA sold its interest in the factory and it was eventually acquired by Edlington Properties Ltd (Edlington).

Edlington brought a claim against Fenner for rent and insurance payments, which Fenner had started to withhold. In its defence and counterclaim, Fenner sought a declaration that it was entitled to set off against its liability for rent and insurance due to Edlington, a claim for damages, which it maintained it had against WDA. (The factory had turned out to be seriously defective and Fenner argued that WDA was in breach of warranty by failing to fulfil all of its building obligations under the lease agreement.)

The Court of Appeal held that Fenner was not entitled to set off its claim for damages from WDA against monies owed to its current landlord, Edlington and so, in essence, has restricted the law of set–off to circumstances where the tenant’s claim and liability is against the current landlord. The decision not to extend a tenant’s right of set–off any further should be viewed as a welcome development for commercial landlords. A tenant who wants the right to set-off a damages claim arising from a breach by a former landlord against its ongoing liability to make payments under the lease will need to make sure that it has an express contractual right allowing for this in the lease.

Pointon York Group PLC v Ann Doreen Poulton [2006] EWCA Civ 1001

If a business tenant wants to rely on the statutory right to renew a lease at the end of its term, then it must be in occupation of the demised premises for the purposes of a business, within the meaning of section 23 of the Landlord and Tenant Act 1954 (the 1954 Act). This case concerned the degree of occupation that a tenant had to prove in order to satisfy section 23, where a sublease it had granted had expired but it had not resumed full occupation of the premises immediately before its own lease expired.

The landlord had granted the tenant a head lease of a suite of offices and parking spaces. In turn, the tenant had sub-let the office space. That sublease terminated three days prior to the termination date of the head lease. The tenant did not sublet the parking spaces and continued to use these in connection with its retained office space. A month before the sublease was due to expire, the tenant notified the landlord of its intention to re-occupy the sublet offices once the subtenant had vacated. In the threeday period following expiry of the sublease, the tenant’s representative visited the premises in order to plan its reoccupation and to check on the redecoration that the subtenant was obliged to carry out. During this time, the tenant’s employees continued to use the car parking spaces.

As soon as the head lease terminated, the landlord changed the locks at the premises, preventing access and clamped a number of cars in the car parking spaces. When the tenant made an application to the court for a renewal tenancy in reliance on the provisions of the 1954 Act, the landlord argued that it did not qualify for protection because it had not been in occupation of the premises for business purposes at the end of the head lease term. On appeal, the Court of Appeal decided that the parking spaces amounted to “premises” for the purposes of section 23 and could be “occupied for the purposes of a business”. It found that this tenant was in occupation of the spaces but that the question of occupation will be a matter of fact and degree in every case.

The court also decided that the tenant had done enough to establish “occupation” of the offices themselves in the three days following expiry of the sublease. It said that it was sufficient for premises to be used in a way that was incidental to the ordinary course of the business, provided they were not used by any other business occupier and not for any non–business purpose.

The repercussions of this decision may prove significant, given the degree of flexibility which this case appears to afford tenants who need to prove “occupation” in order to qualify for the protection of the 1954 Act. It may make it much harder for landlords to determine what tenants intend to do at the end of their lease terms, where they have not given any express notice of that intention.

Future cases

An important case - the “Powerhouse” case - may go before the Court of Appeal in early 2007 (although that remains to be seen). It concerns an issue that potentially gives rise to great concern for commercial landlords. The electrical goods retailer Powerhouse, is seeking to extricate itself from a number of unprofitable leases through the use of a company voluntary arrangement (“CVA”) under which its parent company guarantee will also be released. The landlords of the leases have challenged the CVA. If the Court of Appeal were to sanction the use of a CVA in these circumstances, landlords may face a proliferation in the number of tenants seeking to wriggle out of their lease obligations through this mechanism, by obtaining the consent of the necessary 75% of their creditors by debt value, present and voting at the creditors’ meeting. Needless to say, if this does reach the court, then the decision is eagerly anticipated.