Commercial Property Law - Essay Example

?Commercial Property Law I. Introduction Individuals are free to enter into agreements provided that the object or cause is not contrary to law, public policy and good morals. The conditions embodied in the agreement define the relationship of the parties, including their rights and obligations. In determining the limitations and extent of the contractual relations, all laws and regulations pertinent to the subject matter are deemed incorporated into the agreement notwithstanding that the parties neglected to explicitly include the relevant provisions in the agreement. Any conflict between the parties shall be resolved in consonance with the tenor of the contract, the spirit and letter of the relevant laws as well as applying common law principles and judicial interpretation rendered by courts or tribunals on similar issues. The interpretation of the parties’ rights and obligation in contractual relationships vary and oftentimes the interest of one party may cloud its judgment thus it is important that independent minds should offer impartial opinions to aid the parties in making informed decisions. It is in this context that our firm was commissioned by Tomes Limited (Tomes) to evaluate its standing in a leasehold agreement whether its posturing against the landlord is valid. The account was assigned to me for appropriate action. II. Factual Background The leasehold contract over an Old Victorian Townhouse was constituted on 1 April 1997 for a period of twenty five years where rent review shall be made at the end of the 5th, 10th and 15th years of the term provided that such intention is communicated to the tenant within the 5th, 10th and 15th years. The break clause option is available to either party provided that notice shall be given to the other party during the first six months of the 15th year. The leasehold states that the “tenant shall put and keep the premises in tenantable repair to include the decorations, wall-surfaces, window frames, glazing, and casements.” The Landlord and Tenant Act 1954 shall be applicable as no effort to exclude its operation was undertaken by the parties. Tomes assumed the lease three years ago and utilizes the demised premises as a book shop—an activity which is not prohibited by the user clause. Its peaceful occupation of the demised properly was interrupted when the landlord demanded that Tomes undertake repair on the cracks in the corners of and right across all the ceilings after a structural inspection revealed that cracking has been caused by flexion of floor joists induced by the load imposed by book shelves. The engineer who conducted the structural investigation concluded that the joists may not have been permanently damaged by the load but nonetheless recommends the installation of steel reinforcement of the joists in the floor voids along with load reduction as the upper floors are not particularly well suited to the demands of book storage. III. The Opposing Views The controversy escalated when the landlord insisted that the reinforcement works as recommended by the engineer should be executed by Tomes pursuant to the repairing covenant and its obligation to repair any damage to the demised premises caused by it. The landlord further argues that without the works, the premises cannot properly be used as a book shop. Tomes disagrees claiming that the repairing covenant covers only cosmetic facade and the installation of steel reinforcement cannot be characterized simply as a cosmetic enhancement but one that requires structural repair. Tomes further refuted the move of the landlord for rent review as the review was not timely initiated within the period specified in the leasehold thus estoppel set in. Tomes suspects that the persistence of the landlord to ascribe fault against it is brought about by his recent acquisition of the controlling share in Volumes Limited (Volumes for brevity), a specialist book-seller which needs new retail premises. It would appear that the landlord wants to get Tomes out of the way to install Volumes in the premises as a book-seller. IV. The Issues and Discussion Based on the foregoing, the inquiries to be determined are—first, whether failure to institute rent review constitutes a waiver of such right and alternatively, can rent review be initiated at will and beyond the prescribed period in the leasehold contract? Second, whether the break clause may be availed of and who may rightly initiate it to pre-terminate the leasehold covenant? Third, whether the repairs demanded by the landlord falls within the obligation of Tomes to put and keep the premises in tenantable repair and that the installation of steel reinforcement is considered part of the decorations and others? Tomes submission that the failure of the landlord to timely invoke his right to rent review is estopped from asserting it as it is passed the timeframe may have legal and factual bases. Tomes’ insistence that the landlord’s failure to assert his right within the specified period and belatedly invokes it after the lapse of a long period shall be deemed as a waiver to exercise it. Moreover, the rent review cannot be left to the will or caprice of one party. The review period must be complied with strictly to avoid abuse of the review process considering that it is intended to benefit the landlord. In answering rent review issue, it is important to assess if the provision of the leasehold is one that compulsorily provide that “time is of the essence” or not. This is necessary since the leasehold that provided a “time of the essence” shall be treated differently from a general leasehold contract. Assuming that the landlord waived his right previously, his right to rental review on the 15th year is still availing. The landlord can exercise this option by giving a trigger notice which must be served prior to the relevant review dates and indicating the new rental rate. Within one month from receipt of the trigger notice, the tenant is required to notify the landlord if he accepts the new rental rate or suggest a revise rental rate should he disagree with the proposal. Should the tenant fail to respond, it is concluded that the new rental rate is acceptable. It is postulated that if the landlord neglects to comply with the procedural requirement to trigger rent review within the period specified, the rental review right is deemed waived pursuant to the “time is of the essence” principle. However, under the equity rule of S.41 of Law of Property Act 1925 “time is of the essence” in contracts is not recognized. The limitations imposed by the phrase “time is of the essence” in contracts, according to Moran, shall be applied if it is expressly provided in clear terms—through express provision, contra-indications or other words as contra-indications in the lease—thus in the absence of express provisions in the lease then time is of the essence cannot be presumed and more importantly, the landlord can initiate rent reviews although the review date had lapsed. The review accruing previously shall not be deemed delayed or waived. This is applied in Lancecrest Limited v Dr Ganiyu Aiwaju [2005] EWCA Civ 117, where rent review was declared valid although the trigger notice was served late as time was not of the essence. It was noted that the lease did not express that time of the essence in the service of the trigger notice. On the other hand, the tenant is similarly required to express the necessity that time is of the essence with regard to the service of the counter notice. In the same case, it was declared that the tenant shall enjoy the benefits of making time of the essence if the tenant had served the notice before the review date. A trigger notice sets the rent review process in motion and the tenant is given from receipt of notice to serve the counter-notice. And, should the tenant fail to comply, the effect of such non-adherence to the time element is the presumption that tenant is deemed to have accepted the proposed rent. It would appear in Wilderbrook Ltd v Oluwu [2005] EWCA Civ 1361 that the deeming clause is not automatic. The court declared that the deeming clause would apply only if it passes the scrutiny of the “clear and explicit” test. The counter notice was served out of time but the leasehold did not state the repercussion that the tenant is deemed to have accepted the new rent should the tenant fail to timely issue a counter notice. It was held that even if the deeming clause had been present but without the explicit instruction that counter-notification is mandatory within the period specified and failing to adhere, the tenant is deemed to have accepted the proposed rent. However, the deeming clause in Wilderbrook is not acceptable as it failed to incorporate that time is of the essence. In the Tomes case, there is no express provision that time is of the essence thus the landlord has the right to instigate rent review even if the period stipulated is not adhered to the prejudice of the Tomes. This right of the landlord is not however absolute and judicial declarations are instructive on the matter. The courts did not hesitate to reject the landlords’ long overdue assertion of rent review. In Telegraph Properties (Securities) Ltd v. Courtaulds Ltd, it was ruled that the landlord lost his right to review when the trigger notice was served more than 6 years after the time provided by the rent review clause. The court considered the factual circumstances in its decisions rather than put premium on the length of delay alone. The court held in Amherst v James Walker (Goldsmith and Silversmith) Ltd that delay however lengthy will not prevent a landlord from exercising a rent review clause unless such conduct amounts to an estoppel. The court in this case did not apply the Telegraph verdict although similar in the length of delay. Thus, Tomes can argue strongly that its landlord is estopped from instituting rent review for the years 2002 and 2007 pursuant to the case of Barclays Bank plc v Saville Estates Ltd, the CA in its ruling stated that tenants are entitled to know what level of rent they face either for purposes of their business or for facilitating any assignment. If the landlord is allowed to commence rent review for the prior years when Tomes was not yet assigned the leasehold it is detrimental to its interest as it is left unaware of the circumstances before assuming the leasehold. The period to institute review is imperative to protect the tenant from the whimsical behaviour of the landlord who may commence the process for rent review anytime and take advantage of favourable market forces to increase the rental fees. Without any standards to rely on, tenants are left at the mercy of the landlord. In United Scientific Holdings Ltd v. Burnley Borough Council, it was ruled that despite that the phrase “time if of the essence” is not stated, equity and justice demand that the landlord must initiate rent review at the earliest and appropriate time. However, to preserve an amicable relationship between the landlord and Tomes, it is likewise acceptable for them to discuss rent review notwithstanding that the period had lapsed to preclude a sudden increase in the rental fee. A discussion of the rate of escalation may be a better way to break the impasse. It is observed that the leasehold contract does not mention the acceptable escalation thus it is prudent for Tomes to include this in the discussion. Tomes must however consider several factors before accepting a negotiated rental increase. First, if no negotiation occurs, Tomes should consider if it would end up paying a higher rate since rental increases are generally based on the current open market or a retail price index for similarly situated properties. Second, if Tomes negotiates in good faith, the evaluation should be conducted by disinterested parties so that the rental increase would be impartial and not tainted by any bias in favour of one party. Caution should be exercised nonetheless as this option may not be advantageous to Tomes not only from the practical side from the business standpoint as well. To avoid any future misunderstanding, the leasehold should be amended to reflect the true intent of the parties to include provisions on time is of the essence and escalation clause to protect the interest of both parties. So also, it must include the engagement of disinterested third to assess the valuation for future rent review. The break clause this is exercisable by solely the tenant within the period specified subject to compliance with the provisions covenant. The decisions of the courts require absolute compliance of the tenant’s obligation and mere substantial is not acceptable. Tenants must comply with the conditions that may include repairs to the demised property, rental payment and other similar charges up to the time the break clause is allowed. It is therefore imperative that the tenant comply with his obligations faithfully. The ruling of the House of Lords in the case of Fitzroy House Epworth Street (No.1) Ltd. & anor. vs. Financial Times Ltd., shall be used as a standard in determining material breach to deny the leasehold break which occurs when the landlord's ability to sell, lease and rent the demised premises is affected. The landlord demanded repairs which were declared as trivial considering the works implemented by the tenant on the demised premises which was quite substantial. Thus, the tenant’s right to operate the break clause was upheld. The landlord assertion that the reinforcement of the joist is chargeable to Tomes must fail. This is beyond the letter of the leasehold as the reinforcement is no longer cosmetic in nature. It is common knowledge that the joists form part of the structure hence its repair is for the account of the landlord. Assuming that the damage was caused by the eventual stress produced by the heavy load of the books, the general nature of the leasehold contract which did not exclude any form of business or limit the weight installed in the premises would not make Tomes liable for the reinforcement. The lack of restriction in the leasehold gives rise to the presumption that the structure can withstand all forms of stress. The landlord cannot belatedly demand from Tomes to reinforce the joist as the installation of joist would require Tomes to surrender to the landlord a different form of structure—totally different from the original structure. Thus, the reinforcement should be for the exclusive account of the landlord. It is not disputed that when Tomes introduced the bookshelves into the structure, the landlord’s inability to communicate his objection thereto is indicative of his approval. So also, the plans and specifications submitted to the tribunal were not modified when it was reviewed then there is no justification to require Tomes to reinforce the joist. It is clear from the approval that the weight and bulk are fitting to the existing structure. There is no proof adduced that the tribunal issued a caution or disallowed the installation. Thus, it is logical to state that the damage is a result of a defect in the structure making the damage structural and not merely cosmetic in nature. The responsibility of the landlord is to maintain the demised premises while the tenants are generally accountable for internal maintenance only. Tomes is obligated to “put and keep the premises in tenantable repair to include the decorations, wall-surfaces, window frames, glazing and casements” which are cosmetic repairs only. The landlord shall maintain the structural integrity of the building which would include the joists. Tomes’ assertion that the landlord committed bad faith considering its acquisition of the controlling interest in Volumes Ltd is speculative. However, the actuation of the landlord by demanding the reinforcement of the joists and belatedly enforcing the rent review are indications of ill-will. It is safe to conclude that should litigation between the landlord and Tomes ensue, it is clear that the courts would favour Tomes based on the law and judgements issued by the courts. However, other less expensive options are available such as alternative dispute resolution or arbitration which may be availed of by the parties not only to settle amicably but more importantly, to maintain a more civil and cordial relationship. References Amherst v. Walker [1983] 1 Ch 305, Court of Appeals. European Union. Principles of European Contract Law. 1998. [online] Available from http://www.cisg.law.pace.edu/cisg/text/textef.html [Accessed 20 July 2011] Fitzroy House Epworth Street (No.1) Ltd. & anor. vs. Financial Times Ltd. [2006] EWCA Civ 329. [online] Available from http://www.bailii.org/ew/cases/EWCA/Civ/2006/329.html [Accessed 20 July 2011] Idealview Ltd. v. Bello [2009] EWHC 2808 Jenkins v. Jackson (1888) 40 Ch.D. 71, 74 Kenny v. Preen [1963] 1 Q.B. 499, 511 [online] Available from http://members.fortunecity.com/bprendergast/kenny_v_preen.htm [Accessed 20 July 2011] Lancecrest Limited v Dr Ganiyu Aiwaju [2005] EWCA Civ 117 London Borough of Southwark and Another v. 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