Part 3: Law of Business Leases

Introduction

In this part of the project you are required to undertake an appraisal of legal problems encountered within the subject property, Deacon House, 192 Eyre Street, S1 3GQ.  The property is an eight-storey office block, and is adjoining the retail and office accommodation on Hereford Street.

The legal scenarios are set out below.  There is a question for each scenario.

Scenario 1

Sheffield Developments Ltd (SD), the previous freeholder of the premises, had granted a lease of the premises to RDS Ltd (RDS) commencing on March 25 1991 for a term of 25 years. In the lease, RDS covenanted to pay the rent during the contractual term.  At the same time Geoffrey, a director or RDS, entered into a covenant with the landlord guaranteeing the payment of the rent throughout the term.

SD transferred the freehold reversion to Mr Ash in 1995.  In 2000, RDS assigned the lease to XYZ Ltd (XYZ).

In 2004 XYZ sublet floors 3-8 to Miss Beech for a term expiring 7 days before the head lease. Miss Beech assigned the sublease to Mr Cherry in 2010 and entered into a guarantee agreement with XYZ guaranteeing Mr Cherry’s payment of the sub-rent.

Mr Cherry has failed to pay the installments of rent that were due on 24 June 2013, 29 September 2013 and 25 December 2013.  XYZ have also been in financial difficulties and partly because of Cherry’s failure to pay the subrent they were unable to pay the installment of rent due to Mr Ash on 25 December 2013.

(Assume all assignments and sublettings were granted the necessary consents.)

Scenario 2

The facts are as in scenario 1 except that Mr Ash has now forfeited XYZ’s lease for rent arrears and other breaches and the subleases have also been brought to an end.  In the lease granted by SD, RDS covenanted ‘to keep the structure, exterior, and interior of the demised premises in a good state of repair’.  At termination of the lease there are numerous internal dilapidations (damage to walls, ceilings, floors and windows etc) and the roof was found to be leaking in places.

Mr Ash’s building surveyor has served a terminal schedule of dilapidations on XYZ which sets out the breaches and the costed remedies.  The internal repairs are costed at £150,000 and the replacement of the roof is costed at £100,000.  Mr Ash therefore claims damages from XYZ of £250,000 – the full costs of repair.

After taking professional advice XYZ has responded that:

• the leaks can be repaired by patching-up at a cost of £10,000 – there is no need to replace the roof and so XYZ’s damages liability in respect of the roof is limited to £10,000;
• in respect of the internal dilapidations, no damages are due as the building is ripe for refurbishment to bring it up to modern standards.

Scenario 3

In 2001 XYZ granted a sub-lease of floors 1 and 2 to Engineers 4U for a term of 15 years (expiring seven days before the head lease).  The user covenant provides that the premises shall be used for the business of consulting engineers only.  The property has planning permission for Class B1 use under the Town and Country Planning (Use Classes) Order.  There is a rent review clause in the sublease which provides, amongst other things, the following:

the expression review date means either the expiry of the fifth or the tenth year of the term for the purpose of ascertainment of the fair market rack rental value on those dates;

the ‘fair market rack rental value’ means the higher of the passing rent and the annual rental of the demised premises which might be reasonably demanded by a willing landlord from a willing tenant if let on the relevant review date on the open market for a term of years certain equivalent in length to the term of this lease with vacant possession at the commencement of the term…..such lease being on the same terms and conditions (other than the amount of rent and the user covenant and excluding the provisions of this present clause relating to rent review) as this present demise without the payment of any fine or premium.

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