Court upholds notice addressed to wrong tenant and gives guidance on renewal terms

The County Court decision in Dukeminster Ltd v West End Investments (Cowell Group) Ltd (2018) provides useful guidance on the Landlord and Tenant Act 1954, both as to the validity of notices and the terms to be included in a renewal lease.

Background

A landlord served a section 25 notice on its tenant proposing terms for renewal of an underlease. The notice was addressed to Dukeminster Limited, but at the time of the notice, the underlease was held by Dukeminster (UG) Limited, another company in the Dukeminster group.

The tenant claimed that the section 25 notice was invalid. It later served a section 26 notice on the landlord, which it claimed was the applicable termination notice.

Issues

The court was called on to:

• determine whether the landlord’s section 25 notice was valid or not, and
• decide the terms of the renewal lease.

Notice validity

The court held that the landlord's section 25 notice was valid.

The previous case law made clear the appropriate question was whether or not the notice was "…quite clear to a reasonable tenant receiving it? Is it plain enough that he cannot be misled by it?" This is known as the “reasonable recipient” test.

Applying this test to the Dukeminster case, the court noted the close connections between the two companies, including that the directors of Dukeminster Limited were also the directors of Dukeminster (UG) Limited. Given these close links, the court held that a reasonable tenant receiving the landlord’s section 25 notice would have understood the intended recipient and the effect of the notice.

While it is open to the court to correct errors in notices, fundamental defects such as service upon the wrong entity will usually invalidate a 1954 Act notice. Much will turn on the relationship between the true tenant and the addressee, whether the cause of the confusion is due to the tenant inadvertently misleading the landlord and all other circumstances of the case.

Of course, it is much better to ensure that notices are drafted with care in the first place, avoiding the need to rely on the reasonable recipient test to save a defective notice.

Renewal terms

A term of 10 years

The tenant had a 51 year lease and was seeking a new 5 year lease, whilst the landlord wanted a 12 year term.

The landlord put forward evidence that a number of comparable properties had 10 year leases, and as an investment landlord a longer term was appropriate and reasonable.

The tenant’s evidence was that a 5 year term best suited its business interests, although little detail was given on this or any balance as against detriment to the landlord.

The court granted a new 10 year lease on the basis that it balanced the interests of landlord and tenant, and the Landlord’s evidence was more compelling.  The term was therefore closer to what was considered to be the market norm.

No break clause

The tenant wanted the ability to terminate if a development next door proved unbearable. The landlord argued that there would be little need to terminate if the construction works were properly managed and intrusion to the tenant’s occupation properly minimised. 

The court applied the same test as exists to introduce a landlord’s break clause: whether there is a real possibility that the tenant would need/wish to exercise that break clause, and if so, who should shoulder the burden of that event? 

The court considered the tenant’s fears were exaggerated, unfounded, speculative and fanciful. On the evidence there was no realistic likelihood that the offices would be rendered uninhabitable or the tenant’s occupation intolerable. The court refused the break option.

Rent in line with the landlord’s valuer’s figures

The tenant argued that a substantial reduction in rent was necessary due to the neighbouring redevelopment works rendering the premises effectively unlettable other than on very favourable terms. The landlord adopted a more traditional valuation approach based on several comparable lettings in the area.

The court rejected the tenant’s evidence, largely on the basis that it did not accept the tenant’s concerns that the neighbouring redevelopment would substantially interfere with its occupation of the premises.

A rent review at year five on an upward/downward basis

The refusal of the landlord's request for an upwards only rent review is perhaps surprising. Upwards-only reviews are still market standard in most sectors. However, this case shows that the courts may view upwards/downwards reviews as a fairer approach particularly where, as here, there was no review in the original lease. Where the original lease does contain a rent review, the courts are more likely to follow its terms closely.

How we can help

TLT has an experienced team dealing with 1954 Act lease renewals. We take a practical and commercial approach and in the majority of cases we are able to reach a negotiated agreement on behalf of our clients, avoiding costly and time-consuming litigation.