Ruling could help businesses but hurt landlords

Businesses that lease offices in converted houses may now be able to buy the freehold at reduced rates following a court ruling. Peter Sutherland explains how the decision could be bad news for landlords but an unexpected gift for their tenants.

The simple question of "what is a house?" could be worth millions of pounds to Nottinghamshire landlords and their commercial tenants.

It's important because the law allows tenants in blocks of flats to get together and exercise their right to collective enforcement. This is a legal mechanism that allows them to buy the freehold of their homes on favourable terms as long as there is a majority in favour.

It usually applies to private tenants but recently three small businesses who leased offices in converted town houses argued that it should apply to them as well. They knew that if they succeeded they would be able to buy at prices way below the going rate on the open market.

The tenants argued that the buildings they occupied were still essentially houses and sought to exercise their right to collective enfranchisement under the Leasehold Reform Act 1967.

The landlords objected saying the Act did not apply in this case because the buildings were used exclusively for business purposes.

The case went all the way to the Court of Appeal which has ruled in favour of the tenants. Lord Neuberger said the definition of house could "extend to buildings exclusively used for business purposes".

He said: "Once could, it seems to me, quite naturally describe a building built as a town house, which had subsequently been internally converted into offices, as a 'house used as offices': hence it would 'reasonably be called' a house, even though it was not used for residential purposes."

The ruling could lead to several enfranchisement claims from commercial tenants who will see it as an opportunity to buy the freehold of their offices on favourable terms.

Nottingham could be among areas most affected as it contains so many offices situated in properties originally built as houses.

For more information please contact Peter Sutherland on 0115 988 6714 or email psutherland@andersonssolicitors.co.uk

Landlords getting tougher over break clauses

Extreme times lead to extreme measures and the world of landlord and tenant is no exception. Peter Sutherland looks at why disputes over break clauses are on the rise.

The standard break clauses to be found in most commercial tenancy agreements have often led to disputes, but the numbers have risen dramatically over the last few years.

The recession is the main reason, of course.

Declining orders mean more and more firms are using the break clause option to downsize or just find a better deal elsewhere. In their haste to depart and save money, tenants may not be too careful about meeting all the conditions of the lease, particularly relating to maintenance and repairs.

The landlord is just as likely to be money conscious. In better times, a tenant departure might only be a temporary inconvenience. Now it can be the difference between staying afloat or going out of business.

Faced with the prospect of empty premises they have very little chance of re-letting. landlords increasingly respond by poring over the small print of the tenancy agreement to make sure everything is in order.

It means there have been several recent cases where landlords have challenged break notices for technical reasons.

One example involved a tenant who tried to exercise the break clause by giving the landlord six months notice as required by the tenancy agreement. The landlord refused to accept it because the tenant had failed to also give notice to the property's management company - another requirement of the lease.

The tenant argued this was a mere technicality. The case went all the way to the Court of Appeal where the landlord eventually won and prevented the break clause being exercised.

In another case, a commercial tenant was prevented from terminating a lease because it gave notice under the name of its new parent company rather than its original name which was still on the tenancy agreement. This was in spite of the fact that the landlord had been informed of the change of name and rent invoices were sent to the parent company.

Conditions relating to vacant possession, repairs and maintenance can also lead to disputes as landlords take a tougher stance. They need their properties to be in a fit state so they can re-let them as soon as possible.

It means that if work is not carried out to an acceptable standard or is not completed exactly on time then the landlord may refuse to accept the break. Some tenants try to prevent any problems by asking the landlord for guidance on work required but the landlord is under no obligation to help.

Landlords who do choose to help should make it clear that any information they give does not over-rise the need to comply with the terms of the lease.

Both sides are entitled to protect their interests and so now, more than ever, both sides must try to make sure they comply exactly with every detail of the terms and conditions in the lease. Failure to do so could prove very costly.

For more information please contact Peter Sutherland on 0115 947 0641 or email psutherland@andersonssolicitors.co.uk.