By Alex Lewsley, Senior Associate in Commercial Property & Development.
In an attempt to keep costs down, landlords and tenants often try to come to an arrangement between themselves to remedy a situation. However the law does not allow this and such arrangements could backfire against one or both parties, usually against the party doing the other a favour!
Making private arrangements
The tenant defaults, the landlord lawfully forfeits the lease by peaceable re-entry, the tenant makes good but, in a bid to avoid further costs in connection with a court application for relief from forfeiture, asks the landlord to grant relief itself by acting as if the lease had never been forfeited. If the landlord agrees, effectively the tenant is granted a new lease.
Only the court can grant relief from forfeiture.
The tenant serves a break notice, then changes its mind and seeks to withdraw its break notice. If the landlord agrees this would in fact have the effect of granting the tenant a new lease (albeit on the same contractual terms as the initial lease and for a term expiring on the same day as the initial lease).
The unintended consequences
Unwittingly granting a new lease to a tenant can have adverse consequences for the landlord.
The new lease will be within the security of tenure provisions of the Landlord and Tenant Act 1954. Even if the initial lease had been excluded the tenant will now have a statutory right to a new lease at the end of the term. Guarantors and rent deposits will be lost.
If the initial lease pre-dated 1 January 1996 (‘an old lease’) then former tenants and guarantors on the hook under the initial lease will be released. The new lease, which will be on the same terms as the initial lease, will not contain the usual express provisions now required in leases relating to tenant assignments.
These provisions enable a landlord to require an outgoing tenant to provide an authorised guarantee agreement in relation to the future performance of its lease covenants by the assignee. The tenant will be automatically released on assignment.
The impact on landlords and tenants
These adverse consequences could leave the landlord exposed and/or harm the investment value of the landlord’s interest.
It is not plain sailing for the tenant either. Any concessions in side letters relating to the initial lease will not apply to the new lease. If the break date fell between quarter days, the tenant may find itself contractually liable to pay rent for the same period twice (once under the old lease, if it contained no right of apportionment, for the period from the break date to the end of the current quarter, and once under the new lease for the same period).
Taking legal advice at an early stage rather than attempting to come to a private arrangement will help landlords and tenants to protect themselves from the unintended consequences of those arrangements.