Do not dismay, for you have “O’May”!

31 August, 2016
by: Cripps Pemberton Greenish

This week, trainee Solicitor Rose Gosden tells us about a case every trainee should know before beginning their commercial property seat:

Let me set the scene… you are a trainee solicitor and it is a Monday morning. You have just completed the long walk to work and can almost smell the fresh coffee and bowl of granola waiting for you. As you approach your desk and before you can even reach your cereal bowl, you notice that a large ominous looking document has been perfectly placed on your keyboard. Accompanied with the perfectly placed document is a beautifully written note from your supervisor that reads “this is a renewal lease that has been drafted by the landlord’s solicitor, please review and let me have your comments as soon as possible”. A sense of panic arises from deep within you; you have never completed a task like this before! Where do you start?

What follows is some help, from one trainee to another…

Other than changes to the term and rent of the new lease, Section 35 of the Landlord and Tenant Act 1954 governs changes that can be made to the other terms of a renewal lease. The section broadly states that the terms of a renewal lease shall be agreed by the landlord and tenant or, in default of such agreement, may be determined by the court. The court in making its decision will have regard to the terms of the current tenancy and all other relevant circumstances.

 

The leading case which sets out the approach that the courts will adopt in default of agreement is O’May v City of London Real Property Co. Ltd [1983] 2 AC 726. The simple facts of the case are as follows:

  1. the landlord demised a 5 year lease to a tenant.
  2. on the expiry of the 5 year lease, the landlord proposed a new five year term reversing the obligations of maintenance, repair and service of the building to be placed on the tenant, for a reduction in rent.
  3. the tenant opposed the new terms and started litigation.
  4. on appeal, the House of Lords confirmed that the new lease should not depart from the current tenancy to impose onerous obligations on the tenant.

 

O’May established the following guidelines which should be considered by the tenant’s solicitor when reviewing the “other” terms of a renewal lease:

  1. there must be good reason for imposing the change – is the clause fair and reasonable for both of the parties?
  2. can the detriment to the opposing party be adequately compensated for?
  3. would the proposed change materially impair the tenant’s security and profession having regard to the purpose of the Landlord and Tenant Act 1954?
  4. is the negotiating position of the sitting tenant weak, taking into account current market conditions?

 

Essentially, the new lease should take the form of the current lease, subject to “reasonable modernisation”. The next trick question is what constitutes “reasonable modernisation”. The answer to this question could create another blog post entirely and would be best written by a property litigator rather than a transactional property lawyer, as so few cases have gone all the way to court to set precedents. However, some examples of accepted modernisation are as follows:

  1. updating the alienation provisions in line with S19 of the Landlord and Tenant Covenants Act 1995;
  2. making amendments to guarantor’s liability as a result of the case “Good Harvest” (watch this space for a blog post on this case); and
  3. including provisions relating to Commercial Rent Arrears Recovery (CRAR).

 

Back to O’May…the tenant’s solicitor can use the O’May principles to aid them with any other changes they wish to make or oppose.

Here are some examples of how the O’May principles may be able to help your client:

 

Fair and reasonableness

Take this example:

“The tenant must comply with all regulations that the Landlord may make from time to time, in connection with the use of any Service Media”

This clause should raise a red flag in your mind. The clause allows the Landlord to impose any regulation they can in relation to the use of service media. However, if you inserted the word “reasonable” before “regulations”, this limits the regulations that the landlord can impose to reasonable regulations. To be reasonable is good for both parties.

 

Detriment

A clear example of this guideline is as shown in O’May. The detriment of the obligations on the tenant to be liable for the maintenance, repair and service of the building, outweighed the proposed benefit of the reduction of rent.

 

Security and Profession

You may stumble across a clause which may threaten your client’s business, for example:

“The Tenant shall not attach any sign, fascia, placard, board, poster or advertisement to the Property so as to be seen from the outside of the Building”.

If the tenant cannot advertise its business then this may deter customers from attending the shop, which will materially impair the tenant’s business. Therefore this clause should be modified. Consider including “without the consent of the Landlord, such consent not to be unreasonably withheld” at the end of the clause. This results in the tenant being able to erect signage but only with the landlord’s consent – fair enough. Alternatively, you could include a proviso at the end of the clause to state “except that the Tenant shall be permitted to erect and display non objectionable professionally prepared trade signage and notices in the Tenant’s national adopted corporate branding so long as not more than 25% of the windows are obscured” which would also be a fair compromise.

 

Negotiating Position

As a whole, is the landlord proposing conditions which the tenant has to accept through fear of not being able to find a property elsewhere because of the current market conditions?

To me, the key principle that has emerged from O’May is the principle of fairness and reasonableness. Trust your gut feeling. If you feel that your client is getting the raw end of the deal, they probably are. This case can be used to support your argument to the landlord’s solicitor. However, a word of advice – choose your battles. If there are more important clauses that you feel might be tricky to negotiate, avoid being overzealous with your amendments, try to incorporate fairness for both parties.

I hope this helps the trainee that I described in my opening paragraph. Knowing the O’May principles will help you in giving you a rough guideline of what is acceptable and what is not, but also may help you to impress your supervisor, the other side and the client.

 

Now you can have that coffee…