The first scenario relates to the right to break in lease arrangements. A lease is a contract either in writing or made orally between a landlord (lessor) and a tenant (lessee) specifying the terms and agreements of renting the said property for an agreed period. There are two types of property as classified by the court in Moore v Regents of the University of California. These include real and personal property. Land and the buildings on the land constitute real property.
A lease agreement, a mortgage, and an easement are interests in land. In a lease agreement, the lessee agrees to pay a certain amount of money in monthly installments for the lease. During the subsistence of the lease agreement, the lessee has a right to enjoy possession and all rights accruing from the property against all other parties, including the lessor. Lessees can renew their lease agreements after the expiry of the lease term governed by the Landlord and Tenants Act. Lease agreements are sui generis; therefore, they differ from one another depending on the arrangement. The court stated this position in Burton v Chesapeake There are two types of a lease agreement. The first is the registered lease agreement, and the second is the unregistered lease agreement.
In this research paper, I seek to critically define the right to break a lease agreement and analyze the various issues raised in the fact scenario. Therefore, this paper is divided into several parts to address the question. The first part is the introduction. The second part consists of the right to break in the lease agreement. The third part consists of the issue, the ruling the analysis/ application, and the fourth part consists of the conclusion based on the matters established on the fact scenario.
The right to break in lease agreements
The right to break a lease is the legal right possessed by either the lessor or the lessee to terminate the lease agreement anytime before the expiry of the agreed lease term. A break clause is critical in a lease contract as it determines and affects the relationship between the parties. Further, the exercise of the right to break by the lessee is likely to affect the lessor’s right to possession potentially. Parties in commercial leases mainly exercise this right.
Circumstances under which a landlord may exercise the right to break
At any time during the subsistence of a lease agreement, the lessor may exercise the right to break to obtain possession to repair the premises or for relocation purposes. The lessor’s exercise on this right affects the lessee differently, including the amount payable as rent. The lessor has to consider when exercising the right to break a lease agreement includes the following: the first is the break clause. The second is, are there any break conditions in the contract? The third is the tenant’s identity. The tenant’s identity includes whether the tenant is a registered proprietor or an unregistered proprietor. The fourth factor is the break date which stipulates the date upon which the right may be exercised.
The legal issue for determination in the first scenario relates to who between the two parties (Prism Co. Ltd and Lambchop) has a better claim. Further, determining whether there was vacant possession and whether the right was exercised as required and stipulated in the lease agreement. Moreover, another issue for determination is whether the agents of Lambchop and PCL acted adequately.
A break clause is a provision in a lease agreement stipulating how the parties can exercise their right to break the contract. This clause also notes the relevant parties who can exercise the right, limiting other parties who were not part of the lease contract. Moreover, the break conditions accompany the break clause. Depending on the provided break conditions, a party has acted in breach where the conditions have not been adhered to.
In Mannai Investment v Eagle Star, the court held that parties exercising the right to break the lease must be guided by the express break conditions in the lease agreement. In Riverside Park v NHS, the court emphasized the position laid down in the Mannai Investment case. In this case, the tenant exercised the right to break and vacated the premises. However, the landlord sued the tenant because the tenant had not given vacant possession as there were some fixtures left on the premises. The court held that the tenant’s failure to revert the property in a vacate state as required proved that the lease was not terminated; hence the tenant was bound to pay the rent as agreed in the agreement. The break dates further protect both parties from being given unreasonable notices by the other parties in the exercise of the right to break. The court in Vanquish Properties v Brook Street emphasized this position.
An agency relationship arises where one party (an agent) in a transaction acts on behalf of another party (principal). A principal is bound by the acts of his agent on third parties.
The fact pattern clearly outlines the conditions relating to lease and an extension to the exercise of the right to break. As demonstrated in the rule part of this research paper, the court in the Mannai Investments case set out the rule that parties seeking to exercise the right to break must follow and adhere to the contract’s conditions. Moreover, the right to break extends to the reversion of the premises to the landlord in the form of vacant premises. The fact pattern notes that one of the conditions to break the lease was that PCL had to give vacant possession upon the expiry of the lease. However, PCL left a few movable chattels on the premises, which breached the condition of vacant possession. As discussed in the case of Riverside Park v NHS, the court stated that failure to give vacant possession meant that the contract had not been terminated. PCL has a better claim as opposed to Lambchop because Miss. Fairfax acting on behalf of Lambchop, accepted the keys to the premises and expressly noted that everything was satisfactory.
In this case, therefore, Miss. Fairfax, an agent of Lambchop, expressly stated that everything was satisfactory when Mr. Worthingand, agent of PCL, handed over the keys of the premises. Therefore, Lambchop is bound by the acts of Miss. Fairfax acted on the company’s behalf. The doctrine of promissory estoppel developed in High Trees the case will be relied upon in this case because PCL relied on Lambchop’s statement and are likely to suffer a detriment should Lambchop go back on their promise.
The findings in this research paper indicate that PCL has a better claim to Lambchop concerning the exercise of the right to break the lease agreement.
The agreement between Spinning Vinyl’s tenancy and Lambchop Investments is a lease agreement. A lease is defined in Section 205(1) of the Property Act. As a commercial –
transaction between a lessor and a lessee where the lessee can use the land for a given period for a fee. Street v Mountford defines a lease as a contractually binding agreement where one party grants the other a right to exclusively possess the property for a certain period (term) upon payment of an agreed sum (rent). The fee is payable in the form of monthly installments or as the parties deem fit.
A lease agreement can either be registered or unregistered. Therefore while addressing the issues raised in the fact pattern, this research paper is divided into several parts. The first part is the introduction. The second part analyzes the types of lease agreements. The third part discusses the characteristics of a lease agreement, particularly the lease between the two named parties. Further, the fourth part addresses the rights and duties of landlords and tenants. The conclusion is the last part, centered on the findings made in the research paper.
Types of leases
The first classification of leases is the fixed-term lease. This is related to a contract that has a clear stipulation of the duration of the lease agreement. Further, it includes the date of commencement and the date of expiry of the lease agreement. Therefore, the lease agreement runs for the period provided I the fixed term clause of the contract. The court in Lace v Chantler stated a fixed-term lease must be specific. Therefore, there is no valid lease for this particular category where there is uncertainty about the duration.
The second classification is the periodic leases. These are lease contracts that run from the commencement date periodically and can be terminated by either party upon issuing a notice to the other party. The notice issued in this case must be reasonable to allow the affected party to make arrangements towards the termination of the contract. The third classification is the residential lease agreements. Residential leases involve the lease of premises used for residential purposes. The fourth classification is the commercial lease agreements. Commercial lease arrangements apply the lease of premises for commercial transactions. Commercial lease contracts have express clauses which mandate the lessee to use the premises for commercial purposes only more so the purpose contracted.
Characteristics of a lease agreement
A lease agreement can either be in oral or written form. The parties in a lease agreement are the lessor (landlord) and the lessee (tenant). Upon the conclusion of the lease contract, the lessee acquires full possession of the premises. The lessee has a right to enjoy the benefits accruing from the property to excluding all other parties, including the landlord. However, the complete and exclusive possession of the premises in a lease is not automatically translated to ownership. Bruton v London and Quadrant Housing Trust stated that a lease is a contractually binding agreement granting the lessee exclusive possession. Ownership resides with the landlord, whereas possession in a lease resides with the tenant during the contract’s existence. The landlord can transfer the property to the tenant in various circumstances. These are, through sale, gift, or through a deed of assignment. Lease agreements may either be short-term or long-term. In any lease, there must be certainty of terms. The parties must be aware of the period in which the lease contract is supposed to run. This ensures there is clarity and conciseness in the contract.
Further, the parties in a lease agreement must be specific. For example, the parties can either be the owner of the premises or his agent. The tenant can either be the lessee or his agent. Additionally, the rent must be paid in monetary terms or other valuable considerations as agreed by the parties.
Rights and duties of lessees in lease agreements
A lessee has a right to be informed about any relevant information concerning the premises. The lessee has a right to be compensated for repairs made that were supposed to be made by the lessor. A lessee must pay rent as it falls due. A lessee has to take care of the premises and make repairs where he damages the property.
Rights and duties of landlords in lease agreements
A landlord must repair the premises, hand over possession, deliver the premises to the lessee in good shape, and compensate the lessee for any expense incurred when repairing the premises. The landlord also must fully disclose to the tenant any critical information relating to the premises. In addition, the landlord has a right to correct the rent of the premises as it falls due and to repossess the premises upon the expiry of the contracted term.
As indicated in the second scenario, the lease agreement is the fixed term lease agreement going for six years. However, the parties are unable to agree on the terms of the contract moving forward. A contract has an offer, acceptance consideration, and intention to create legal relations as its elements. Therefore, in determining the future of the agreement in this second scenario, the court must assess whether the parties can agree on the terms, and if they cannot agree on the new words in the contract, a contract will not be formed. Secondly, this is a commercial transaction. The general presumption in such transactions is that the parties intend to be bound by the contractual terms. The court in Edwards v Skyways emphasized this position. Lambchop makes an offer, and Spinning Vinyl’s tenancy makes a counter offer.
The court, in this case, will apply the law of contract relating to the formation and performance of contractual obligations. The paper has discussed the elements of a valid contract and the characteristics of leases, types of leases, and the rights and duties of the parties in a lease contract. A valid contract, including a lease, is only formed where the parties agree on the terms and intend to be bound by the contract terms.
The third scenario deals with the concept of presumption of reality in lease agreements. A lease agreement is a contract between a landlord and a tenant upon which the landlord transfers possession to the tenant for an agreed period at a fee. Consequently, in addressing the issues raised in the fact scenario, this research paper is divided into several parts. The first part is the introduction. The second part focuses on the presumption of reality in lease agreements in detail, and the conclusion forms the last part. For this research paper, demised premises refer to the premises that have already been leased out to lessees.
Rent review is defined as the approach used in determining the rent a lessee should pay to the lessor. Rent review was introduced in commercial lease agreements after the Second World War to protect landlords against inflation. Rent reviews lasted for a maximum of 14 years which has changed with time. Rent reviews are determined by assessing the premises’ current value and adjusting rent rates based on the current value. Rent reviews are carried out in two processes. The first is based on the Retail Prices Index. This process involves an assessment of the fluctuation of prices of goods and services in the United Kingdom. The second is based on the rental market. In this process, the landlord analyzes the rent paid by similar properties in the area and fixes a rent review based on such determination.
At all material times when rent reviews are applied in a lease arrangement, the parties must be duly notified within a reasonable time. Tenants have a right to either agree or disagree with the terms in the rent review and offer their proposals. A neutral third party is mainly consulted to help the landlord, and the tenant arrives at fair and favorable terms. In commercial leases, the standard form of rent review applied is the open market review. This method of rent review focuses on the rent the landlord could have obtained from the tenants if he was trading at the open market. Other forms of rent review assessment include fixed rent increase method, turnover rents, and index-linked.
Presumption of reality
This is the starting point of construing the rent clauses in lease agreements. Under the presumption of reality, there is an assumption that the rental value is to be interpreted as a whole of the demised premises as they exist at the review date. In Beegas Nominees case, the court outlined that when determining the effect of a rent review clause in a lease agreement, a court must always apply the presumption of reality in each case. The facts of the case were that the rent review was determined based on the assessment of the rental market. The study assessed what other premises situated near the demised properties were valued and done their rent review. The claimants rejected this review because the other premises used in the comparison were indeed located in better locations compared to the current location of the premises in question. Neuberg J held in Canary Wharf case pointed out that a hypothetical term in a hypothetical lease must be reasonably construed to mean a period not exceeding 25 years. He further noted that the time 25 years runs from the relevant review date and not 25 years from when the actual lease date begins. The facts of the case are that the landlord in this lease contract insisted that the first day of the hypothetical lease also marks the first day of the actual lease.
Additionally, Justice Lawrence Collins in the Chancebutton case, the issue for determination before the court was whether the date of commencement of the lease could be used to reference where the hypothetical term was not indicated. The facts of the case were that the claimants petitioned the court seeking a declaration of the meaning of a rent review clause. It was unclear to the plaintiffs whether the rent review commenced on the date the lease was contracted or the rent review started on the hypothetical date. In Ritz Hotel (London) case The court demonstrated that when construing and determining rent review clauses, the hypothetical term must always be tantamount or equal to the terms granted in the actual and original lease. In this case, the rent review clause expressly provided a direction that the tenant would carry the turnover or accumulated profits of the business. Despite the express stipulation in the rent clause of the demised premises, the casino part of the business did not adhere to this stipulation. It failed to work out a measure to prevent the profits from being taken over. Consequently, the plaintiff sued for breach of the rent clause in the lease agreement.
The fact pattern provides that the rental review set relied on the market rental value method for the 10-year sublease. A notional lease has a time frame of between 10-15 years and, depending on the agreed terms, and the landlord may be responsible for making repairs in the demised premises. The fact the user covenant is restricted to the tenant and its subsidiaries are not likely to have a depressing effect on the rental value. This is because different lease agreements have other arrangements.
This research paper has discussed rent review and the concept of presumption of reality. It has added that the rationale behind the adoption and incorporation of rent review is to offer protection to landlords against inflation. It has also discussed with case law the effects of the rent reviews on parties.
Landlord and Tenant Act, 1985.
Property Act, 1925.
Landlord and Tenants Act, 1954.
List of cases
Beegas Nominees Ltd v Decco Ltd (2003) 43 EG 138.
Bruton v London and Quadrant Housing Trust (1999) UKHL 26.
Burton v ChesapeakeBox & Lumber Corporation (1950) 57 S.E.2d 904.
Canary Wharf Investments v Telegraph Group Ltd (2003) EWHC 1575.
Central London Property Trust Limited v High Trees (1947) 1KB.
Chancebutton Limited Compass Services UK & Ireland Limited (2004) EWHC 1293.
Edwards v Skyways Limited (1963) 1 WLR 349.
Lace v Chantler (1944) KB 368.
Mannai Investment Co Ltd v Eagle Star Assurance (1997)UKHL 19.
Moore v Regents of University of California (1990) C513755.
Ritz Hotel (London) Ltd v Ritz Casino Ltd (1989) 2 EGLR 135.
Riverside Park v NHS Property Services Ltd (2016) EWHC 1313.
Street v Mountford (1985) A.C. 809, 818.
Vanquish Properties v Brook Street (2016) EWHC 1508.
Seavey. A, ‘A Rationale of Agency’ (1919) 29 Yale LJ 859.
Richard Krever, ‘Edging Towards an Understanding of an Enterprise’ (2006) 17(1) International VAT Monitor 41-42.
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