In circumstances where it is more desirable to repurpose parts of a building or development, how should the courts try to balance positions of all concerned
In circumstances where it is often more desirable (or cost effective) to repurpose parts of a building or development, how should the courts try to balance the potentially conflicting positions of landlords and tenants? Many modern leases expressly reserve the right for the landlord to redevelop the whole or part of the building, notwithstanding the occupation of sitting tenants in other parts. How can this be reconciled with a landlord’s covenant to give ‘quiet enjoyment’ to those self-same tenants?
The issue has recently been considered in the High Court. The property in question was a mixed use block across the street from the Connaught Hotel in central London. The ground floor of the property was originally let in 2007 on a twenty year lease to an art gallery, Timothy Taylor Limited. At the time of the dispute the passing rent of this lease was in the order of £500,000 per annum. The remainder of the building (a further five storeys) was divided into residential apartments. In around 2012 the landlord obtained planning permission to add a further mansard roof and virtually rebuild the whole of the interior of the building above ground floor level. The tenant did not dispute the landlord’s right to carry out the works (by and large) but was upset about the manner in which the landlord tried to carry them out. In the end, the court largely sided with the tenant’s arguments and awarded damages equivalent to a 20% reduction in the rent for the whole of the period of the landlord’s works (which are currently ongoing and likely to take two years to complete). Further, the court also ordered certain restrictions on particularly noisy works and/or the duration that such works should be carried out for.
So what does the decision tell us?
In reaching his decision, the Judge considered both previous case law, and its particular application in this case. Key themes included the following:
- Regardless of the precise wording used, the landlord must take ‘all reasonable steps’ to minimise disturbance to its tenants. Clearly this is not the same as saying there can be no disturbance, but nonetheless the landlord must take account of the tenants’ continuing occupation during the carrying out of the works.
- It is relevant whether the tenant knew at the date of the lease that the landlord had redevelopment proposals in mind. Merely inserting the necessary permissive wording to allow redevelopment in a lease does not constitute ‘knowledge’. In this case the landlord was unable to persuade the court that it had set out the likely timescale and extent of the proposed redevelopment, or that this had been reflected in the lease terms negotiated.
- An offer of compensation to the tenant can be taken into consideration in assessing the overall reasonableness of the steps taken by the landlord. In effect this is what the court ordered through the rent reduction – a selfhelp solution the landlord had not shown any interest in pursuing.
- The nature of the property can also be relevant. Here the premises were operated as a high class art gallery at a substantial rent, and the bar for what constituted ‘reasonable steps’ was set appropriately higher.
- There is an element of ‘say what you do and do what you say’. Apart from the noise issues, the tenant’s main complaint related to the way in which scaffolding was erected at the property. Having been shown indicative plans which would leave most of the shop front visible to passers-by, what was constructed ultimately was a series of hoardings giving the impression that “the Gallery had entirely disappeared and was now part of what was a building site”. The tenant had apparently received numerous comments asking whether or not the gallery was closed and when it would reopen.
So what are the practical lessons to be learned from the case? Ultimately, in spite of what the lease wording enabled the landlord to do in theory, trying to achieve that outcome ended in expensive litigation and a hefty rent reduction. That said, ‘quiet enjoyment’ is not the same as ‘nearly silent’, so there is food for thought on both sides. Things to think about when considering works being undertaken (whether landlord or tenant) include:
- Ensuring tenants are aware of any proposed plans for development works prior to the grant of leases so far as possible.
- Consulting early with tenants on any proposed works to reassure them that all reasonable steps will be taken to minimise interference.
- Instructing contractors to specifically take into account the use and enjoyment of other parts of the premises during construction works. This will go beyond essential health and safety issues to considering wider concerns such as scaffolding design, arrangements for delivery of materials and regular communication with all affected parties about the progress of the works.
- Timetable noisy works and liaise with tenants over their duration and noise levels. Consider also keeping acoustic records of noise levels to prevent disputes arising subsequently.
- Consider offering compensation by way of discounted rent. The landlord’s refusal to do so in this case appears to have weighed heavily against it. This is particularly so as the landlord had paid a substantial sum to a neighbouring owner in order to secure licence to oversail their property with a crane during the construction period!
Perhaps unsurprisingly, the moral of this case is all about engaging proactively and seeking to manage tenant relations in a sensible manner. Failure to do so can have expensive consequences.
The content of this article is for general information only. For further information regarding the repurposing of a building development, please contact Stuart Raven or a member of the Commercial Property team. Law covered as at July 2016.