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LZ newsletter 016
Changing Market and Varying a Lease
The definition of ‘lease‘ is "the grant of a right to the exclusive possession of land for a determinate term less than that which the grantor has himself in the land". In practice, a lease is a document that embodies the terms and conditions of the tenancy that are agreed between the first landlord and first tenant. How agreement is reached, whether any terms and conditions were willing, conceded or compromised, will vary depending upon the bargaining strength of the original parties.
Leases comprise 1) what would be called the principal details: for example, rent, start date, duration of term, frequency of rent review, repairing and decorating covenants, service charge if any, insurance, permitted use, alienation, break clause, and any special requirements; and 2) the ’small print’: the words and terminology, the sort of stuff that the parties often leave to their respective lawyers to agree.
The contractual term of a tenancy is often for years, and during that period of time the market for the premises and/or the style of lease is continually changing. The identity of either or both of the original parties might change, sometimes more than once, since the lease was granted. Terms and conditions may become outmoded, new legislation might have come into operation, case–law can override an intention, and different advisers analysing the terminology in the light of the prevailing market might come up with different interpretations on what was agreed by the original parties. Wording and phrasing ranges from precedent to novel as draftsmen try to be both conventional and futuristic, but frankly it is anyone’s guess how successful a lease would be at withstanding the test of time.
After completion the wording of a lease cannot be changed or varied except by mutual agreement, or rectification. Rectification is the correcting of mistakes in drafting which, judging by communications before the lease was completed, one or both parties never intended. Usually, rectification can only be done between original parties. Otherwise variation by mutual agreement occurs as a result of either the tenant or landlord requesting a change.
For the landlord, the usual reason for wanting a variation is either to maintain or enhance investment value. A product of the direction of the market, investment value is a measure of performance for the location and type of property. For the tenant wanting a variation is to do with flexibility of terms and conditions and marketability of the tenant’s business, especially when business and premises are closely bound up through having a secure lease.
All original parties may agree whatever changes they like. Problems involving variations are only likely to crop up when the tenant is an assignee in default and the landlord calls upon the original or former tenant to perform the covenants and pay the rent under privity of contract.
The variation would be recorded in a Deed of Variation or where a variation is agreed in conjunction with something else incorporated into a Licence for that other matter. Unless the first or outgoing tenant and guarantor also agree to the variation, their respective obligations under privity of contract will end on the date of variation. That may not matter if the former tenant and/or guarantor are “people of straw” but where substantial and the covenant of the former tenant is a feature of the investment, the landlord considering a request from the incumbent tenant has to weigh up the consequences of a variation, and whether the old or new rules for privity of contract would apply.
From the landlord’s perspective, to have the previous tenant still on the hook is a comfort, whether or not via an authorised guarantee agreement, (”AGA”). Outgoing tenants are not daft. Rid of the premises, they will try to arrange their financial affairs to also be rid of on–going liability. Most individuals are stuck with taking a chance. For incorporated businesses, it’s a choice between dormant, dissolution, or administration and pre–pack, and restructuring. Using dormant companies, tenants can run the business at the premises through a different company to the company in whose name the lease is vested. The consequences for the landlord’s investment are weakening: for example, any other assets of the tenant’s (old) company would be transferred to a new company, the old company’s name then changed, the new company changes its name to that of the old company, the landlord be none the wiser.
As an example of what can go wrong after a variation, recovering the full annual rent of a stepped increase in rent payable after review has been held to be unenforceable under privity where the lease makes no provision for stepped increase. In the event of a disclaimer by an assignee's administrator and claim against the original tenant under privity, I wonder whether monthly rents might not also fall foul.
Generally, rent is yearly and payable in instalments. Recent leases might incorporate provision for payment quarterly or monthly, depending upon the tenant’s preference, but where monthly rent is agreed in a side–letter, possibly also a non–transferrable personal concession, it is questionable whether the side–letter would be deemed a variation. Side–letters are useful at the time but if not properly drafted can render the entire agreement void.
Another form of variation is the confidentiality agreement. As secret documents, we are not supposed to know about them, but their use is widespread. A confidentially agreement is a side–letter for varying the lease without an overt deed of variation. A confidentiality agreement could be disclosable under certain circumstances, such as legal proceedings, but one has to remember to ask.
With short leases upon which nothing much rests or where the landlord is relieved the property is let, the consequences of a variation to the original lease are unlikely to concern. But where the value of the investment hinges upon what was agreed at the onset the consequences of a ill–thought through variation may be dire.
Leases comprise 1) what would be called the principal details: for example, rent, start date, duration of term, frequency of rent review, repairing and decorating covenants, service charge if any, insurance, permitted use, alienation, break clause, and any special requirements; and 2) the ’small print’: the words and terminology, the sort of stuff that the parties often leave to their respective lawyers to agree.
The contractual term of a tenancy is often for years, and during that period of time the market for the premises and/or the style of lease is continually changing. The identity of either or both of the original parties might change, sometimes more than once, since the lease was granted. Terms and conditions may become outmoded, new legislation might have come into operation, case–law can override an intention, and different advisers analysing the terminology in the light of the prevailing market might come up with different interpretations on what was agreed by the original parties. Wording and phrasing ranges from precedent to novel as draftsmen try to be both conventional and futuristic, but frankly it is anyone’s guess how successful a lease would be at withstanding the test of time.
After completion the wording of a lease cannot be changed or varied except by mutual agreement, or rectification. Rectification is the correcting of mistakes in drafting which, judging by communications before the lease was completed, one or both parties never intended. Usually, rectification can only be done between original parties. Otherwise variation by mutual agreement occurs as a result of either the tenant or landlord requesting a change.
For the landlord, the usual reason for wanting a variation is either to maintain or enhance investment value. A product of the direction of the market, investment value is a measure of performance for the location and type of property. For the tenant wanting a variation is to do with flexibility of terms and conditions and marketability of the tenant’s business, especially when business and premises are closely bound up through having a secure lease.
All original parties may agree whatever changes they like. Problems involving variations are only likely to crop up when the tenant is an assignee in default and the landlord calls upon the original or former tenant to perform the covenants and pay the rent under privity of contract.
The variation would be recorded in a Deed of Variation or where a variation is agreed in conjunction with something else incorporated into a Licence for that other matter. Unless the first or outgoing tenant and guarantor also agree to the variation, their respective obligations under privity of contract will end on the date of variation. That may not matter if the former tenant and/or guarantor are “people of straw” but where substantial and the covenant of the former tenant is a feature of the investment, the landlord considering a request from the incumbent tenant has to weigh up the consequences of a variation, and whether the old or new rules for privity of contract would apply.
From the landlord’s perspective, to have the previous tenant still on the hook is a comfort, whether or not via an authorised guarantee agreement, (”AGA”). Outgoing tenants are not daft. Rid of the premises, they will try to arrange their financial affairs to also be rid of on–going liability. Most individuals are stuck with taking a chance. For incorporated businesses, it’s a choice between dormant, dissolution, or administration and pre–pack, and restructuring. Using dormant companies, tenants can run the business at the premises through a different company to the company in whose name the lease is vested. The consequences for the landlord’s investment are weakening: for example, any other assets of the tenant’s (old) company would be transferred to a new company, the old company’s name then changed, the new company changes its name to that of the old company, the landlord be none the wiser.
As an example of what can go wrong after a variation, recovering the full annual rent of a stepped increase in rent payable after review has been held to be unenforceable under privity where the lease makes no provision for stepped increase. In the event of a disclaimer by an assignee's administrator and claim against the original tenant under privity, I wonder whether monthly rents might not also fall foul.
Generally, rent is yearly and payable in instalments. Recent leases might incorporate provision for payment quarterly or monthly, depending upon the tenant’s preference, but where monthly rent is agreed in a side–letter, possibly also a non–transferrable personal concession, it is questionable whether the side–letter would be deemed a variation. Side–letters are useful at the time but if not properly drafted can render the entire agreement void.
Another form of variation is the confidentiality agreement. As secret documents, we are not supposed to know about them, but their use is widespread. A confidentially agreement is a side–letter for varying the lease without an overt deed of variation. A confidentiality agreement could be disclosable under certain circumstances, such as legal proceedings, but one has to remember to ask.
With short leases upon which nothing much rests or where the landlord is relieved the property is let, the consequences of a variation to the original lease are unlikely to concern. But where the value of the investment hinges upon what was agreed at the onset the consequences of a ill–thought through variation may be dire.