Drafting Leases
Russell Hewitson
Track/Slide 19
Several assumptions are already being considered in respect to the
circumstances of the hypothetical letting but there are certain other
assumptions which are commonly made as well, and we’ll look at these now.
The first of these is an assumption that the premises are fully fitted out and
ready for immediate occupation and use by the incoming tenant. An
assumption of vacant possession necessarily leads to an assumption that the
tenant has moved out and taken all his fixtures with him. The assumption that
the premises are fully fitted out attempts to counter this deemed removal of
fixtures by assuming that the hypothetical tenant would be able to move
straight into the premises without asking for a rent-free period in which he
could carry out his notional fitting out works. Hence this assumption removes
any discount the tenant would claim at review in respect of the rent free period
that the hypothetical tenant might have claimed.
The phrase “fit for occupation” doesn’t appear to go as far as fully-fitted out as
the former assumption anticipates a stage where the premises are simply
ready to be occupied for fitting out, in which case the hypothetical tenant
might still demand a rent-free period. In practice some property lawyers prefer
to deal with this problem in a different way by including an assumption that no
reduction is to be made to take account of any rental concession which, on a
new letting with vacant possession, might be granted to the incoming tenant
for a period within which its fitting-out works would take place. An assumption
is made that the covenants have been performed. Most rent review clauses
include an assumption that the tenant has complied with his covenants in the
lease.
In the absence of such a provision, the courts are willing to imply one in any
case, as it’s a general principle that a party to a transaction shouldn’t be
allowed to profit from its own wrongdoing. This is particularly important when
considering the tenant’s repairing obligation. Clearly a hypothetical tenant can
be expected to pay more in terms of rent if the premises are in good repair,
and conversely less if they are in poor condition. A tenant shouldn’t be
allowed to argue in reduction of a rent at review that the premises are in a
poor condition if it’s through his own default that the disrepairs come about.
Hence the reason for this assumption.
The landlord may try to include an assumption in respect of his own
covenants, in other words an assumption that he has performed his covenants
in the lease. A tenant ought to resist this, especially where a landlord has
taken on significant obligations in the actual lease. For example, in a lease of
part of the landlord’s premises, the landlord may enter into covenants to
perform services and covenants to repair and maintain the structure and
exterior and common parts of the building. If the landlord later fails to perform
these covenants, the likely result is that the rental value will decrease as the
building will be less attractive to tenants in the market. Accordingly the rent on
review would be adjusted to reflect this. However, an assumption that the
landlord has performed his covenants enables the landlord to have the review
carried out on the basis that the building is in full repair and so his default is
disregarded. This means that the tenant will be paying for something at review
which he doesn’t in fact have and such an assumption should be strongly
resisted by a tenant.
It may be though that the landlord will not concede the tenant’s argument
easily. Landlords will argue that without it, the valuer will assess the new rent
at a lower level, even though immediately afterwards the tenant might bring
proceedings against the landlord in respect of the landlord’s breach of
covenant, which will force the landlord him to put the building in repair.
Landlords will argue that it’s unfair that the rent will be set at a lower level for
the entire review period on the basis of a temporary breach of covenant,
which the landlord might soon be required to put right. The tenant’s counter
argument is that a claim for breach of covenant is no substitute for a
dilapidated building.
The final assumption I want to look at deals with VAT. If the landlord has
waived the VAT exemption in respect of premises so that VAT is payable in
addition to the rent, this will negatively affect the tenant who is in adverse VAT
status. Organisations such as banks, building societies and insurance
companies make exempt suppliers in the course of their business and
therefore don’t receive any output tax which could be set off against input tax
paid on the rent. These organisations have to bear the VAT on the rent as an
overhead of the business. Arguably, such tenants would reduce their bids in
the market in order to compensate for this VAT overhead. Some landlords
counter this by including an assumption that the hypothetical tenant will be
able to recover VAT in full or by ensuring that the hypothetical letting includes
a covenant by the landlord not to waive the exemption for VAT purposes.
Tenants ought to try to resist such provisions and leave the valuer to value the
lease on the basis of the reality of the actual letting.