Fixtures, Fittings, Alterations and Successive Leases

Monday, 07 January 2013

 Long-standing retail occupants are, for diverse reasons, abandoning the high street. The decision-making process which takes place beforehand should involve a careful analysis of the benefits of staying compared to the benefits of relocating or closing down the store altogether – the "shall I stay or shall I go" decision assisted by lawyer and surveyor.

 Executive Summary

 Tenants have a right to remove tenant's fixtures which have been added to demised premises during an old lease and also during any statutory continuance of that lease up to the date upon which a second lease is granted

• If the tenant surrenders the first lease and vacates the premises without removing the tenant's fixtures, then he is held to have abandoned them.
• If the tenant surrenders his lease and remains in possession under a new lease, absent express words, the common law rule applies and he retains his right to remove the fixtures so long as he is in possession as a tenant
• The lease may state what is to happen to tenant’s fixtures and fittings and may create an obligation to remove them breach of which may sound in damages represented by the cost of removal; such an obligation would prima facie apply to fixtures and fittings installed by the same tenant of the same premises under a previous lease
• Tenant’s fixtures and fittings left in the premises will accrue to the landlord and may become subject to the general repairing obligations
• A reinstatement obligation may be limited to alterations carried out “during the term” or it may incorporate an extended obligation to reinstate alterations made during any prior term or period of the tenant’s occupation. If the obligation is extended in this way then the schedule of dilapidations following expiry of a second or third lease will properly specify alterations made under a prior lease.
• In more usual circumstances where the reinstatement obligation is limited to alterations carried out “during the term”, the landlord will, at the end of the second or third lease not be able to enforce the reinstatement obligation under that lease in respect of historic alterations but will potentially have a cause of action under the old lease [subject to issues of limitations] for damages for breach.
• Although section 18 does not apply to covenants for reinstatement, a similar end result can be achieved by the tenant arguing that at the date of the historic breach there was no loss because the landlord did not actually reinstate and the landlord retained a tenant paying the same rent under the successor lease

Analysis

 One of the, often underestimated and therefore under analysed, issues within this process is the potential liability which the tenant may have to the landlord under its lease covenants relating to repair, reinstatement, alterations and fixtures and fittings.

 In this paper I would like to concentrate on the aspect of this analysis which is, in my experience, frequently arising in circumstances where tenants have held a particular unit for a substantial number of years under a succession of leases and have, during the earlier leases installed often substantial and expensive to remove fixtures and fittings or carried out a substantial alterations. The particular lease has come to an end and following negotiations between the parties or proceedings under the 1954 Act, a new lease has been entered into for a further term. At the time of the grant of the new lease no thought was given to the question of tenant’s fixtures and fittings installed during the first lease or to the question alterations made by the tenant during the period of the first lease. The second or third successive lease then comes to an end and the tenant elects to vacate.

 What is the position then with regard to the tenant's fixtures and fittings? What is the responsibility of the tenant in relation to alterations made during one of the earlier leases?

 Fixtures and Fittings

 In terms of fixtures and fittings installed by a tenant for the purposes of its business the position is now relatively settled at least to the level of the Court of Appeal.

 Prior to 1981 the position appeared to be substantially confused and there was a substantial body of judicial comment to the effect that a tenant lost his right to remove his fixtures at the end of the original lease unless the right was expressly reserved in the new lease.

 In Leschallas v Woolf [1908] 1 Ch 641 @ 652 Mr Justice Parker commented that

 "If the tenant upon the surrender of his lease in order that a new lease may be granted makes no stipulation to the contrary, he does lose his right to remove tenant's fixtures".

 Mr Justice Scrutton held likewise in the context of surrender by operation of law. See Slough Picture Hall Co Limited v Wade (1916) 32 T.L.R. 542

 In 1920 Lord Justice Warrington in Pole-Carew v. Western Counties and General Manure Company Ltd [1920] 2 Ch 97 @ 122 said

 "I think it is clear that after a surrender of the term in the land to which tenant's fixtures are attached and the subsequent lease to the same tenant the latter can no longer remove the tenant's fixtures unless his existing right to remove them is reserved expressly or by necessary implication"

 In late 1981, however, the issue arose before the Court of Appeal chaired by Lord Denning Master of the Rolls sitting with Lord Justices Dunn and Fox in the context of determining the open market rental value of demised premises and how far the tenant's fixtures were to be included in that analysis. See New Zealand Government Property Corporation v HM & S Ltd [1982] 1 QB 1145.

 In that case based upon a large body of first instance dicta it was submitted by the landlords that a tenant who wished to retain the right to remove tenant's fixtures during a new term should expressly reserve that right in the new lease and if he did not do so then, as a matter of law, at the end of the original lease all of the tenant's fixtures accrued to the landlord and attached to the freehold.

 For the tenants it was submitted that there was no case which held that when a tenant continued in occupation after the end of an original lease he lost his right to remove his fixtures. If there was any distinction drawn on the authorities it was between a tenant who was leaving the demised premises altogether and the tenant who was staying in the premises under the auspices of a new arrangement with the landlord.

 The Court of Appeal was clearly not attracted by an argument which gave rise to fine distinctions dependent upon the circumstances in which a particular lease came to an end or which could give rise to different answers dependent upon whether or not the original lease was determined by an express surrender or by an implied surrender and whether or not the tenant vacated or remained in possession under the terms of a new lease.

 Lord Denning, giving the leading judgement began his analysis by noting that

 "It is clear law that a tenant has a right to remove "tenant’s fixtures" before the term comes to an end".

 He stated that in those circumstances there was no doubt that the tenants had a right to remove tenant's fixtures which had been added to the demised premises during the old lease and also during the statutory continuance of that lease up to the date upon which the second lease was granted and, as the court indicated, the first lease was effectively surrendered by operation of law.

 The question for the court was whether or not the right to remove the tenant's fixtures continued after that surrender by operation of law and throughout the duration of the second lease.

 Despite the weight of first instance authority the Court of Appeal held that those previous opinions were wrong. Lord Denning said the tenant remains entitled to remove the "tenant’s fixtures" so long as he remains in possession.

 He said that this had been the law and decided since 1801 in a case called Penton v Robart (1801) East 88 where the Lord Chief Justice had said at page 90

 "Here the defendant did no more than he had a right to do; he was in fact still in possession of the premises at the time the things were taken away, and therefore there is no pretence to say that he had abandoned his right to them".

 Lord Denning also referred to a later decision, Weeton v Woodcock (1840) 7 M 7 W 14, in which Baron Alderson said at page 19

 "The rule to be collected from the several cases decided on this subject seems to be this, that the tenant's right to remove the fixtures continues during his original term, and during such further period of possession by him as he holds the premises under a right still to consider himself as tenant".

 The absence of clear authority at Court of Appeal level meant that the Court could consider the point afresh and that in all circumstances, where an existing lease expires or is surrendered and is immediately followed by another lease to the same tenant remaining in possession, the tenant does not lose his right to remove the tenants fixtures and he is entitled to remove them at the end of his new tenancy.

 Lord Justice Dunn said

 "I believe the true rule of common law to be that a tenant has the right to remove tenant's fixtures so long as he is in possession as a tenant whether by holding over, or as a statutory tenant...... on an extension of a lease of business premises....”

 He went on to comment

 "If the tenant surrenders his lease and vacates the premises without removing the tenant's fixtures, then he is held to have abandoned them. But if he surrenders his lease, either expressly or by operation of law, and remains in possession under a new lease, it is a question of construction of the instrument of surrender whether or not he has also given up his right to remove his fixtures. If nothing is said, than the common law rule applies and he retains his right to remove the fixtures so long as he is in possession as a tenant".

 Lord Justice Fox gave a judgement to similar effect and said this

 "First, I can see that, if a tenant upon the determination of his lease quits the holding without removing his fixtures, he may have to be taken to have abandoned them. Secondly, if the tenant executes an express surrender of his lease or enters into an express agreement to surrender his lease, the surrender or agreement must be construed according to its terms. It may be that the document can only be construed as a disposition of the entirety of the tenant's rights in respect of the land and will, therefore, extinguishes rights thereafter to remove tenant's fixtures....... but when one comes to cases where the tenant, after the determination of his lease, remains in possession of the property under a new lease and the determination of the old lease was either by effluxion of time or surrender by operation of law, it seems to me that quite different considerations apply. I can see no sensible reason why, in the circumstances, the tenant should lose his right to remove his fixtures. The fixtures were brought in by him for the purposes of his occupation as tenant and one would suppose that (subject to any express disposition by him) his rights in respect of them would not alter so long as he continued to occupy as tenant whether under his original lease or a new lease taking effect upon the determination of the original lease. I do not believe that a person holding over as a tenant from year to year taking a renewal of his lease under a provision in the original agreement would imagine that any rights that he had to remove fixtures would be affected by the determination of the original lease. The Landlord and Tenant Act 1954 is designed to ensure security of tenure for business tenants. The Act in effect enables such tenants to obtain extensions of their leases from time to time to enable them to carry on their businesses. One would be reluctant to reach the conclusion that while tenants are secure in their tenancies they may lose their rights in respect of valuable business fixtures."

 Accordingly the position appears to be that any tenant’s fixtures or fittings which are installed by the tenant under one of a succession of leases in favour of the same tenant will not lose their status notwithstanding the fact that each successive grant of a new lease takes effect as a surrender of the old lease. In the blink of an eye between the surrender of the old term and the grant of the new term, the fixtures and fittings do not lose their status and accrue to the landlord as part of the freehold reversion but remain items which the tenant is entitled [possibly obliged] to remove subject to express provision to the contrary.

 This means, therefore, that when one is considering the position of tenants’ fixtures and fittings at the end of a second or third successive lease one must do so bearing in mind the fact that the tenants fixtures and fittings installed under an earlier lease are not only capable of being removed by the tenant but, perhaps more importantly, may well be the subject matter of an express obligation in the lease to remove them.

 A relatively standard obligation on the part of a tenant to remove tenants fixtures and fittings from the demised premises at the end of the term will, therefore, ostensibly apply to fixtures and fittings applied to the premises both during the final lease but also such fixtures and fittings as retained that status having been placed upon the demised premises by the tenant under an earlier lease.

 Assuming the absence of a positive obligation to remove tenant’s fixtures, if the tenant elects not to remove them then there is a further possibility that the repairing obligations under the lease will apply to the fixtures which have thus become part of the freehold reversion. The non-removal means that the items accrue to the landlord and the landlord can therefore expect that they should be delivered up in repair.

 In Simmons v Dresden [2004] EWHC 933 HH Judge Seymour QC held that where a tenant had left partitions, fixtures and fittings in breach of an obligation to remove them, a landlord was limited to his remedy in damages for non-removal and could not [on the wording of the covenant in question] leave them in situ and argue for their repair costs. The covenant was unusually worded and care needs to be taken to look at the lease obligations as a whole with regard to yielding up and repair (as well as the extent of the demise and whether this is expressed to include or exclude tenant’s fixtures) in order to determine what the positive leasehold obligations are with regard to removal and [assuming there is no obligation to remove them] whether the outgoing tenant is better off in any event removing the fixtures or leaving them in situ and merely ensuring that they are delivered up in repair.

 It is suggested that in the usual case where there is no express obligation to remove the fixtures and the tenant does not do so, the fixtures will accrue to the landlord, there will be no breach of any obligation with regard to yielding up because there was no positive obligation to remove which has been breached, but that the fixtures, having become part of the reversionary corpus, will nevertheless be subject to the obligation to repair upon yielding up.

 Thus the tenant may well have to factor in to his calculations the costs of removing or possibly even repairing defunct machinery and equipment. At the end of the second or third successive lease the landlord would appear to have a strong case for charging to the tenant the costs of removal.

 The Code of Practice for Commercial Leases states that the landlord's control over alterations should not be more restrictive than necessary to protect the value of the property and any neighbouring property of the landlord. At the end of the lease, tenants should not be required to reinstate unless reasonably required. The BPF and BCO model clauses incorporate an obligation in relation to reinstatement :

 “(save to the extent reasonably required in writing by the Landlord) remove and make good any alterations or additions made to the Premises during the Term, or any prior period of occupation by the Tenant or its predecessors, and reinstate the Premises in a good and workmanlike manner to the Landlord's reasonable satisfaction”

 Alterations

 So what is the position with regard to alterations?

 In this context the relevant distinction is probably between those alterations which are lawful and those which are unlawful.

 The landlord’s cause of action for breach of a covenant against alterations will be broken at the time the alterations are undertaken whereas the cause of action for a failure to reinstate [whether lawful or unlawful] alterations will accrue at the time of the failure to reinstate – which will almost always be the end of the term. In the context of alterations the lease covenants will be the most important factor to consider. Unlawful alterations may however be caught by two distinct covenants; the covenant against alterations per se and the covenant to reinstate. Thus the landlord may well find himself with 2 separate causes of action, one of which accrues much later than the other.

 A reinstatement obligation maybe conditional upon the landlord requiring reinstatement or may be absolute. The obligation may be limited to alterations carried out during the term or it may incorporate an extended obligation to reinstate alterations made during any prior term or period of the tenant’s occupation. If the obligation is extended in this way then the schedule of dilapidations following expiry of a second or third lease will properly be able to specify reinstatement obligations notwithstanding that the alterations were made under a prior lease. But in more usual circumstances where the reinstatement obligation is limited to alterations carried out “during the term”, the landlord will, at the end of the second or third lease not be able to enforce the reinstatement obligation under that lease in respect of historic alterations.

 It is suggested that the following analysis will apply in this context.

 Firstly, the tenant will be in breach of his reinstatement obligations under the first lease at the latest by the date upon which the first lease is surrendered by operation of law in favour of the grant of the second lease.

 Second, the landlord’s cause of action will probably be a specialty and therefore last for 12 years from the date of the breach.

 Thirdly, assuming that the second lease merely refers to alterations made during “the Term”, this would not ordinarily extend to alterations made during a prior lease.

 Fourthly, therefore, by the time the second lease comes to an end [depending upon its length] there may be limitation issues with regard to enforcement of that cause of action.

 Fifthly, even if the historic breach of the reinstatement obligation under the first lease is not statute barred, the tenant will inevitably argue that it would be unreasonable to award damages for that historic breach because the landlord retained a tenant paying rent in the premises as altered without any reinstatement costs having been incurred by the landlord. Whether this argument is properly categorized as a prima facie measure of damages argument or a decision based upon Ruxley and the reasonableness of expenditure for nil return is debateable.

 It would be argued that the relevant cause of action for these purposes is the one under the first lease and that the landlord cannot elide the need for reinstatement under the second lease [but the absence of a power to require it] with the obligation and breach under the first lease and thus claim damages at the end of the second or third lease referable to the cost of reinstatement at that time.

 Section 18 will not apply in terms to a claim in reinstatement and accordingly the true measure of damages is the cost incurred by the landlord in remedying the breach. The damages which flow from a breach of a reinstatement obligation should be assessed at the date of the breach and here the relevant breach occurred many years ago and gave rise to no loss to the landlord.

 Thus, on behalf of a landlord, upon successive leases it is important to ensure that the reinstatement obligation covers alterations made during the term and any prior term or period of occupation by that particular tenant.

 On behalf of the tenant it will be important to seek to limit the reinstatement obligations to those carried out during the relevant term only and to exclude any wider reinstatement obligations in the successor lease.

 STEPHEN J PRITCHETT