Assignment Of Dilapidations Claims

This is a term that refers to the repairing liability that a lease places on the owner, or occupier of that lease. It is implicit in any lease that unless otherwise stated, each occupier must return the premises in a fully refurbished and ‘as new’ condition, often described as Category A.

Such refurbishment will typically extend to new ceilings, carpets, a full re-paint and the stripping out and making good of all additions/ alterations to a demise that are of the occupier’s doing such as meeting rooms, private offices, communications rooms, kitchens and indeed any and all other partitioning.

This is acceptable in instances where an occupier has taken possession of premises in this same Category A condition at the commencement of a lease. However, if this is not the condition of the premises at the outset of a lease, then very careful attention must be paid to the drafting of the terms and ultimately the lease at the point that they are being negotiated so as to protect the occupier from inappropriate repairing liabilities that do not match the reality of the situation.

If not dealt with properly at the outset of negotiations, occupiers will be exposing themselves to potentially crippling exit costs that will be vigorously pursued by the landlord upon expiry or earlier exit of the lease.

If disposal by sub-lease is chosen, it usually falls upon the Lessor to take care of the dilapidations at the expiry of the lease, as a properly advised incoming tenant will request a schedule of condition in order to limit their own reinstatement liability.

If disposal by assignment is the preferred path, the Assignor is usually able to pass on the responsibility of the dilapidations onto the Assignee, as detailed in the current lease.

Dilapidations are an important issue whether your business is at the stage of acquiring or of exiting an office.

If disposal by sub-lease is chosen, it usually falls upon the Lessor to take care of the dilapidations at the expiry of the lease, as a properly advised incoming tenant will request a schedule of condition in order to limit their own reinstatement liability.

If disposal by assignment is the preferred path, the Assignor is usually able to pass on the responsibility of the dilapidations onto the Assignee, as detailed in the current lease.

In the Lankester case, in 2008 the landlord had entered into a lease with the tenant of a car showroom. The tenant gave the usual covenants to pay rent and not to assign the benefit of the lease without the landlord’s consent. The lease also contained a tenant’s break clause which was personal to the tenant and could not be exercised after May 2012.

In October 2008, the tenant approached the landlord to discuss the possibility of surrendering the lease or assigning it to a company with the benefit of the break clause. The landlord made it clear that it would only consent to an assignment of the lease if the directors of the incoming company guaranteed that the company would comply with lease covenants and the break was not to be assigned. Negotiations continued for a while but no such guarantees were forthcoming.

In November 2008, the tenant vacated the premises and allowed the company to take up occupation without completing a formal assignment with the landlord. A transfer deed was prepared by solicitors acting on behalf of both the tenant and the company. The transfer was signed, but undated and held on the solicitor’s file. 

Once the company entered into occupation, it made payments to the landlord on account of rent, carried out improvements to the premises and also asked the landlord to carry out repairs.

However in February 2010, the company gave notice to the landlord of its intention to vacate the premises. The landlord sought to pursue both the tenant and the company in respect of breaches of covenant. In this regard, the landlord’s case was sought to make both the tenant and company liable and its correspondence was confused in this respect. This allowed the tenant to later argue that the landlord was prevented from claiming that the company was not a formal assignee. The company settled its liability to the landlord, but the landlord had to issue proceedings against the tenant for outstanding rent arrears.

The county court held that there had been no effective assignment of the lease from the tenant to the company. It was clear that the landlord had only been prepared to consent to the assignment subject to the provision of personal guarantees and the completion of a formal assignment. The Court held that even though the tenant allowed the company into occupation of the premises, the tenant remained liable under the lease covenants as there had been no valid assignment of the lease.

The tenant appealed to the Court of Appeal. 

The Court of Appeal dismissed the tenants appeal. In the Court’s view, it was clear that the document prepared by the tenant’s and company’s solicitor could not transfer legal title to the company. This was on the basis that registration of the transfer had not taken place. The case confirms that when registered leasehold land is transferred the registration requirements of the Land Registration Act 2002 must be satisfied in order to vest a legal estate in the new tenant. From the date of the transfer until the application for registration, the transfer operates only in equity. Therefore, in this case, the legal interest in the lease remained with the tenant.

The court also pointed out that the document prepared by the tenant’s and company’s solicitor had not been delivered as a deed to the landlord. The transfer was held by the solicitors whilst the parties negotiated several outstanding matters, including the landlord insistence on personal guarantees. 

The Court also rejected the tenant’s arguments that the landlord had made representations and/or had acted in such a way so as to now be prevented from pursuing the tenant.

The case is a useful reminder to both landlords and tenants of the effects of failing to comply with all the necessary formalities for an assignment of a lease. If the tenant wishes to ensure that it is released from the tenant’s covenants in the lease, then it must complete the assigning formalities. If it fails to do so, it will remain liable and could be pursued sometime after it has vacated the premises.

If a landlord is approached by a tenant with a proposal to assign a lease, it should make clear the terms on which it would be prepared to consent to the proposed assignment. Once those terms are set out, the landlord should not act or make representations which do not reflect those terms or confirm to the tenant that an assignment on different terms has been accepted. Dependent on covenant strength, the landlord may wish for the incoming party to be liable under the lease covenants as soon as possible.

Therefore, it will be important from the landlord’s point of view to ensure that the assignment is effectively completed. If not, he may find himself having to pursue an impecunious previous occupier.

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