2018 was an interesting year for cases involving the Landlord and Tenant Act 1954.

The recent decision of the County Court in Dukeminster Limited v. West End Investments (Cowell Group) Limited is one that has caught the attention of many property litigators, landlords and tenants. The court provided further guidance on the interpretation of the Landlord and Tenant Act 1954 (1954 Act) and, in particular, it revisited the Mannai principle. The Mannai principle is one which litigators seek to rely on time after time following the service of notices. The Dukeminster case therefore provided welcome commentary on the principle.

Background

In Dukeminster, the landlord of the property served a section 25 notice on Dukeminster Limited, whereas in fact it was Dukeminster (UG) Limited that was the tenant.

The tenant later tactically argued that the notice was defective on the grounds that it was addressed to the wrong tenant and served its own notice outlining terms for the new tenancy. The intention of the tenant was to defeat a claim for interim rent for the period between the landlord's "defective" section 25 notice and the tenant's section 26 request.

Shortly after service of its section 26 request, the tenant issued protective court proceedings in the event the landlord's notice was deemed by the court to be a valid notice.

Mannai revisited

The court followed the principles laid down by the House of Lords in Mannai,¹ which outlined that the construction of notices must be approached objectively and that the issue is how a reasonable recipient would have understood the notices taking into account the relevant objective contextual scene. Here it was relevant that the directors of Dukeminster Limited were also the directors of Dukeminster (UG) Limited and so were well positioned to know the identity of the correct tenant.

In applying Mannai, the court concluded that the omission of "(UG)" was a careless mistake rather than a deliberate attempt to coerce the tenant out of occupation of the property at minimal cost to the landlord and that a reasonable recipient would have had no reasonable doubt as to how the section 25 notice was to operate and in respect of which company.

Consequently, the court held that the landlord's section 25 notice was valid.

Terms of the lease renewal

Once the court had determined that the landlord’s section 25 notice was valid, it was then asked to consider the terms of the new lease.

The landlord wanted a 12-year term without a break, subject to upwards-only rent reviews.

The tenant wanted a five-year term and, in the event the court ordered a term of 10 years or more, it sought a five-year upwards and downwards rent review and a break clause.

The court had difficulties adopting the tenant's preference as to term because it had little evidence about what its intentions or business interests were. The court was therefore swayed by the landlord's evidence and considered 10 years to be the market norm.

The existing lease had no rent review clause, however it was clearly appropriate to include such a clause in the renewal lease. While the court acknowledged that most commercially negotiated rent review provisions were upwards only, section 34 of the 1954 Act did not give primacy to market forces in determining what type of rent review clauses should be adopted. Instead inherent fairness dictated that the new lease should contain an upwards or downwards rent review at year 5 to account for changes in either direction.

The tenant argued that a break clause was required to protect it from any future breach of quiet enjoyment caused by the well-publicised proposed redevelopment of the former United States Embassy, which was located adjacent to the building and which the tenant feared would render its use of the premises unbearable. This was described by the court as "fanciful" – alternative mechanisms, such as the Party Wall Act 1996, would seek to protect the tenant during any proposed redevelopment works. A break clause in this case was considered inappropriate.

The parties approached the calculation of the rent using different theories. The tenant's valuer approached rent by concluding the property as it stood was unlettable and therefore the only way to make the property lettable was to offer a drastic reduction in rent. The judge rejected the tenant's "distinctive approach" to valuation. Unusually it entirely favoured the landlord's evidence, which was primarily based on the "usual" approach of comparables. Surprisingly, the court agreed with the landlord's figures without any discount to take account of any of the tenant's arguments.

In summary the court ordered a 10-year term with an upwards and downwards rent review after year 5 and with no break clause. The rent was to be set at a level in line with the landlord's valuer's figures. What is so surprising about this decision is that it went so far against the terms the tenant sought.

Conclusion

It must be remembered that this is a county court decision only and it is therefore not binding authority for other cases. However, fewer 1954 Act cases are litigated to trial and therefore this fresh reminder as to how the court is likely to approach lease renewals and the frequently visited Mannai principle is welcomed.

However, litigating lease renewals to trial should be discouraged and the parties should be encouraged to take a pragmatic and commercial approach to lease renewal terms. It is critical to ensure that notices are drafted with absolute care to avoid any slip-ups and the need to rely on Mannai to save a defective notice, which can turn into a very costly exercise.

1. Mannai Investment Co. Limited v. Eagle Star Life Assurance Co. Limited [1997] AC 749 ↩