Commercial property disputes can arise for any number of different reasons. There tends to be a substantially larger number of people leasing commercial property then you find with occupiers in the residential sector. This is down to the purpose of commercial property in that most of the time is a facilitator for business rather than the business itself.
Because there are more people leasing in the commercial sector it tends to provide a greater chance of conflict between someone who is paying a substantial rent for a shop or office and the owner of the property, the landlords. Landlords of commercial properties may end up in a commercial property dispute with their tenants when they either want to renew a lease of commercial premises or, alternatively, want to oppose a renewal lease because they have redevelopment plans for the property.
Commercial Property Lease Disputes
Commercial property lease disputes may occur at the point of the initial negotiation of the lease, during the active term or on termination. There are several key points where disputes are most likely to occur.
Interpretation of lease terms is always a flash point for disputes. This is why a lot of time and effort goes into drafting leases in as clear a fashion as possible. Lease disputes can arise because a lease clause is open to being interpreted in different ways by either side, often is a way that favours their own interests.
Wording of a clause can sometime lead to ambiguity and this can be exacerbated where a similar lease has been used for a number of tenants who have interpreted it in similar ways, that the landlord considers are breaches, or where multiple interpretations of the same lease term have been made.
There may be disputes over break clauses, rent reviews, use of premises, service charges, renewal of the lease or failures in carrying out of repairs (tenant or landlord), payment of rent, assignment, sub-letting or alterations or use of the premises.
To try and regulate the points as which disputes may occur, the Landlord and Tenant Act 1954 sets out clear procedures for lease renewals and situations where there are disagreements between landlord and tenant. There are very clear procedures to be followed that involve serving notice and potentially issuing Court proceedings.
Sometimes a tenant fails to pay their rent. In recent months this has been a very common occurrence as the pandemic has had a dire impact on many business incomes. Obviously, a landlord will be eager to recover the arrears. Disputes have become more complex as emergency legislation enacted to protect tenants’ rights during the pandemic has made options for landlords very limited. This effectively means that commercial property disputes over rent or service charge payments are frozen in many cases, only to probably reignite once we emerge from the present Covid-19 situation.
An example of a commercial property lease dispute would be where a tenant is in breach of the terms of the existing lease. The landlord may then want to forfeit the lease by serving a section 146 notice and Court proceedings. Other areas that can cause disputes are where tenants apply for Relief from Forfeiture applications. If the landlord gets the procedure wrong and has waived their right to forfeit the lease it could potentially allow the tenant to bring a damages claim against the landlord.
A related area and one that has, like non-payment of rent, been increasingly common during the Covid-pandemic is tenant insolvency. Disputes can between landlord and tenant may arise if there is a guarantee in place and a request for an overriding lease is received.
Dilapidations & Repair of Commercial Property
Another area for commercial property landlords to become embroiled in a dispute with is in relation to the repair of commercial property.
Dilapidations claims are a well-known source of disputes. At the end of a lease there are certain requirements for tenants to return the property to the state in which it was taken (though individual terms can vary widely in this area). Tenants can get taken by surprise by the full cost impact and requirements involved with complying with this if they have not analysed their lease properly. Disputes are often settled by a third party adviser negotiating a settlement.
Commercial property disputes are also common during the term of a lease where either the landlord or the tenant does not keep the property in question in good repair. There are remedies available to ensure that commercial premises are kept in good condition.
Commercial property lease disputes can arise when tenants have breached the terms (covenants) of their lease, whether that be around use of the premises, opening hours, noise/pollution or a myriad of other possible breaches. Landlords of commercial properties have many options available to them to remedy the breach and ensure compliance with the terms of the lease. A commercial property lawyer will be able to advise on this area.
Covenants are a common source of disputes between landlords and tenants. Covenants are usually in writing and contained in the lease. Covenants generally dictate how parties to a lease must or must not act. The effect of covenants can be coercive or preventative and will afford a benefit to one party whilst being detrimental to another.
Disputes arise where one or other party to a lease fails to comply with a covenant, for example, to pay rent, to insure, to keep premises in repair, not to alter premises or to assign etc.
Some breaches of covenant are considered to be continuing breaches and others are seen as “once and for all” breaches.
Break notices are a common feature of most leases. They can be tenant, landlord or mutual. As with the procedures at the end of a lease, there is potential for disputes if the preparing and serving of a break notice if not undertaken correctly. Failure to effectively serve a break notice means that the lease will continue and can have obvious significant consequences for one or other side.
Commercial property landlords are usually required to have to give consent for a range of matters contained within a lease. Some of these may be basic, such as signage changes or decorative issues but others may be more significant in terms of dealing with use of the premises or assigning the property lease to a third party. There are clear legal guidelines over what a landlord can refuse and where applications are badly handled or decisions over consent that are then challenged, then a dispute can arise quickly.
Rent review procedures are infamous for raising commercial property disputes as they can have a profound effect on the tenants cashflow and profitability. Rent review procedures vary and some rent reviews have precise triggers that involve serving notices at the correct time and in the correct manner. Rent review evidence can be challenged and can involve third parties in the process. Disputes over rent reviews are fairly fundamental and, of course, tenants will challenge rent review evidence they believe does not suit the current economic or trading conditions or where they have alternative evidence of comparable rents in the vicinity.
Disputes can occur if a landlord wishes to re-develop a property if it is not done in the correct manner. For example, if you are considering making a disposal of your interest in a commercial building that also contains residential flats, then by law you must offer it to the tenants before offering it on the open market.
If you are a landlord or a tenant and have a commercial property issue contact rhw’s commercial property team for advice on how they can help you.