My apologies for not publishing this before.
MORGAN & CLARKE DECEMBER 2013 NEWSLETTER NO. 27
Pigeon House, The Broadway,
Oakridge Lynch, Stroud, Glos. GL6 7NU
Email: email@example.com Phone: 01285 719292
(Also at: London, Cardiff, Matlock, Braunton, Lewes)
We make no apologies for concentrating this month on three main features, namely dilapidations and the obligation to repair, and the recording of structural alteration works undertaken by the tenant at the tenant’s expense. We have had a number of cases recently that are depressingly similar and every single time, to the detriment of the tenant.
The start of the process is the imbalance between the experience of the two sides. On one side you have the Pubco/Brewer with a wealth of experience of similar circumstance and on the other side, you have the individual – or perhaps a husband-and-wife, or even a small corporate operation – who are solely focused on the business of running a successful public house.
It is appreciated that in every modern transaction or agreement, there is an obligation for the future lessee to openly declare whether or not they have taken professional advice. The problem is that solid professional advice rarely comes free-of-charge (although there are exceptions!) and it is understandable that adding further costs to a surprisingly cost-generative transaction of a new lease, is something that is looked at with concern. As often as not, extra professional costs are saved wherever circumstances allow.
1. Dilapidations – A Salutary Lesson (Pub name and parties’ identities omitted for obvious reasons!)
Flat roofs at the rear of a linear, terraced pub property fronting a busy high street. On either side of the front of the pub are two large retail premises and at the rear of one of them, some open land that was once used for car parking, which is now overgrown and has ivy growth substantially up the side of the rear flat roofed pub function room, which has crept in under the flat roof. At the start of the lease nobody went next door to look at the side of the building from the empty land and the new lessee was completely unaware of the ivy growth. No Schedule of Condition was taken and the lease was a standard full repairing obligation. Spin forwards five years and the ivy growth is now a major problem, having penetrated a substantial element of the flat roof over the function room.
Lessee finally notices that the flat roof is leaking like a sieve and realises that the ivy growth is a substantial reason why. They contact the next door owners who confirm that the rear land which contains the ivy growth, was sold off three years ago to some private investors who live overseas. The lessee tries to sue the original owner at substantial cost and the legal route effectively led nowhere but cost nearly £10,000.
The Pubco wake up to the situation and serve an interim Dilapidations Schedule on the lessee which, together with a number of other outstanding wants of repair, adds up to just over £50,000. The Pubco point to the repairing clause of the lease which quite clearly states that the lessee must ‘put and keep’ the building in good and substantial repair. The lessee claims that the building always had ivy growth at the side of the function room and anyway, the ivy growth was not the lessee’s responsibility and the lessee could not control its spread.
The lessee tries to mount an insurance claim for the replacement of the flat roof as a result of the ivy damage and the ease with which rainwater is now penetrating the entire structure. The insurance company send in their loss adjustor who quite rightly points out that the ivy damage pre-dated the grant of the new lease and if a claim were accepted for the complete replacement of the roof and associated structure, that would be classed as ‘betterment’ – in other words, putting the whole affair in a much better condition than when it was originally taken on. Claim dismissed.
The core issue is that there was no Schedule of Condition taken out at the start of the new lease which then would have documented the state of repair of the property that was being handed on to the new lessee. The only area of slight relief that could be offered to the lessee, was that the Pubco required that all of the electrical wiring and central heating system should be replaced completely. The lessee, however, could easily repair the central heating system rather than replace it and also could easily repair the electrical systems without, again, having to completely re-wire. Basically it is the tenant’s obligation in the absence of a Schedule Condition, to return the premises in a good and tenantable condition with the items of plant in satisfactory working order. There is no direct obligation to deliver up the premises with brand new equipment on the basis that the standard of repair is to be judged by reference to the condition of the fixtures, fittings and effects as at the date of the grant of the lease. This was recently covered in an influential recent piece of Case Law: Sun Life Europe Properties Limited –v- Tiger Aspect Holdings Ltd .
However, the outlook does appear very bleak for the lessee who is unable to sue the landlords of the property next door for having allowed the ivy growth to cause so much damage. An insurance claim has been ruled out and the Pubco is able to act under the repairing obligations of the lease as there was no initial Schedule of Condition drawn up and agreed between the parties.
There are a large number of lease renewal cases being pursued, generally because of disagreements over the rent that should apply as at the start of the new lease. Almost all of the third party referrals are now settled by Private Arbitration on Court Terms which is generally seen as a more cost-efficient and time-expedient method of resolution compared with the County Court. However, there are still one or two large, well-funded cases, marching sturdily towards the County Court. We always press for mediation as a method of resolving difficulties, as it almost always leads to a negotiated settlement. Strangely, the Pubcos and Brewers rarely offer the opportunity of mediation and would far rather see the issues settled at far greater cost in open Court. Some say they might be trying to ‘cash starve’ the tenant into settlement pre Court hearing. This often happens.
Mediation is a system of genuine give-and-take in that each side will probably, in the fullness of the day’s haggling, concede much more than they had originally intended, to broker a settlement which can be signed there and then. We always start off mediation hearings on the day by telling the Client “you will not necessarily like the outcome, but you will have achieved certainty and the outcome is a huge cost-saving”.
The two opposing sides have a ‘face-to-face’ airing of views as the first steps in the process. Both parties then retire to their respective conference rooms and the mediator, in effect, shuttles between the two rooms exchanging direct views over factual and non-factual issues. Generally each side will have a Solicitor present and indeed sometimes a Barrister, and will certainly have their own valuation experts. Sometimes the experts meet separately and independently of the parties to try to the narrow the issues which is always helpful.
Strengths and weaknesses are openly aired and it is almost like a game of poker as to who blinks first and concedes the most to gain a formal written settlement.
In our considered view, it is essential that the offer for mediation should be made as early as possible, which forces the other side to have to respond positively.
There was a recent reported item of Case Law in the Court of Appeal which confirmed that failure to respond to an invitation to mediate, may well be penalised in the issue of final costs, even if the party that turned down the mediation is ultimately successful when the whole affair proceeds to the County Court. The Judgement underlines the enthusiasm which the Judiciary has for mediation as a positive means of resolving disputes out of the formality of a prolonged Court hearing. The decision was PGFIISA -v- OMFS Company 1 Limited .
It should be recognised that not every single mediation is successful – if one of the parties comes to the process with no intention whatsoever of negotiating, but just to posture and bully. This can also be supported by hostility and total aggression which thankfully is rarely encountered with pub disputes.
Pub disputes are slightly special in that it is recognised that there is an ongoing trading relationship between the Pubco and the lessee and the process of mediation can sometimes save – and even re-structure – that relationship which might have been founded either on a ‘misunderstanding’ or a personality clash that can be resolved by the member of the Pubco’s retail staff being assigned to other outlets.
If push comes to shove, mediation is infinitely preferable to marching off to the County Court.
3. Structural Works
If we could have a pound coin for every time that we have a case where structural works have not been documented, we would all be very rich people! There have been a spread of recent rent review and lease renewal cases where the Pubco / Brewer has had full knowledge of sometimes quite extensive structural works, have had planning application forms served on them and have even suggested that they as the freeholders would undertake the relevant work, and had the works themselves costed. However, in every single instance, the freeholder never offered to document the whole affair with a standard Licence of Alteration.
Then the rent review comes along and either the extensive structural works are ‘forgotten’, or if the issue is raised, it is batted away with the mantra of ‘it hasn’t been formally documented as required under the terms of the lease’.
Generally, rent review disregards will confirm that the effect on rent of structural works being undertaken by the tenant at the tenant’s expense, should be ignored from the rent review process. That being the case, it is in the freeholder’s interest to conveniently forget this sometimes quite substantial disregard and proceed on the basis that all of the structural works that were undertaken at the tenant’s expense, are included in the assessment of Fair Maintainable Trade.
The way out of this situation, which we propose in every single instance of its happening, is the application for a retrospective Licence of Alteration which cannot reasonably refused. Indeed, if the works themselves are not massive, we have had a number of instances – certainly with Enterprise Inns – where there has been the grant of a Small Works Agreement, generally in letter form, which helpfully regularises the situation. However, not all Regional Managers even know that the facility of a Small Works Agreement exists.
4. Economic Forecast
Salutary thoughts from the Office of National Statistics who published their latest Report on the 3rd December 2013.
Working households have seen their incomes fall 6.4% since 2007, set against the income of pensioners which has risen more than 5% in the same period. By contrast, tax credits for lower paid families have been cut and child benefit has been frozen and removed altogether from higher earners.
Stagnating wages have hit families hardest with the following thoughts from Gavin Kelly, Chief Executive of the Resolution Foundation:
“Since the financial crisis, wages have risen by between zero and 1.5% while inflation has risen by between 2% and 5%. This means for most people, their wages have fallen a long way behind.
He then said that lower earners with a couple of children, have fared particularly badly with the changes in personal tax allowance outweighed by cuts to tax credits and benefits to families. The biggest losers are those under 30 and in work. Their incomes have fallen by about 12% since 2009 according to the Resolution Foundation.
John Hawksworth, Chief Economist of Price Waterhouse Cooper said that “we are returning to the growth rates common in the 1950’s and 1960’s. In general, we will have to live within our means. It’s a return to the 50’s and 60’s ‘make-do-and-mend’ with consumers becoming much more price-conscious”.
However, the length of time that consumers will have to tighten their belts has really shocked experts. It is considered that consumers will face being saddled with austerity until 2030 with rising housing, energy and food costs eating into squeezed household budgets. Economic forecasts, if right, suggest that consumers will be left with the longest hangover in history after bingeing on debt-fuelled spending in the 20 years leading up to the financial crisis which most agree kicked off in the autumn of 2008. There is a direct effect on the discretionary leisure spend in the On-licensed trade, particularly with sensitive high pricing as a result of supply ties.
We know it is somewhat doom and gloom. However, it does place into proper perspective the outlook of one independent expert valuer acting for a Pubco in a recent disputed rent review, when he declared that: “relatively the economy has recovered and the outlook is now far more positive”.
But less of the dry stuff, Christmas is almost upon us and we wish you all the very best for the Festive Season and for a, hopefully, financially viable 2014.
5. And Finally
“I drink champagne when I’m happy and when I’m sad. Sometimes I drink it when I’m on my own. When I have company I consider it obligatory. I trifle with it when I’m not hungry and I drink it when I am, I never touch it – unless I’m thirsty” (Lily Bollinger)
“Don’t put any ice in my drink. Takes up far too much room”. (Groucho Marks)
“I have a theory. Beer makes you smarter. It made Bud Weiser”. (Bill Mather)
Best wishes from the Team at M & C
Phone: 01285 719292