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O’May in the 21st Century

Landlords sometimes acquire properties with old fashioned leases that contain an overly restrictive user clause, such as prohibiting the tenant from using the premises for anything other than a "pharmacy”, "garage" or "green grocer" and so on.

If this is the case there is a serious issue for landlords on rent review and also when such leases are renewed under the landlord and Tenant Act 1954 ("the Act"). Restrictive user clauses reduce the tenant’s prospects of ever assigning the lease, accordingly this increases the tenant’s risk and therefore this depresses the rent a "willing tenant" would be prepared to pay on review.

Lease renewal under the Act can offer an opportunity for parties to refresh the terms of a lease. A landlord faced with a restrictive user clause may want to relax the terms of the lease in terms of use, or change the rent review mechanism. However the Act does not accept such changes if the sole reason is to increase the rent.

Where parties are unable to agree on the terms of the renewed lease, the Court has the power to decide the new terms under Section 35 of the Act, which states:

"The terms of a tenancy granted by order of the court under this Part of this Act (other than terms as to the duration thereof and as to the rent payable thereunder) shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court; and in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances."

Taken at face value, it appears that the Court may be able to make changes to the lease in question on the landlords terms. Notwithstanding this, if the landlord simply wants to achieve a higher rental this will not succeed.

When attempting to relax a restrictive use clause, one must look to the case of Charles Clements (London) Ltd v Rank City Wall Ltd (1978). Here the landlord wished to alter the lease by inserting the words "such consent not to be unreasonably withheld" after "without the landlord’s previous consent in writing." This would represent a relaxation of the use clause, and likely lead to an increase of rent when looking to the hypothetical new lease. The Court decided that any restrictive use clause will not be relaxed by the Court, where the main purpose is to increase the rent.

This can have the effect where the clause is restrictive of driving rent down, with little recourse for any landlord to make changes in order to maintain rental value. It also ignores any potential benefits to the tenant. Where a use clause is made less restrictive, it gives the tenant the option to change or alter the business they carry on in the premises. Should the lease no longer be needed, the tenant will also be more able to assign the lease to another party. These abilities may also have potential benefits to any landlord in ensuring that the premises remain attractive and so protecting their interest.

Any changes under Section 35 of the Act will also be subject to the principles laid down in O'May v City of London Real Property Co Ltd [1982] ("O’May"). O’May laid down the following guidelines for the Court to follow when determining the terms of a lease, having regard at all times for the terms of the existing lease:

  • Those proposing a change of the terms of the lease which has not been agreed must show good reason for doing so having regard to fairness between the two parties.
  • Should the Court allow the change, would the other party be compensated adequately, taking into account the positive and negative impacts on both parties?
  • The main purpose of the Act at inception was deemed to be to provide security of tenure for a tenant, and so protect its ability to operate its business on the premises in question. As such the Court will have regard to any potential impact on the ability of the parties to do as such.
  • The change must be deemed fair and reasonable, when taking into account the surrounding circumstances including market conditions.

Following from this it appears that the Court will have regard to what is seen as the purpose of the Act: to protect the tenant and his business. Since the Act came into force, the balance of power between landlord and tenants has in many cases changed. As such it seems time that we go back to the question of reasonableness as to whether any change should be made, rather than focusing on the supposed purpose of the Act to protect the tenant’s interests no matter the potential cost to the landlord.

After thirty years these principles have been subject to very few changes due to little in the way of case law. The Act and the principles that have flown from it were very much products of their time, and to many appear to remain tenant focused. Times have, however, changed, and in many circumstances the relevant bargaining positions of the parties involved have also changed. As such, is it time for the principles to move into the 21st Century?

When returning to the Act itself, the Court "in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances." This does not appear to restrict the ability of the landlord to change the lease. As long as the change is fair and reasonable, which seems to be the key principle coming out of O’May, why should the landlord not be able to propose a change of use, and so protect his own interest?

There may have been some recent movement in the way the Court treats the principles of O’May, in the case of Edwards & Walkden (Norfolk) Ltd v The Mayor and Commonalty and Citizens of the City of London [2012]. Here the Court, having regard to the commercial arrangements of other tenants within the market area, allowed a change of the terms of the lease to separate the payment of rent and service charges, rather than continuing with the previous lease which dealt with the sums on an all-inclusive basis. 

Whether this will have any impact for a landlord in the above situation however, is still not clear. By its very nature the case dealt with a very specific area of the lease with a focus on modernising the leases and ensuring that they where in line with other leases, and did not go as far as to dismantle the longstanding principles of O’May.

The landlord’s position might change where it can be clearly shown that there are good reasons to relax the user clause in the renewed lease. Where it can be shown that a landlord isn’t just motivated by raising the rent and that there are other sound reasons for the change this should be properly considered. One likely circumstance would be to align a particular lease with other leases within a shopping centre so that there is uniformity with how each of the retail units are managed and controlled.

We expect that there will be some movement in this area in the coming years.

For more information please contact Peter Levaggi, Partner

T: +44 (0)845 359 0025