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Fri 30 Nov 2018

Part 36 Offers and Unopposed Lease Renewals

Part 36 Offers and Unopposed Lease Renewals

Where a lease of commercial premises has the benefit of security of tenure, thereby continuing automatically beyond the expiry of the contractual term, if the parties cannot agree terms for the grant of a new lease then either party can serve on the other a notice terminating the tenancy and either offer to grant (in the case of the landlord) or take (in the case of a tenant) a new lease. This is known as an unopposed lease renewal.

If terms cannot be agreed, then either party may apply to the court to determine the terms of the new lease. The legislation imposes an absolute deadline for starting court proceedings which, if missed, will deprive the tenant of security of tenure, although the deadline can be extended by agreement. However, court proceedings may be started by either landlord (usually where it has reasons to accelerate the process) or the tenant (who will wish to avoid losing its security by missing the deadline). In practice, the issue of proceedings is a purely protective measure and terms are agreed between the parties without much further involvement of the court.

Unlike most other forms of litigation (where the claimant is usually the aggrieved party) the claimant in unopposed lease renewal proceedings will be whichever party is the first to make the application to court.

Parties to a court claim may make offers to settle which attract “without prejudice” privilege and therefore will not be seen by the judge deciding the case. It is possible to make an offer which is made without prejudice save as to costs (referred to as a “Calderbank” offer) which means that it is privileged and cannot be referred to, until the substantive decision has been made and the court is deciding the question of costs. Such offers are frequently made by both sides in an unopposed lease renewal which will be proceeding against the backdrop of an ongoing negotiation as to the terms of the new lease.

Under the Civil Procedure Rules, a particular type of offer may be made under Part 36 which, if it satisfies the various formal requirements, has certain fixed consequences, most notably is that whoever makes the offer (claimant or defendant), if it is accepted within 21 days (or such longer period as stipulated in the offer), the defendant must pay the claimant’s costs down to the date when the offer is accepted. However, if a defendant’s offer is not accepted and the defendant goes to trial and “beats” the offer (by securing a more advantageous outcome from the court), the defendant will be entitled to his costs of the proceedings from the end of the 21-day period . Conversely, if the claimant “beats” an offer he has made, the defendant will have to pay all of the claimant’s costs, including those costs from the expiry of the 21-day period on the indemnity basis and penal interest on those costs (at the rate of 10 per cent).

Part 36 is therefore skewed in favour of claimants. The rational is supposed to be that a claimant has had to come to court to secure a result and ought to be compensated if he has been put to needless expense.

It is the commonly held view therefore that the use of Part 36 offers in unopposed lease renewals is not appropriate since the claim is, essentially, a negotiation of the terms of a new commercial agreement where the parties usually pay their own costs and there is never usually a clear “winner”: see Reynolds & Clark, Renewal of Business Tenancies (5th Edition) at para. 15-60.

The writers recently acted for a tenant of commercial premises in unopposed lease renewal proceedings where the landlord was the claimant and made a series of Part 36 offers – Bencameron Limited v Sterling Estates Management Limited (November 2017, Oxford County Court, His Honour Thomas Corrie) the latest of which was accepted by the tenant close to trial, but the tenant nevertheless avoided the usual rule under Part 36 whereby, as defendant, it would have to pay the landlord’s (claimant’s) costs.

The Facts

Sterling Estates Management Limited (“SEM”) held a lease of office premises at Stanmore House, Stanmore, Middlesex (“Premises”) for a term of 5 years from 18 April 2016.

In March 2016, the landlord served a notice on SEM under s.25 of the 1954 Act, terminating SEM’s tenancy on 30 September 2016 and indicating that it would not oppose a claim for a new lease.

SEM contended that the s.25 notice was invalid and served its own notice requesting a new tenancy to commence on 21 March 2017. On 8 July 2016, the landlord confirmed that it agreed to proceed on the basis of SEM’s s.26 request and acknowledged that its s.25 notice was invalid.

The statutory period for bringing a claim for a new lease by 21 March 2017. Nevertheless, the landlord chose to issue its own claim for a new lease much earlier and without notice to SEM on 19 September 2016.

In its claim, the landlord sought a landlord’s break clause to be exercisable in the event that it intended to redevelop the Premises, on the second anniversary of the term of the new lease. This had not been proposed in its (invalid) s.25 notice and so came as a surprise to SEM.

The proceedings took the fairly standard course of an unopposed business lease renewal: a draft lease was passed between the parties to narrow the areas of dispute, witness evidence was produced on the disputed terms and expert valuation reports were exchanged relating to the disputed rent. The most contentious issue between the parties was whether the landlord should be permitted to have an unconditional break clause in the new lease. SEM argued that any right to break should be limited to redevelopment only.

During the course of the proceedings, a number of offers and counter-offers were made. On 10 October 2017, the landlord made an offer which was attractive to SEM and which SEM accepted on 3 November 2017. The trial of the claim was due to be heard over two days in the Oxford County Court on 22 November 2017. Save for that offer, all Part 36 offers made by the landlord referred to an unconditional right to break the lease. Conversely, all offers made by SEM offered the landlord a redevelopment break clause.

The acceptance of the offer brought the substantive “dispute” to an end but as the offer had been accepted more than 21 days after it was made, if the parties could not agree liability for the costs of the proceedings then the costs would have to be determined by the trial judge under CPR r.36.13(4)(b).

In that situation, CPR r.36.13(5) provides that the court must, unless it considers it unjust to do so, order that the claimant be awarded its costs.

SEM submitted to the trial judge that it would be unjust for it to pay the landlord’s costs of the proceedings and that the court should order that each party bears its own costs for the following reasons:

  1. it was only chance which caused the landlord rather the tenant to be claimant, with the ability to rely on the presumption as to costs in Part 36;
  2. lease renewal proceedings do not lend themselves to a “costs follow the event” order as the “event” is the grant of a new lease, which is never in dispute. Rather, the proceedings must be issued to avoid the tenant losing his security of tenure and, once issued, the proceedings impose a negotiation on the parties with the court having power to determine those terms which cannot be agreed;
  3. until 10 October 2017, had SEM accepted any of the landlord’s offers, it would have been required to agree to a general landlord’s break (rather than a break limited to redevelopment);
  4. other terms, apart from the redevelopment break (e.g. service charge cap) were also in dispute and only conceded by the landlord in its 10 October 2017 offer;
  5. the landlord’s Part 36 offer of 10 October 2017 was almost identical to a Calderbank offer by SEM of 3 October 2017, the only difference being that acceptance of the Calderbank offer would leave each party to bear its own costs, but acceptance of the landlord’s Part 36 offer within the 21-day period would automatically lead to SEM paying the landlord’s costs down to the acceptance of the offer.

 

Judgment

The Judge (HH Thomas Corrie) held, in an unreported judgment, that it would be unjust for SEM to have to pay the landlord’s costs in the circumstances of this case. He did not accept the more radical argument that as a matter of principle, it is necessarily unjust for a tenant, as defendant to a landlord’s claim for a new lease under s.24 of the Landlord and Tenant Act 1954, to be subject to the usual rule under Part 36 to pay the landlord’s costs. In this regard, the Judge acknowledged the force of the commentary at para. 15-60 of Reynolds & Clark, Renewal of Business Tenancies, where it is stated that it is inappropriate to make offers under Part 36 (as opposed to Calderbank offers which, unlike Part 36 Offers, can be made on terms that each party pays its own costs). However, rightly or wrongly, the rule-making committee has not provided any exceptions to the rigours of Part 36 for claimants and defendants to a claim for a new lease under the 1954 Act and therefore the Court must proceed on the basis that it applies in the same way in such a claim as it does in any other.

Nevertheless, when considering whether it was unjust for SEM, as defendant, to be required to pay all of the landlord’s costs of the proceedings after it accepted the landlord’s offer, the Judge acknowledged the fact that the proceedings in a 1954 Act lease renewal claim are different in nature to ordinary adversarial proceedings where the claimant has a grievance against a defendant which the court is called upon the resolve. Against that background, the Judge looked at the substance of the various offers made by the landlord during the course of the proceedings, some of which had been Calderbank offers, others made under Part 36. It was not until the offer of 10 October 2017 which SEM eventually accepted, that the landlord offered to compromise the claim on the basis of terms which included a landlord’s break clause exercisable only if the landlord intended to redevelop. Prior to the 10 October 2017 offer, all of the landlord’s offers sought an unqualified break option for the landlord (unlike the landlord’s open position in the claim in which the landlord was seeking a redevelopment break). The landlord attempted to argue that it ought to have been clear, notwithstanding the terms of all previous offers, that the landlord was prepared, in reality, to compromise on the basis of a redevelopment break only, but that Judge rejected that argument. Offers must be made in clear terms so that the recipient and its legal advisers know what he is binding himself to if the offer is accepted. It was not until shortly before trial when the landlord offered to compromise on the basis of a redevelopment break that an offer was on the table for the claimant to accept which aligned (so far as the break clause was concerned) with the landlord’s open position in the claim.

The Judge considered recent case law, including Optical Express Limited v Associated Newspapers Limited [2017] EWHC 2707 (QB), in which it is emphasised that the fact that a Judge takes the view that he Part 36 regime is itself harsh or unjust is not a reason for concluding that it would be unjust for the usual costs consequences of accepting a Part 36 Offer to apply. Nevertheless. in the peculiar context of a claim for a new lease under the 1954 Act, the Judge was prepared to conclude that the usual rule was, indeed, unjust to SEM and therefore that each party should pay its own costs down to the acceptance of the offer. Since the landlord had refused to accept that it should not have its costs of the entire proceedings and pursued the point to a final hearing and lost on that issue, the Judge awarded SEM its costs from the date of acceptance of the offer to the end of the trial.

Comment

The mismatch between unopposed lease renewal proceedings and the use of Part 36 offers is highlighted by the authors of Reynolds & Clark at paras. 15-60 to 15-61. However, the text does not go so far as to conclude that Part 36 cannot be used, for the simple reason that Part 36 of the Civil Procedure Rules does not contain any exception preventing its use in proceedings of this sort.

Nevertheless, Part 36 Offers are rarely encountered in the uncontested business lease renewal proceedings under the 1954 Act (as recognised in Reynolds & Clark at para. 10-27). This is because the rigid framework of Part 36 does not lend itself to proceedings which are not hostile, where there is no binary outcome: neither party disputes that there will be a new lease and the court is merely assisting the parties to conclude a negotiation of the terms of that lease. Whilst costs might be awarded to one party or the other at trial where there are one or two discreet terms in issue, it is unlikely that those costs would relate to the whole of the proceedings because until the parties get to a point where the principal disputed terms are all that is outstanding, the litigation better resembles a negotiating process than a process of dispute resolution.

Since the rational which underpins Part 36 is that a successful claimant is required to come to court because the defendant has wronged him in some way (by not paying him or providing some other benefit which the claimant ultimately secures at trial or by making an offer to the defendant which is accepted), the consequences of accepting or not accepting an offer under Part 36 do not sit easily with the nature of an uncontested lease renewal. It is often mere chance which party ends up being claimant. It is, perhaps, sometimes overlooked by a claimant in a lease renewal claim, that Part 36 might be capable of being used to his advantage, whether he is the landlord or the tenant.

However, the decision in Bencameron Estates Limited v Sterling Estates Management Limited shows that Judges might be prepared to use the “unjust” criterion in r.36.13(5) to avoid what would be an unjust outcome for a defendant who accepts the claimant’s offer. This approach makes purely tactical use of Part 36 in this scenario more risky. In order to bring itself within the scope of the court’s discretion to depart from the usual costs order in favour of a claimant if the claimant’s offer is accepted, it is necessary for the defendant to wait until the claimant’s 21-day period for accepting the offer has expired as in Bencameron.

A claimant who is behaving tactically would, then, have an opportunity to withdraw the offer. However, if the claimant does not do so and the defendant accepts it after the initial 21-day period, the defendant ought to be ready to argue that it would be unjust to have to pay the claimant’s costs purely because of the somewhat fortuitous circumstances that he is the defendant and the other party (whether landlord or tenant) is the claimant).

Where the defendant wishes to make an offer which the claimant might accept, the period for acceptance is outside the control of the defendant, but it might be possible to bring himself before the Court on the question of costs (rather than being saddled with the default rule of paying all of the claimant’s costs) by making an offer on all matters except interim rent (where interim rent is claimed in the proceedings) because, under r.36.13(2), the usual rule will not apply where an offer is made to settle only part of the claim.

The decision of the Circuit Judge in Bencameron does, however, show that the Court will be prepared to consider the inflexibility of Part 36 and the fact that the rigid scheme does not sit easily with the unconventional nature of the litigation in an uncontested lease renewal.

For more information, please contact Steven Ross on 020 7644 7261

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