Alan Massenhove, Solicitor in Sykes Anderson LLP’s Litigation and Dispute Resolution Department discusses the implications of a recent Court of Appeal decision on the Landlord/Tenant relationship

The Proposition

In the recent Court of Appeal case of Reichman & Another -v- Beveridge & Another, what started as a simple debt collection matter was taken to the Court of Appeal to decide the preliminary issue of whether a landlord, faced with a tenant who has vacated the premises, is obliged to take action to mitigate his loss or whether he can simply sue for payment of the rent as it falls due.

The argument was advanced on the basis that normal contractual principles are increasingly being applied to leases. Cases supporting this construction from the last thirty years were cited as evidence that a lease should be regarded as a contract, even though it also creates an estate in land. This attitude is increasingly prevalent; even the Office of Fair Trading has indicated that residential leases should comply with the Unfair Terms in Consumer Contract Regulations 1999.

The Facts

The defendants had ceased trading and vacated the premises three years into a five year lease. They did not pay rent from March 2003. In January 2004 the claimant brought proceedings for rent arrears. The defendants alleged that the claimants were under a duty to mitigate their loss and that they should have forfeited the lease and re-let the premises.

The existence or otherwise of a landlord’s duty to mitigate loss in these circumstances fell to be tried as a preliminary issue. The county court held that there was no such duty and the High Court upheld this judgment. The matter went to the Court of Appeal as a second appeal. The Court of Appeal also upheld the judgment and put forward some useful guidance for landlords.

• If a tenant repudiates the lease by moving out of the premises and ceasing to perform its obligations under the lease the landlord can choose to accept the repudiation or to continue to hold the tenant liable. The landlord’s actions must not be wholly unreasonable (although it would be difficult to envisage a situation where holding the tenant to its obligations would be wholly unreasonable).

• The landlord does not have a general obligation to seek a new tenant, although it is usually open to the tenant to seek an assignee provided that the lease allows for an assignment or underletting with the consent of the landlord. There may be practical considerations to consider in this respect.

• Where a landlord terminates the lease by taking possession of the premises or otherwise doing an act inconsistent with the continuance of the tenancy, he will lose his right to the rent under the original tenancy. He cannot therefore claim damages for any reduction in the rent from a new tenant or in respect of any void periods.

It may be possible for a landlord to seek a middle ground by serving notice upon the tenant that it intends to seek a new tenant on behalf of the existing tenant. If the notice gives rise to a valid agency relationship between the landlord and the tenant, the landlord may be able to replace the tenant and maintain a claim in damages for any reduction in rent and void periods as against the existing tenant. This is risky though - landlords may wish to include an express right to serve such a notice when granting the lease to maximise their chances of upholding a successful claim for damages against the original tenant.

Conclusion

Landlords should take some comfort in the outcome of this case as it does not impose any additional burden on them. A word of caution may be necessary though; the tenant must be the party at fault in order for these principles to apply and the contractual term of the tenancy must still be current.

Landlords should not just sit back and relax though; they will need to take a commercial decision as to whether the tenant is worth suing for the rent or whether it is more cost effective to attempt to re-let the premises. It should also be noted that the landlord cannot take possession of the premises so that they will remain vacant which could lead to security and risk management problems.