Legal advice: Tenancies in the balance

Is the landlord-tenant relationship weighted in the landlord's favour? The Trade and Industry inquiry has put the issue under the spotlight as never before.

By Keith Miller of thePublican.com's team of legal experts from London solicitor Joelson WIlson.​

The relationship between landlord and tenant can sometimes be challenging. The Department of Trade & Industry (DTI), no stranger to interfering in the licensed trade, is seeking views on the landlord-tenant association through the Trade and Industry select committee inquiry. Below, I impartially examine some of the relevant issues.

• The lease​

The landlord always starts off with an advantage, because it will dictate the form of lease. Even in the smaller landlord companies, the estates department will want to keep its pub leases in similar form for easier management. At the upper end, the large pubcos will probably be required by their banking documents to let their premises on specified types of lease only. Apart from site-specific changes, the message delivered by the landlord's surveyors and lawyers will be that no amendments will be accepted. If the deal has been set up on this basis, the tenant's solicitor will have little scope to negotiate amendments of any substance. Even such minor matters as when the premises should be decorated will probably be non-negotiable.

Demand​

If there were no demand for their product, landlords might think twice about the form of lease on offer. There seems to be no shortage of prospective tenants willing to sign themselves up willy-nilly to pub leases and supply agreements, however. What accounts for this state of affairs? If not just foolhardy, are prospective tenants:

• Badly advised?
• Over confident in their own ability and personality?, or
• Misled (unintentionally, of course)?

Advice​

Advice to the prospective tenant is available from surveyors, lawyers, accountants and other specialist business advisers to the licensed trade.

If the tenant employs a licensed property surveyor not just to check the structural condition of the premises, but also to negotiate the rent and other features of the deal, it should be money well spent. More than purely purchasing a property, the acquisition of licensed premises is a major business venture, which will radically affect that person's life. To spend a few thousand pounds on getting advice from the right quarters can save years of misery.

As stated above, once the deal has been reduced to heads of terms, even if subject to contract, there is little opportunity to go back on major issues.

Code on commercial leases​

As discussed recently on these pages in relation to the code on leases, the rent review pattern is rarely altered from the "upwards-only" model, a practice being investigated by the government. The code does not only cover rent reviews, but many aspects of the landlord-tenant relationship both before and during the lease period. If the code is not voluntarily adopted, the government may intervene with legislation to compulsorily protect tenants' interests.

Other issues​

From the licensed property angle, these are the main points covered, and most favour the landlord - at least for the time being. Some of the following aspects may well become issues when the DTI start to investigate:

• Unfair contract terms. The Unfair Contract Terms Act 1977 does not apply to property contracts but a recent case in which the Office of Fair Trading was a party held that certain 1999 regulations and an EC directive apply to contracts relating to land. This decision has only been applied to residential tenancies so far but judges are always capable of re-interpreting the law, in which case tenants might want to challenge terms in their leases.
• Monopolies. The Beer Orders, which have now been cancelled, were intended to bring an end to the brewers' monopoly and its effect on pub tenancies. It could be argued that a new form of monopoly exists under which a major percentage of all pubs in the country are owned by two companies - Enterprise and Punch - whose tenants are tied to the landlord's contracted supplier.
• Supply agreement. Making a tenant buy from an outside supplier with which the landlord has a contractual relationship may not be what is called "bundling" in other industries, but the DTI will be looking closely into all tying arrangements. Some blanket agreements were entered into when the brewing and property arms of breweries were separated.

Perhaps the licensed trade needs its own regulator - Beeroff!

A rosy future for tenants?​

There could be developments in this sector which would artificially alter the balance of power between landlords and tenants. Although tenants would welcome this in the short term, the effect on the free market and investment in licensed property could be radically affected. Landlords may then turn away from tenancies in favour of managed houses but landlord companies which specialise in tenanted houses may see it as being in their own interests to improve relationships with tenants.

Freeholds v leaseholds​

Inevitably, if the conclusion is that leases are tilted against tenants, the question arises again why licensees enter into such arrangements rather than buying freehold freehouses. The impression from the property pages is that freeholds cost less than the equivalent residential properties, so why not buy and really be your own master? Of course you will probably need a mortgage, in which case the licensees' traditional enemy, the government, will be blamed for rising interest rates instead of the landlord for increasing rents! The answer seems to be that any decent freehold is snapped up either for management or tenancy. The leftovers are those not considered viable for either.