Supreme Court ruling highlights need to treat property alterations licence as separate to lease, says expert

Out-Law News | 08 May 2014 | 5:19 pm | 2 min. read

A licence permitting a commercial property tenant to make alterations to that property was a separate contract to the underlying sub-lease, meaning that the terms of the sub-lease were not automatically incorporated in the licence, the UK's Supreme Court has ruled.

Giving a rare judgment on a Scottish property case, the UK's highest court said that a term of the sub-lease requiring notices, consents and approvals to be given in writing did not automatically extend to the licence. This meant that the landlord, Batley, did not have to give tenant North Lanarkshire Council written notice of its requirement that alterations carried out under the licence had to be removed at the end of the sub-lease, the judge said.

Property law expert Richard Linton of Pinsent Masons, the law firm behind Out-Law.com, said that the decision underlined the importance of getting things down in writing, whether strictly required by the contract or not.

"North Lanarkshire Council may feel aggrieved at the decision but, as the court held, if it wanted more formal clarification on whether the landlord wanted the alternations removed, it could have asked," he said. "Equally, the landlord could have avoided the time and cost if the court action if it had documented the request more formally. Whether or not the lease requires the request in writing it is far better - evidentially - to put it in writing."

Batley was the mid-landlord of sublet premises on an industrial estate in Cumbernauld, near Glasgow. North Lanarkshire Council was the subtenant. Under the terms of the sub-lease, any alterations to the property required the prior written consent of the mid-landlord. In this case, the permission was given in 1998 the form of a 'minute of agreement', also known as a licence for alterations.

In his judgment, Lord Hodge found that this agreement was supplemental, and did not amount in law to a variation of the sub-lease. This was despite the fact that the agreement contained a clause which said that all "undertakings and obligations on the part of the sub-tenant ... shall be deemed to be incorporated in the sub-lease" and an additional clause that said that the sub-lease was ratified "except in so far as amended hereby".

"It appears that in [the minute of agreement] the parties stated expressly when a communication had to be in writing and when more informal communication was permitted," he said.

"It is also relevant to see the minute of agreement in its context as a document required by [the sub-lease]: the mid-landlord's consent to the sub-tenant's works. The minute of agreement exists in the context of the head lease and the sub-lease, both of which are part of the factual matrix. But it is a separate contract and, as I have said, the starting point in the words which it contains. Those words point towards the conclusion that writing was not required for communications in all circumstances," he said.

"I think this decision is right," said property law expert Richard Linton. "Landlords and tenants often say in licences for alterations that they ratify the lease as amended, but this is superfluous. The licence does not amend the lease - it's just a document which is collateral to the lease. Whilst this may come as a surprise to some it does emphasise the need to treat these documents as stand-alone contracts, and that means paying attention to the interpretation clause."

Batley said that it had instructed a chartered surveyor to inform a named official at the Council orally of the need to restate the premises to their original condition. Lord Hodge said that this intimation was perfectly valid as "a sub-tenant that conscientiously addresses its mind to its obligations ... to keep the sub-let premises in repair could readily respond to an intimation by the mid-landlord or its surveyor that it include the removal of the licensed works in the works it carried out at the end of the sub-lease". "If in doubt, it could ask the mid-landlord," he said.

Litigation expert Steven Blane of Pinsent Masons said that the type of repairing obligation contained in the lease was common enough to Scottish commercial leases to make the decision one of "general public importance".

"This was a rare opportunity for the Supreme Court to consider what is a very commonly used type of clause," he said.