24 December 2012 #Commercial Real Estate
It is not unusual for leases to contain an obligation on the landlord to manage the property “in accordance with the principles of good estate management” which seems to mean little more than “well”. It may indicate that the company managing the property should have regard to issues of more than just its own profit but the phrase does not include or refer to any objective standards and there are certainly no “principles” published by the Royal Institution of Chartered Surveyors or any other body.
The expression is generally thought to be so vague as to be practically meaningless, but landlords should be aware that an obligation of this nature was enforced by the grant of an injunction in 2006 in Capita Trust Co (Channel Islands) Limited v Chatham Maritime J3 Developments Limited.
This case showed that a party can be forced to grant a lease (by injunction) against its own wishes, if that is what is needed to comply with an obligation to observe “the principles of good estate management”.
In this case, Chatham Maritime held a headlease of a large shopping centre and covenanted with its landlord, Capita Trust, that it would operate the development as a factory outlet would use all reasonable endeavours to keep every unit continuously let and would observe the principles of “good estate management” with all units being let on standard leases.
Unfortunately, the shopping centre was not the success that had been anticipated. The headlease contained a break clause (exercisable by either party) and the landlord was worried that the tenant would shortly exercise its break. If that happened, then all of the occupational underleases would automatically end. The landlord would have found it very difficult to find replacement occupiers for the centre. To try and prevent this, the landlord negotiated for Marks & Spencer to take a unit in the development, with the idea being that it would be a “magnet” for visitors to the centre and encourage other prospective occupiers to take leases.
The headlessee refused to grant the necessary sublease to the magnet tenant unless their landlord paid them £2.6m for giving up their break clause.
The landlord applied for a mandatory injunction against the headlessee and succeeded. In the court’s view, the headlessee’s refusal to grant the underlease to the magnet tenant was a clear breach of the management obligations to manage the centre in accordance with the principles of good estate management. The fact that the proposed sublease to the magnet tenant would not be exactly the same as all the other subleases did not mean that there was a breach of the “standard leases” clause and accordingly a mandatory injunction was appropriate.
This decision gives an additional weapon to tenants but does this mean that “good estate management” obligations now have any force?
In the circumstances, there was no need to look too closely into the meaning of “the principles of good estate management”, and what a court might decide the expression means in any future case remains a matter for conjecture.
The case does at least illustrate that the obligation has some degree of effectiveness but it is likely that the court will be very cautious about allowing this to develop any further.