There is no doubt in my mind that Professor Richard Susskind OBE is right when he says that: "the legal marketplace, in my view, is in the middle of a period of unprecedented upheaval". Two of the main factors he cites as driving change are:
clients are demanding more, whilst seeking to reduce their legal costs, at a time when there seems to be more law and regulation than ever before. Reportedly, in-house legal teams are predicted to reduce their legal spend by 30 to 50 per cent over the next three to five years; and
technological advances continue at an incredible pace. Susskind argues that: "technology and the internet are fundamentally changing all corners of our society and there is no reason to think they will have less impact on the legal world which, after all, is so highly document and information intensive".
Providing legal services to the real estate sector is not exempt from these trends and it may be tempting (against a backdrop of streamlining processes, speeding up transaction times and reducing costs) to focus too much on "getting the deal done" at the expense of getting the documentation right. Such an approach is dangerous and runs the risk of simply postponing problems and costs to a later date. After all, a substantial proportion of legal disputes between commercial parties centre on the meaning of written contracts made expressly between them.
As we start 2016, property professionals would be well advised to remind themselves of good drafting practice and brush up on the basics of contract law underpinning real estate transactions. Tempting though it may be, do not leave it to the court to "fill in the gaps" if and when a dispute arises. The following Supreme Court decisions delivered in 2015 (less than six months apart) remind us that parties to a contract cannot rely upon the courts to re-write a bad bargain:
In the M&S case, the Supreme Court, finding for the landlord, refused to imply into a break clause a term that would entitle M&S to a refund of rent and other sums that they paid in advance in accordance with the express terms of the lease. This was despite "a strong case for the implied term" being "powerfully argued" on behalf of M&S and despite the fact that the break clause "could be said to work rather unfairly without the implied term". The commercial result was that M&S could not get back around £1.1m in rent and other charges after exercising a break clause in the lease of its former head office premises at The Point, Paddington.
In the Arnold case, despite the commercially detrimental consequences for the tenants, the court emphasised that the "purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed". In that case, the tenants of 25 holiday chalets near Swansea were left potentially facing escalating service charges which could rise from £90 per annum when the leases were initially granted to £1m per year by the time their leases come to an end in 2072.
As both Supreme Court decisions illustrate, the court may not read a contract in a way that does commercial justice to the situation or so that it is fair to the parties. Courts may, in fact, adopt the "Ronseal" approach to interpretation and decide that the contract means exactly what it says. As Moore-Bick LJ put it "… it is no part of the court’s function in the guise of interpretation to remake the parties’ contract in a way that seems to improve its operation or mitigate unfortunate consequences for one or other party" (see PST Energy 7 Shipping LLC v OW Bunker Malta Ltd  EWCA Civ 1058).
It goes without saying that getting the drafting right is paramount. Here are some practical tips:
A final thought on the M&S decision. Without doubt, we will see more tenants insisting upon a landlord’s covenant to refund payments made in advance, but which relate to the period falling after the lease ends (whether that be as a result of a break or for some other reason). The Model Commercial Leases include such a clause as standard (see cl. 5.3). However, do not be a slave to the precedent. Check with your client regarding their internal procedures for dealing with refunds and make sure that the lease drafting reflects the commercial reality. How long does it normally take the client to process a refund? A refund within two weeks (as suggested by the Model Commercial Lease) seems reasonable, but larger landlords may struggle to make repayments within that period. One client we discussed this with, said it could take up to three months.
This article was published in Landlord and Tenant Review in January 2016.