Andrew Baines
Posted on 18 Jun 2018

Restructuring rent arrears: The risks of an oral agreement

If a tenant agrees with the landlord to restructure rent payments, whether in arrears or not, the agreement must be documented properly.  The judgement of the Supreme Court in Rock Advertising Limited v MWB Business Exchange Centres Limited on 16 May 2018 is a salutary lesson to the former occupier of serviced offices.  The landlord, in effect, forfeited the licence for occupation when the occupier fell into arrears of monthly payments and did not accept (as the occupier believed it had) a proposal to restructure the arrears and ongoing payments. 

The case

The case concerned an occupational licence.  This is a less secure form of occupation than a lease or tenancy, but the consequences are the same in the case of business premises. This is because a landlord will invariably retain the ability to forfeit or 'peaceably re-enter' in the event of a breach of agreement by the tenant.  This is typically done by changing the locks when the tenant is absent. 

The Rock Advertising case involved a licence in which one of the terms was a "no oral modification" ("NOM") clause:

"This Licence sets out all of the terms agreed between MWB and the Licensee.  No other representation or term shall apply or form part of this Licence.  All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."

The problem for Rock Advertising was that their restructuring proposal was not set out in writing.  Representatives of Rock Advertising believed that they had agreed a restructuring with a representative of MWB and this gave rise to a number of arguments, which are commonly deployed in situations where one party wants to try and circumvent a written contract, or achieve some other objective in the absence of any written contract.  These strategies usually include (in typical descending order of prospects of success): misrepresentation, an implied term, a collateral contract, and estoppel. 

These disputes often occur because parties sign standard form written agreements without one or both parties truly understanding what the written agreement says.  The common complaint when events depart from those imagined by the written agreement is that one party alleges that the other assured it of an alternative agreement.  Sometimes such claims are successful, but they almost invariably require considerable analysis of the facts; an expensive legal process in which to become involved. 

Supreme Court decision

The outcome in Rock Advertising might seem unsurprising given that the alleged agreed variation was not put in writing, but that did not stop the parties arguing vigorously.  The majority of the Supreme Court agreed that there was no implied term that the NOM clause could not be overridden by an oral agreement to do so, or that there was a collateral agreement to that effect.  It was possible that an estoppel (detrimental reliance on an alternative assurance) might have saved them, but there was insufficient evidence to support the criteria for such a plea.

Lessons from this case

This case applies not just to the situation in which rent arrears are restructured; it could equally apply to any other variation of the contract agreed between the parties, where a NOM clause is included.

The lesson, as ever, is to read the lease or contract at the outset and where possible renegotiate any unacceptable terms before the contract is completed. If this is not possible, or if it becomes necessary to renegotiate terms during the term of the lease or licence, the deal struck or any amended conditions should be properly documented and the original contract varied, so that they form part of an enforceable legal agreement between the parties.

For more information please contact Andrew Baines, Partner and Head of the Property Litigation team on Andrew.Baines@michelmores.com or +44(0)117 906 9336.