The High Court of Justice (Chancery Division) gave judgment in the
case of Lunar Office SARL v Warborough Investments Limited on Friday 13
January 2017 in the trial of a preliminary issue.
The trial was in relation to the true construction of an alienation
covenant (“the Covenant”) in a 99 year commercial lease dated 1980 (“the
Lease”), the Court placing weight on the literal meaning of words in
the Lease. While the court held that neither side was “obviously right
or obviously wrong”, when reading the language used in the Lease, if the
parties intended for the Lease to operate in a certain way, they could
and should have drafted it with words to that effect.
The facts in Lunar Office SARL v Warborough Investments Limited
This case concerned premises comprising four self-contained shops
with offices above. The freehold owner of the premises is Warborough
Investments Limited (“the Defendant”) and the long leaseholder tenant
(with a 67 year revisionary interest) is Lunar Office SARL (“the
Claimant”).
The Lease contained the following Covenant:
“(a) Not at any time during the term hereby granted to
assign part only of the demised premises and not at any time during the
said term to assign this Lease without the previous consent in writing
of the Lessor which consent shall not be unreasonably withheld
(b) Not at any time during the term hereby granted to
underlet or part with possession of the whole or any part of the demised
premises other than by written underlease which shall not be in respect
of less than complete floors or shop units for terms of not less than
10 years and at such rent or rents and upon such terms generally
(including provision for the periodic review of rent at five yearly
intervals) as shall accord with the principles of good estate management
and with the duty (which is hereby imposed specifically upon the
Lessee) of managing the demised premises to the best commercial
advantage of the parties hereto
(c) Not at any time during the said term without the
consent in writing of the Lessor first obtained such consent not to be
unreasonably withheld to grant an Underlease or Undertenancy of any part
of the demised premises except at a rent which shall represent the best
rent reasonably obtainable for the premises concerned as between a
willing lessor and a willing lessee
(d) Not at any time during the said term on the granting of any such Underlease or Undertenancy take a fine or premium”
On 9 August 2011, the previous tenant under the Lease granted an
underlease of part of a floor of the premises to a company called the
Turner Agency Limited for a term of ten years (“the Underlease”). It was
not disputed that the Underlease was for part of a floor.
The Defendant argued that the Underlease was granted in breach of the
Covenant and without the prior knowledge or consent of the Defendant.
The Claimant contended the Underlease was granted in accordance with the
terms of the Lease.
On 5 February 2016 the Defendant served on the Claimant a notice
pursuant to section 146 of the Law of Property Act 1925 (“the Notice”)
specifying a breach of paragraph (b) of the Covenant. In response to the
Notice, the Claimant commenced the proceedings for declaratory relief
as to the proper construction of the Covenant.
The Claimant’s pleaded case
The Claimant argued that paragraph (b) and paragraph (c) of the
Covenant ought to be read separately, and as a result, where an
underlease is prohibited by paragraph (b), it can still be granted
pursuant to paragraph (c). The Claimant submitted that while the
Underlease was not granted in compliance with the requirements of
paragraph (b), it was granted pursuant to paragraph (c) as no consent
was required for the Underlease under section 19 (1) (b) of the Landlord and Tenant Act 1927.
The Defendant’s pleaded case
The Defendant argued that paragraph (b) and paragraph (c) of the
Covenant ought to be read together, and any underlease must comply with
both paragraphs of the Covenant, with the Defendant refusing consent to
grant the Underlease.
The trial
The preliminary issue to be decided was whether paragraph (b) and (c)
of the Covenant are separate conditions or whether they are to be read
together.
The High Court held that the Claimant’s construction of the Lease was
correct. The Court held it is clear that the Covenant as a whole has
two entirely separate subjects: paragraph (a) deals with assignment and
paragraphs (b) to (d) deal with underletting. While paragraph (d) is
linked to both (b) and (c), that does not mean both (b) and (c) are
linked to each other. When coming to its conclusion, the court placed
weight on language used in each paragraph and relied on the fact that:
- There are no words which link paragraph (b) to paragraph (c). This
is not fatal, but in reading both paragraphs it is clear that there are
two separate covenants against sub-letting, with different conditions
and exceptions; - There are no words that indicate the two exceptions are to be read as cumulative;
- The parties chose to separate these exceptions into two paragraphs;
- If the paragraphs were to be read together, the Claimant (or any
future lessee) could not enter any new underlease in the final ten years
of the term; and - It is difficult to see why the parties would set out detailed
conditions for underletting and also impose an additional obligation to
obtain consent elsewhere.
The High Court also considered the commercial common sense of the
Covenant and held that it was highly unlikely that the parties would
have sought to impose on the lessee such inflexible and circumscribed
conditions on underletting. The court reached this conclusion as:
- There is no good commercial rationale to explain why the Claimant
would not be able to underlet at all in the final 10 years of the Lease;
and - The commercial purpose of reading paragraph (b) and (c) separately
achieves a balance between the Claimant’s flexibility to underlet, and
the Defendant’s long-term protection from being faced with a patchwork
of underleases. Reading the paragraphs cumulatively tilts the power
disproportionately and unjustifiably in favour of the Defendant.
Commentary
The High Court has provided additional certainty for parties to a
Lease to ensure that all clauses and covenants are drafted in such a way
to give effect to the intention of both parties. As the court noted
here, if the parties intended for the Covenant to be read in such a way,
they should have expressly specified this in the Lease.
For further information, please contact the Real Estate Disputes Team at Hamlins.