Co-operative Bank plc v Hayes Freehold Ltd (in liquidation) and others

Landlord and tenant – Surrender of lease – Commercial premises – Defendants purporting to surrender superior lease and underlease of commercial premises – Claimant lender seeking relief as to validity and effect of surrender – Second defendant issuing Part 20 claim for declaration that deed of surrender of no effect or void –Whether deed containing implied condition precedent that first defendant had power to accept surrender of superior lease – Whether second defendant establishing implied fraudulent misrepresentation – Whether surrender of underlease and release of guarantor being void for mistake – Whether rescindable on ground of unjust enrichment – Part 20 claim dismissed The claimant lender sought relief in relation to the validity and effect of a purported deed of surrender of commercial premises known as the Digiplex Megaplex Centre at Brookfields, Beaconsfield Road, Hayes, which had been entered into between the four defendants. A superior lease had been granted by the first defendant freeholder to the second defendant out of the freehold mortgaged to the claimant. The mortgage prohibited surrender of the lease without the claimant’s consent. An underlease was granted to the third defendant subject to the same restriction with the fourth defendant acting as guarantor. A deed dated 6 August 2015, entered into by the second, third and fourth defendants, purported to effect a surrender of the headlease and underlease, and a release of the fourth defendant from its guarantee. Clause 6 of the deed provided: “The Landlord hereby unconditionally and irrevocably releases the Tenant and the Tenant’s guarantor … from all the … obligations of the Lease”. However, the claimant failed to give its required consent, the surrender of the headlease was not effective and the second defendant was not released from its liability to pay the head rent. The second defendant’s solicitors acknowledged professional negligence in failing to search the freehold title prior to the execution of the deed. The second defendant issued a Part 20 claim against the third and fourth defendants for a declaration that the deed of surrender was of no effect or was void and for further declaratory relief. The only active defendants to the underlying claim were the second and fourth defendants. The only active defendant to the Part 20 claim was the fourth defendant. The first and third defendants were in liquidation and did not take part in the proceedings. The second defendant contended that if the surrender of the superior lease was void and ineffective, so was the surrender of the underlease and the release of the fourth defendant from its guarantee. It argued that: (i) the deed contained an implied condition precedent that the first defendant had the power to accept a surrender of the superior lease; (ii) the approval of the draft deed by the first and third defendants constituted an implied fraudulent representation that they had power to accept the surrender of the headlease and underlease; (iii) the deed was executed under a unilateral or mutual mistake that the first defendant had the power to accept a surrender of the superior lease so that the surrender of the underlease, and the release of the fourth defendant guarantor, were void for mistake; and (iv) the deed could be rescinded on the ground that the fourth defendant had been unjustly enriched. Held: The Part 20 claim was dismissed. (1) Clause 6 of the deed plainly meant that the fourth defendant was released unconditionally and irrevocably from its obligations under the guarantee. The implication of a condition precedent would contradict the express term of the contract. It would require the clause to be rewritten so that the release of the guarantee became conditional on the effective surrender of the headlease. The implication of such a condition precedent was not necessary to give the deed business efficacy or commercial coherence, nor was its implication so obvious that it went without saying that the parties did not intend the deed to take effect if the first defendant did not have the power to accept the surrender of the headlease. In circumstances where the parties knew that the second defendant, as a sophisticated organisation, was represented by commercial solicitors, the implication of the condition sought was neither so obvious that it would have gone without saying, nor required to give the transaction commercial coherence. A reasonable person might well conclude that it was for the second defendant, as the party seeking to obtain the benefit of the surrender of the headlease, to ensure that it was open to the first defendant to accept such surrender. That was why it had instructed solicitors. The judge in an earlier application for summary judgment had rightly assumed that the second defendant’s pleaded case as to knowledge was correct: Co-operative Bank plc v Hayes Freehold Ltd [2016] EWHC 2068 (Ch). But the present court had not accepted its case. Although the judge rightly concluded that its case was arguable, that did not mean its arguments were correct: Marks & Spencer plc v BNP Paribas Securities Servies Trust CO (Jersey) Ltd [2015] UKSC 72 followed; Associated Japanese Bank (International) Ltd v Credit du Nord SA [10989] 1 WLR 225 considered. (2) On the facts, it could not be said that there had been any implied fraudulent misrepresentation. Neither an email dated 8 April 2015, nor the accompanying draft deed, constituted a statement of fact on which the second defendant was intended and entitled to rely. The deed contained the approval of the first and third defendants to the proposed transaction and was put forward on the basis that it would be reviewed and checked by the second defendant’s lawyers prior to approval. A reasonable person would have concluded that the second defendant was undertaking the necessary checks to satisfy itself that the transaction would give effect to its requirements: Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2011] 1 Lloyd’s Prep 123 applied. (3) The second defendant was not entitled to rescind the deed for unilateral mistake. The deed could not be characterised as a voluntary disposition. The second defendant accepted the surrender of the underlease and in return obtained release from its covenants as landlord under the underlease. That did not amount to a gift or voluntary disposition. If that conclusion was wrong, the court had not concluded that the actions of the second defendant or of any of the individuals concerned had been careless. The reason for instructing a solicitor, specifically to ensure that the deed would be effective to achieve the aims of the second defendant, had been to guard against the risk that the surrender of the deed might be ineffective to achieve its aims. That risk materialised and its remedy was against the party responsible for addressing that risk, namely the solicitor. Whilst the consequences of the mistake were serious, they were mitigated by the availability of an alternative remedy. Furthermore, the second defendant had not shown that the mistake it made caused it to execute the deed: Pitt v Holt [2013] UKSC 26 followed. (4) The second defendant was not entitled to rescind the deed for mutual mistake. The evidence did not establish that the parties each had a positive belief that the first defendant had the power to accept the surrender of the headlease. The correct construction of the deed was that it allocated the risk that the surrender of the headlease might be ineffective to the second defendant and contractual performance was not rendered impossible by any mistake made in respect of the surrender of the headlease. (5) It was not unjust to release the guarantee in circumstances where the parties had expressly agreed to do so. The doctrine of unjust enrichment could not be used to relieve a party of the consequences of the bargain it had made: Swynson Ltd v Lowick Rose LLP [2017] 2 WLR 1161 followed. Jonathan Gaunt QC and Mark Sefton (instructed by Forsters LLP) appeared for the second defendant; Ben Valentin QC and Gary Cowen (instructed by White & Case LLP) appeared for the fourth defendant. Click here to read transcript: Co-operative Bank plc v Hayes Freehold Ltd (in liquidation) and others Eileen O’Grady, barrister