Hold on to your dreams

The litigation in Dreams Ltd v Pavilion Property Trustees Ltd [2020] EWHC 1169 (Ch); [2020] PLSCS 93 arose as a result of arrangements put in place when a retailer was bought out of administration. The retailer’s assets included a lease of premises in Margate, which did not expire until 2031. However, the buyer, Dreams, entered into an agreement with the landlord shortening the term, supplemented by a further agreement enabling it to serve six months’ notice requiring the landlord to accept a surrender of the lease five years earlier, on 25 April 2019. On receipt of such notice, the landlord sent Dreams a priced schedule of dilapidations. But some of the work identified in the schedule remained undone on 25 April 2019 and the landlord refused to complete the surrender until it was paid £102,699 plus VAT to cover the cost of the work, claiming that it was “a condition of completion that the tenant is to pay any money due on completion”. Dreams sought specific performance of the agreement and the court was asked to consider two preliminary issues. Unliquidated damages Dreams claimed that the money was not “due”. It argued that the contract contemplated a simple process for determining the amount payable on completion and contrasted the rents and service charges payable under the lease, which were readily ascertainable, with the landlord’s claim for damages for items of disrepair. The court accepted that, for the contract to work properly, the amount of “money due” must be identifiable on completion, and that the landlord’s claim for damages for breach of the repairing covenants lacked this feature. Dilapidations claims usually take time to resolve and, given that items of disrepair can accumulate until a lease ends, it was very unlikely that the parties would have made completion conditional on the payment of an uncrystallised sum, which could only be ascertained after the lease had ended.  The judge was not persuaded by the effect of a provision in the prescribed form of surrender attached to the parties’ agreement providing for the absolute release of the tenant’s liabilities under the lease on completion. Arnold v Britton [2015] UKSC 36; [2015] EGLR 53 confirmed that it is not the function of the court to rewrite bargains that may appear to be unwise, or to construct a reasonable contract for the parties through interpretation. And, although his interpretation of the words “money due” meant that Dreams would be relieved from liability for the items of disrepair on completion of the surrender, the judge explained that he must construe the contract made by the parties.  The judge acknowledged that the result might appear surprising, given that Dreams would have been liable to repair had the lease run its length. However, those were the terms “hammered out on the anvil of commercial negotiation”. The landlord had made rent concessions when the lease was assigned to Dreams, and may have agreed to include the release in the agreed form of surrender because it did not want an empty property. Vacant possession The parties had agreed that vacant possession would be given on completion, and the landlord complained that this was not available because Dreams should have removed its trade fixtures, fittings and belongings before the lease ended. However, the premises still contained a mezzanine floor and lift.  For the purposes of the application, the parties asked the judge to assume that vacant possession had not been given. Their question was: could the landlord be compelled to accept the surrender anyway? In other words, was vacant possession a condition precedent of the obligation to complete, even though the parties’ agreement did not expressly say so? Or could the court make specific performance conditional on the landlord being compensated for the tenant’s failure to comply with its contractual obligation?  The judge ruled that a seller in default of its obligation to provide vacant possession cannot insist on completion, citing Lambeth London Borough Council v Lexadon (unreported, 14 June 2000) and Cook v Taylor [1942] 1 Ch 349, subject to one possible qualification. A court might be prepared to grant specific performance, subject to the payment of compensation, if the deficiency in performance is small and immaterial (although that was not the case here).  The parties had deliberately structured their agreement as a contract for the transfer of an estate, incorporating the standard commercial property conditions. The bargain involved the transfer of the premises with vacant possession – in return for the acceptance of the surrender and the release of all liabilities under the lease. And these could properly be regarded as conditional obligations, with one being needed to earn performance of the other.  Points to consider The judge noted that this was not a break clause. It was a contract to convey land and, because time is not of the essence until the service of a notice to complete, failure to provide vacant possession did not put paid to the tenant’s rights under the agreement immediately. It is worth adding that the judge suggested that an agreement which curtails the length of a lease takes effect in law as a surrender and re-grant – although it was not one of the triggers recognised by the Court of Appeal in Friends Provident Life Office v British Railways Board [1995] 2 EGLR 55. The suggestion will reignite debate on this topic, at a time when landlords and tenants are reviewing – and perhaps renegotiating – property liabilities in the light of the coronavirus pandemic.  Key points Payment for dilapidations was not a condition of completion of an agreement for the surrender of a lease The provision of vacant possession on completion was a condition of completion, even though the agreement did not expressly say so Allyson Colby is a property law consultant