Most commercial leases prevent the tenant from assigning, underletting, or parting with or sharing possession or occupation of its premises without the landlord’s consent. Warborough Investments Ltd v Lunar Office SARL [2018] EWCA Civ 427; [2018] PLSCS 50 concerned the alienation provisions in a 99 year lease of premises comprising four self-contained shops with offices above them, and two further office blocks in the courtyard at the rear. The lease prohibited underlettings of parts that did not comprise complete floors or shop units. It was also a condition that underlettings of the whole, or parts, were to be for terms of at least 10 years. Furthermore, the rents and covenants were to “accord with the principles of good estate management and with the duty of managing the demised premises to the best commercial advantage of the parties hereto”.
A separate provision prohibited the tenant from underletting any part without the landlord’s consent except at a rent that represented the best rent reasonably obtainable for the premises. The question was: were these provisions cumulative? Or were they free-standing requirements?
The judge at first instance had found in favour of the tenant. He ruled that, if the initial conditions were not satisfied, it remained possible for the tenant to underlet if it complied with the alternative conditions that governed underletting of part. In the judge’s view, it was highly unlikely that the parties would have imposed such heavily circumscribed and inflexible cumulative conditions on underletting in a long investment lease. For example, there was no good commercial reason to prohibit underletting in the last 10 years of the term (which was the effect of the condition that underleases should be for a minimum of 10 years).
The Court of Appeal has reversed the decision. Lord Justice Patten, who spoke for the court, cited Arnold v Britton [2015] AC 1619 in which the Supreme Court warned of the danger of approaching the construction of a document with pre-conceived ideas about what the parties, acting commercially, are likely to have intended, and allowing those ideas to subvert the clear language of the document. In the court’s view, the judge at first instance had allowed his own views of what would have been a sensible commercial regime controlling subletting to prevail over what the parties had actually said and agreed.
The tenant had interpreted one of the alienation provisions as qualifying the other, even though there was no express link between them. And the absence of such a link pointed away from the tenant’s construction, rather than in favour of it. Furthermore, if the tenant’s interpretation were correct, the tenant would be able to avoid the restraints on subletting simply by granting an underlease at the best rent reasonably obtainable and could respond to any refusal of consent by the landlord by contending that it was unreasonable.
In the Court of Appeal’s view, the provisions were not alternatives. They comprised a series of cumulative negative covenants and all of them needed to be complied with according to their terms.
Allyson Colby, property law consultant
