An increasing number of property owners and occupiers are seeking to escape from commitments that they can no longer afford. As a result, lawyers are being asked to review contracts to identify potential grounds for termination or rescission.
In Akzo Nobel UK Ltd v Arista Tubes Ltd [2009] EWHC 497 (Ch); [2009] PLSCS 99, the High Court had to decide whether a buyer was bound by an agreement to take an underlease. The parties entered into the agreement in 1998, but were unable to complete the underlease without the superior landlord’s consent.
An increasing number of property owners and occupiers are seeking to escape from commitments that they can no longer afford. As a result, lawyers are being asked to review contracts to identify potential grounds for termination or rescission. In Akzo Nobel UK Ltd v Arista Tubes Ltd [2009] EWHC 497 (Ch); [2009] PLSCS 99, the High Court had to decide whether a buyer was bound by an agreement to take an underlease. The parties entered into the agreement in 1998, but were unable to complete the underlease without the superior landlord’s consent. The buyer and seller agreed that if the requisite consent had not been obtained within 12 months either party could serve three months’ notice to terminate their obligations under the agreement. On the expiry of that notice, the buyer was required to vacate the property. The buyer served a notice to terminate the agreement in 2007. The seller obtained a licence to underlet and issued proceedings for specific performance. It claimed that the parties’ obligations remained in force until the expiry of the notice. Consequently, the seller’s obligation to use all reasonable endeavours to obtain the licence to underlet continued until the date of the expiry of the buyer’s notice – and so too did the buyer’s obligation to deliver a duly executed counterpart of the underlease. The High Court dismissed the seller’s claim that the notice provision gave the parties one last chance to complete within the confines of the notice period. The judge ruled that there was no reason to suppose that the parties had intended the notice provision to act in the same way as a notice to complete under the standard conditions of sale and decided that the notice was final. Consequently, it was no longer open to either party to require completion of the underlease. The judge was clearly unwilling to reach a conclusion that would, in his view, lead to business uncertainty. The premises were used for industrial purposes. The buyer needed time to vacate them and it was not surprising that the parties had agreed on a period of three months. Were the seller’s interpretation correct, and it could trigger completion at any time during that period, the buyer would not know where it stood until the end of the notice period. Consequently, the judge preferred to interpret the termination provision as providing a period of certainty, in which the seller could seek another tenant and the buyer could prepare to vacate. The case highlights the care required when drafting termination provisions. In particular, where a notice to terminate will take effect at a point in the future, the parties should specify which contractual obligations are to remain in force while the notice period is running, whether any new or additional obligations should arise as a result of the termination of the contract and whether the party in default can rescue the contract by rectifying the breach. Allyson Colby is a property law consultant
