Warborough Investments Ltd v Lunar Office SARL

Landlord and tenant – Commercial lease – Alienation covenant – Appellant freeholder serving notice on respondent leaseholder under section 146 of Law of Property Act 1925 on grounds of breach of alienation covenant – Respondent applying for relief – Preliminary issue arising as to true construction of covenant – Court ruling in favour of respondent – Whether judge erring in law – Appeal allowed The appellant was the freehold owner of premises at 12-20 Denmark Street, Wokingham which comprised four self-contained shops with offices above and two office blocks, over three floors, with a car park to the rear. It had acquired the premises in 2007 subject to a head lease dated 16 April 1980 for a term of 99 years from 25 March 1980. The respondent company was the current lessee by assignment and was registered as the owner of the lease on 4 April 2014. Clause 4(21) of the head lease contained an alienation covenant: … “(a) Not at any time during the term hereby granted to assign part only of the demised premises and not … to assign this lease without the previous consent in writing of the lessor … not to be unreasonably withheld; (b) … 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 the terms generally … as shall 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; (c) … grant an underlease or undertenancy of any part of the demised premises except at the … best rent reasonably obtainable for the premises concerned as between a willing lessor and a willing lessee; (d) … take a fine or premium”. The respondent’s predecessor had granted an underlease of part of the premises for ten years. The appellant contended that the underlease was granted without its prior knowledge or consent and served a notice on the respondent pursuant to section 146 of the Law of Property Act 1925, specifying a breach of paragraph (b) of the covenant because the premises demised comprised only part of the first floor of one of the office blocks. In response, the respondent commenced proceedings, giving rise to a preliminary issue as to whether the grant of the underlease constituted a breach of clause 4(21)((b). The central issue was whether clauses 4(21)(b) and (c) took effect as separate covenants in the sense that, even if an underletting was not of a whole floor or shop unit and was for a term of less than ten years, it would still be lawful if the conditions in clause 4(21)(c) were met or whether they were cumulative in their effect so that a breach by the tenant of clause 4(21)(b) was a breach of covenant regardless of whether the tenant was or was not also in breach of clause 4(21)(c). The judge ruled in favour of the respondent: see [2017] EWHC 19 (Ch); [2017] PLSCS 8. The appellant appealed. Held: The appeal was allowed. (1) Having recognised that there was no evidence of any relevant background circumstances beyond what was apparent from the headlease itself and having declined to take judicial notice of what the assumptions, practices and expectations of those letting commercial property in the 1980s might have been, the judge had allowed his own views of what would have been a sensible commercial regime to control subletting to prevail over what the parties had actually said and agreed. While commercial common sense was an important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appeared to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation was to identify what the parties had agreed, not what the court thought they should have agreed. It was not unknown for people to enter into arrangements which were ill-advised, and it was not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract, a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party: Arnold v Britton [2015] UKSC 36; [2015] EGLR 53 applied. (2) Clause 4(21) contained an example of the kind of torrential drafting which was not uncommon in commercial leases of this kind. It comprised four sub-clauses none of which contained any express link to the others save for sub-clause (d) which referred to “such underlease” in the context of prohibiting the taking of a fine or premium. The clause contained four separate or individual covenants by the tenant not to assign or underlet except upon certain terms and conditions. Both sub-clauses (a) and (b) contained absolute covenants (respectively) against the assignment of part of the premises or the underletting of the whole or part of the premises except upon certain terms. It was not suggested that there was anything unclear about the internal language used in sub-clause (b) and it was equally clear that the underlease as granted was a breach of that covenant by the respondent’s predecessor in title if one read sub-clause (b) in isolation. There was nothing to justify a departure from the plain language of clause 4(21). The judge’s construction of the phrase “any part of the demised premises” involved a misreading of clause 4(21)(b) and required one to give different meanings to identical words in successive subclauses of the headlease when there was nothing in the terms of the headlease itself or the surrounding circumstances to justify doing so. Edwin Johnson QC (instructed by Rex Cowell Solicitors, of Gravesend) appeared for the appellant; David Holland QC (instructed by Hamlins LLP) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Warborough Investments Ltd v Lunar Office SARL.