Tiffany Investments Ltd. & Anor v Bircham & Co Nominees (No 2) Ltd. & Ors

By a lease dated 22nd August 1979 (“the Lease”) the predecessors in title of first and second defendants (“the Lessors”) demised No. 1 Thurloe Close, South Kensington, London, SW7 (“the Property”) to J.G. Hemingway for a term of 47 years, 4 months and 3 days from the date thereof at a rent of £40 per annum. That was a long lease at a low rent for the purposes of Part I of the Landlord and Tenant Act 1954 so that if and as long as the tenant was an individual and in occupation of the Property he would enjoy the protection afforded by the Rent Act. Clause 2(9) contained a covenant against assignment. Clause 5 conferred a right of pre-emption on the lessor if at any time during the term the Lessee should wish to dispose of the Lease.

On 20th October 1983 the term was assigned by Mr Hemingway to the third and fourth defendants, Mr and Mrs Bailie (“the Bailies”), who were registered as proprietors thereof on 7th November 1983. The Bailies moved into the Property on about 6th January 1984. By an agreement dated 8th August 1986 (“the 1986 Agreement”) the Bailies agreed, in the circumstances therein stated, to sell the Lease to the first claimant Tiffany Investments Ltd (“Tiffany”) for £250,000. The Bailies did not then first offer to sell the same to the lessor whether pursuant to clause 5 of the Lease or otherwise but the 1986 Agreement was never completed by the registration of an assignment of the Lease to Tiffany. The Bailies moved out of the Property in December 1986 or January 1987 with the consequence that the protection afforded by Landlord and Tenant Act 1954 Part I then ceased.

On 16th March 1999 by a series of agreements, to which I shall refer collectively as “the 1999 Agreement” Tiffany agreed to sell the Lease, described as held by the Bailies in trust for Tiffany, to the second appellant Ms Coral Chantry (“Ms Chantry”) for £475,000. On the same day solicitors for the Bailies sought the consent of the Lessors to an assignment of the Lease to Ms Chantry and gave notice under clause 5 of the Lease of their wish to dispose of the Property for £475,000. By a letter dated 31st March 1999 from their agents the Lessors declined to exercise their right of pre-emption but failed to respond to the request for consent to an assignment to Ms Chantry.

On 19th December 2001 the Lessors instituted proceedings against the Bailies for specific performance of the right of pre-emption claimed to have arisen in consequence of the sale of the Lease to Tiffany under the 1986 Agreement. Those proceedings were compromised by an agreement (“the 2002 Agreement”) made on 8th February 2002 between the Lessors and the Bailies whereby the Bailies were to give notice under clause 5 of the Lease offering to sell the same to the Lessors for £250,000. Such offer was made and accepted by the Lessors. In addition there was an order in Tomlin form which required the Bailies forthwith to assign the Lease to the Lessors. The consideration for that assignment of £250,000 was to be put into an account with the Lessors’ solicitors pending the resolution of any claims made by Tiffany or Ms Chantry.

These proceedings were commenced by Tiffany and Ms Chantry on 13th March 2002. They claimed that the Bailies held the Lease in trust for Tiffany, that Tiffany had agreed to sell the same to Ms Chantry for £475,000 and that the Lessors were unreasonably withholding their consent to an assignment of the Lease by the Bailies to Ms Chantry. By their defence and counterclaim against both claimants and the Bailies the Lessors contended that the events of 1986 gave rise to an option pursuant to clause 5 of the Lease entitling the Lessors to buy the Lease for £250,000 in priority to any rights of Tiffany or Ms Chantry under either the 1986 Agreement or the 1999 Agreement. In those circumstances they claimed that Tiffany was not entitled to assign the Lease to Ms Chantry so that the question whether the Lessors have unreasonably withheld their consent does not arise. They do not dispute that if the question does arise then their consent has been unreasonably withheld. The Lessors claimed declarations that they were entitled to be registered as proprietors of the Lease and that Tiffany and Ms Chantry had no interest in it. By their reply and defence to counterclaim Tiffany and Ms Chantry contended that clause 5 of the Lease did not in the events which had happened operate to confer any option on the Lessors to acquire the Lease both because of the terms of clause 5 and the provisions of s.17 Landlord and Tenant Act 1954 to the effect that the provisions of Part I of that Act are to have effect notwithstanding any agreement to the contrary.

The claim and counterclaim came before Lindsay J. He concluded that (i) clause 5 imposed an obligation on the Bailies to offer to sell the Lease to the Lessors immediately before the conclusion of the contract to sell it made by the Bailies with Tiffany on 8th August 1986, (ii) that obligation was not affected by s.17 Landlord and Tenant Act 1954, so that (iii) on 8th August 1986 an equitable interest in the Lease became vested in the Lessors by reason of the failure of the Bailies to perform that obligation and (iv) that interest has priority over any interest of Tiffany or Ms Chantry. Accordingly he made the declarations sought by the Lessors.

This is the appeal of Tiffany and Ms Chantry brought with the permission of Lindsay J. A respondent’s notice has been served by the Lessors raising for the consideration of this court the same issues relating to s.17 Landlord and Tenant Act 1954 as were before Lindsay J. Accordingly the broad issues we have to determine may be summarised as follows:

The relevant provisions of the Lease are contained in clauses 2(9)(iii) and 5. So far as material they provide:

The 1986 Agreement was not a straightforward contract for the sale of a lease. The Bailies were defined as the vendors and Tiffany as the purchaser. It was recited that the Vendors “have in mind to agree with the Purchaser for the sale” of the Lease in the form of the contract for sale annexed thereto “which the Vendors and the Purchaser have signed for the purposes of identification”. It was further recited that Tiffany had requested the Bailies to seek to secure the enfranchisement of the Lease pursuant to the Leasehold Reform Act 1967 which the Bailies had agreed to do “subject to the terms and conditions hereinafter set forth.” By clauses 1 to 3 the Bailies agreed to use their best endeavours to enfranchise the Lease by serving the requisite notice after their entitlement to make such application arose “namely after 6th October 1986”. They agreed to continue to live in the Property. Tiffany agreed to pay the Bailies the costs of the enfranchisement.

Clause 4 provided

By clause 5 Tiffany agreed to pay to the Bailies the deposit of £25,000 referred to in the annexed form of contract for sale and the balance of the purchase price, namely £225,000, on 1st September 1986. By clause 6 the Bailies agreed to discharge all mortgages affecting the Property on 1st September 1986. The annexed form of contract for sale was in the standard form incorporating the National Conditions of Sale 20th Edition. The completion date was left blank. Special condition G provided that the Bailies would on completion assign to Tiffany the benefit of any notice served by them on their Landlord pursuant to the provisions of the Leasehold Enfranchisement Act 1967. General Condition 11(5) provided that the sale was subject to the reversioners’ licence being obtained but if the vendor could not obtain it he might rescind the contract.

As Lindsay J recorded in paragraph 11 of his judgment:

Before turning to the judge’s conclusions it is convenient to refer to the decisions of this Court in Pritchard v Briggs [1980] 1 Ch.338 and of Sir Richard Scott V-C and of this Court in Bircham & Co Nominees Ltd v Worrell [2001] EWCA Civ 775; (2001) 82 P&CR 427.

In Pritchard v Briggs a conveyance executed in 1944 conferred on the purchasers a right of pre-emption in respect of the vendors’ retained land. In 1959 the successors in title of the vendors let the retained land to the plaintiff with an option to buy the freehold reversion. In 1972 the retained land was sold to the defendants in purported compliance with the right of pre-emption. A year later the plaintiff purported to exercise his option and claimed to be entitled to the retained land in priority to the defendants. Walton J dismissed the claim. The plaintiffs appeal was allowed. The Court held that the grant of the right of pre-emption in 1944 did not confer on the purchaser an interest in land and the grant of the option did not trigger the right of pre-emption.

Templeman and Stephenson LJJ also considered that the grantee of the right of pre-emption had a right to call for a conveyance of the land if the conditions on which the right is exercisable are fulfilled. It is this last conclusion on which, in Bircham & Co Nominees Ltd v Worrell, Worrell and, in the instant case, the Lessors rely. At page 418 Templeman LJ said

In Bircham & Co Nominees Ltd v Worrell [2001] EWCA Civ 775; (2001) 82 P&CR 427 Worrell was the lessee under a lease granted in 1984. Clause 5 in that case was in the same form as clause 5 in this. Worrell informed the agents for the Lessors that it had received an acceptable offer for the property and asked if the lessors wished to exercise their right of pre-emption. 21 days thereafter the solicitors for the lessors replied to the effect that the lessors did wish to exercise the right of pre-emption and purported to accept the offer said to be contained in the earlier letter of £1.7m to include curtains, carpets and kitchen fittings and with vacant possession on completion. When the time for completion came Worrell contended that there was no contract for sale to the lessors because the original letter did not constitute an offer capable of acceptance, the response of the lessors solicitors did not amount to an unconditional acceptance and, in any event, the provisions of s.2 Law of Property (Miscellaneous Provisions) Act 1989 were not satisfied. There was no transaction effected by Worrell which could have amounted to a disposal of the Lease to a third party.

At trial it was conceded that the original letter did constitute an offer capable of acceptance. Sir Richard Scott V-C concluded that the response was not an unconditional acceptance, because of the addition of the curtains, carpets and kitchen fittings, but a counter-offer which had been subsequently accepted by conduct. He held that a contract so formed did not comply with s.2 Law of Property (Miscellaneous Provisions) Act 1989 and dismissed the claim. The lessors appealed on the grounds that the requirements of s.2 did not apply to the right of pre-emption and in the events which had happened they were entitled to an equitable interest in the lease arising from the failure of Worrell to perform its obligations under clause 5 of the lease. The appeal failed. Because there had been no disposal by Worrell to a third party and the original offer could be withdrawn at any time before acceptance no equitable interest could arise before either of those events and neither had occurred. In any event the provisions of s.2 had not been satisfied.

The claim to an equitable interest in the property arising from the failure of the tenant to perform his obligations under clause 5 was founded in that case, as in this, on the majority decision of this court in Pritchard v Briggs [1980] 1 Ch. 338 to which I have already referred. Sir Richard Scott V-C rejected it on the ground that clause 5 did not impose a positive obligation but a negative obligation not to dispose of the leasehold interest to anyone else without having first offered to sell it to the lessors. Chadwick LJ summarised the basis on which Sir Richard Scott rejected this part of the claim in the following terms (p.434):

Chadwick LJ considered (pp. 434-436) the obligation imposed by clause 5 at some length. First he considered that there were three features of the clause which were clear. They are that (i) the clause imposes a restriction on such right as the lessee would otherwise have to dispose of the lease, (ii) it is for the lessee alone to fix the price and decide whether the assignment should be subject to any and if so which incumbrances and (iii) the only obligation to assign the lease is on the terms of the offer made by the lessee and accepted by the lessor. He then considered two further features which he described as rather less clear, namely whether there is any positive obligation upon the lessee to make an offer to sell to the lessors and if so when that obligation arises and whether the offer once made could be withdrawn.

With regard to the first of those features Sir Richard Scott held that

Chadwick LJ then observed that on the other point the Vice-Chancellor had held that there was no obligation to keep an offer open so that it could be withdrawn at any time before acceptance so long as the lessee did not then seek to dispose of the lease to a third party. He agreed with that conclusion too. After considering the majority decision in Pritchard v Briggs and the decision of Vinelott J in Kling v Keston Properties Ltd (1983) 40 P&CR 212 he held (p.440):

Chadwick LJ concluded that the appeal should be dismissed in any event because there was no contract to satisfy the requirements of s.2 Law of Property (Miscellaneous Provisions) Act 1989 and any option which might have arisen on Worrell’s failure to observe the terms of clause 5 had not been exercised. It is not clear to what extent the other members of the court agreed with the analysis and conclusions of Chadwick LJ. Sir Christopher Staughton agreed that the appeal must be dismissed on the ground that there was no contract and added (page 444):

In paragraphs 28, 29 and 31 of his judgment Lindsay J set out the argument of Tiffany and Ms Chantry to the effect that clause 5 imposed no positive obligation on the lessee to offer anything to the lessor on the formation of the wish to dispose and that there could be no breach of clause 5 on a contract to dispose of the Lease but only on the actual assignment to a third party. In paragraph 31 he recorded the counter-argument of the Lessors to the effect that clause 5 imposed a positive obligation which arises when the lessee forms a settled wish to dispose of the Lease and is clearly manifested immediately before and by the execution of a contract to sell to a third party.

Lindsay J accepted the argument of counsel for the Lessors. In paragraph 32 he said:

Lindsay J then considered the judgments in Bircham & Co Nominees Ltd v Worrell, concluded that they clearly supported the argument of counsel for the Lessors and accepted his construction of clause 5. He considered the judgments of Templeman and Stephenson LJJ in Pritchard v Briggs and of Chadwick LJ in Bircham & Co Nominees Ltd v Worrell and held that (para 36) the failure of the Bailies in August 1986 to offer to sell the lease to the Lessors for £250,000 gave rise to the creation of an equitable interest in the Lease in favour of the Lessors. In paragraph 37 he added:

Tiffany and Ms Chantry (“the Appellants”) contend that the judge was wrong. They submit that (i) clause 5 did not impose any positive obligation on the Bailies, but that if it did (ii) there was no breach of that obligation because there was no assignment by the Bailies to a third party, so that (iii) no equitable interest in the Lease vested in the Lessors.

I will deal with the questions of interpretation inherent in the first two submissions first. Counsel for the appellants rely on a number of aspects of the clause. First, they submit, the use of the word “shall” does not necessarily denote a positive obligation. They give as an example a provision that “if the lessee wishes to assign the lease he shall first seek the landlord’s written consent”. They submit that such a provision does not cast any positive obligation on the lessee to seek such consent. They contend that the opening words of clause 5 are similar. They rely on the judgment of Chadwick LJ in Bircham & Co Nominees Ltd v Worrell at paras 16, 19 and 23 in which they suggest Chadwick LJ reached the same conclusion. Second, they argue that if the opening words give rise to a positive obligation then the draftsman would have used the words “forthwith” rather than “first” and “intend” rather than “wish”.

I do not accept these submissions. It is true that what appears to be a positive obligation may in its context be no more than the formulation of a condition precedent. In the example given the purpose of the provision is to enable the landlord to veto the proposed transaction. There is no need to impose on the tenant a positive obligation enforceable by the lessor. But in the case of a right of pre-emption that is not so. The making of an offer is essential to the right conferred because without it the landlord is unable to compel the tenant to give effect to it. In some rights of pre-emption the offer may be contained in the agreement conferring the right as, for example, a conditional option; but if it is not then a positive obligation to make an offer is essential to the right conferred. I do not find the use of the words “first” and “wish” significant either. No doubt if the words “forthwith” and “intend” had been used instead the positive aspect of the obligation would have appeared the more clearly, but their absence does not dictate a conclusion that the obligation has no positive aspect.

Further I do not accept that the judgment of Chadwick LJ can be read in the sense for which counsel for the Appellants contended. In Bircham & Co Nominees Ltd v Worrell the lessee had not disposed of the lease to a third party. Accordingly it was still open to him to give effect to the right of pre-emption if he later formed the wish to dispose. But, as Chadwick LJ recognised in paragraph 23 of his judgment, once he forms the relevant wish then a positive obligation does arise immediately before entering into a binding contract to sell. This leads in to the other point of construction, namely the point of time at which the obligation is to be performed. Counsel for the Appellants contended that the Vice-Chancellor and Chadwick LJ were wrong to identify the instant before entering into a binding contract to sell rather than the final disposition of the legal estate by assignment as the time by which the obligation is to be performed. They contended that such views were obiter only and that Lindsay J was wrong to arrive at the same conclusion in paragraph 37 of his judgment.

The Appellants contend that the disposal referred to must be the assignment of the lease for that is the end of the period beginning with the formation of the wish by which the offer to the lessor is to be made. They contended that this consequence is demonstrated by cases on the statutory right of pre-emption conferred by Land Clauses (Consolidation) Act 1845 such as Carington v Wycombe Railway Co. (1868) 3 Ch App. 377 and LSW Railway v Blackmore (1870) 4 App. Cas. 610 and by my own decision in Butts Park Ventures (Coventry) Ltd v Bryant Homes Central Ltd [2003] EWHC 2487 Ch.

I do not accept that submission either. The relevant time must depend on the proper interpretation of the language by which the right is conferred. Clause 5 draws a clear distinction between a disposition and an assignment. The obligation arises “if....the Lessee shall wish to dispose of the term” not “if...the Lessee shall wish to assign the term”. The reference to “dispose” is to be contrasted with the eight subsequent references in clause 5 alone to an assignment, assignee or assign. No doubt “dispose” includes “assign” but I can see no reason why it should be limited to “assign”. Further, as Lindsay J pointed out, if the relevant point of time is immediately prior to the execution of an assignment the likelihood of the right of pre-emption being defeated by an assignment to a bona fide purchaser for value without notice is considerably increased.

In Pritchard v Briggs at pages 396-398 Goff LJ explained why the cases on the Land Clauses (Consolidation) Act 1845 to which I was referred do not help. Similarly my decision in Butts Park Ventures (Coventry) Ltd v Bryant Homes Central Ltd and the share option cases on which the Lessors relied were based on the materially different wording of the relevant provisions in those cases and are of no help in this. It is true that the observations of the Vice-Chancellor and Chadwick LJ in Bircham & Co Nominees Ltd v Worrell in relation to the time when the obligation arose were obiter, but in my view they were right.

In the course of oral argument counsel for the appellants sought to contend that if the point of time to be considered was the moment immediately before the conclusion of a binding contract then Lindsay J was wrong to do so in this case because the 1986 Agreement was conditional. Counsel for the Lessors objected to this line of argument as it had not been raised in the court below, was contrary to the assumptions on which the trial proceeded and would cause prejudice to the Lessors if it was raised for the first time in this court. We upheld the objection and said that we would give our reasons for that decision in our judgments on the appeal as a whole.

The conditions relied on by Counsel for the Appellants are those contained in National Conditions of Sale Condition 11(5) and the provisions of clauses 2(9)(iii) and 5. They claimed to be entitled to rely on the express terms of the relevant agreement. They submitted that it was for the Lessors to plead and prove satisfaction of those conditions or waiver by both parties. They accepted that the point had not been taken before Lindsay J. But it is clear from all the documents that the trial proceeded on the basis that the 1986 Agreement was unconditional. Had it been contended that it remained conditional then Counsel for the Lessors would have had to consider amending his pleadings so as to aver waiver by the Bailies and Mr Nelson, the individual apparently behind Tiffany, and Ms Chantry and cross-examination of them on that basis. Certainly the events I have recorded in paragraph 12 above would have provided ample material for the purpose.

In these circumstances it would, in my view, be unjust at this stage to permit the Appellants to contend that the 1986 Agreement was conditional. But that conclusion does not inhibit the Appellants contending by reference to conditional agreements generally that the material time is not immediately prior to the conclusion of a binding agreement for sale. In my view that consideration does not suggest any different conclusion. A conditional contract will be a disposition by the lessee because he will thereby have put the property beyond his sole control. Performance of the condition cannot depend on his volition alone for if that were the case the agreement would not be a contract at all. If the condition is performed then the disposition will be complete, if it is not then the property will remain subject to the provisions of the right of pre-emption in the event of any further disposition. Accordingly, in my view, given the nature and purpose of a right of pre-emption the fact that the contract is conditional does not mean that it is not a disposition for the purpose of clause 5.

In my view Lindsay J was right to conclude that at the moment of the conclusion of the 1986 Agreement the failure of the Bailies to offer to sell the Lease to the Lessors for £250,000 constituted a breach of clause 5. Accordingly the third issue referred to in paragraph 26 arises. In this court counsel for the Appellants did not suggest that the decision of the majority in Pritchard v Briggs, considered without qualification by the Court of Appeal in Bircham & Co Nominees Ltd v Worrell, does not correctly formulate the principle to be applied by us. They reserve the right to contend in the House of Lords that the minority judgment of Goff LJ in Pritchard v Briggs should be preferred but acknowledge that that is not a course open to us.

It follows that the issue is whether, in the words of Templeman LJ quoted in paragraph 15 above, in breach of clause 5, the Bailies contracted to sell the Lease to a third party without first offering the Lease to the Lessors. In the light of my conclusions so far the answer to that question is in the affirmative. The consequence, also indicated by Templeman LJ in the same passage, is that the lessors as the holder of the right of pre-emption were entitled to buy the Lease and therefore entitled to an equitable interest in it.

It was suggested in argument that even if the Bailies were in breach of clause 5 the Lessors were not without more entitled to buy the Lease. No offer had been made or accepted nor was there any document sufficient to satisfy s.2 Law of Property (Miscellaneous Provisions) Act 1989. The Bailies had not determined the price at which they wished to dispose of the Lease nor to which, if any, of the subsisting incumbrances the sale should be subject. This is true but it does not, in my view, lead to the conclusion that the Lessors did not at the time the 1986 Agreement was concluded then acquire the equitable interest to which Templeman LJ referred. The terms of the 1986 Agreement supply the details which the notice would have contained namely a price of £250,000 and a sale free from incumbrances. It would be inconsistent with the principle to which Templeman LJ referred if the failure to give the notice as required by clause 5 could defeat the consequence of the breach of the primary obligation.

For all these reasons I conclude that, subject to the effect of s.17 Landlord & Tenant Act 1954, in August 1986 the Lessors became entitled to an equitable interest in the Lease commensurate with that of a purchaser under a binding contract for sale at a price of £250,000. I turn then to the second issue.

Part I Landlord & Tenant Act 1954 applies to a long tenancy at a low rent if the qualifying condition set out in s.2(1) was satisfied. That condition is

By s.1 on the termination in accordance with the provisions of that Act the tenant is entitled to the protection of the Rent Act in accordance with the later provisions of the Act. Thus at the termination of the term the tenancy continues by force of s.3. If the lessor seeks to determine the tenancy by notice then the tenant may elect for a tenancy on terms agreed or settled by the court, ss.4-9. The landlord may recover possession in certain defined circumstances, ss 12 and 13. S.17 provides:

Part II of the Act contains the well-known provisions relating to business tenancies. In summary the tenant under such a tenancy is entitled to apply to the court for a new tenancy. His old tenancy continues in the meantime. S.38(1) provides:

There are three decided cases to which I should refer. In Joseph v Joseph [1967] Ch.78 the Court of Appeal concluded that the words in s.38(1) “purports to” means “has the effect that” so that an agreement to give up possession in two years when the lease would still have six years to run infringed s.38 as it would preclude an application or request for a new tenancy even though an actual surrender was permitted by s.24(2).

In Re Hennessey [1975] 1 Ch 252 Sir Anthony Plowman V-C arrived at the same conclusion in a case under s.17. In that case there was a long lease at a premium of £2,500 and a low rent of three rooms at the top of a building. Clause 7 provided that the landlord should be entitled to buy the residue of the lease for £2,500 if either the tenant gave notice to the landlord that he wished to vacate the premises or the landlord gave notice to the tenant that he wished to sell the building with vacant possession. It was contended that the proviso to s.17 applied to an agreement to surrender in the future as it applied to a present surrender. This was rejected by Sir Anthony Plowman V-C. After referring to the judgments of the Court of Appeal in Joseph v Joseph he agreed with counsel that it was an analogous case and any other conclusion would drive a coach and horses through the Act. He declared clause 7 to be void.

The third case is Allnatt Properties Ltd v Newton [1981] 2 AER 290. In that case a lease of business premises contained a clause to the effect that if the tenant wished to assign the premises he should first offer to surrender them to the landlord for the equivalent of the net premium value. If the landlord did not accept the offer then the tenant might apply to him for consent to assign such consent not to be unreasonably withheld. The tenant made an offer to surrender which the landlord accepted. The tenant then, being dissatisfied with the price offered, purported to withdraw his offer. The landlord sued for specific performance of the contract he alleged to exist. The tenant contended that any such agreement was avoided by s.38(1).

Sir Robert Megarry V-C held that as the effect of the agreement if performed would be to preclude the tenant applying for a new tenancy at the end of the term it was void. But whilst the agreement for surrender was avoided the provisions in the lease providing the machinery for the conclusion of that agreement were not.

Lindsay J considered that Re Hennessey was correctly decided on its facts but questioned (paragraph 42) whether the operation of clause 5 would lead to an agreement invalidated by s.17. Nevertheless he approached the problem on the assumption that it would render any resulting agreement between the Lessors and the Bailies unenforceable. On that footing he considered that, as in Allnatt Properties Ltd v Newton, although the agreement might be avoided the obligation to make the offer was not. As it was the breach of that obligation which gave rise to the equitable interest, so that interest could not be avoided by s.17. However he rejected the alternative argument that even if s.17 had avoided the obligation to make the offer and therefore the creation of the equitable interest the avoidance lasted only so long as the provisions of the Act applied. Consequently the equitable interest would arise in any event in January 1987 when the protection of the Act was lost.

The appellants contend that the judge was wrong to conclude that s.17 did not preclude the creation of the equitable interest in 1986. The Lessors claim that he was wrong to have considered that the observations of Sir Anthony Plowman V-C in Re Hennessey applied at all and wrong to have rejected the alternative contention that such interest arose when the protection of the Act was lost. In my view the judge was right in his conclusions but gave to the observations of Sir Anthony Plowman V-C a wider operation than is justified.

The observations of Sir Anthony Plowman V-C in Re Hennessey must be read in the context of a dispute between the tenant in occupation and the landlord. No doubt s.17 would have invalidated the exercise of the options as between those parties so long as the prevailing state of affairs continued. S.17 could not have invalidated them altogether because they might subsist between landlord and tenant in circumstances in which Part I of the 1954 Act did not apply. In that event s.17 would be inapplicable. Accordingly, in my view, s.17 cannot have invalidated clause 5 altogether. Further though the obligation in Re Hennessey to sell the lease to the landlord if the latter wished to sell the property with vacant possession could be inconsistent with the application of Part I of the 1954 Act I find it hard to see how any inconsistency would arise in the case of the tenant wishing to vacate the premises. The tenant cannot be compelled to remain in occupation and if he ceases to live there then the protection afforded by Part I is lost. Though s.38 precludes an agreement for a future surrender as held in Joseph v Joseph I do not see why s.17 should necessarily have the same effect.

Nor do I see why the observance of the provisions of clause 5 should undermine the rights conferred by Part I of the 1954 Act or discourage a tenant from exercising them. Clause 5 only becomes relevant if the tenant wishes to dispose of the property to a third party. Such a disposition does not engage the rights conferred by Part I at all. By contrast those rights arise on the termination of the contractual tenancy and operate to confer additional security on the tenant. But the performance of all the obligations and steps envisaged by clause 5 does not necessarily give rise to the termination of the contractual tenancy. That will only happen if there is a merger of the Lease in the reversion. Merger is a matter of intention, see Halsbury’s Laws of England 4th Ed Reissue Vol 27(1) para 534. There is no reason to attribute to either party, let alone the Lessors, an intention to effect a merger if the consequence is to avoid the provisions of clause 5 or the consequences of its operation. Even if it be assumed that the consequence of operating the provisions of clause 5 is to give rise to an agreement for the sale of the lease by the tenant to the landlord in order to effect a merger that would constitute an agreement to surrender in the present, not the future. Such a surrender is expressly permitted by s.17, even if an agreement for a surrender in the future is not. This conclusion makes it unnecessary to consider the alternative argument that the effect of s.17 is suspensory only.

For these reasons I conclude that s.17 does not affect the validity of clause 5 or any steps taken in its performance. It follows that it cannot affect the creation in the Lessors of the equitable interest which arose in consequence of its non-observance by the Bailies.

Given my conclusions on the first two issues there can be no doubt about the answer to this one. The appellants do not rely on the 1986 Agreement but on the 1999 Agreement. They submitted that the latter superseded the former. In particular they relied on the recital to the 1999 Agreement that the Bailies agreed that they held the Lease in trust for Tiffany. There can be no doubt that the equitable interest of the Lessors arose before that of Tiffany even if the interest of the latter arose in 1986. There are no grounds for concluding that the priority conferred on the Lessors by time has been lost by any conduct of theirs.

Furthermore as the priority of the Lessors arose from the events of 1986 it is unnecessary to consider the relative priorities arising from the 1999 and 2002 Agreements.

For all these reasons I conclude that:

I would dismiss this appeal.

I would also dismiss this appeal for the reasons given by the Vice-Chancellor.

If it were an open question I would be concerned about the effect of s.17 of the Landlord and Tenant Act 1954 on clause 5 of this lease. The statutory purpose appears to me fairly straightforward. It does not invalidate a surrender freely entered into, but it does invalidate, among other things, a prior commitment or obligation to effect one. It is there to stop parties with unequal bargaining power from contracting out of the protection of the Rent Acts.

The clause 5 arrangement could not be less like an actual surrender – moving one’s effects out, handing back the keys and so forth. If it were not for the analysis (albeit under the related provision of s.38(1)) contained in the judgment of Sir Robert Megarry V-C in Allnatt Properties Ltd v Newton [1981] 2 All ER 290, 295 and upheld by this court [1984] 1 All E 423, as well as the conclusion reached by the other two members of this court in the present case, I would want to consider more fully whether a provision that on the happening of a certain event the lessor will have the right to take back the term is not, precisely, an agreement to oust Part 1 of the 1954 Act.

For the rest I respectfully agree with the judgment of Sir Andrew Morritt V-C.