BP Oil UK Ltd & Ors v Lloyds Tsb Bank Plc

Before us are two appeals from the order of Mr Michael Brindle QC dated 8 March 2004 made at the trial of this action. The claimants are BP Oil UK Ltd (“BP Oil”), BP Fuels Marketing Ltd (“BP Fuels”) and Mobil Exploration and Production UK Ltd (“Mobil”) (collectively “the oil companies”). In his judgment, the judge determined two issues as to the interpretation of an agreement (“the option agreement”) dated 30 September 1995 between Lloyds Bank plc (“Lloyds”), the defendants in the action, and the oil companies. He determined the first issue in favour of the oil companies, and the second issue in favour of Lloyds. This enabled him to give judgment in favour of the oil companies. Both sides now appeal against the issue on which the judge ruled against them respectively. The material parts of the option agreement are set out in the appendix to this judgment.

Under the option agreement, Lloyds granted the oil companies the right to “put”, that is to require Lloyds to take a reassignment of, the lease as defined in the agreement. This was a lease (“the lease”) dated 21 December 1990 made between Crosstyle plc and Lloyds in respect of premises (“the premises”) known as Unit 1, Triangle Business Park, Wendover Road, Stoke Mandeville, Aylesbury, Buckinghamshire. The lease was for a term of 25 years, expiring in 2015. The background to the option agreement was as follows. In 1998, Lloyds had found that the premises were surplus to its own requirements and the oil companies had decided that it was convenient for them to occupy part of the building. The terms of the head lease prevented Lloyds from granting an underlease of a part in the way that the oil companies desired. Accordingly, the oil companies took an assignment of the lease on terms that Lloyds entered into the option agreement and granted the oil companies an option to put the lease back on to Lloyds for no consideration. This right was exercisable on 28 September 2004 and 28 September 2010.

At the time of the option agreement, the oil companies were in a partnership arrangement but subsequently this had to be determined for competition reasons. The agreed terms included the release by Mobil of its interest in the lease, and this was achieved by the oil companies assigning the lease to BP Oils and BP Fuels. On 20 March 2003, BP Oils and BP Fuels together with Mobil, gave notice to Lloyds of the exercise by them of the put option. No issue arises as to the form or timing of that notice. However, Lloyds contends that the oil companies could only give effective notice if they were, and had remained since the date of the assignment to them, the registered proprietors of the lease. The judge upheld this contention in part. He held that the oil companies had to be registered proprietors of the lease at the date of the option notice though they did not have to be the registered proprietors throughout the period of the option agreement. Accordingly, on 15 March 2004, the two BP companies assigned the lease back to themselves and Mobil. This was duly registered with the Land Registry. On 23 March 2004, the oil companies gave a further notice exercising the option in accordance with the terms of the option agreement. No point is taken on the form or timing of this notice.

There were three issues before the judge. We are not concerned with the second issue, which it was also not necessary for the judge to determine. The first issue was whether the exercise of the option on 20 March 2003 was effective or not. As I have already indicated, the judge held that the exercise was invalid because the lease was not then vested in all three oil companies. The third issue was whether the option could be exercised at all if the lease had not throughout been vested in all three oil companies, even if it had been re-assigned back to the three companies by the date of the exercise of the option. The judge answered this question in the affirmative.

The option holder under the option agreement is “the Purchaser”. As a result of the definitions at the start of the agreement, “the Purchaser” means, and means only, all three companies. There was accordingly no provision for any change in the identity of the parties to the oil companies’ partnership arrangement. It is common ground that the terms of the option agreement must be strictly complied with: see generally Finch v Underwood (1876) 2 ChD 310.

The judge reached his conclusion on the first issue on the basis of the provisions of the option agreement read as a whole. He found that various provisions of the agreement dealing with the conveyancing steps, particularly clauses 4, 5 and 10, contemplated that the Purchaser and the assignor (following the exercise of the put option) should be the same person. If the notice could be exercised by the Purchaser even if the oil companies were no longer the registered proprietors of the lease, it could not, in the judge’s view, be said in any real sense that the option was personal and non-assignable, as provided by clause 12. Effectively, the oil companies could assign the lease and agree to exercise the option at the behest of the assignee. That would largely negate the protection in clause 12.

In my judgment, the judge was correct in his interpretation of the agreement. The agreement can be made to work if notice of exercise of the option is given by the Purchaser at a time when the oil companies are not the registered proprietors of the lease. For instance, the agreement requires them to deduce title in accordance with section 110 of the Land Registration Act 1925 (Clause 4). Section 110(5) makes it possible for a person to fulfil a contract for the disposition of an interest in land which he does not himself hold at the date of the contract either by procuring the transfer to himself and then transferring it on to the purchaser, or by procuring a transfer direct from the registered proprietor to the purchaser. However, other provisions of the agreement show that it was clearly not anticipated that this would occur. For example, clause 5.1 provides for the Purchaser to assign the lease to Lloyds. Likewise, clause 7.1.2 refers to the Purchaser obtaining a declaration by a court that the landlord had unreasonably withheld his consent to assignment to Lloyds. The natural reading of this clause is that the Purchaser would bring the proceedings as the current tenant seeking to assign. Furthermore, I agree with the judge that if the oil companies can give notice at a time when they no longer are the registered proprietors of the lease, they could in turn agree to exercise the put option at the request of an assignee. If this occurred, while there would have been no assignment of the put option as such, it would not have been exercised by them for their own benefit. In my judgment, the word “personal” in clause 12 must mean something additional to “not capable of assignment”. At minimum, it seems to me to exclude the possibility of exercising the option at the direction of a third party. Put another way, in clause 12 the parties not only prohibited any assignment of the option agreement. They also agreed that the character of the person exercising the option was material. Given the background to the put option, and the fact that it was in a separate agreement, that interpretation seems to me to be consistent with the commercial aims of the parties. Accordingly, I agree with the judge that, all three oil companies, being “the Purchaser” as defined in the option agreement, must exercise the option without any direction from a third party, and that at the time of giving notice of exercise they must, on the natural interpretation of the option agreement, be the registered proprietors of the lease.

Mr Kirk Reynolds QC, for Lloyds, takes clause 12 one stage further. He submits that it is a consequence of clause 12 that the put option ceased to be exercisable once the Purchaser had assigned the lease. He relies also on other provisions of the option agreement. In particular, he relies on clause 8.1.2, which only requires Lloyds to give an indemnity to the Purchaser and its successors in title. In the context of this clause, the successors in title must, in my judgment, be the successors in title to the indemnity and not (as submitted by Mr Michael Barnes QC for the oil companies) successors in title to the lease. They are not mentioned as might have been expected if the parties were contemplating an assignment by the oil companies followed by a reassignment later back to them. However, I do not consider that the point on clause 8.1.2 is a strong point as the Purchaser may simply not have wanted an indemnity to be given for the benefit of other parties. More seriously, clause 10.3 stipulates that the assignment pursuant to the exercise of the option is to contain a covenant from the oil companies to Lloyds to indemnify Lloyds against losses arising from breaches by the Purchaser “or any undertenant or licensee of the Purchaser” of any of the tenant’s covenants in the lease. This clause does not refer to any assignee of the oil companies or to any undertenant or licensee of an assignee of the oil companies. Mr Barnes responds to this by pointing out that under clause 10.1 the Purchaser assigns the lease with full title guarantee and that, pursuant to section 4 of the Law of Property (Miscellaneous Provisions) Act 1994, this means that the Purchaser is deemed to covenant that there is no subsisting breach of any condition or any tenant’s obligation and nothing which at the date of the assignment would render the lease liable to forfeiture. Accordingly, the lacuna is filled by clause 10.1.

Mr Reynolds also relies on a number of cases where a similar point to that arising on clause 12 in this case has arisen. The first is Olympia & York Canary Wharf Ltd v Oil Property Investments Ltd [1994] 2 EGLR 48. In this case the Court of Appeal held that a landlord could properly refuse to consent to the assignment of a lease back to an original tenant in circumstances where the parties accepted that, if there was a re-assignment, the original tenant could exercise a right conferred on it alone as tenant to determine the lease. The relevant clause was clause 5(13) which so far as material read:-

“If the Tenant (meaning only ICI Petroleum Ltd) shall desire to determine the term at the expiration of the tenth year thereof, and of such desire, shall give to the Landlord more than twelve months notice in writing ...”

Although it was common ground that the break clause could be exercised by the original tenant on reassignment of the lease back to him, Sir Donald Nicholls VC was doubtful whether this was correct. He expressed the view, obiter, that if it had been intended that the original tenant should be able to exercise the break clause after re-assignment to it, clause 5(13) would have been drafted in different terms. The Vice-Chancellor said:-

“One asks oneself why the right conferred by the break clause was made personal to Enterprise. There is no obvious answer to this. There could perhaps be a certain commercial logic in confining the right to Enterprise so long as Enterprise throughout remains the tenant. Enterprise could pull out after ten years if it wished. But if, meanwhile, Enterprise chose to realise its investment by disposing of its entire interest by assignment then its right to withdraw would lapse. However, neither party contended before us that Enterprise’s right is so confined. Quite what is the commercial rationale which would revive Enterprise’s right to terminate if, having assigned the lease, it takes a re-assignment, is not apparent on the material before us. Be that as it may, what is clear is that, had the intention been that at any time Enterprise was to have the right to end its liabilities on the lines now being contended for, clause 5(13) would not have been drafted in the form which the parties chose.”

In the later case of Max Factor Ltd v Wesleyan Assurance Society [1996] 2 EGLR 210, this court had to decide the issue whether a break clause in a lease was exercisable by an original lessee following assignment by it of the lease and re-assignment by the assignee back to the original tenant. In that case, the break clause was mutual but contained a proviso making it clear (“for the avoidance of doubt”) that the lessor’s right to determine the term ceased if the lessee assigned its interest in the lease prior to the expiration of the tenth year of the term. The relevant clause was in these terms:-

“5.09

If either the Lessor or the Lessee (here meaning Max Factor Limited only) shall be desirous of determining this present Lease at the end of the tenth year of the term hereby granted and of such desire deliver to the other not less than twelve months’ previous notice in writing and in the case of Max Factor Limited pays all rent and six months’ further additional rent at the rate then applicable (such additional rent being payable in full on the expiry of such notice) then and in such case immediately after the expiration of the tenth year of the term this Lease shall cease and be void but without prejudice to any claim by either party against the other in respect of any antecedent breach of any covenant or condition herein contained provided that for the avoidance of doubt in the event of the Lessee (here meaning Max Factor Limited only) assigning the interest in the demised premises prior to the expiration of the tenth year of the term then the Lessor’s right to determine the term contained in this Clause shall forthwith cease.”

This court (Auld and Aldous LJJ, Staughton LJ dissenting) held that the break clause was not exercisable following assignment of the lease, even though it had been re-assigned back to the original tenant. It determined on the assignment. The reasons on which the majority relied were first, that the right to exercise the break clause was mutual, second that the proviso to the break clause expressly provided for cesser of the landlord’s rights on assignment by the landlord and was expressed to be “for the avoidance of doubt”, and third, that the landlord had a right to refuse re-assignment back to the original tenant, thus rendering any exercise of the break clause nugatory. As Mr Barnes points out, none of these factors is present in the present case.

The third authority is Equinox Industrial (GP2) Ltd v Sketchley Ltd [2003] EWHC 2 (Ch), a decision of Lawrence Collins J. In this case, the question was the tenant’s right to exercise a break clause following assignment and subsequent revesting of the original lease in it. In the relevant clause the tenant meant only Sketchley plc and not its successors in title or its assigns. Lawrence Collins J concluded at [33] that he was satisfied that the wording of clause 8 as a whole, and in particular the exclusion in clause 8.3 of successors in title and assigns, had the effect of making it clear that it was only the original lessee, as original lessee, which could exercise the break clause. The judge held that his conclusion was supported by other clauses and confirmed by commercial common sense. At [31] he accepted the submission of the claimants in that case that the original lessee had two options. It could retain the benefit of the lease, and enjoy the special personal right conferred on it under the break clause, or it could realise the value of the lease by assigning it but if it did so the special personal right would no longer be operable so that any price for the assignment would not reflect that right. It made little commercial sense that an arrangement should exist under which the original lessee could assign the lease but then hope or expect that it could still exercise the special right under the break clause if at some appropriate date in the future it reacquired the lease. That would lead to uncertainty and would obviously be unattractive to the landlord, especially if it intended to transfer the reversion. The uncertainty would also affect the purchaser.

We are referred to a further authority, Taita Hotel Ltd v Spelman [1963] NZLR 206. This authority is of limited assistance since the wording in the lease entitled the tenant to renewal of the lease if he was “still” the lessee. McGregor J held that it was sufficient that the lessee of the demised premises was a lessee at the time the conditions precedent to renewal were fulfilled. Because the terms of the clause in question are so different, I derive little assistance from this authority.

In the present case, the option is contained in a document which is separate from the lease. It confers an option on the assignee as against the assignor. The landlord is not involved. Moreover, the option holder is described as “the Purchaser” and not by any expression which would restrict its capacity to that of tenant under the lease. If the position had been otherwise, it would clearly be arguable that its status was limited to its status as assignee pursuant to the assignment to it by Lloyds. The other factors relevant in the Max Factor case are not present. All the cases cited turn on the construction of the leases in question. It is unnecessary to draw any distinction between the three English cases cited and this one based on the fact that they concerned break clauses. The fact is that the agreement in this case is different. Nor is it necessary to draw a distinction between the lease becoming vested in two of the oil companies, rather than a third party. In my judgment, it would be stretching clause 12 too far to say that the option agreement (meaning the rights conferred by the option agreement) was personal to the Purchaser in the sense that the Purchaser had to have retained exactly the same interest in the lease throughout the period of the option agreement. I have already found that clause 12 has the meaning explained above. It would not be justified to add to that meaning. On this basis, the put option did not cease to be exercisable on a permanent basis when the lease ceased to be vested in the oil companies. At that point, it ceased to be exercisable but it became exercisable once again when the lease was revested in the oil companies. The indications are that the parties did not contemplate that the Purchaser would assign the lease and then take a re-assignment back to itself. However, by the same token, the parties have not included the provisions necessary to prevent that happening.

Accordingly, in my judgment, the judge was right on this issue too.

In the circumstances, I would dismiss both appeals.

I agree

I also agree.