Fairgate International Ltd v Citibank International Plc

Citibank International Plc (“Citibank”) appeals against the order of His Honour Judge Havery QC, whereby he determined certain preliminary issues as to the true construction of a lease. The judge himself gave permission to appeal.

By a lease dated 8 December 1987, Adamant Investment Limited (“Adamant”) granted Citibank Financial Trust Limited a lease (“the 1987 lease”) for a term of 25 years from 29 September 1987 of premises at 364-366 Kensington High Street, London. The premises consist of a ground floor and 7 upper floors.

In October 1988, Adamant sold the freehold reversion to Fairgate International Limited (“Fairgate”). On 12 January 1989, Fairgate granted Citibank a lease (“the 1989 lease”) for a term just short of 25 years expiring on 25 December 2013. By clause 2 of the 1989 lease, which was granted substantially on the same terms as the 1987 lease, Citibank covenanted:

By a deed dated 19 December 2001, the 1989 lease was surrendered and Fairgate re-let the premises to Citibank for a term expiring on 28 September 2002. Clause 3 of the deed incorporated the terms and conditions of the 1989 lease.

On 28 August 2002, Fairgate’s solicitors sent Citibank a letter stating: “In accordance with clause 2(8)(B) of the lease we hereby require you to reinstate the premises in accordance with sub-clauses 2(8)(B)(i) and 2(8)(B)(ii)”.

On 1 October 2002, Fairgate’s solicitors wrote to Citibank: “under the terms of Clause 2(8)(B) of the Lease of the premises and this firm’s letter to you of 28^th August 2002 you were required to reinstate the premises in accordance with the terms of the Third and Fourth Schedules of the Lease”.

On 18 July 2003, Fairgate issued proceedings, claiming damages for breach of clause 2(8)(A) and (B). Citibank responded by raising preliminary issues as to the validity of the notice of 28 August 2002. In a nutshell, its case was that the notice was invalid because it purported to invoke alternative, and mutually exclusive, covenants (namely clause 2(8)(B(i) and (ii)). If Citibank’s contentions were correct, its liability was limited to a breach of the covenant in clause 2(8)(A) to yield up the premises in a good state of repair, for which the recoverable damages would be capped by section 18(1) of the Landlord and Tenant Act 1927.

Three preliminary issues were tried by the judge. These were:

No issue arises on this appeal in relation to the third declaration. But Citibank seeks to overturn the first and second declarations.

The problem of construction arises because there is no conjunction between sub-clauses (i) and (ii). Are they to be construed as conjunctive or disjunctive? The judge held that they are not mutually exclusive alternatives. Mr Kirk Reynolds QC submits that he was right to do so, and that the proper construction of clause 2(8)(A) and (B) is as follows: (i) the tenant is obliged to yield up the premises in repair at the end of the term; (ii) if the landlord has so requested, the tenant is obliged in addition to carry out the works necessary to remove fixtures, fittings etc; and (iii) if the landlord has so requested, the tenant is obliged in addition to carry out the works necessary to achieve the standard contemplated by the specifications in the Third and Fourth Schedules.

It is important to note that there is no conjunction between clause 2(8)(A) and (B) either. But it is common ground that these two clauses are conjunctive. That is obviously right. The covenant in clause 2(8)(A) requires the tenant to yield up the demised premises repaired in accordance with its covenants. These covenants include the obligation in clause 2(5) “to repair, renew and clean the entirety (including the interior and exterior and structure) of the Demised Premises and keep the same in good and substantial repair and condition…” It is accepted by Mr John Cherryman QC on behalf of Citibank that, notwithstanding the absence of the conjunction “and” between clause 2(8)(A) and (B), the landlord may require the tenant to carry out work in accordance with clause 2(8)(B)(i) or (ii) without prejudice to Citibank’s obligation to comply with the covenant in clause 2(8)(A). He accepts that the judge was right to hold that an obligation created by a request under clause 2(8)(B) would clearly override an obligation under clause 2(8)(A) that was inconsistent with it.

Mr Cherryman advances a number of reasons in support of his submission that clause 2(8)(B)(i) and (ii) are mutually exclusive.

First, he submits that clause 2(8)(B)(i) and (ii) envisage the premises being yielded up in completely different states. Under clause 2(8)(B)(i) the premises must be yielded up by reference to their original condition. By contrast, the Third Schedule requires a high quality office block which is very different from the building that existed at the commencement of the lease. Clause 2(8)(B)(i) and (ii) are conceptually different from each other, so that to invoke both clauses would, in effect, be to rely on inconsistent rights. The landlord must make an election. It is to be inferred that the reason for inserting clause 2(8)(B)(i) into the lease was that the landlord wished to have the option of restoring the premises to their original condition, possibly in order to facilitate a change of the use of the premises from offices to some other user. The reason for clause 2(8)(B)(ii) was that the landlord wished to have the option of continuing to have the premises used as offices, but in a high quality modern building.

Secondly, there is nothing in the lease to inform the tenant how to reconcile inconsistencies between the works required to be carried out to comply with clause 2(8)(B)(i) and those required to be carried out to comply with clause 2(8)(B)(ii). There is no reason for accepting the submission of Mr Reynolds that clause 2(8)(B)(ii) should take precedence where both clauses are invoked. The absence of any machinery for resolving inconsistencies between a requirement to comply with clause 2(8)(B)(i) and (ii) shows that they must have been intended to be alternatives.

Thirdly, the roles of the landlord and his surveyor are completely different in respect of the two sub-clauses. In relation to the works required under clause 2(8)(i), it is only the finished product that must be “to the reasonable satisfaction of the landlord’s surveyor”. In contrast, when the tenant is required to undertake work under clause 2(8)(B)(ii), the materials and finishes are to be of a quality previously approved in writing by the landlord, and the works are to be carried out to the reasonable satisfaction of the landlord’s surveyor. Mr Cherryman submits that the different roles played by the landlord and his surveyor are inexplicable if the lease is intended to permit clause 2(8)(B)(i) and (ii) to be invoked simultaneously.

I cannot accept Mr Cherryman’s submissions. It is true that clause 2(8)(B)(i) and (ii) envisage the premises being yielded up in different states. If the landlord gives notice under clause 2(8)(B)(i) and not under clause 2(8)(B)(ii), he expects the tenant both to remove those fixtures and fittings etc which he requires to be removed and to yield up the premises in repair accordance with clause 2(8)(A) ie in such condition as:

It is also true that, if the landlord gives notice under clause 2(8)(B)(ii) and not under clause 2(8)(B)(i), he expects the tenant to equip and lay out the premises in accordance with the Third and Fourth Schedules, and, so far as it is consistent to do so, to yield up the premises in good repair. The state of the premises that results from the operation of clause 2(8)(B)(i) alone is very different from the state that results from the operation of clause 2(8)(B)(ii) alone. But for the reasons that follow, I consider that clause 2(8)(B)(i) and (ii) are not mutually exclusive.

First, the landlord may choose to require only a small number of items to be removed under clause 2(8)(B)(i). There is no reason in principle why the landlord should not be able to give notice under clause 2(8)(B)(ii) and at the same time require the tenant to remove specific fixtures or fittings etc, insisting on the restoration of those items to their original condition. It seems to me that the words “all or any” mean exactly what they say: they do not oblige the landlord to require the removal of all or none of the fixtures or fittings etc that have been installed by the tenant. It is inherently unlikely that the parties should have intended that, if the landlord required the restoration of, say, a small number of fixtures or fittings, it should thereby forfeit the right to require the carrying out of the work described in the Third and Fourth Schedules. The language of the lease does not, either expressly or by necessary implication, require such an intention to be imputed to the parties. The precise reconciliation between a requirement that specific fixtures and fittings etc should be removed and a requirement to do the work stated in the Third and Fourth Schedules would be worked out as the details of the specifications were finalised (see further para 21 below).

Secondly, as Mr Reynolds points out, there may be fixtures and fittings which would not need to be removed in the event that clause 2(8)(B)(ii) were invoked. He gave the following example. Suppose that a satellite dish has been fixed by the tenant to the top of the premises for the receipt of financial information by satellite and the landlord wishes to have it removed. Suppose further that the dish is not in disrepair, so that clause 2(8)(A) cannot be invoked in relation to it. The dish might be perfectly in keeping with “a high quality office building”, so that arguably it cannot be removed pursuant to clause 2(8)(B)(ii). If the landlord wants it to be removed, the only way it can compel the tenant to remove it would be to invoke 2(8)(B)(i).

In both of the circumstances just postulated, the landlord might wish to exercise rights under both clause 2(8)(B)(i) and (ii). In short, there is nothing in clause 2(8)(B)(i) and (ii) which necessarily indicates that the parties intended that the two sub-clauses could not be invoked simultaneously. In my judgment, it is nothing to the point that the state resulting from the exercise of the right under clause 2(8)(B)(i) alone is very different from that resulting from the exercise of the right under clause 2(8)(B)(ii) alone.

Thirdly, it is true that there is no machinery which expressly provides what is to happen if an apparent inconsistency results from the giving notice under both clause 2(8)(B)(i) and (ii). If (as happened in the present case) the landlord gives a general notice under both clause 2(8)B)(i) and (ii), there is an apparent inconsistency. This is because, on the face of it, the tenant is required both to remove all fixtures and fittings etc and restore the originals and to carry out the Third and Fourth Schedule works, and these works will necessarily require many, and probably most, of those restored fixtures and fittings etc to be replaced. But the relationship between clauses 2(8)(A) and (B) gives rise to a similar problem of potential inconsistency. Mr Cherryman rightly accepts that, if clause 2(8)(B)(ii) had been invoked on its own, any obligation under clause 2(8)(A) which was inconsistent with 2(8)(B)(ii) would be over-ridden by the latter. For example, suppose clause 2(8)(A) required the partitions to be repainted, but the partitions would have to be stripped out under clause 2(8)(B)(ii). There would be an obvious inconsistency between the requirements of the two clauses. Although there is no machinery for the resolution of this inconsistency, it is common ground that the requirement in clause 2(8)(B)(ii) would prevail. It is obvious that the obligation in clause 2(8)(B)(ii) would take precedence. It would make no sense (and cannot have been intended) that the tenant should be required to repaint the partitions under clause 2(8)(A) and then strip them out under clause 2(8)(B)(ii). In my judgment, a similar approach is implicitly required by the lease to resolve any apparent inconsistency between clause 2(8)(B)(i) and (B)(ii).

Finally, as regards Mr Cherryman’s third point, it is to be noted that in both clause 2(8)(B)(i) and (ii), the surveyor is concerned with the “finished product”. It is true that the landlord itself is entitled to approve the finishes under 2(8)(B)(ii), but that is not a reason for saying that the two clauses are mutually inconsistent.

I would, therefore, hold in agreement with the judge that, upon the true construction of the lease, clauses 2(8)(B)(i) and (ii) are not mutually exclusive. The judge was right to decide that the lease should be interpreted as entitling the landlord to require the tenant to carry out work under clause 2(8)(B)(i) except to the extent, if any, that it was inconsistent with or rendered unnecessary by the provisions of clause 2(8)(B)(ii).

At one stage it appeared that the outcome of the second issue was entirely dependent on the resolution of the first issue. But it became clear during the course of argument that Mr Cherryman was submitting that, even if clause 2(8)(B)(i) and (ii) are not mutually exclusive, the notice of 28 August 2002 was void on the grounds that it was uncertain. Mr Cherryman also submitted that the notice was self-contradictory or internally inconsistent. But it seems to me that this is not in truth a separate point. On the hypothesis that (as I have held) a notice can be given both under clause 2(8)(B)(i) and (ii), the real point raised by the second issue is whether the notice actually given was void for uncertainty.

Mr Cherryman submits that the notice of 28 August did not inform Citibank what it had to do. For example, how could it know what fixtures and fittings (if any) it was being required to remove?

I am persuaded by the answer given by Mr Reynolds. He submits that, upon receipt of the notice, the tenant would have known that he was required to comply with the Third and Fourth Schedules. These contained no more than the barest of design briefs, the details of which would have to be worked out to the reasonable satisfaction of the landlord’s surveyor. Until the detailed specifications had been agreed, the tenant would not know precisely which of the fixtures and fittings etc (if any) it was required to remove. It would have known that in principle it was being required by the notice to remove any fixtures and fittings etc whose removal would not be over-ridden by the specifications that were finally agreed. The important point is that the notice will have engendered no more uncertainty in the tenant’s mind as to what was required in relation to clause 2(8)(B)(i) than in relation to clause 2(8)(A). At the date of the notice, the tenant might well have been uncertain as to what repairing obligations it was required to discharge. It was implicit in this lease that the precise scope of work required under clause 2(8)(A) and (B) might not be defined at the end of the term or when the notice was first given by Fairgate. This would only become clear when the details of the work required to be carried out in accordance with the Third and Fourth Schedules were finalised. In my view, therefore, the notice of 28 August 2002 was not void for uncertainty.

I conclude, therefore, that the judge reached the right conclusion on the second issue.

For the reasons that I have given, I would dismiss this appeal.

I agree.

I also agree.