Business Environment Bow Lane Ltd v Deanwater Estates Ltd

In October 2001 the defendant, Deanwater Estates Ltd (“the Lessee”), was the lessee and the claimant’s predecessor in title the lessor under a lease (“the Old Lease”) of the basement, ground and four upper floors of 7 Bow Lane/73 Watling Street, London, EC4 (“the Building”) for the residue of a term of 25 years granted by the Church Commissioners in April 1980. Between October 2001 and January 2002 negotiations took place for the surrender of the Old Lease and the grant by the predecessor in title of the claimant to the Lessee of a new lease (“the New Lease”) for a term of five years in respect of the four upper floors and parts only of the ground floor of the Building. The Old Lease was duly surrendered and the New Lease granted on 18th January 2002. By clause 2(5) the lessee covenanted to keep the property in good and tenantable repair and condition and, subject to an immaterial condition, to deliver up the same in such condition at the expiration or sooner determination of the term. Ss.24-28 of the Landlord and Tenant Act 1954 were excluded.

The New Lease was terminated by the Lessee in accordance with the provisions of clause 4(10)(a) thereof on 25th December 2004. In April 2005 the interest in the Building of its predecessor in title was acquired by the claimant (“the Lessor”). By an assignment dated 6th April 2005 the Lessor became entitled to the benefit of the repairing covenants contained in the New Lease and the right to enforce them against the Lessee. The Lessor sought to do so in proceedings it commenced against the Lessee on 22nd February 2006 in respect of dilapidations to a value of £416,632 specified in a schedule served on 14th April 2005. By its defence served on 30th April 2006 the Lessee claimed that the Lessor was precluded from so enforcing the repairing covenants contained in the New Lease by a collateral contract and/or a promissory estoppel arising from communications between the parties and their representatives leading up to and concluding with the execution of the New Lease. A preliminary issue whether those contentions afforded a defence to the Lessor’s claim came before Briggs J. For the reasons explained in his judgment given on 5th December 2006 Briggs J considered that they did and dismissed the action. He stated that his mind had wavered on the issue more than once and gave the Lessor permission to appeal.

Before us it is common ground that the defence of promissory estoppel adds nothing to the defence of collateral contract; to that extent the preliminary issue has been narrowed. In addition both parties accept that the judge was right to have concluded that the oral evidence before him added nothing either, so that the defence depended on the documentary evidence and inferences properly drawn from it. Accordingly I shall describe the relevant documentary evidence in some detail before considering the judgment of Briggs J, the parties’ submissions on this appeal and my conclusions.

In the period 1996 to 2000 there had been negotiations between the Lessee and the then lessor with regard to a straight surrender of the Old Lease. These came to nothing. In April 2000 the reversion was acquired by various companies to which I shall refer collectively as Lionbrook and negotiations restarted. There was some debate before us whether or not Lionbrook was anxious to obtain a surrender of the Old Lease. It is unnecessary to consider that matter in order to resolve the issue on this appeal.

The relevant starting point is a letter dated 10th October 2001 from Mr Martin Chilcott, a director of the Lessee, to Mr Simon Latham of Baring Houston and Saunders, the surveyors for Lionbrook. He set out his understanding of the provisional agreement which they had reached. It included the following passages:

“Surrender of Lease

[The Lessee] will surrender the lease dated 22 April 1980 on the property known as 7 Bow Lane and 73 Watling Street, London, EC4. At that time all liabilities under the terms of that lease will cease. Contemporaneously [The Lessee] will enter into a new lease on terms set out below.”

“Lease

A lease will be granted for a term of 5 years from the 25 December 2001 or such earlier date as can be agreed, subject to a tenant’s only option to determine the lease on six months notice prior to the 25 December 2004. If this option is exercised by [the Lessee] all existing and future contingent liabilities will cease and any sub-tenants in place will become the direct responsibility of the landlord. The lease will be drawn on internal repairing and insuring covenants. [The Lessee] will retain responsibility for maintaining but not replacing any plant and machinery including boiler, lift and other plant solely serving the upper parts of the building.”

“Alienation

The tenant will have normal rights of alienation to sub-let in part or whole and to assign the whole. Other covenants in the lease will follow the basis of the original lease.”

“Other terms

The new lease will be contracted out of the Landlord & Tenant Act 1954 (as amended) and the end or sooner determination of the term there will be no liability for dilapidations or reinstatement.”

Mr Latham responded on 11th October 2001 with comments on other parts of the letter. On 19th October 2001 Mr Latham e-mailed Mr Chilcott stating that he was happy with the broad heads of terms which by then included an external repairing obligation, that he had instructed solicitors and a draft lease would be with the solicitors for the Lessee the following week. On 22nd October 2001 Ms Kate Potts of Dechert, the solicitors for Lionbrook, wrote to Mr Tuthill of William Sturges, the solicitors for the Lessee indicating that she would prepare a draft lease and send it to him shortly. She added:

“I do not anticipate that the negotiation of the new lease will be a lengthy one as the lease to be granted is based largely on both your clients existing lease and the lease which was previously to be granted to 110 Limited, copies of both of which you already have.”

On 24th October 2001 she duly sent Mr Tuthill drafts of the New Lease and a surrender of the Old Lease. The repairing covenants in the draft New Lease required the tenant to put and keep the premises in good and substantial repair including any necessary rebuilding or renewal. It contained nothing derogating from a full dilapidations responsibility on the tenant on termination. The solicitors then corresponded on matters not material to this appeal.

Mr Tuthill sent a copy of the drafts to Mr Chilcott. On 12th November 2001 Mr Chilcott wrote at some length to Mr Tuthill with his observations on the draft New Lease. They included the following:

“Repairing Requirements

The wording of the Draft Lease appears to put a more onerous responsibility upon us than has been agreed. As noted above we are purely to be responsible for keeping the premises in repair and there is to be no replacement or renewal. Specifically, and I cannot see it noted in the documentation there is to be no responsibility for dilapidations at the end of the term. This must be absolutely clear in the documentation. We will deliver up at the end or sooner determination of the lease, with the building as is both internally and externally.”

“We will not be liable for redecorating the premises in the last year of the term specifically.”

“You will need to qualify the rights of entry by the landlord to repair as we do not wish for:

(a)

Any interim schedules of dilapidations to be served

(b)

The Landlords to insist that we carry out works or items of repair that we do not consider necessary or appropriate.”

“The drafting does not reflect our agreement, although you have amended the wording it must be made abundantly clear that our repairing liability is limited and there are no dilapidations at the term and no rights for the Landlord to enter to force us to carry out any other repairs during the currency of the lease.”

“There are clearly a number of issues which need to be resolved and discussed. It seems to me that Decherts are exceeding their instructions and I will be discussing the matter with Lionbrook’s surveyors, to clarify one or two matters.”

Seemingly a copy of that letter was supplied to both Dechert and Mr Latham and discussions took place between Mr Latham and Mr Chilcott in relation to the matters raised by the latter. This prompted a letter dated 13th November from Ms Potts to Mr Tuthill, with which the travelling draft New Lease was enclosed, suggesting that

“if your client has any further concerns these are reflected by your amendments to the document rather than by comments direct to my client.”

Much the same point was made in an e-mail of the same date from Mr Latham to Mr Chilcott in which he wrote:

“Could I suggest that rather than make single alterations on an ad hoc basis, you speak to your solicitor once the revised lease, which is being sent back to him today, has been reviewed so that all the changes can be incorporated as one.”

On 15th November 2001 Mr Tuthill wrote to Ms Potts. He found her comment concerning his clients concerns ‘a little odd’ and likely to generate unnecessary costs. In addition he set out extensive comments on her amendments in green to the travelling draft New Lease in relation to the repairing obligations. Ms Potts replied on 20th November 2001 dealing with the 12 points taken by Mr Tuthill in his letter of 15th November. She concluded:

“...the essence of the agreement between our two clients is one based on flexibility. We would therefore hope that your client would now be able to confirm to you its approval.”

The reference to flexibility echoed comments in e-mails from Mr Latham to Mr Chilcott of 13th and 20th November 2001 where he emphasised the need for flexibility in all their dealings.

On 29th November 2001 Mr Tuthill wrote again to Ms Potts with further amendments to and comments on the draft New Lease. He concluded:

“My clients have emphasised once again that they are entering into this arrangement with your clients on the clear understanding that their liabilities in respect of repair and maintenance etc are kept to a bare minimum and that your clients, for instance, will not be spending the term of this lease making inspections and serving interim schedules for dilapidations on my clients. This was most definitely a quid pro quo for my clients accepting that the new lease is going to be subject to a s.38 order. [sc. s.38 the Landlord and Tenant Act]

Whilst your clients have accepted now that the repairing liability should be limited to that of a good and tenantable nature, my clients remain concerned about the ability to enter and serve schedules of dilaps. I have therefore suggested to my clients, and I think that they would accept, that there should be a letter issued by your clients to my clients at completion of the lease along the lines of the draft enclosed. Can you please take your clients instructions on that. You will see that it would be personal to [the Lessee].”

The suggested letter was to be written on the headed paper of Lionbrook and addressed to the Lessee. It read as follows:

“Dear Sirs

Lease dated...December 2001 between ourselves and yourselves

73 Watling Street and 7 Bow Lane London EC4.

In consideration of your today completing this lease we confirm that so long as [the Lessee] remain the lessee under the lease we will not, in respect of those parts of the premises demised by the lease and which [the Lessee] have not underlet:

1.

exercise our rights of entry under clause 2(6) of the lease

2.

require you to carry out any rectification of dilapidations at the end of the term of the lease (however it comes to an end)

unless in either case we have justifiable cause for concern that your repairing covenants under the lease are not being or have not been materially and substantially complied with.

We are further concerned but will use our best endeavours to procure the issue to you of a letter in terms similar to this letter (mutatis mutandis) upon any disposal (including the grant of an overriding lease) of our interest in the premises demised by the lease or any part of them.”

On Friday 30th November 2001 Ms Potts acknowledged receipt of the letter from Mr Tuthill dated 29th November. Later the same day she sent various plans and a clean draft of the New Lease to Mr Tuthill. She concluded that she believed the lease to be in agreed form and asked Mr Tuthill for his confirmation.

There was a flurry of faxes and e-mails on Monday 3rd December 2001. At 1204 Mr Chilcott e-mailed Mr Latham. He stated:

“I have now read the draft lease number 3 & subject to my solicitors amendments I am happy.”

At 1300 Mr Latham replied:

“Your solicitors amendments have all been included in the last copy.”

At 1346 Ms Potts asked Mr Tuthill to confirm that he had received her letter of 30th November and the travelling draft lease and a clean copy. At 1444 Mr Tuthill confirmed that he had received Ms Potts’ letter and indicated that he was looking at it. Having read her letter, at 1516, Mr Tuthill sent another e-mail to Ms Potts with a copy to Mr Chilcott. He stated:

“I have checked through the clean draft lease and as far as I am concerned it is OK SUBJECT however to your agreeing the draft side letter on which you make no comment in your letter of Friday. I understand that my clients are faxing me with their comments on the draft lease in its state as last amended by me and if there is anything further to mention I will of course mention it.”

At 1726 Ms Potts responded:

“I am instructed that my client will not accept the side letter in any form. We fail to see how this can still be a concern of your client following the negotiation of the lease and in particular the removal of any provision for your client to be responsible for the preparation and service of any schedule. With regard to the approval of the lease, your client has indicated to my client that the lease is agreed. Please therefore let me know as soon as possible that the lease is in an agreed form so that I may prepare engrossments for execution.”

Mr Tuthill responded by a faxed letter dated Tuesday 4th December, copied to Mr Chilcott. He wrote:

“The more difficult point remains the repairing covenant. On this there are two elements which I think have been made clear from the outset:-

1.

My clients do not want your clients exercising rights of entry every five minutes to inspect the property and serve notice requiring works to be done.

2.

There is to be no terminal schedule of dilapidations.

Unfortunately I do not have the original travelling draft lease with me; you are still retaining that I think but I believe that my amendments reflected these points.

On the first of these, as an alternative to removing any rights of entry I suggested a form of side letter which would entitle your clients to exercise their rights of entry to inspect and serve notices of wants of repair only in circumstances where there is justifiable cause for concern that my clients repairing covenants are not being materially and substantially complied with. I believe that this represents a fair approach to this particular problem.

The second point is by no means addressed by the removal of any provision for my clients “to be responsible for the preparation and service of any schedule”. All you have done is to remove the tenants liability for paying the costs specifically of a terminal schedule of dilapidations although paragraph (a) on page 18 even with that deletion does not preclude the possibility of the landlord serving a notice at the last minute and charging the tenant for it. This is not the same as agreeing, as I understand the parties have, that there will be no terminal dilapidations liability.

I did incorporate appropriate provisions in the earlier travelling draft but these seem to have fallen by the wayside. I am prepared, however, for this point to be covered in the proposed side letter which I repeat is intended to be personal to my clients. I suggest, therefore, a revised version of the letter as enclosed. I am copying this to my clients so that they may take up this matter with your clients.”

No copy of the revised letter has been produced in these proceedings.

Ms Potts replied later that day by a letter to Mr Tuthill with a copy to Mr Latham to keep him updated. She wrote:

“As indicated in my fax of yesterday, my client is not prepared to accept your client’s obligations being limited by way of the side letter. The nature of this transaction is to be one of flexibility and co-operation. My client is concerned that your client has these worries about my client’s management of the property. Clause 6 of the lease is entirely standard and my client merely requires this position to ensure that your client is complying with its covenants under the lease. My client does not have time to attend the property “every 5 minutes” as indicated in your letter. Your comments as to my clients intentions are not within the spirit of this transaction. My client has already indicated to your client that a terminal schedule of dilapidations will not be served and this should be satisfactory comfort for your client.

When I initially sent you the clean draft of the lease with my letter dated 20th November 2001, I enclosed the travelling draft lease for you to be able to check this against the clean draft. Are you concerned that I have not carried through the amendments I had previously agreed? I am enclosing the original travelling draft again with this letter for you to check the clean copy again. Please return the travelling draft to me when you have finished with it.”

Later that day Mr Chilcott wrote to Mr Latham regarding two outstanding issues which he thought had been agreed and in the light of the copy correspondence between the solicitors which he had. With regard to the first outstanding issue he wrote:

“Firstly that there is to be no liability for dilapidation’s at the end or sooner determination of the term, which was in the original Heads of Terms which we agreed. The second point is the ability of you and your clients to enter upon the premises almost at any time to serve interim schedule of dilapidation’s or to enforce us to carry out our works. The essence of the deal was, as you will recall, that we would keep the premises in good and tenantable repair during the currency of the lease, but there would be no liabilities beyond this. The side letter proposed, in my view, covers this point.”

Mr Chilcott then referred to the other outstanding issue and concluded with the hope that:

“at this late stage...we can resolve all these outstanding issues, which in any event are in my view reflected in our Heads of Terms.”

Mr Latham replied to Mr Chilcott by e-mail at 1118 on the same day. He wrote:

“I refer to your letter. I really do believe you are making something out of nothing on the dilapidation’s issue and seem to be suggesting that I would have nothing better to do than worry about your repairing obligations!!!

However in order to move matters along I have asked Dechert to change the provision to specifically exclude interim and final schedules. I am not however prepared to give up the right to inspect to ensure you are meeting the requirements of the watered down repairing obligations. This is only standard practice.”

After referring to the other matters Mr Chilcott still considered to be outstanding Mr Latham concluded:

“I am working within what we agreed so we either go forward as set out above or we call it a day.”

Ms Potts then wrote to Mr Tuthill. She indicated that she had taken instructions on his letter of the day before in the light of the discussions she understood that Mr Latham had had with Mr Chilcott. With regard to the repairing obligation she wrote:

“My client has accepted that clause 2(6) of the lease may be amended with the addition of the following words at the end of the clause:-

‘provided that any action taken by the Lessors upon entering the said premises will not result in the Lessors serving an interim or final schedule of dilapidations’.”

After dealing with the other outstanding matters she concluded:

“In view of my client’s willingness to co-operate with your client, the lease should therefore now be agreed. Please confirm by close of business today this is the case so that I may prepare engrossments for execution.”

Mr Tuthill was not in his office on Tuesday 5th December. Accordingly his letter dated 6th December faxed at 1207 was a reply to the last letter from Ms Potts dated 4th and her e-mail of 5th December. He wrote:

“Thank you for your letter of 4 December received yesterday when I was unfortunately at home nursing a heavy cold. Your fax of yesterday overtakes much of what was said in your letter and I can confirm my advice to my clients to accept your amendment to clause 2.6. So far as I am concerned therefore you may prepare the engrossments and, presumably, send off the Court Application.”

Later that day Ms Potts confirmed to Mr Tuthill that she had made amendments to the lease in accordance with the points made in her fax of 5th December.

The New Lease was duly granted on 22nd January 2002 in exchange for the surrender of the Old Lease. The repairing covenants were in the following form:

“(5)(a) From time to time and at all times during the said term to keep the said property (including all landlord’s fixtures and fittings plant machinery apparatus and appurtenances thereto belonging) in good and tenantable repair and condition (damage by any of the Insured Risks as defined in clause 2(15) excepted save to the extent that...

(b)

Subject to the terms of clause 4(7) to deliver up the same to the Lessors in such good and tenantable repair and condition as shall accord with the other covenants on the part of the Lessee herein contained at the expiration or sooner determination of the said term

(c)

At the end or sooner determination of the said term if so required by notice in writing from the Lessors to remove from the said property all tenants trade fixtures and fittings and to make good to the satisfaction of the Lessors all damage caused to the said property by such removal

(d)

For the avoidance of doubt the Lessee shall not be required to renew replace or rebuild any part of the structure of the said property nor to renew replace or rebuild any non-structural parts of the said property save as part of the Lessees repairing obligations pursuant to clause 2(5)(a).

(6)

To permit the surveyors of the Lessors or their agents or either of them with or without workmen and others at all reasonable times upon giving to the Lessee prior notice thereof (except in the case of emergency) to enter upon the said property for the purpose of examining the state and condition thereof and in case any defect or want of reparation shall appear and shall represent a breach of the Lessee’s covenants in the Lease the Lessee will upon notice thereof in writing being given to him or left upon the said property cause the same to be repaired in compliance with the aforesaid covenants in that behalf within three calendar months next after the date of such notice and also that if the Lessee shall not within one month after the service of such notice commence and proceed diligently with the execution of such repairs (but without prejudice to the right of re-entry under the clause in that behalf hereinafter contained and to any other rights of the Lessors with regard thereto) then to permit the Lessors with workmen and others to enter into and upon the said property and to execute such repairs and so that the cost thereof with interest thereon from the date of demand for recovery by the Lessors to the date of payment by the Lessee at a rate equal to Four per centum per annum above the base rate from time to time in force of National Westminster Bank PLC (or if such base rate shall for any reason cease to be used or published then the interest shall be calculated by reference to such other comparable rate as the Lessors may specify) and calculated from day to day shall be a debt due from the Lessee to the Lessors and forthwith recoverable by action provided that any action taken by the Lessors upon entering the said premises will not result in the Lessors serving an interim or final schedule of dilapidations.”

Not having seen the travelling draft it has not been possible to trace the evolution of these provisions apart from the concluding passage which I have emphasised. This was inserted in consequence of the exchange of correspondence I have set out in paragraphs 18 and 19 above.

It is common ground that all the correspondence to which I have referred was “subject to contract” and that the proviso added at the end of clause 2(6) pursuant to the correspondence between Ms Potts and Mr Tuthill to which I have referred in paragraphs 18 and 19 does not preclude the claim advanced by the Lessors in these proceedings. The Lessee relies on the terms of the letter from Ms Potts dated 4th December 2001 which I have quoted in paragraph 15 above, specifically the passage in which she wrote:

“My client has already indicated to your client that a terminal schedule of dilapidations will not be served and this should be satisfactory comfort for your client.”

It is contended that that stipulation or warranty was given contractual force at the time of and by virtue of the execution of the New Lease.

After describing the nature of the issue before him Briggs J referred to the relevant principles relating to collateral contracts in paragraphs 5 to 8. They are not in dispute. The material passages are the following:

“5.....The law relating to collateral contracts ....is well settled, in particular in its relationship with leases. The starting point is that where parties create the relationship of landlord and tenant between themselves by the execution of a lease, the terms of that relationship are to be derived exclusively from the lease itself, including, for that purpose, any implied terms. The parole evidence rule applies as much to a lease as to any written contract, and in general a party to a lease is not permitted to prove that some aspect of their relationship is governed by a prior oral (or for that matter written) agreement in a manner contradicted by the provisions later made in the lease itself. See, for example, Henderson v Arthur [1907] 1 KB 10. The maintenance of that healthy principle is of particular importance in relation to leases because of the inherent and commonplace transferability of the rights and interests of the parties. It means that a lease will frequently regulate the relationship between persons who had nothing whatsoever to do with its negotiation, and who acquire their interests in ignorance of what took place.

6.

Nevertheless there are well-recognised exceptions to that principle, including rectification, collateral contract and estoppel. See, for example, Dowding and Reynolds on Dilapidations (3rd Ed) at paragraph 4.17; Lewison on the Interpretation of Contracts (3rd Ed) at pages 72 and 79; and Chitty on Contracts (29th Ed) at paragraph 12-103.

7.

A collateral contract may arise where one party (I will call him “party A”) says that he will only enter into the written contract or, as here into the lease, if the other party, party B, agrees not to enforce some provision of it against him in specific circumstances. The consideration for party B’s promise is party A’s agreement to execute the lease. The best known reported example of such a collateral contract is to be found in the decision of Harman J in City & Westminster Properties (1934) Ltd v Mudd [1959] 1 CH 129 in which, although the case was argued in promissory estoppel, Harman J described the facts as showing that there was:

“A clear contract acted on by the defendant to his detriment …”

… by executing the lease. Another example is the decision of the Court of Appeal in Brikom Investments v Carr [1979] 1 QB 467.”

Briggs J then quoted from the judgment of Lightman J in Inntrepreneur Pub Company Limited v East Crown Ltd [2000] 2 Ll.L.R 611, 615 in which he identified the distinguishing features of a collateral warranty. They are:

“(1)

a pre-contractual statement will only be treated as having contractual effect if the evidence shows that parties intended this to be the case. Intention is a question of fact to be decided by looking at the totality of the evidence;

(2)

the test is the ordinary objective test for the formation of a contract: what is relevant is not the subjective thought of one party but what a reasonable outside observer would infer from all the circumstances;

(3)

in deciding the question of intention, one important consideration will be whether the statement is followed by further negotiations and a written contract not containing any term corresponding to the statement. In such a case, it will be harder to infer that the statement was intended to have a contractual effect because the prima facie assumption will be that the written contract includes all the terms the parties wanted to be binding between them;

(4)

a further important factor will be the lapse of time between the statement and the making of the formal contract. The longer the interval, the greater the presumption must be that the parties did not intend the statement to have contractual effect in relation to a subsequent deal;

(5)

a representation of fact is much more likely intended to have contractual effect than a statement of future fact or future forecast.”

In paragraphs 12 to 14 the Judge dealt with a submission to the effect that as the negotiations were all ‘subject to contract’ a representation or warranty made in the course of them could not found a collateral contract. He rejected the contention because:

“If a party makes a promise in “subject to contract” negotiations, the consideration for which or reliance upon which consists of the promisee making the very contract being negotiated, then the proviso becomes enforceable, either by way of collateral contract or promissory estoppel, regardless of the parties’ use of the “subject to contract” label. Putting it another way, it is a necessary implication from what they have done that the promise is not deprived by that label of legal effect.”

Briggs J then described the facts, quoting the relevant passages from the documents, in some detail. In paragraph 39 and following he considered the effect of them. He did so in two stages. The first stage was down to the time of the statement of Ms Potts on 4th December 2001 on which the Lessee relies. He concluded in paragraph 41 that:

“Had matters rested there, I consider that there would clearly have been a good collateral contract or promissory estoppel sufficient to afford the defendant a complete defence to this claim.”

The judge recognised that matters did not rest there. In his second stage he considered whether, in what followed,

“the [Lessee] negotiated an exchange of the previously proffered assurance that there would be no terminal schedule for an amendment to clause 2.6 which, in the event, gave them nothing of any substance with which to prevent such a terminal schedule being served. Or whether, on the other hand, the assurance remained in place, notwithstanding that amendment.”

In that context he considered that “the critical part of that analysis is whether the proviso to clause 2.6 makes more sense as an adjunct to a continuing assurance or as the substitute for it.” His conclusion was:

“47.

I have found this a very difficult question and I admit that my mind has wavered on it more than once. I have, in particular, been concerned not to override the express bargain of the parties by a collateral contract or estoppel founded on less than clear evidence. But the evidence of what the parties said and did is clear and precise. The uncertainty lies in what they meant.

48.

In the end, I have on the narrowest of balances, come to the conclusion that the assurance given (or at least recorded) in Dechert’s letter of 4 December was not (and was not intended to be) overridden by the amendment to clause 2.6 proposed on 5 December and accepted on 6 December.”

Counsel for the Lessor referred us to four authorities, namely, Henderson v Arthur [1907] 1 KB 10, Heilbut Symons v Buckleton [1913] AC 30, City & Westminster Properties (1934) Ltd v Mudd [1959] 1 Ch.129 and Brikom Investments v Carr [1979] 1 QB 467. He relied on these cases for the purposes of establishing the strictness of the test for the establishment of a collateral contract and the proposition that the decision of Briggs J goes further than any previously decided case in this field.

In Henderson v Arthur [1907] 1 KB 10 the lessor sought to enforce a covenant to pay the rent quarterly in advance. The lessee relied on an oral agreement made before the lease was executed to the effect that the rent might be paid by a bill payable at three months. There was no dispute as to the oral agreement, only whether the evidence as to its existence might be relied on by the lessee to contradict the express terms of the lease. The Court of Appeal held that he could not. The Master of the Rolls, with whom Cozens-Hardy and Farwell LJJ agreed, observed that:

“It was somewhat faintly suggested that the agreement relied on was a collateral agreement in the nature of a condition upon which the lease was entered into by the defendant. But it appears to me, when the terms of the agreement are looked at, that it is not a merely collateral agreement, but provides in another and contradictory manner for doing what was subsequently provided for by the lease. Under these circumstances I think that the agreement relied upon was not admissible in evidence.”

Counsel correctly points out that there was in that case no doubt that such an agreement had been made.

In Heilbut Symons v Buckleton [1913] AC 30 the manager of the defendant had falsely represented to the plaintiff the nature of the company in which he accepted an allotment of shares. The claim for damages for deceit failed but the jury concluded that a warranty had been given and was false. An award of damages was upheld by the Court of Appeal but discharged by the House of Lords. The House of Lords emphasised the simple principle that an affirmation can only be a warranty if the evidence establishes that it was so intended. Thus, at page 47, after explaining the juridical basis of a collateral contract Lord Moulton observed:

“Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject matter.”

Counsel emphasises that any such laxity is particularly to be avoided in a case such as this where the parties are substantial commercial concerns, each represented by experienced solicitors, negotiating ‘subject to contract’ the terms of a lease of office premises in the City of London where the consequence would be to provide an immunity from repairing obligations in excess of that which had already been rejected and commercially most unlikely. Such a situation, he submits, is quite unlike that in either of the other cases to which he referred us.

In City & Westminster Properties (1934) Ltd v Mudd [1959] 1 Ch.129 the tenant accepted a new lease on the basis of an assurance by the lessor that he might continue to live in the demised premises. He defended subsequent proceedings for forfeiture for breach of the user covenant on a number of grounds including that assurance. Harman J concluded that the tenant’s residence in the demised premises constituted a breach of covenant and that the lessor’s acquiescence in his doing so did not constitute a release of the covenant. He rejected a claim for rectification. But he went on to hold that the tenant’s signature to the lease in reliance on the assurance made to him constituted a defence because:

“...there was a clear contract acted upon by the defendant to his detriment and from which the plaintiffs cannot be allowed to resile.”

As counsel for the Lessor points out the evidence was clear.

In Brikom Investments v Carr [1979] 1 QB 467 the landlord of a block of flats offered its existing tenants long leases of their respective flats. He promised to repair the roofs at his expense. He duly repaired the roofs but then sought to recover from the lessees, their assignees or the assignees of their assignees their share of the expenditure on the footing that it was recoverable under a covenant in their respective long leases. The County Court judge and the Court of Appeal considered that they were not entitled to do so but they were not agreed as to the reason.

The County Court judge and Lord Denning MR justified such conclusion on the basis of a promissory estoppel binding on successors in title. Roskill and Cumming-Bruce LJJ considered that the original promise constituted a collateral contract or waiver on which the original tenant might rely. They concluded that subsequent assignees might do so too on the ground that the lease, as assigned to them, had been shorn of the liability to contribute to the cost of these repairs. As Counsel for the Lessor points out the evidence was clear in that case.

Counsel for the Lessor took us through the documentary evidence in detail. He emphasised that the side letter proposed by Mr Tuthill in his letter to Ms Potts dated 29th November 2001 (see paragraphs 10 and 11 above) would only confer immunity from the repairing obligation under the New Lease to the Lessee personally and then only to the extent that the failure to perform or observe them was not material and substantial. If, he suggested, that limited immunity was unacceptable how much more unacceptable must be a complete immunity to the Lessee and its successors in title. In relation to the letter from Ms Potts dated 4th December 2001 (see paragraph 15 above) he emphasised that Ms Potts was reporting and reiterating what had already been indicated not purporting to enter into any contractual commitment on behalf of her client in the course of ‘subject to contract’ negotiations. Apart from all other considerations any such commitment would have been inconsistent with the requirement for flexibility so stressed by the Lessor (see paragraph 9 above) and referred to by Ms Potts in her letter of 4th December immediately before the passage on which the Lessee relies.

Counsel for the Lessor submitted that Briggs J was wrong to have considered the position from even a prima facie point of view as at 4th December as he did in paragraphs 39 to 41 of his judgment and in any event was wrong in the conclusion to which he came. In relation to the first submission he contended that the judge should have considered all the correspondence and reached a conclusion in regard to the alleged collateral contract as at 22nd January 2002. In relation to the second submission he suggested that the judge was wrong because the statement in the letter from Ms Potts could not have been intended to have contractual effect.

With regard to the subsequent events he criticised the judge’s conclusion on the basis that the documentary evidence shows that it was the intention of both parties that the problem should be dealt with by means other than a collateral contract. Thus Mr Chilcott continued to press for a side letter (paragraphs 16 and 17 above) and Mr Latham indicated that he would instruct his solicitors to amend the provision in the lease (paragraph 17). In the event Mr Chilcott’s preference for a side letter was overtaken by events and the solution proposed by Ms Potts for an amendment to the New Lease was accepted (paragraphs 18 and 19).

Counsel for the Lessor submitted that the course of negotiations as a whole shows that as at the date the New Lease was granted the statement made by Ms Potts some six weeks before was not then intended to have contractual effect. He relies, in particular, on features (3), (4) and (5) as identified by Lightman J in Inntrepreneur Pub Company Limited v East Crown Ltd [2002] WLR 611 (paragraph 23 above).

Counsel for the Lessee accepted that the features so identified by Lightman J were to be applied in this case. He specifically supported the conclusion of the judge that the ‘subject to contract’ condition did not preclude a collateral contract as it is necessarily implicit in the conclusion of the main contract that the condition shall not operate to deprive the collateral contract of legal effect. He emphasised that there was no subsequent contradiction of the passage on which the Lessee relies in the letter from Ms Potts dated 4th December 2001.

Similarly he supported the judge’s consideration of the position as at that date. He submitted that the statement in that letter was a consistent theme throughout. He suggested that it would be odd if subsequent events created or preserved a repairing liability in excess of what was there stated. He pointed out that the judge appears to have assumed in paragraph 41 of his judgment that Mr Chilcott had or had seen a copy of Ms Potts’ letter of 4th December (see paragraph 14 above) when writing his letter of the same date to Mr Latham (see paragraph 16 above) because he refers to “Dechert’s then stance in relation to both Mr Tuthill’s concerns”.

It is convenient to deal with this point at this stage. I agree that the judge appears to have made that assumption but I do not think it is one which the documentary evidence justifies. It is true that Mr Tuthill starts by referring to “copy correspondence from both my solicitor and Decherts” but he then repeats his suggestion for a side letter without any recognition of the fact that the letter from Ms Potts had unequivocally rejected it. Further there is no indication in this letter from Ms Potts that it was being sent by fax and the copy we have indicates that it was received by Mr Tuthill on 5th December. When Mr Tuthill did respond to it by his letter of 6th December (see paragraph 19 above) he referred to it as a letter, not a fax, received on 5th December, not the 4th.

Counsel for the Lessee suggested that all that followed the letter from Ms Potts dated 4th December went to reinforce the assurance given on the 4th December. Thus, in the letter from her dated 5th December she proposed an amendment to the lease but in the context of concluding passage (see paragraph 18 above) promising the co-operation of her client.

The law relating to collateral contracts is well-established but in connection with sales or leases of land needs to be applied with caution if not the suspicion to which Lord Moulton referred in Heilbut Symons v Buckleton [1913] AC 30, 47. Thus, if the promise said to be binding as a collateral contract is in truth one of the terms for the sale or other disposition of land it will be unenforceable unless it is contained in the written contract required by s.2 Law of Property (Miscellaneous Provisions) Act 1989. It must also be recognised that such a promise may be binding on successors in title of both parties without the need for notice or registration as a Land Charge or in the Land Registry, cf Brikom Investments v Carr [1979] 1 QB 467. In that case Lord Denning considered (p.484) that conveyancers could look after themselves. But he gave no indication of how they could protect their clients from variations to the terms of a document forming part of their title to land of which they did not and could not know.

Counsel for the Lessor did not rely on s.2 Law of Property (Miscellaneous Provisions) Act 1989 but he did emphasise the need for certainty in conveyancing transactions generally. I agree with him. I would go further. In a normal conveyancing transaction in a commercial context with both parties represented by experienced solicitors the usual course of dealing is to ensure that all agreed terms are put into the contract and conveyance, transfer or lease. Accordingly those who assert a collateral contract in relation to a term not so contained must show that it was intended to have contractual effect separate from the normal conveyancing documents. Otherwise it will be invalidated by s.2 Law of Property (Miscellaneous Provisions) Act 1989 even if evidence as to its existence is admitted.

In this case Briggs J recognised the dangers in paragraphs 5 and 47 of his judgment. He correctly directed himself as to the relevant law and subjected the documentary evidence to a meticulous examination. Yet at the end of the oral argument in this court I had reached the opposite conclusion. Before expressing it I need to identify the point or points in the judge’s reasoning with which I disagree.

In paragraphs 12 to 14 Briggs J dealt with the submission for the Lessor based on the agreed proposition that all the negotiations were ‘subject to contract’. He concluded in paragraph 14 that such a condition would not preclude the formation of a collateral contract if and when the main contract was duly signed. I agree. But it does not follow that the collateral contract could have come into existence at any earlier time. I do not suggest that the judge thought that it could but he took his initial stand as at the time on 4th December 2001 when the letter from Ms Potts containing the statement on which the Lessee principally relies had been received by Mr Tuthill and then considered the subsequent negotiations to see if they were sufficient to dislodge the prima facie inference to be drawn as at that date. I can well understand why he took that course but I consider that it led him to the wrong conclusion. There could have been no collateral contract at that stage, for the offer was subject to contract and could be withdrawn or modified by conduct in the subsequent negotiations. The question is whether all the negotiations between 10th October 2001 and 22nd January 2002 led to the conclusion of a collateral contract, as alleged, on the latter date. That is not the same as what the judge considered to be the critical question (see paragraph 26 above). Further in addressing what the judge described as the critical question he was, as I think, looking at the subsequent dealings from the wrong point of view.

The matter may also be tested by reference to the five propositions identified by Lightman J in Inntrepreneur Pub Company Limited v East Crown Ltd [2000] 2 Ll.L.R 611, 615 and quoted by Briggs J in paragraph 8 of his judgment (see paragraph 23 above). Propositions (3), (4) and (5) all point, as at 22nd January 2002, away from any collateral contract. Thus not only was the letter from Ms Potts dated 4th December followed by further negotiations such negotiations included the suggestion from Lionbrook that the outstanding issues should be dealt with by suitable amendments to the New Lease, the proposal of an amendment by the solicitor for Lionbrook and the agreement thereto of the solicitor for the Lessee (see paragraphs 17 to 19 above). In the case of proposition (4) I would not place too much weight on the lapse of 7 weeks before the New Lease was executed because that was delayed pending the construction of a corridor, but that there was an appreciable delay after the making of the statement relied on is clear.

Proposition (5) is, on the facts of this case, the most telling. The representation relied on related to future events in unforeseeable circumstances. As a contractual commitment it would be wholly uncommercial. Further it would commit the Lessor, whoever he was, to a far greater extent than, as the rejection of the side letters showed, Lionbrook was prepared to accept for itself.

Taken as a whole I do not think that the correspondence shows, objectively, that the parties did intend on 22nd January 2002 to make any contract other than that resulting from the grant of the New Lease. The opening correspondence (see paragraphs 5 and 6 above) set the scene for the negotiation of the terms of the New Lease. It included the stipulation that “there will be no liability for dilapidations or reinstatement”. There then followed correspondence and discussions between the Lessee and Lionbrook on the scope of the repairing obligation and the need to amend the draft New Lease (see paragraphs 7 to 12). That some amendments were made seems to be clear from the letter from Mr Tuthill dated 4th December (see paragraph 14 last paragraph of quotation) even if the nature of the amendments is not. In the course of them the solicitor for Lionbrook became increasingly concerned that the points on which the Lessees were troubled should be dealt with by amendments to the draft lease and not in discussions between the lay clients. If and insofar as a point was not dealt with in the New Lease then the emphasis was on flexibility and co-operation not some extraneous contractual obligation. Thus the proposal made by the solicitor for the Lessee for a side letter in his letters of 29th November and 4th December was rejected (see paragraphs 10, 11 and 14 above). Even when it came to the crucial letter from Ms Potts dated 4th December she referred back to the initial heads of agreement, emphasised the need for flexibility and co-operation and challenged Mr Tuthill to point out any of the agreed amendments to which his letter of 4th December had referred, which she had not carried through from the travelling draft. The context in which the statement relied on was made is quite inconsistent with an intention to enter into some extraneous contractual obligation.

The subsequent correspondence emphasised that the draft of the New Lease was the place in which to deal with outstanding issues. Thus Ms Potts, at Mr Latham’s suggestion, proposed a further amendment to the draft New Lease. This was accepted by Mr Tuthill in the mutual willingness to co-operate to which he referred (see paragraphs 15 to 18). The concluding correspondence emphasised acceptance of the further amendment rather than any reliance on the statement in Ms Potts letter or any earlier assurance to the same effect (see paragraph 19).

It may be that the amendment proposed to the New Lease did not entirely meet the second point that Mr Tuthill had made in his letter dated 4th December (see paragraph 14 above); though it is hard to see how there could be a final schedule of dilapidations arising from an inspection during the term for which a notice to remedy had been given. The terms of clause 2(5) might be thought to exclude them. Be that as it may, I see no ground for inferring that it was the intention of both parties as at 22nd January 2002 that the statement of Ms Potts in her letter of 4th December 2001 should have contractual effect outside the terms of the New Lease and as collateral to its grant.

Depending on which view is taken of the different reasoning of the Court of Appeal in Brikom Investments v Carr [1979] 1 QB 467 a collateral contract in the form alleged would bind the successors in title on both sides either by way of estoppel or as a contractual waiver. In that event it would be hard to resist the conclusion that the outcome is not a contract collateral to the lease but a term integral to its grant which was neither contained in the New Lease nor in any prior contract which complied with s.2 Law of Property (Miscellaneous Provisions) Act 1989.

I agree with Briggs J that this case is on the borderline, but I do not agree with him as to which side it comes down on. In my view the Lessee has no defence to the claim based on collateral contract or estoppel. I would allow this appeal and refer the matter back to the Master for further directions as to the future conduct of the claim.

I agree that this appeal should be allowed for the reasons given by the Chancellor. I gratefully adopt his account of the facts and circumstances of the appeal.

In my view, the heart of the matter is as follows. I agree that the questions whether the claimant’s claim is disabled by collateral contract or promissory estoppel has to be judged taking account of the circumstances as a whole, and in particular the whole course of the parties’ negotiations and their outcome, that is, the replacement lease which the landlord and tenant entered into. In particular, the sentence in Dechert’s letter of 4^th December 2001, in which Kate Potts wrote “My client has already indicated to your client that a terminal schedule of dilapidations will not be served and this should be satisfactory comfort for your client”, has to be seen in context and in the light of subsequent correspondence and events.

The context included what had been provisionally agreed, as recorded in Mr Chilcott’s letter of 10^th October 2001, to the effect that it would be a term of the new lease that there would be no terminal liability for dilapidations or reinstatement. The travelling draft lease did not contain such a term up to 4^th December 2001, and the landlord twice rejected the suggestion of a side letter. Although the terms of the one version of the side letter which we have were muddled, the tenant’s relevant request was clearly expressed in their solicitors’ letter of 4^th December 2001, to which Kate Potts’ letter was a response. The tenant did not want the landlord exercising rights of entry every five minutes to inspect the property and serve notices, and there was to be no terminal schedule of dilapidations.

These were not the only relevant communications of 4^th December 2001. For on the same day, Mr Chilcott wrote to Mr Latham in a letter whose second paragraph made the same two points. Mr Chilcott may or may not at that stage have seen Kate Potts’ letter. On balance, I rather doubt it, but that is not crucial. In response to Mr Chilcott’s letter, Mr Latham wrote on 5^th December 2001 somewhat reluctantly saying that, to move matters along, he had instructed Dechert to change the provision to exclude specifically interim and final schedules. He was not prepared to give up the right to inspect. By their letter of 5^th December 2001, Dechert acted on those instructions in drafting and including the proviso to clause 2(6) of the lease. This amendment so drafted was accepted by the tenants on advice from their solicitor – see Mr Tuthill’s letter of 6^th December 2001. The amendment found its way into the executed lease.

In my judgment, in the absence of a claim for rectification, the proviso to clause 2(6) of the lease, however it is to be construed, is to be seen as the parties’ considered agreed conclusion of the negotiations to resolve the two relevant points of contention. This entirely embraced and superseded the matter in Kate Potts’ letter of 4^th December 2001 on which the defendants rely. That letter said what it said, but things moved on and the agreed outcome was that which was contained in the lease. There is in these circumstances no room for a collateral agreement or a side promise preventing the landlord from relying on the terms of the lease, whatever may be their effect.

Although for some considerable time I thought that this was indeed a borderline case, I do not in the end on reflection think that it is. I am now clear for the short reasons I have given that the judge’s conclusion was wrong and that the appeal should be allowed.

I agree that the appeal should be allowed. I would agree with the judge that, if the dealings between the parties leading up to the grant of the new lease had ended with Ms Potts’ letter of 4 December, from which the Chancellor has quoted at paragraph 15 above, then a collateral contract might well have been made out. Her statement might readily be construed as an assurance as to her client’s future conduct, on the basis of which the tenant was invited to proceed without any further amendment to the agreed text of the draft lease, and on the footing that the assurance was an adequate protection for the tenant’s particular concerns. It would not be very different from what happened in City & Westminster Properties (1934) Ltd v Mudd.

However, that was not the end of the dealings between the parties about the terms of the lease. For my part, of the factors identified by Lightman J in Inntrepreneur Pub Company Ltd v East Crown Ltd, quoted by the Chancellor at paragraph 23, the most important for the present case is the third. The statement was followed by further negotiations. The course of those negotiations does not suggest that the tenant took the indication given as sufficient protection; rather, an amendment of the lease was sought and was agreed to by the landlord.

The tenant might have been better off if the indication had been accepted, because the effect and value for the tenant of the agreed amendment to clause 2(6) seem rather uncertain and doubtful. There seems to have been some muddled thinking, or at least expression, on these points as between the two solicitors. Be that as it may, I agree with the Chancellor that, looking back from 22 January at the course of the preceding negotiations, as one should, the indication by Ms Potts on 4 December is to be seen as no more than one step in the continuing process, and that, whatever force it might have had if it had been the end of the process, before the execution of the lease, it ought not to be regarded as having collateral contractual effect as of 22 January because it was not accepted and acted on by the tenant, who sought different protection by the amendment to the lease which was agreed. By analogy, in terms of the closely related topic of promissory estoppel, if the statement in Ms Potts’ letter on 4 December was a representation which might have founded an estoppel, the continuing negotiations showed that the tenant did not rely on it. That factor seems to me to be fatal to the claim that there was a collateral contract.