Rail Safety and Standards Board Ltd v British Telecommunications Ltd

This is an appeal from the order dated 27 July 2011 of Mr Robin Knowles QC, sitting as a deputy judge in the Chancery Division, by which he ordered judgment for the claimant British Telecommunications Plc (“BT”). The Deputy Judge gave permission to appeal.

The claim is for damages for the failure of the defendant, Rail Safety and Standards Board Limited (“RSSB”), to take an underlease of the first floor and an underlease of the second floor of the building at 120 Holborn, London EC1 (“the Building”), pursuant to an agreement between BT and RSSB dated 4 September 2007 (“the Agreement”). RSSB intended to carry out substantial works to those premises.

The case turns on the proper interpretation of the provisions in the Agreement entitling either party to determine the Agreement with immediate effect if the "Superior Landlord’s Consent" was not obtained by 5 October 2007. That is what RSSB purported to do, but the Deputy Judge held that it was not entitled to do.

BT is the tenant of the Building under a lease dated 3 August 1984 between the Prudential Insurance Company Limited and BT (“the Headlease”). The reversion on the Headlease became vested in Holborn Management Limited and 120 Holborn PropCo Limited (together “the Superior Landlord”). By the Agreement BT agreed to grant, and RSSB agreed to take, a lease of the first floor and a lease of the second floor of the Building.

In the Agreement BT was defined as "the Landlord", RSSB was defined as "the Tenant", the underleases to be granted by BT to RSSB were defined as "the Leases", and the works to be carried out by RSSB were defined as "Tenant’s Works".

Clause 1.2 of the Agreement defined the following expressions as follows:

“Superior Landlord's Consent means the consent of the Superior Landlord to the grant of the Leases by way of the Licence to Underlet and to the Tenant's Works by way of the Licence for Alterations.

Licence for Alterations means the licence for alterations to be entered into between (1) the Superior Landlord (2) the Landlord and (3) the Tenant which shall be in the form in Schedule 4 subject to any amendments that the Superior Landlord may require to make as shall be approved by the Landlord and the Tenant such approval not to be unreasonably withheld or delayed.

Licence to Underlet means the licence to underlet to be entered into between (1) the Superior Landlord (2) the Landlord and (3) the Tenant which shall be in the form in Schedule 3”

Under the Agreement completion was to take place five working days after (1) the receipt by BT of the Superior Landlord’s Consent, or (2) the date of the notice given in terms of clause 3.2 of the Agreement.

Clause 2 of the Agreement was as follows, so far as relevant:

“Superior Landlord’s Consent

2.1

Subject to the Tenant complying with its obligations under clause 2.2, the Landlord shall use reasonable endeavours to obtain the Superior Landlord’s Consent as soon as reasonably practicable after the date of this Agreement

2.2

The Tenant agrees:

(a)

to provide all such reasonable assistance as may be necessary to facilitate the grant of the Superior Landlord’s Consent;

(b)

to join in the Licence to Underlet;

(c)

that as soon as reasonably practicable after the date of this Agreement to provide such detailed drawings, plans and specifications detailing the Tenant’s Works to the Landlord and the Superior Landlord as the Landlord and the Superior Landlord may require in order to properly consider the Tenant’s application for consent to carry out such fit-out works;

(d)

that as soon as the drawings, plans and specifications detailing the Tenant’s Works have been agreed to provide as many copies of the same as the Superior Landlord and the Landlord properly require; and

(e)

to join in the Licence for Alterations, relating to the Tenant’s Works and to reimburse the Landlord’s and the Superior Landlord’s proper and reasonable costs relating to the grant thereof.”

Clause 3 of the Agreement contained provisions applicable if the Superior Landlord’s Consent could not be obtained by 5 October 2007. It provided as follows:

“Determination: Non Fulfilment

3.1

Subject to the terms of clause 3.2, if Superior Landlord’s Consent has not been obtained by 5 October 2007 then either party may at any time thereafter serve notice in writing to the other to determine this Agreement with immediate effect but without prejudice to any right of action either party may have against the other for any antecedent breach of the obligations contained in this Agreement Provided That any notice served pursuant to this clause 3 shall be void and of no effect if the Superior Landlord’s Consent shall have been granted prior to the date of service of the notice and Provided That the Tenant’s obligations in clause 2.2(e) shall not determine upon determination of this Agreement under this clause.

3.2

If the Superior Landlord’s Consent has not been obtained by 5 October 2007 but the Landlord has received the Superior Landlord’s consent to the grant of the Leases by way of the Licence to Underlet the Tenant may at any time up until either party has served notice to determine this Agreement in terms of clause 3.1 notify the Landlord in writing that it wishes to complete the Leases without the benefit of the Licence for Alterations and the Completion Date shall be the date five working days after the date of such notice.”

On 13 September 2007 draft Licences to Underlet signed on behalf of BT were sent to RSSB's solicitors. They were signed on behalf of RSSB and returned to BT's solicitors on 28 September 2007. On 7 November 2007 the Superior Landlord's solicitor stated by email that she was holding the executed Licence to Underlet. The draft Licence for Alterations was signed by BT on about 12 November 2007. On 16 November 2007 the Superior Landlord's solicitor sent an email stating as follows:

On 19 November 2007 BT's solicitors asked RSSB's solicitor for the sums necessary to pay the Superior Landlord's costs. On 20 November 2007 RSSB served a notice of termination pursuant to clause 3.1 of the Agreement.

BT refused to accept the validity of that notice of termination because it contends that the “Superior Landlord’s Consent” had already been granted. It served a Notice to Complete on 19 December 2007. RSSB did not complete on the grounds that it had already lawfully terminated the Agreement. BT purported to rescind the Agreement on 11 January 2008.

BT commenced the present proceedings on 9 August 2010 for damages in excess of £1.5 million.

The Deputy Judge dealt with the issue of liability only. He summarised (in paragraph [8]) the argument of Mr David Mitchell, counsel for BT, as being that by "Superior Landlord’s Consent" the parties did not mean completion of Licences to Underlet and for Alterations; the unilateral act of consent in principle from the Superior Landlord was sufficient; entry into the Licences as tripartite agreements would follow after consent in principle but was not the requirement.

The Deputy Judge set out in his careful judgment (at paragraph [10]) a number of principles of interpretation which he derived from Investors Compensation Scheme Limited v  West Bromwich Building Society [1998] 1 WLR 896; Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 79; Multi-Link Leisure Development Ltd v North Lanarkshire Council [2010] UKSC 47; Deutsche Genossenschaftsbank v Burnhope [1996] 1 Lloyd’s Rep 113; and Ravennavi SpA v New Century Shipbuilding Co Ltd [2007] EWCA Civ 58, [2007] 2 Lloyd’s Rep 24. He also referred (in paragraph [11]) to Mount Eden Land Ltd v Prudential Insurance Company Ltd [1997] P&CR 377, Aubergine Enterprises Ltd v Lakewood International Ltd [2002] EWCA Civ 177; and The Old Monk Co plc v Puzzle Pub Co Ltd [2004] EWHC 3457 (Ch). Having done so, the Deputy Judge agreed with BT and concluded (in paragraph [12]):

The Deputy Judge said in paragraph [13] of his judgment that he reached that conclusion for the following reasons:

Despite the Deputy Judge's clear and careful reasoning, I would allow this appeal.

Mr Mitchell, for BT, essentially adopts the reasoning of the Judge.

Before turning to the Agreement, it is necessary to mention one important statement by the Deputy Judge which was not correct. In paragraph [6.5] of his judgment he said that on 19 November 2007 the only thing that remained undone was RSSB signing the Licence for Alterations. That is not strictly accurate. The Licence to Underlet and the Licence for Alterations were intended to be executed as deeds. They were never executed by the Superior Landlord as deeds because they were never delivered. They were retained undated by the Superior Landlord's solicitors, apparently pending the payment of their fees by BT or RSSB. Those fees were not paid prior to the service by RSSB of the notice under clause 3.1 and the Licences were never delivered as deeds prior to that notice. Furthermore, the Licences executed by the Superior Landlord would inevitably have been held subject to delivery of the counterparts by BT and RSSB. Accordingly, one critical matter that was outstanding was delivery of the Licences as deeds by, or on behalf of, the Superior Landlord.

In his skeleton argument Mr Mitchell contended that the Judge's statement at paragraph [6.5] of the judgment is a finding of fact, which cannot be challenged on appeal. I do not consider that to be correct. All the facts and matters I have just mentioned are clear and undisputed. The Judge's statement is therefore erroneous, not as a matter of fact, but of law.

I regard the language of the Agreement and the meaning of clause 3.1 as clear and unambiguous. This is not a case where it is necessary to give words anything other than their natural and ordinary meaning because "something has gone wrong” with the drafting or because it produces a result which is unreasonable or inconsistent with business common sense: cf. Investors Compensation at 913D (point 5) and Rainy Sky SA  v Kookmin Bank [2010] EWCA Civ 582 at [21] to [23].

The Headlease contained provisions against subletting and carrying out alterations. Some contained absolute prohibitions and some were subject to the Superior Landlord’s consent not to be unreasonably withheld. There was an absolute prohibition against subletting part, which is what the grant of the underleases of the first and second floors would have been. Breach of those provisions would have given rise to a right to forfeit the Headlease. Subject to relief from forfeiture, forfeiture of the Headlease would also terminate any subleases. That is the commercial and legal context for the Agreement being made conditional on the obtaining of the "Superior Landlords Consent". It is made clear by the recitals in the form of the Licence to Underlet and the form of the Licence for Alterations in schedules 3 and 4 respectively to the Agreement, which refer to the requirement for the Superior Landlord’s Consent in the Headlease.

The Agreement provides that the Superior Landlord’s Consent means the consent of the Landlord "by way of" the Licence to Underlet and "by way of" the Licence for Alterations. The ordinary and natural meaning of the words is that the Superior Landlord’s Consent has to be in those specified forms of Licence and no other. That the ordinary and natural meaning applies is confirmed by the mandatory requirement in the definitions of "Licence to Underlet" and "Licence for Alterations" that those Licences "shall be" in those forms (subject, in the case of the Licence for Alterations, to any amendments that the Superior Landlord may require to be made and are approved by BT and RSSB). That mandatory requirement makes no sense if the Superior Landlord’s Consent can be given, for example, orally or on quite different terms to those in the schedules, and, in particular, without the various covenants by BT and RSSB.

That point is reinforced by the consideration that the Licence to Underlet contains a time condition for the grant of the Underleases (clause 2.1), and is a consent to the Underleases notwithstanding that they do not in all respects conform with the alienation provisions in the Headlease (clause 2.4) (which was a reference to the absolute prohibition against subletting part), and contains numerous covenants directly between RSSB and the Superior Landlord and between BT and the Superior Landlord. Similarly, the Licence for Alterations is expressed to be for the execution of the works, and in their entirety, within 6 months (clauses 2.1, 2.3, 8.1. and 8.2) and contains covenants by RSSB with both the Superior Landlord and BT and by BT and the Superior Landlord. It is clear that BT and RSSB intended that the Superior Landlord’s Consent should be in the specific form of those carefully drawn Licences and no other. The prescribed forms in Schedule 3 and Schedule 4 respectively show that they were intended to be executed as deeds.

The Superior Landlord’s Consent was in fact sought, and intended by the Superior Landlord to be given, in the form of the prescribed Licence to Underlet and the prescribed Licence for Alterations. As I have said, that consent was never given. For the reasons I have already mentioned, neither document was ever delivered by the Superior Landlord as a deed. Unless and until that occurred the Superior Landlord was free to change its mind about granting consent. It seems inconceivable, and certainly defies business common sense, for BT and RSSB to have agreed to commit themselves to the grant of the Underleases without the Superior Landlord’s Consent, so exposing BT to the forfeiture of its Lease and RSSB to the loss of the Underleases.

Accordingly, I do not agree with the reasoning of the Deputy Judge in paragraphs 13(1), (2), (4) and (5) of his judgment.

I find it difficult to understand the Deputy Judge's reasoning in [13.3] of the judgment. Neither BT nor RSSB could escape the transaction prior to 5 October 2007 merely because the Superior Landlord’s Consent was not obtained by that date. They were, however, perfectly entitled to do so after that date (subject to any argument about the time limit being a strict one, and subject to RSSB's option under clause 3.2) if the Superior Landlord’s Consent had not by then been obtained. That was the whole purpose of clause 3.1. Furthermore, so long as the Agreement remained on foot, both before and after 5 October 2007, BT and RSSB were under their respective obligations in clause 2.1 and clause 2.2 of the Agreement to procure the Superior Landlord’s Consent. I cannot see anything unlikely or odd about those contractual arrangements. BT has not alleged in these proceedings that RSSB was in breach of its obligations under clause 2.2.

I cannot see the force of the Deputy Judge's comments in paragraph [13.6] of the judgment. The expression "Superior Landlord’s Consent" defines a fact or a state of affairs. Clause 2.2 of the Agreement imposes obligations on RSSB to bring about that fact or state of affairs. Strictly, it can be said that the obligations in clause 2.2(b) and the first part of clause 2.2(e) are unnecessary in view of the general obligation in clause 2.2(a), but that is equally true of 2.2(c) and (d). The structure of clause 2.2 is to start with an overarching duty and then to reinforce it with specific obligations. I cannot see, therefore, that clause 2.2(b) or (e) throw any light on the meaning of “Superior Landlord’s Consent”.

In his oral submissions this morning, which reinforce his skeleton argument, Mr Mitchell sought to give an explanation of the meaning of “Superior Landlord’s Consent” and of the Agreement as a whole, which was consistent with BT's case and the finding of the Deputy Judge that there was no right of RSSB to withdraw from the transaction under clause 3.1. His argument, in short, is that the “Superior Landlord’s Consent” referred to in clause 3.1 is any indication by the Superior Landlord that it is willing to enter in due course into the Licence to Underlet and the Licence for Alterations in the form provided respectively in schedule 3 and 4 to the Agreement. He submitted that that is consistent with the obvious commercial intention that neither BT nor RSSB should be entitled to withdraw from the transaction once the Superior Landlord had given a clear indication of its willingness to enter into the prescribed forms of Licence.

He accordingly submitted that, in the definition of “Superior Landlord’s Consent” in clause 1.2 of the Agreement, the words "by way of" the Licence to Underlet and "by way of" of the Licence for Alterations were merely a shorthand for saying that it is sufficient if the Superior Landlord indicated that in due course the Licences would be executed by the Superior Landlord in the prescribed form. He submitted that this would not place the parties in the obviously uncommercial position of having to complete the transaction even if the Superior Landlord never committed itself to those forms of Licence. He submitted that it is implicit in the Agreement as a whole, although not expressly stated, that neither BT nor RSSB would be obliged to complete the grant of the Underleases unless and until the Superior Landlord had actually given its form of consent by way of deed in the form of the two prescribed Licences.

It seems to me, with respect to Mr Mitchell, that this is not only inconsistent with the express language of the Agreement but also produces a most uncommercial and unlikely result. The argument is inconsistent with the express definition of “Superior Landlord’s Consent” since it involves reading into the definition a significant number of extra words, making a distinction between an indication by the Superior Landlord that it is willing to enter into the prescribed Licences in due course, and the necessity for the Licences to have been entered into, executed and delivered by the Superior Landlord before any obligation becomes binding on BT or RSSB respectively to grant and take the Underleases.

Furthermore, Mr Mitchell's gloss that it is implicit in the Agreement that neither BT nor RSSB was under an obligation to complete the transaction, although unable to withdraw from it once the Superior Landlord had given such an indication, seems to me wholly inconsistent with the objective in clause 3.1 of providing a clear cut-off date. Mr Mitchell submitted that both parties, once such an indication had been given by the Superior Landlord, would be unable to withdraw and would be committed to their obligations for a reasonable period of time. Again, such an unlikely and uncertain requirement seems wholly inconsistent with this carefully drawn document and the express provisions providing certainty in clause 3.1.

Accordingly, notwithstanding Mr Mitchell's able submissions, I am clear that, for the reasons I have mentioned, the expression “Superior Landlord’s Consent” means exactly what the definition says in clause 1.2 of the Agreement. There was no Superior Landlord’s Consent in this case by the time that RSSB served its notice of withdrawal under clause 3.1.

For those reasons I would allow this appeal.

I agree.

I also agree.