Equinox Industrial (Gp2) Ltd & Anor v Sketchley Ltd

By a lease dated January 14, 1994 made between Slough Properties Ltd as landlord and Sketchley plc as tenant commercial premises known as Building 32 (Postal No 3), Wharfside, Rounds Green Road, Sandwell Green, Oldbury, West Midlands were demised to Sketchley plc for a term of 25 years from June 24, 1993. The initial yearly rent was £67,104 subject to upwards only review every 5 years during the term.

Clause 2.1 of the lease provided that where the context so admitted the expression “the Tenant” included the successors in title of the Tenant. Clause 8 of the lease created a tenant’s option to determine the lease at the expiration of the tenth year of the term, i.e. on June 23, 2003:

“8.1

If the Tenant wishes to determine this Lease at the expiration of the tenth year of the term (‘the Termination Date’) and shall give to the Landlord not less than 12 months prior notice in writing expiring on the Termination Date and shall in respect of the period up to the time of determination pay the rent and substantially perform and observe the covenants contained in this Lease then upon the expiry of such notice subject to the Tenant giving vacant possession of the Premises and subject also to the provisions of clause 8.2 hereof the Term shall immediately cease and determine on the Termination Date but without prejudice to the rights of either party in respect of any antecedent claim or breach of covenant.

8.2

The Tenant shall pay unto the Landlord on the Termination Date a sum equivalent to eight months rent (based on the annual rack rent payable immediately prior to the Termination Date) which sum shall be paid in addition to and not in substitution for any other sums payable pursuant to the terms of this Lease.

8.3

For the purposes of this clause 8 the term the Tenant shall mean Sketchley plc only and not its successors in title or its assigns.”

On September 8, 1999 the original tenant, Sketchley plc, changed its name to Semara Holdings Ltd. On October 27, 1999 Semara Holdings Ltd assigned the lease to Sketchley Retail Ltd, pursuant to a licence to assign granted by the landlord. On April 25, 2000 Semara Holdings Ltd changed its name to Sketchley Ltd. On January 15, 2002 Sketchley Retail Ltd assigned the lease back to Sketchley Ltd, pursuant to a licence to assign granted by the landlord.

Thus on January 15, 2002 the lease became re-vested in the original tenant, now called Sketchley Ltd.

The landlord’s interest under the lease is now vested in the Claimants by virtue of an overriding lease for 999 years granted by Slough Properties Ltd to Slough Properties Ltd and Equinox Investment (GP1) Ltd on September 23, 2002 and a transfer of the long leasehold interest so created from the lessees to the Claimants dated September 25, 2002.

On June 19, 2002 solicitors acting for Sketchley Ltd served a notice on the landlord under clause 8 of the lease purporting to determine the lease at the end of the tenth year of the term. The Claimants seek a declaration that the notice is invalid, and Sketchley Ltd seeks to counterclaim for a declaration that it is valid.

The issue is whether Sketchley Ltd was entitled to serve a notice to determine the lease having regard to the fact that the right to determine was by clause 8.3 made personal to Sketchley Plc and did not pass to its successors in title or assigns. The Claimants contend that on a true construction of clause 8 the right to determine the lease ended once and for all when Sketchley plc (under its then name Semara Holdings Ltd) assigned the lease to Sketchley Retail Ltd on October 27, 1999 and that that right was incapable of being revived by the subsequent assignment back to Sketchley Ltd on January 15, 2002. Sketchley Ltd contends that the right to determine the lease revived on the assignment of January 15, 2002.

What is before the court is an application for summary judgment by the Claimants, and an application by Sketchley Ltd for permission to counterclaim. It is accepted on both sides that what is involved is a pure point of construction on which no evidence of factual background would be helpful, and that therefore the issue of the validity of the notice should now be finally determined.

The Claimants submit that the purpose and effect of the clause 8 as a whole is to confine the right to determine the lease to the original tenant prior to any assignment by the original tenant, and that that construction is supported by the commercial purpose of the provision, and by the treatment of similar provisions in the decided cases.

In particular, the Claimants contend, once the lease has been assigned the first assignee and every subsequent assignee is of necessity a successor in title or assign of Sketchley plc, even if the lease is subsequently re-assigned back to Sketchley plc. In such a case, the title of Sketchley Plc is that of an assignee not that of the original tenant, and an assign cannot operate the break clause.

Sketchley Ltd’s position is that as at the date of the notice, June 19, 2002, it was squarely within clause 8, because “the Tenant shall mean Sketchley plc,” and Sketchley Ltd is that entity. It was the tenant under the lease and able to give notice and comply with clauses 8.1 and 8.2. Clause 8.3 provides that clause 8 can only be operated by the company now known as Sketchley Ltd. This requirement was complied with, since it was Sketchley Ltd which operated clause 8.

I have been referred to cases in clauses in leases which leave no room for doubt on this point (in the sense for which the Claimants contend) are quoted (St Martins Property Investments Ltd v CIB Properties Ltd [1998] L&TR 1, 4; Brown & Root Ltd v Sun Alliance Ltd [2001] Ch 733, 737). The Claimants accept that there is an ambiguity in the provision in this case.

It is, of course, accepted that if the contractual language used is capable of two meanings that meaning should normally be adopted which is the more consistent with the likely commercial purpose of the contract: see, e.g. Co-OperativeWholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR 97, 99, per Hoffmann LJ. It is also accepted that on questions of the construction of contractual documents everything turns on the exact language used and its context in the contract as a whole, and that it would be wrong to refer to authorities on other documents merely for the purpose of ascertaining the construction of a particular document: e.g. Equity & Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR 124, 125, per Dillon LJ. But in practice (particularly in relation to rent review clauses) substantial weight is given to decisions of the higher courts where the same point has arisen and where the decisions have been carefully reasoned: Lewisham Investment Partnership Ltd v Morgan [1997] 2 EGLR 150, 158, per Neuberger J.

Subject to the appropriate reservation that they concerned wording which was not identical with that in the present case, I was referred to two decisions of the Court of Appeal, and a decision at first instance in New Zealand, which deal with, or touch upon, the question whether the original tenant, after taking a re-assignment of the lease, can exercise rights under a break clause (or, in the New Zealand case, a right of renewal) which is made personal to the original tenant.

In Olympia & York Canary Wharf Ltd v Oil Property Investments Ltd [1994] 2 EGLR 78 a 25 year lease of office premises was granted to ICI Petroleum Ltd (subsequently known as Enterprise Petroleum Ltd). The lease contained a break clause in favour of the tenant at the expiration of the tenth year of the term, and a requirement that the landlord should not unreasonably withhold consent to an assignment. The break clause included these words:

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

In 1987 the lease was assigned to Olympia & York Canary Wharf Ltd, a company which was for a period in administrative receivership, and then subject to a company voluntary arrangement. By early 1990s the rent payable under the lease was far in excess of the current open market rent (£450,000 as against £1.015 million per annum), and in those circumstances, Olympia & York wished to assign the lease to Enterprise, which was willing and “indeed anxious” (see at 429) to accept a re-assignment because this would enable it to exercise its right to terminate the lease, and relieve itself of a liability which was capitalised at more than £7 million.

The issue was whether the landlords were reasonable in refusing their consent to the proposed assignment. It was held that the refusal was reasonable. The landlord could refuse consent because Olympia & York was seeking to compel the landlord to accept a proposal which would enable Enterprise to achieve indirectly what it could not achieve directly. Olympia & York and Enterprise were seeking to depart from the original bargain, because the lease made plain that an assignee had no right to terminate the lease, and they were seeking to achieve that very result by an indirect route, when the direct route had been barred by the express words in the lease.

Sir Donald Nicholls V-C, who gave the main judgment, left open the possibility that the position might be different if the assignment were for some other purpose, such as Enterprise wishing to occupy the property or sub-let it, and if it were prepared not to undertake to give notice of termination. He said (at page 50):

“… the key to the present case lies in keeping in mind one fact which is incontrovertible, namely that [the break clause] was not intended by the parties to confer any right on an assignee from Enterprise … [A]n assignee’s inability to break the lease after 10 years would inevitably mean that Enterprise’s exposure on its covenant as original lessee would continue. That [the break clause] was not intended to confer any right on an assignee despite this obvious consequence for Enterprise is made clear beyond a peradventure by the express wording of the clause, whereby the right was expressed to be personal to Enterprise … [The break clause] conferred a right expressly on the original lessee alone. In my view, given that express limitation, there is no scope for treating [the break clause] as impliedly conferring rights on an assignee … over and above the rights an assignee would otherwise possess.”

It was assumed by the parties that, if the re-assignment were to take place with the consent of the landlord, then Enterprise would have been able to operate the break clause. Notwithstanding this concession by the landlords, Sir Donald Nicholls V-C said (at page 50):

“I add this. I have referred to the intention of the original parties to the lease and to the bargain comprised in the lease. One asks oneself why the right conferred by the break clause was made personal to Enterprise. There is no obvious answer to this. There would perhaps be a certain commercial logic in confining the right to Enterprise so long as Enterprise throughout remained the tenant. Enterprise could pull out after 10 years if it wished. But if, meanwhile, Enterprise chose to realise its investment by disposing of its entire interest by assignment, then its right to withdraw would lapse. However, neither party contended before us that Enterprise’s right is so confined. Quite what is the commercial rationale which would revive Enterprise’s right to terminate if, having assigned the lease, it takes a reassignment, is not apparent on the material before us. Be that as it may, what is clear is that, had the intention been that at any time Enterprise was to have the right to end its liabilities along the lines now being contended for, [the break clause] would not have been drafted in the form which the parties chose.”

This passage suggests that the Vice-Chancellor’s view was that Enterprise would not have been entitled to operate the break clause on re-assignment. Both Leggatt and Henry LJJ concurred on the basis that the landlord’s refusal was reasonable. Leggatt LJ said that Enterprise gave up the assurance of the benefit under the contract when it exercised its right to assign the lease: “Once they had done so, their right to determine the lease ceased and could be revived only if the lease was reassigned to them; and that could not occur unless the respondents refrained from exercising, or had no ground on which they could properly exercise, their power to refuse consent to that assignment” (page 51). Henry LJ said that: “Under the clear terms of [the break clause], the appellant is empowered to give notice of termination only if they are at the time a tenant, and they cannot become tenants again unless the landlord gave consent to that, a consent that would be massively against the landlord’s financial interest.” (page 51).

In Max Factor Ltd v. Wesleyan Assurance Society [1996] 2 EGLR 210 a 25 year underlease of office premises was granted to Max Factor Ltd. The underlease contained a mutual break clause, which included these words:

“If either the Lessor or the Lessee (here meaning Max Factor Limited only) shall be desirous of determining this present Lease at the end of the tenth year of term hereby granted and of such desire deliver to the other not less than twelve month’s previous notice in writing … then and in such case immediately after the expiration of the tenth year of the term this Lease shall cease and be void … provided that for the avoidance of doubt in the event of the Lessee (here meaning Max Factor Limited only) assigning the interest in the demised premises prior to the expiration of the tenth year of the term then the Lessor’s right to determine the term contained in this Clause shall forthwith cease.”

Max Factor assigned the term with the consent of the landlord to Proctor & Gamble and then the lease was re-assigned (with the consent of the landlord) to Max Factor, which then gave notice of its wish to determine the lease in accordance with the break clause. It was held, by a majority (Staughton LJ dissenting), that Max Factor had lost the right to operate the break clause because it had ceased to be the original lessee.

Auld LJ reached the conclusion that the right to operate the break clause ended irrevocably on the first assignment for two reasons. The first reason was that the right to determine the lease was personal to Max Factor Ltd. After referring to the Olympia & York case, he said (at 212): “Once Max Factor assigned the lease to Proctor & Gamble I do not see what continuing contractual life there was in the break clause. It did not pass to Proctor & Gamble with the term, and Max Factor retained nothing to which it could relate. It was dead. Proctor & Gamble could not, by reassignment of the underlease, bring it to life again.” The second reason was that the proviso had the effect that in any event the mutuality of the right to break the lease would not survive the assignment by Max Factor Ltd: “I cannot read into the provision any indication that the parties intended that Max Factor’s personal right would survive assignment in a suspensive state and would be capable of exercise by it in the event of the underlease falling back into its hands.”

Auld LJ also shared the puzzlement of the Vice-Chancellor in the Olympia & York case as to what might be the commercial rationale of providing for a revival of a right to determine on re-assignment, especially because the entitlement of a lessee would in normal circumstances be of little practical value, since the landlord, if vigilant, could protect itself against reactivation of the break clause by reasonably refusing its consent to the re-assignment, as the lessor did in the Olympia & York case.

Aldous LJ reached the same conclusion for two reasons (with which Auld LJ agreed). The first was that the proviso manifested the intention of the parties that the language of the earlier part of the break clause should limit the right of the lessor to the period when Max Factor held the underlease as original grantee. The second reason was that the court should be slow to construe a lease as creating a right intended to run with the lease:

“The right to determine in [the break clause] is a personal right which fell away on the occasion of the assignment. It could not remain with Max Factor after assignment as it parted with the term and therefore did not have any right to determine the lease. This is consistent with the conclusion of Nicholls V-C in Olympia & York. That being so, I cannot see how it can revive. Once the right to determined had been extinguished on assignment, the subsequent re-assignment could not revive it.”

Aldous LJ went on (at 214):

“The conclusion reached appears to me to give effect to the words of the clause and make commercial sense. The original tenant had an interest in negotiating a break clause personal to it and conceding as part of that negotiation a reciprocal right to determine the agreement. There can be no commercial sense in the tenant bargaining for, or the landlord conceding, that once the tenant had chosen to assign the lease and realised any value it had, the right to determine the lease should revive if the tenancy should be reassigned to the original tenant. Indeed, that it is demonstrated by the decision of the Court of Appeal in Olympia & York. If the right to determine were to revive, the landlord could reasonably refuse consent to the reassignment if he did not want the lease to be determined, and so the right would be entirely nugatory”

In Taita Hotel Ltd v. Spelman [1963] NZLR 206 a lease provided that the lessee could renew the lease on notice “if the lessee shall still be the lessee.” The original lessee assigned the lease, and when the landlord challenged the right of the assignee to give notice of renewal the assignee sought the landlord’s consent to re-assign the lease to the original lessee. It was held by McGregor J that the original tenant would be entitled to the benefit of the right to renew if the lease were re-assigned to him, and that the landlord’s refusal of consent to the re-assignment was unreasonable. On the first point, the only argument which seems to have been made against the original lessee’s right was that he was not “still” the lessee. It was held that the fact that there had been an assignment would not prevent him “still” being the lessee. Refusal of consent to the re-assignment was unreasonable because the only reason was that the landlord desired to avoid granting a renewal of the lease: that was part of the original contract, and the reason was unreasonable and arbitrary.

In the present case the break clause enured for the benefit of the named tenant, Sketchley plc, and “not its successors in title or its assigns.” In Olympia & York it enured for the benefit of “the Tenant (meaning only ICI Petroleum Ltd)” and in Max Factor it enured for the benefit of “the Lessor and the Lessee(here meaning Max Factor Limited only)” and contained a proviso for the avoidance of doubt to the effect that the lessor’s right to determine should cease if Max Factor Ltd assigned its interest prior to the relevant date.

Accordingly in Olympia & York there was no provision which touched expressly on the effect of an assignment, whereas both in this case and in Max Factor the question of an assignment is addressed by the relevant provision.

I have already quoted the passage in Olympia & York at 50, where Sir Donald Nicholls V-C questioned the commercial rationale which would revive the original tenant’s right to terminate if, having assigned the lease, it took a re-assignment; and the passage in Max Factor, where Aldous LJ said that there could be no commercial sense in the tenant bargaining for, or the landlord conceding, that once the tenant has chosen to assign the lease and realised any value it had, the right to determine the lease should revive if the tenancy should be re-assigned to the original tenant. Aldous LJ said that the construction advanced by the landlords in that case gave effect to the words of the clause and made commercial sense.

I therefore accept the contention of the Claimants that there is commercial sense in an arrangement under which a right, such as a right to determine a lease, is available to the original lessee but which ends should that lessee choose to assign the lease. The original lessee then has two options. It can retain the benefit of the lease and enjoy the special personal right conferred on it or it can realise the value of the lease by assigning it but recognising that the special personal right is then no longer operable so that any price for the assignment will not reflect this right. What is less commercially intelligible is an arrangement under which the original lessee can assign the lease but then hope or expect that it can still exercise the special right if at some appropriate date in the future it re-acquires the lease. If the right can be revived there is inevitably a measure of continuing uncertainty involved. Such a position would be obviously unattractive to a landlord especially if it intends to transfer the reversion, and the same uncertainty would affect any purchaser of the reversion.

The construction contended for by Sketchley Ltd would be of very doubtful commercial benefit to a tenant. If Sketchley Ltd is correct the right to determine the lease can be revived by an assignee re-assigning the lease to the original tenants (as it says has occurred in this case). Yet the landlord could prevent the revival of the right by refusing consent to the proposed re-assignment, and in doing so would be acting reasonably: Olympia & York. Both Auld LJ and Aldous LJ in the Max Factor case [1996] 2 EGLR 210 at pp 212 and 214 relied on this point in concluding that re-assignment did not revive the right. Nor do I consider that it makes a difference to this conclusion (as Mr Morgan QC contended for Sketchley Ltd) that the court has a power to make a vesting order in favour of the original tenant under section 181(2) of the Insolvency Act 1986. The court has a discretion, and the landlord could object to an order unless the original tenant gave an undertaking not to operate the break clause.

I am satisfied that the wording of clause 8 as a whole, and particularly the exclusion in clause 8.3 of successors in title and assigns, has the effect of making it clear (whatever might have been the position if, as in Olympia & York, there had been no such express exclusion) that it is only the original lessee, as original lessee, which can exercise the break clause. For the purposes of the break clause, Sketchley Ltd falls within the category of those who are excluded from the benefit of the clause. I am also satisfied, despite Mr Morgan’s reliance on clauses 1.17 and 6.5, that there are no other provisions in the lease which militate against this conclusion, which is, in my judgment, confirmed by commercial common sense.

I will therefore make the declarations sought by the Claimants. If the form of order cannot be agreed, I will hear argument.