Altonwood Ltd. v Crystal Palace F.C. (2000) Ltd.

The first issue raised is whether the Licence continued to subsist for the purposes of clause 4.3.3 of the Lease after the execution of the Operation Agreement and the 2003 Letter. Clause 4.3.3 provides that the Turnover Rent is reduced from 10% to 7½% of gate receipts during such time as the Licence shall subsist or there shall subsist any other ground sharing licence. It is not suggested that any other ground sharing licence subsists.

This issue requires consideration of two questions. The first is whether the Licence was discharged or merely varied by the terms of the Operation Agreement and the 2003 Letter. The Licence can only have been discharged if it ceased to have any contractual force. Altonwood contend that it did cease to have any contractual force, since the Operation Agreement expressly in clause 6 relieved WFCL of what is agreed to have been its only subsisting obligation, namely to pay the licence fee due thereunder. This argument on the part of Altonwood would have had force if the subsisting obligation to pay was an obligation to pay CPFC, for the Operation Agreement and the 2003 Letter recognised that there was no such subsisting obligation. But this argument failed to have regard to the legal character and effect of the Side Letters. By those letters CPFC instructed WFCL to pay all licence fees and other monies payable under the Licence to Altonwood and to continue to do so unless otherwise instructed by Altonwood. The legal effect in law of such an irrevocable instruction is to effect an assignment of the right to payment of the sums in question under the Licence as a chose in action to Altonwood: see Re Kent and Sussex Sawmills [1947] Ch 177. From the date of such assignment CPFC had no right to payment. The right to payment was vested in Altonwood. Nothing was done or could be done by CPFC and WFCL without the consent of Altonwood to prejudice this entitlement and, so long as this entitlement continued, the Licence necessarily has continued in force and effect. There was accordingly no discharge of the Licence. I should add that the assignment extinguished the duty which might otherwise have been implied in clause 15.13.3.3.3 of the Lease to require WFCL to pay the licence fee and account for it to Altonwood, for after the assignment CPFC ceased to be entitled to require WFCL to make any such payment. No claim is accordingly maintainable for any breach of such duty.

This answer to the first question requires consideration of the second question, namely whether (notwithstanding the fact that the Licence remained in force) having regard to the provisions of the Operation Agreement the Licence ceased to subsist for the purposes of clause 4.3.3 of the Lease.

The impact of the Operation Agreement was (as I have said) that WFCL ceased to have any right to use the Stadium for the playing of football matches. The “nut” has gone and there survives only the “shell” of the Licence. In a literal sense the Licence may be said to subsist in the sense that it continued to exist, but it ceased to subsist as a ground sharing agreement as defined by clause 5.13.1 of the Lease for the purposes of the Lease. In my judgment, upon the true construction of the Lease for a ground sharing agreement to continue to trigger the provisions of clause 4.3.3 of the Lease and effect a reduction in Turnover Rent, it is necessary not merely must the Licence continue to exist, but it must continue to subsist as a ground sharing agreement as defined in clause 5.13.1. The Licence was deprived of that character by the Operation Agreement and it thereupon (for purposes of clause 4.3.3 of the Lease) ceased to subsist.

CPFC admit that by the Operation Agreement it varied the terms of the Licence by removing the right of WFCL to use the Stadium, that this variation was made without the consent of Altonwood and that accordingly the variation was made in breach of clause 5.13.4 of the Lease. The second issue raised is whether Altonwood has any, and if so what, entitlement in damages in respect of this admitted breach of contract.

The first line of defence of CPFC to the claim in damages for that breach is that Altonwood could not reasonably have withheld consent to the variation of the term of the Licence, since it occasioned no financial loss to Altonwood and that accordingly the breach of covenant was technical only and occasioned no damage. I do not agree that the mere fact that the variation cannot be shown to have occasioned loss involves reaching the conclusion that Altonwood could not reasonably have withheld consent. It seems to me that Altonwood could reasonably have objected to a variation to the Licence which denuded the Licence of its essential character. I proceed accordingly on the basis that consent could reasonably have been refused. But nonetheless I accede to CPFC’s second line of defence that on the evidence before me the breach of covenant neither occasioned any loss to Altonwood nor enriched CPFC. There is no real dispute that this is so. Therefore no inquiry as to damages should be granted. I should add that until an advanced stage in the proceedings Altonwood claimed entitlement under clause 5.13.6 to the £100,000 paid to CPFC by WFCL or at least part of it. There was however no basis for that claim. The evidence before me established that the £100,000 was paid in discharge of the liability of WFCL in respect of O&M Costs and not in respect of any liability for licence fee, and only if the payment had been made in respect of liability for a licence fee could Altonwood maintain any claim in respect of that payment.

On the 14^th May 2004, the Defendant played a football match (“the Match”) at the ground against Sunderland FC. The match was the first leg of the semi-final of the Football League Play Off Competition for promotion from the First Division to the Premier League. The sum taken through the turn-stiles for the match on the 14^th May 2004 was £398,436.60. Pursuant to the rules of the Football League governing the Play Off Competition CPFC paid the sum taken to the Football League. Pursuant to those rules the Football League subsequently paid back to CPFC in respect of the match and the second leg of the semi-final played at Sunderland £229,781.85. This sum was one eighth of the aggregate gross receipts of the four semi final matches. CPFC paid to Altonwood in respect of the Match the sum of £9,690.61. CPFC purported to calculate and pay this figure on the basis that the Match was a Cup, and not a League, match and that Altonwood was entitled to 10% of what was under the rules of the Football League the Tenant’s Share of that sum. CPFC do not seek to support the calculation and payment of £9,690.61 which is plainly erroneous on any basis.

The third issue between the parties is the proper basis of calculation of the sum which is payable by CPFC to Altonwood under the Lease in respect of the Match and this turns on whether the match was (as Altonwood contends) a League match within the meaning of clause 1.1.17 of the Lease or (as CPFC contends) a Cup match within the meaning of clause 1.1.7 of the Lease. In the case of a League Match, clause 4.3.1.1 provides that the Turnover Rent is 10% of the Gross Gate Receipts taken in respect of a League Match. In the case of a Cup Match, clause 4.3.1.2 provides that the Turnover Rent is 10% of the Tenant’s share of the Gross Gate Receipts taken in respect of a Cup Match. If Altonwood is correct, it is entitled to 10% of £398,436.69 i.e. £39,843.66 which is some £30,000 more than it was paid.

In my judgment it is plain that the Sunderland Match answered the description of a League Match, for it was a first team competitive match played under the authorisation of the Football League. It is likewise plain that it did not answer the description of a Cup Match. It was not a Cup Match because, though it was a first team competitive match, it was not a match “in a cup competition” or a “cup match of a similar or comparable nature”. The term “cup” in this context means some form of trophy which may or may not be in the form of a cup. The terms “cup competition” and “cup match” mean a competition or match held under rules which provide that the winner is to be awarded a “cup”, and this particularly must be so in the context in which they appear in this case. The Football Association Cup and the Football League Cup are cups which the governing rules provide shall be awarded to the winner of the Football Association and Football League competitions. The rules under which the Match was played were the rules of the Football League’s Play Off Competition and these rules awarded to the winner, not a cup or other trophy, but promotion from the First Division to the Premier League. I was told that, though not provided for in the rules, in fact the winner of the Football League Play Off Competition is awarded a trophy. The fact that outside the rules a trophy is presented to the winner cannot make the competition a cup competition or cup match within the meaning of the Lease. Regard must be had for this purpose alone to the rules of the competition.

Neither the status of the match as a League Match nor the entitlement of Altonwood under clause 4.3.1.1 of the Lease to 10% of the Gross Gate Receipts is affected by the fact that under the rules governing the Play Off Competition CPFC is obliged to pay over the Gross Receipts of the Match to the League and receives back one eighth of the aggregate of the receipts of the four matches which form the semi-final of the competition. There is nothing patently unfair in Altonwood being entitled to 10% of the Gross Gate Receipts, most particularly when it is borne in mind that Altonwood is not entitled to any part of the one eighth share of the aggregate gross receipts of the four semi-final matches received by CPFC. The sum of £398,436.60 remained the Gross Receipts of a League Match, whatever obligations CPFC owed to the League in respect of that sum, and Altonwood remained entitled to 10% of that sum. The balance between that sum and what was in fact paid has accordingly at all times been due and payable by CPFC to Altonwood.

The fourth issue raised is whether CPFC can deduct from the Basic Rent and Turnover Rent which subsequently accrue due under the Lease the payment of sums in respect of the issue of complimentary tickets as part of the Turnover Rent which it previously made under the erroneous view that they were payable as part of the Turnover Rent or other like erroneous payments which it made.

CPFC covenants in clause 5.1.1 of the Lease to pay the Basic Rent “without deduction or set off by twelve equal payments in advance” and under clause 5.1.2 to pay any balance of the Rent due under clause 4.3 (i.e. Turnover Rent) by equal quarterly instalments in arrear “credit being given for any over payments made in respect of a previous quarter such payments to be made without deduction or set off”. The first question raised is as to the effect of such provisions on any right of set-off or deduction which might otherwise exist. Certain legal principles are clear. In the absence of any contractual provision to the contrary a tenant is entitled to deduct from the rent payable, so as to extinguish or reduce an instalment of rent due, any cross claim arising out of the provisions of the lease and the operation of the lease: see Federal Commerce & Navigation Company Limited v. Molena Alpha Inc [1978] QB 927 and British Anzani v. International Marine Management (UK) Limited [1980] QB 137. The right of deduction and set off has been judicially described as “essentially an act of self-help: see Robert Goff J in SL Sethia Liners Ltd v. Naviagro Maritime Corporation [1981] 1 Lloyds Rep 18 at 26. To meet this situation, express provisions are often inserted in leases which take away the tenant’s right to make such deductions. The language must be clear if it is to exclude the tenant’s remedy of equitable set-off. A provision requiring payment “without any deduction” has been held to be insufficiently clear for this purpose: see Connaught Limited v. Indoor Leisure Limited [1994] 1 WLR 501. On the other hand a provision requiring payment “without any deduction or set off whatsoever” has been held sufficient to exclude any right of deduction or set-off: see Star Rider Limited v. Inntrepreneur Pub Co [1998] 1 EGLR 53. In my judgment the formula used in the present case in respect of payment both of Basic Rent and Turnover Rent, “without any deduction or set-off”, omitting the word “whatsoever”, is likewise clear and sufficient (if less emphatic) to exclude any right of deduction or set-off. There is however one gloss on the application to Turnover Rent. Clause 5.1.2 provides that credit shall be given to CPFC for any over payment in payments of Turnover Rent made in a previous quarter.

The second question raised relates to the ambit of the provision in clause 5.1.2 for giving credit for overpayment in payment of Turnover Rent in a previous quarter. Mr Barnes for Altonwood has submitted that this provision should be construed as applying only where there has been an error in calculation of the Turnover Rent and not where by reason of an error of law there has been included in the calculation an item which ought not to be included (e.g. a sum in respect of complimentary tickets) and that, where by reason of an error of law an item has wrongly been included, CPFC is not entitled to a credit in respect of the Turnover Rent payable in another quarter. In my judgment the language of the provision is apt to cover, and require credit to be given for, any over payment of Turnover Rent however it arises. The language used in the provision is perfectly general and does not limit its application to over payments arising in one way and not in another.

The third question raised is whether CPFC is likewise entitled to credit for and to deduct any overpayment of Turnover Rent in respect of its liability to make any subsequent payment of Basic Rent. The principle is long established that a payment of rent before it is due is not a fulfilment of an obligation to make that payment. There may however be an agreement (and the payment in appropriate circumstances may evidence an agreement) between the landlord and tenant that on the day that the rent becomes due the payment shall be treated as a fulfilment of the obligation to pay the rent, and in such a case on the day that the rent becomes due the landlord is bound to treat payment in this way: see e.g. De Nicholls v. Saunders (1870) 5 LRCP 589 and Lord Ashburton v. Nocton [1915] 1 Ch 274 at 290 per Swinfen Eady LJ. There is no such agreement in this case, and none is alleged. Accordingly the erroneous payment in respect of Turnover Rent cannot be treated as a prepayment of or discharge of the future obligation to pay Rent and in particular the Basic Rent. For all purposes of the Lease the full amount of the monthly instalments of Basic Rent continue to be payable and the sanctions for non-payment become enforceable as and when the monthly payments accrue due and are undischarged. CPFC’s rights are confined to claiming credit in respect of future liabilities for Turnover Rent and to making a claim in restitution for repayment. This result, as it seems to me, is fully in accord with the evident intention of the parties who have excluded all rights of deduction and set-off and limited the right to credit for overpayments to credit in subsequent payments of Turnover Rent.

The fourth question raised is whether (as contended for by Altonwood) the Basic Rent continues to be payable by monthly instalments as provided in clause 5.1.1 of the Lease irrespective of what has been paid in respect of Turnover Rent. Altonwood contends that this is the true construction of the Lease and that the obligation to pay the instalments of Basic Rent continues unabated notwithstanding that it results in payments of Rent in excess of the Rent reserved

As it seems to me the answer to this question lies in clause 5.1.1 of the Lease, which imposes on CPFC the obligation to pay “the Rent”, and the definition in clause 1.1.26 of “the Rent” as the greater of the Basic Rent and “the Turnover Rent”. The measure of the obligation on the part of CPFC is at all times to pay the higher of those two sums, and nothing more and nothing less. The higher of the Basic Rent and the Turnover Rent is at all times the ceiling on the obligation of CPFC. The provisions of clause 5.1.1 for payment of the Basic Rent and of clause 5.1.2 for payment of Turnover Rent are merely mechanisms for fulfilment of the obligation to pay the Rent and the obligations to pay the instalments of Basic Rent and to pay Turnover Rent are only intended to operate to the extent necessary to ensure that at all times the Rent (and no more) is duly paid to Altonwood.

As I have already said clause 5.1.2 specifically provides that only so much Turnover Rent shall be paid as is necessary to “top up the Basic Rent” to equal the Rent due on the day of payment. Likewise it is in my judgment implicit in the scheme of the Lease that if by reason of a substantial payment of Turnover Rent the higher of the Basic Rent and the Turnover Rent has already been paid on the date for payment of an instalment of Basic Rent without recourse to that instalment or the whole of it, that instalment or the part of it already covered by the payment of Turnover Rent ceases to be payable.

I accordingly reject the construction propounded by Altonwood and hold that the monthly instalments of Basic Rent are not payable so long and to the extent that CPFC has already by payment of Turnover Rent paid “the Rent”, i.e. the higher of the Basic Rent and Turnover Rent payable on the monthly date for payment of an instalment of Basic Rent.

The fifth issue requiring determination is whether for the purposes of calculation and payment of Turnover Rent the lump sum paid to CPFC for a season ticket over one or more seasons for any facility at the Stadium is to be included in full in the Gross Gate Receipts of the quarter in which it is received (i.e. on a receipts basis) or whether the payment should be treated as spread over the period during which the benefits or services purchased are provided (i.e. on an accruals basis). Which basis should be adopted must be determined as a matter of construction of the Lease.

Expert evidence in the form of a report by Mr Gerry Boon (“Mr Boon”) a Chartered Account and partner in the firm of Deloitte & Touche LLP, has been prepared and placed in evidence to explain the accruals concept and to comment on the use and application of the accruals concept, with particular reference to the football industry and season tickets covering more than one season.

The Summary of the Report reads as follows:

“2.1

In my view, it is appropriate that the Defendant should recognise in its accounts the income from season ticket sales, that cover more than one season, over the period for which that season ticket is valid. This approach is consistent with the accruals and matching concepts which are fundamental principles of accounting. To account for the income on a cash receipts basis would distort the reported financial results of the Defendant such that they would not show a true and fair view. The cash receipts basis does not reflect the economic substance of the transaction entered into with season ticket holders and it would breach a fundamental accounting principle and generally accepted accounting practice.

2.2

As this report sets out, there are valid reasons why income received – for a benefit which accrues to the purchaser over a period of more than one season – is deferred in part and released over the period for which the purchaser receives that benefit and over which the provider of the benefit incurs the associated costs.”

The Report goes on to say (in paragraph 4.3) that the accruals concept is one of four fundamental accounting concepts; (in paragraph 4.4) that it requires revenue and costs to be accrued i.e. recognised as they are earned or incurred, and not as money received or paid, and matched with each other insofar as their relationship can be established or justifiably assumed; (in paragraphs 4.11 and 4.23) that the accruals basis shows the economic substance of transactions entered into whilst the receipt basis does not do so and may be misleading. The thrust of the Report as stated in the Summary is picked up in paragraph 4.15:

“The above examples demonstrate that the accruals basis of accounting is adopted in practice when accounting for the income of football clubs that straddles a number of accounting period ends.”

There can be no issue that CPFC and other football clubs prepare their accounts on the accruals basis. How they do or should prepare their accounts is not however the question before me. The question before me is whether the parties have agreed that the percentage of Gross Receipts which constitute the Turnover Rent shall be calculated and paid on the accruals basis.

There is no doubt that the parties to a lease can so agree. They did so in a case where (in the words of Hoffmann J) the lease contained “an unusual provision for calculating the quarterly rent”. The case, which was cited as affording guidance on the question before me, was SB Property Co Ltd v. Chelsea Football & Athletic Co Ltd (unreported) 6^th November 1990 (“SB”). Clause 1 of the lease in that case provided that the quarterly rent should be the higher of: (a) the amount payable by the landlord as interest on certain borrowings; and (b) 10% of the Club’s gross receipts in that quarter as defined by clause 1(1)(b). Clause 1(1)(b) read as follows:

“ten per cent of the gross receipts for the use of the demised premises received by the Tenant (being receipts for the use of the demised premises for the purposes of playing professional football where a charge is made for admission or a fee is received for the use of the demised premises) in such quarter after deducting therefrom the Value Added Tax on such receipts at the rate or rates for the time being in force.”

Clause 1(2) read as follows:

“Either the Landlord or the Tenant shall have the right to call for evidence as to the correct sum payable pursuant to sub-clauses (1)(a) and (b) hereof in which event the Landlord or the Tenant as the case may be shall procure the issue of a certificate by the auditors of the Landlord or the Tenant as the case may be certifying the correct sum payable in which case any shortfall or overpayment (as the case may be) shall be made good within a period of 14 days from the issue of such certificate.”

The relevant part of the judgment of Hoffmann J reads as follows:

“3.

Time apportionment

The typical payment which raises a question of time apportionment is the purchase of a season ticket. Everyone buys their season tickets at the beginning of the season. The ticket entitles the holder to admission to matches held during the whole season, covering more than one quarter. Is the whole payment to be brought into the calculation for the quarter in which it is made, or is it apportioned according to the quarters in which the matches take place?

Clause 1(2) provides for the correct sum payable to be certified by an auditor. One would expect him to do so in accordance with normal accounting principles. It is a basic principle of accounting, called ‘the accruals concept’, that the accounting period in which a receipt is recognised should be matched against the period in which the corresponding expenditure is incurred. In other words, a payment in the September quarter to attend a match in the March quarter should be apportioned to the March quarter, when the cost of putting on that match will be incurred. The fact that this lease uses quarterly accounting periods whereas the accruals concept is usually used in relation to annual periods is irrelevant.

This principle is so well established that I would expect it to be applied unless there was clear language to exclude it. Mr Scrivener says that there is. The clause speaks of ‘gross receipts for the use of the demised premises received by the Tenant (…) in such quarter’. That is said to show clearly that what matters is the quarter in which the payment is received. I agree that ‘in such quarter’ would, as a matter of good English, most naturally apply to the immediate antecedent ‘received by the Tenant’, even though they are separated by a long parenthesis. But the words are also capable of referring back to ‘for the use of the demised premises’ and from a commercial point of view, that seems to me the more sensible construction. I therefore hold that receipts must be time apportioned by reference to the quarters in which the matches to which they relate are played.”

The significant features of the lease in that case which formed the basis for the decision were: (1) the provision for certification by an auditor who would be expected to certify in accordance with normal accounting principles (i.e. the accruals concept); and (2) the provision (as construed by the judge) for payment quarterly of 10% of the gross receipts “for the use of the demised premises received by the Tenant in such quarter”. It was these considerations that led Hoffmann J to hold that receipts must have been intended to be time apportioned by reference to the quarters in which the matches were played.

The significant features of the lease in SB are absent here. The significant features of the Lease are: (1) that “Gross Gate Receipts” is defined in clause 1.1.12 as meaning “all admission money including money received from … Season Ticket”; and (2) that clause 4.3.1 provides that the Turnover Rent shall be 10% of the aggregate of the “Gross Gate Receipts taken” or “the Tenant’s share of the Gross Receipts taken” in respect of the matches played or to be played at the Stadium in a season and including “Gross Gate Receipts taken before the beginning of the relevant Season”. Clause 4.3.1.3 goes on to provide that “such sum shall be calculated on a quarterly basis”. “Such sum” refers to the quantum of the Turnover Rent referred to in clause 4.3.1 and the calculation referred to is the calculation of 10% of the aggregate of the specified Gross Receipts. The requirement for calculation on a quarterly basis is for calculation of 10% of the specified Gross Receipts taken in the relevant quarter.

Not only does it seem to me that the language of the Lease is apposite to calculation and payment of Turnover Rent on a receipts basis, but this is the fair and business-like construction. The Lease is replete with references to receipts and there is express provision that Gross Gate Receipts include receipts in respect of both matches played and to be played. I do not think that any significance is to be attached to the use of the word “season” in the singular. In this context the singular must surely include the plural. Under the Lease Altonwood and CPFC have agreed in the provision for payment of Turnover Rent to share the Gross Gate Receipts as there provided. There is no provision in the Lease, and there is no reason in fairness or otherwise to read into the Lease a provision for the deferral of receipt by Altonwood of its share of receipts for the benefit of CPFC which adoption of the Accruals Basis requires. It was argued before me that adoption of the Receipts Basis worked an injustice on CPFC because payment of 10% of the Turnover Rent on a receipts basis may require CPFC to pay Rent that is more than the higher of the Basic Rent and the Turnover Rent and that this risk would be avoided if the sums payable in respect of Turnover Rent were spread over the season or seasons which the season tickets covered. There is however no risk of over payments if (as I have already held) the obligation to pay Basic and Turnover Rent is to be read as subject to the overriding limitation that at no time shall CPFC be obliged to make any payment in respect of Basic or Turnover Rent where and to the extent that Rent (i.e. the higher of the Basic and Turnover Rents) has already been paid.