William Page & Company Ltd v BNP Paribas Securities Services Custody Bank Ltd & Anor

The parties to this action are William Page & Company Limited (“the claimant”) and BNP Paribas Securities Services Custody Bank Limited and BNP Paribas Securities Services Trust Company Limited (“the defendants”). The claimant is asking the court to enforce an option. The option is contained in a lease (“the lease”). The lease, of a shop at 121 Shaftesbury Avenue in London’s West End, was made on the 20^th December 1994 between Corston Holdings Limited (“Corston”), the claimant (therein called “the tenant”) and Chinacraft Limited (“CCL”). The term was expressed to begin on the 1^st March 1994 and to end on 24^th December 2004. The option is for a new lease for a further term of ten years, which the claimant purported to exercise on 15^th December 2003. The option is in clause 6(1) of the lease, in these terms (so far as material):

“If:-

(a)

the residue of the term of this lease is vested in William Page and Company Limited only and it wishes to take a further lease (“the Further Lease”) of the Demised Unit for a term of ten years from the expiry date of the contractual term hereby granted (“the Contractual Term”) and on the terms of the lease annexed at the Fifth Schedule hereto and at the rents mentioned therein; and

(b)

William Page and Company Limited only has given previous written notice (“the Notice”) of its desire to the Landlord not less than twelve calendar months before the expiry of the Contractual Term; and

(c)

throughout the Contractual Term the Tenant has paid the rent hereby reserved and reasonably substantially performed its covenants contained herein;

the Landlord (subject to the determination provisions contained in Clause 6(2) below not having been exercised) covenants with the Tenant to grant a Further Lease of the Demised Unit to William Page and Company Limited for a term of ten years in the form and at the rents contained in the Fifth Schedule hereto and William Page and Company Limited hereby covenants with the Landlord that it will accept the Further Lease on the foregoing terms and Chinacraft Limited hereby covenants with the Landlord that it will guarantee William Page and Company Limited’s obligations under the Further Lease and enter the Further Lease as surety pursuant to the surety’s obligations contained in the form of Further Lease......” [My emphasis]

For convenience, I shall, where appropriate, adopt the abbreviations in this clause throughout the remainder of this judgment.

The defendants acquired the freehold reversion on the lease in March 2006 and were duly registered as the freehold owners in April 2006 under their previous names (they changed their names in July 2007). The lease had been entered into following negotiations which had taken place while the claimant was in occupation under the terms of agreements for leases of the shop and an area described in the negotiations as “the Mall area”. These had been made in 1984 and 1985 respectively and were for twenty year terms both commencing in 1984 albeit on different dates. The grantor in both cases was Cambridge Circus Limited (“Cambridge”). The negotiations were it seems crucial to a planned redevelopment scheme which envisaged the claimant surrendering the Mall area. The landlord’s interests in these negotiations had, as I understand it, been represented by Linklaters & Paines, the well known solicitors, who also, it seems, acted for mortgagees in possession. Savills, the equally well known property consultants, had offered terms for the transaction following a meeting or meetings with Mr. Andrew North (“Mr. North”), one of the claimant’s directors and also a director of both CCL and China Catering Group Limited (“CCG”), a company to which I shall refer later in this judgment.

Savills’ letter to Mr. North dated 21^st December 1993 incorporating the terms (as far as material) read as follows:

“1.

SURRENDER OF AGREEMENT OF LEASES

a)

Parties:

Landlord – Corston Holdings Ltd

Tenant – William Page and Company Ltd and Chinacraft Ltd as guarantor.

2.

GRANT OF NEW LEASE

a)

Parties:

Landlord – Corston Holdings Ltd

Tenant – William Page and Company Ltd and Chinacraft Ltd as guarantor.

b)

Term:

For a period to expire on 23^rd June 2004. The tenant will have the right to extend the lease for a further 20 years to expire 23^rd June 2024 by serving a 12 months notice prior to 23^rd June 2004. The form of the lease will be identical to the current draft lease annexed to the agreement for lease except as set out in this letter.

c)

Rent and Rent Reviews:

Rent to remain at £100,000 per annum exclusive until completion of the deed of surrender and grant of a new lease, whereupon the rent will reduce to £80,000 per annum exclusive until expiry in 2004.

From 24^th June 2004 until 23^rd June 2014 the rent will rise annually from £80,000 per annum exclusive at a rent of 2% compounded. The lease will contain a rent review on 24^th June 2014 to open market value with subsequent rent reviews on 24^th June 2019.....”

During negotiations which followed, Mr. North and the claimant’s solicitors, Brecher & Co, sought unsuccessfully to persuade Corston through its representatives to obtain its agreement to CCG being the tenant and to the dropping of the requirement that CCL guarantee the lease. Indeed, at one point, it seemed they had partly succeeded, in as much as a solicitor at Linklaters & Paines in a letter to Brechers dated 28^th January 1994 wrote:

“I would propose that since I understand William Page is now a shelf-company, that Chinacraft Limited takes the lease directly, rather than acting as guarantor.”

This was followed up by Brecher & Co by letter dated 2^nd February 1994 proposing,

“....for the reasons which they [their clients] have explained to your clients’ agents they would like the new lease to be taken by China Catering Group Limited. I am instructed that this company has net assets in the region of £1.5m and it is not clear why it is said that its covenant is not satisfactory. Would you please clarify. If there are compelling reasons for your client’s rejection of this company my clients would like to know what they are.”

Mr. North explained in evidence that the reasoning behind this proposal was that as a result of a vertical corporate reorganisation, the claimant was now wholly owned by CCG and neither it nor CCG was now in the same group as CCL.

The gist of Linklaters & Paines’s response by letter dated 3^rd February 1994 to the question about CCG posed in Brecher & Co’s letter was broadly that their clients would be happy to have CCG as tenant if, in light of CCG’s less than satisfactory accounts (from their client’s perception that is), the claimant (meaning in the context Mr. North on the claimant’s behalf) could provide further information likely to afford its client comfort as regards the strength of CCG’s covenant.

While negotiations continued for some time with regard to whether the claimant, CCG or CCL should be the tenant and/or guarantor and about the length of the further lease upon exercise of the proposed option and other topics including break options, and so on, ultimately the transaction in most material respects was in accordance with the terms originally offered: the claimant was to be the tenant and CCL was to give the guarantee.

I should add that it is common ground that the claimant is a dormant company, that there has been no assignment, that CCG has at all material times been in occupation of the demised unit and that CCG has been paying the rent due under the lease. And also, for completeness, that forms of lease annexed to the 1984 and 1985 agreements did not prohibit occupational licences.

An important inference to be drawn from this and all the surrounding circumstances is that the commercial purpose of the transaction was to facilitate the redevelopment scheme. This was to be achieved by replacing one set of leases with another comprising substantially but not exactly the same premises as under the 1984 and 1985 agreements. The claimant’s rights were not to be radically altered and certainly not diminished. Corston would have the benefit of at least as good a covenant as it had had before through CCL’s guarantee. Which of the companies under Mr. North’s direction was actually paying the rent or actually in occupation and would continue in occupation was largely an irrelevance against this background. There was certainly an absence of clarity about it in correspondence and emails adduced in evidence. Mr. North did his best to shed some light on this in the witness box. Counsels’ agreed note of his evidence on the point is as follows:

On its face, this is not conclusive one way or the other, but given the lapse of time since the negotiations took place and the number of meetings that there must have been involving the structure of the transaction and Mr. North’s candour in the witness box, I am prepared to accept and find that it is more likely than not that everyone to whom it might have mattered, if it mattered at all, should have been well aware that CCG was at the time and would continue in occupation.

The defendants take no point on the form of the option notice but claim that it was invalid because the claimant was not qualified to give it for the following reasons:

“a.

The “Tenant” is defined, in the Lease, as including “successors in title” and permitted assigns of the Tenant and if the Tenant for the time being is more than one person then it includes each of them and the Tenant’s covenants shall in such case be construed as made by such persons jointly and severally”. The Lease has not been assigned.

b.

The Claimant has not been in occupation of the Premises.

c.

The Claimant has not been paying the rent.

d.

Chinacraft Catering Group Limited has been in occupation of the Premises since, at least as far as the Defendants are aware, 1994, and Chinacraft Catering Group Limited has been paying the rent.

e.

The Claimant is and has been a dormant company within the meaning of s.249AA of the Companies Act 1985 and the Claimant cannot therefore assert that it was in fact the Tenant for the purposes of clause 6 or that it paid rent within the meaning of clause 6.”

The claimant joins issue on the general point that the option has not been validly exercised and belts and braces its claim in three ways which it contends are complete answers. These all involve mixed questions of fact and law, and are as follows:

The claimant’s primary case rests on the true construction of the option conditions. These, it acknowledges, must be strictly construed and performed to the letter subject to the qualification that the meaning of words in a document is to be ascertained having regard to the contextual setting or factual matrix in which the document came into existence. See, the judgment of Lord Hoffmann in ICS Ltd v. West Bromwich [1998] AC 896.

Counsel for the claimant aptly described the process of construction as ‘holistic’, from which, as a general proposition, I do not dissent given that this approach accords with the principles which Lord Hoffmann rehearsed in ICS.

Crucial to the analysis involved in the process of construction is clause 3(26) of the lease, which I shall set out in full, so far as material, a little later in this judgment. The meaning of, ‘tenant’, in the lease is also of the first importance in this process. Thus, the lease provides:

“the Tenant” ........ shall where the context so admits include the successors in title and permitted assigns of the Tenant and if the Tenant for the time being is more than one person the it includes each of them and the Tenant’s covenants shall in such case be construed as made by such persons jointly and severally.”

It is not asserted by either party that CCG is a tenant, still less that it is a ‘permitted assign’ within the meaning of the lease. It is not asserted it is entitled to exclusive possession. Neither is it asserted that the ‘rent’ CCG had been paying until the defendants imposed a ‘rent-stop’ on 23^rd January 2003 was equivalent in amount to a market rent. Indeed, Mr. North admitted during his cross-examination that the rent reserved by the lease was not a market rent:

“I did not take advice whether the £80,000 was below market rent. I accept now that it was”.

It is noteworthy that CCG’s financial statements for the year ended 28^th February 2007 identify an item charged the previous year equal in amount to this ‘rent’ as an annual commitment under a non-cancellable operating lease, although, obviously, this does not bind the parties one way or the other.

In all the circumstances, therefore, it is, in my judgment, a proper inference to draw that CCG has at all material times occupied the demised unit as licensee. Indeed, I do not understand it to have been submitted in argument before me that CCG has been in occupation on any other basis. A point which has been argued quite vigorously, however, is that occupation by CCG as licensee is a substantial breach of clause 3(26) of the lease.

CCG’s status is important for two reasons. First, it is clear from the documentary evidence that Corston would not accept CCG as tenant (it considered its covenant financially unsatisfactory). Second, while, with one exception, clause 3(26) of the lease precluded the tenant from lawfully underletting or parting with possession or occupation of part only of the demised unit, it did not (again with exceptions) preclude it from underletting the whole of the demised unit. The still unresolved question is whether clause 3(26) prohibits the creation of occupational licences and hence whether CCG is lawfully or unlawfully in occupation of the whole of the demised unit. I should underscore, therefore, that CCG has at all material times been in occupation of the whole rather than part only of the demised unit.

Clause 3(26) of the lease (so far as material) reads as follows:

“(26)

(a) (1) Not to assign part only of the Demised Unit and not without (i) complying with the proviso hereinafter contained and (ii) the written consent of the Landlord (such consent not to be unreasonably withheld) to assign the Demised Unit as a whole PROVIDED THAT the Landlord may require the proposed assignee to enter into direct covenants with the Landlord to perform all the covenants hereinafter contained on the tenants part to be performed and observed;

(2)

Not to permit or suffer any person deriving title under the Tenant in respect of any permitted underlease either to assign part only of the premises comprised therein or without the written consent of the Landlord (such consent not to be unreasonably withheld) to assign the whole of the premises comprised therein;

(b)

(i) Not to underlet agree to underlet share or part with the possession of or occupation of part only of the Demised Unit save that the tenant may as an alternative only to underletting the whole of the Demised Unit underlet to a single undertenant only up to fifteen per cent only of the total floor area of that part of the Demised Unit which is shown on Plan 2 (“the Permitted Part”) and the Tenant may not during such time as this undertenant occupies or has a right to occupy the Demised Unit further underlet any part whatsoever of the Demised Unit;

(ii)

Not to underlet or agree to underlet the Demised Unit or permit any person to occupy the Demised Unit at a fine or premium nor except at a rent which is not less than the market value of the Demised Unit (or in the case of an underletting of part of the relevant proportion thereof) nor to permit the reduction of rent paid or payable by any underlessee;

(c)

Not to underlet the whole or the Permitted Part of the Demised Unit without on each occasion procuring:-

(i)

that any intended underlessee shall only be of the whole of the Demised Unit or such part as is permitted pursuant to sub-clause 3(26)(b)(i) above;

(ii)

that any intended underlessee shall covenant with the Landlord as from the date of the underlease to observe and perform the covenants and conditions herein contained (excluding the covenant to pay the rents hereinbefore reserved) and not to underlet or agree to underlet or share or part with possession or occupation of the whole or any part of the underlet premises;

(iii)

that in any underlease the rent shall be payable quarterly in advance and shall if the rent is to be reviewed be subject to review in an upward direction only;

(iv)

.......................

(d)

Subject as aforesaid the Tenant shall be permitted to underlet the Demised Unit as a whole or to underlet the Permitted Part with the prior written consent of the Landlord which shall not be unreasonably withheld.”

The argument before the court has centred on the rather awkward language of sub-clause (b)(ii) but, in my judgment, the meaning of this sub-clause is explained perfectly clearly by sub-clause (d): the tenant must not part with possession of part of the demised unit or even licence occupation of part of the demised unit, subject to the small-area exception provided for in sub-clause (b)(i). If it wishes to carve out a leasehold interest or confer any occupation right in relation to the whole of the demised unit it must not take an upfront payment nor in the case of an underletting do so except at an open market rental, again subject to a small-area exception.

While the prohibition on taking a fine or premium can sit (albeit uneasily) with the idea that a tenant is not to take money up front from a licensee, the prohibition on underletting except at a full market rental and to reducing rent is clearly inapplicable to licences.

Bearing in mind the clarity of the language in sub-clause (d), it would, in my judgment, be contrary to reason to construe sub-clause (b)(ii) as barring the grant of occupational licences of the demised unit as a whole.

Although, in my judgment, the true meaning of these sub-clauses is perfectly clear, it is nevertheless supported by the contextual evidence which I have already recounted.

As Lord Hoffman observed at pages 912H to 913B in ICS, interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. Thus anything in this category is admissible with the exception of previous negotiations and declarations of subjective intent, an exception the boundaries of which he advisedly observed are in some respects unclear. The background may not merely enable the reasonable man to choose between possible meanings of words which are ambiguous but even to conclude that the parties must, for whatever reason, have used the wrong words or syntax. Thus, if, irrespective of the natural or ordinary meaning of words, the background leads to a conclusion something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which flouts business commonsense. See Lord Hoffmann’s judgment in ICS at page 913B-E.

It is proper in appropriate cases, therefore, to compare a conclusion reached on the basis of a strict construction of a document with a conclusion based on admissible evidence of the background to its coming into existence in order to test whether the latter rather than the former or vice versa is the true construction.

In the present case, there is, as I have remarked already, a degree of linguistic confusion in the very sub-clause which it is necessary to construe in order to determine whether CCG is lawfully or unlawfully in occupation. However, given the contextual background to which I have alluded, in particular the well known fact at the date of the lease that the claimant was a shelf or dormant rather than a trading company, and that clearly one of the company’s under the control of or affiliated in some way with the claimant would need to underwrite the claimant’s and CCL’s covenants by trading at the premises if these premises were not simply to be a millstone around these corporate necks, it is, in my judgment, inconceivable that the parties intended this sub-clause or any others to preclude the claimant licensing one or other of these companies to occupy the demised unit as a whole. At all events the court will lean against such a construction, and I, for my part, for all of the reasons I have given, do so.

Accordingly, the presence of CCG at the demised unit is not and never has, in my judgment, been in breach of covenant.

This conclusion leads inexorably to the parallel question whether the option conditions, precisely because they are attached to an option, are nevertheless to be construed inconsistently with the practical realities, i.e., as not having been fulfilled simply because a licensee (in this case CCG, but for this purpose it might have been CCL or some other person or entity) has paid the rent and performed the tenant’s covenants. Is it necessary, as the defendants contend, to construe these conditions differently simply because they are expressed in the active voice rather than the passive?

With all due respect, I have to say that I view this argument as excessively legalistic. True, options must be strictly construed, which means that they must, as a general rule, be followed to the letter. But strict construction does not involve ignoring either common sense or commercial purpose.

Thus, there is, in my judgment, no warrant, absent clear words, to construe the option conditions, and in particular sub-clause (c), any differently from a covenant to pay rent or covenants, such as a repairing covenant, which touch and concern the demise. A repairing covenant, for example, can, as a general proposition, be performed in any manner the tenant wishes.

Performance by or through an agency is completely normal and perfectly acceptable. Rent is frequently paid in this way, as invoices in evidence stating that third party payments will be treated as paid by an agent amply illustrate. A repairing covenant is properly performed whether it is performed directly or indirectly, for example, through an agent or by an independent building contractor. It cannot sensibly be argued that the tenant has not performed such a covenant just because he has not used his bare hands. Yet it appears to me that this is what the defendants’ narrower construction of the option conditions requires if they and the tenant’s covenants are to be construed consistently.

This apart, it appears to me the draftsman went to some trouble when drafting the conditions in sub-clauses (a) and (b) of the option to point out that the option was intended to be personal to the claimant; trouble which, by contrast, he did not take in sub-clause (c) (see my emphasis in paragraph 1). While this is a small point in my analysis, it is an important point which should not be ignored in the process of construction.

It has not been suggested before the court, not seriously anyway, that there have been any breaches of the tenant’s covenants besides, arguably, CCG’s presence at the demised unit. That, however, has not been established. It follows, therefore, that the claimant, as tenant, has throughout the contractual term paid the rent reserved by the lease and reasonably substantially performed its covenants contained therein.

The option conditions have therefore been fulfilled and the option validly exercised.

It is not strictly necessary for me to decide the three additional issues to which I have earlier alluded. However, in case the matter goes further, I shall now briefly summarise the findings of fact and law which I would have made had it been necessary for me to decide them.

The prerequisite for waiver by election by X is X’s knowledge of facts which give him a choice between exercising one of two mutually inconsistent rights and X’s unequivocal communication of his intention to waive one of these.

Cambridge is said to have elected not to take a point on the option notice through its solicitors, Olswang, shortly after it was served with it. The claimant relies, in particular, on a letter of Olswang dated 22^nd December 2003 addressed to Battens, the claimant’s solicitors, stating they were arranging for the form of the lease to be typed onto their system and were hoping to issue a first draft shortly, and on Cambridge’s failure, by Olswang or otherwise, to notify the claimant it would be taking the point on the notice at any time during protracted correspondence about the new lease before it parted with the reversion to the defendants.

On the evidence, for the best part of two years there had been inter-solicitor correspondence consistent only with a clear consensus that the matter would eventually complete. The consensus had been broken when one of Olswang’s partners became alerted in December 2005 to a point which might be taken on the option conditions. He had formed the view that the claimant could not satisfy the conditions if it was not actually in possession and had not itself paid the rent, believing, wrongly as it happened, that CCL was in occupation and paying the rent. Thinking that the client could capitalise on this, Olswang, on 5^th January 2006, wrote Poole & Co (the firm of solicitors then acting for the claimant):

“My client has asked me to advise you that it would consider renewal terms at an open market rental level.”

The defendants acquired the reversion with notice of this correspondence and these facts.

The claimant’s contention in light of this is that Cambridge was put to its election after 23^rd December 2003 or, alternatively, 24^th December 2004, by proffering a draft lease and embarking on negotiations about it without in any way reserving its position. This amounted to an election which Cambridge could not go back on. The Defendants following their acquisition of the reversion could be in no better position.

From a legal perspective, the contention depends for its success on the case being on all fours with Kammins Ballrooms Co. Ltd v. Zenith Investments (Torquay) Ltd [1971] AC 850 and Bristol Cars Ltd v. RKH Hotels Ltd [1979] 2 EGLR 56, but those cases were very different from this one where there was merely delay in taking the point. In Bristol Cars, the tenant had started proceedings for a new lease following a request for a new tenancy under the Landlord and Tenant Act 1954 to which the landlords had failed to respond, but these had gone to sleep while negotiations proceeded. The tenant’s request was defective. When it became obvious that the negotiations would not fructify, the tenant revived the proceedings, but this was followed by another lapse and further negotiations, which again came to nothing. The action was again restored. The landlords applied for an interim rent, a step which the court treated as an election between choices on the one hand to affirm the request and taking the step they had, on the basis this represented their election, and on the other to object that the application was invalid. The step they chose was inconsistent with the latter, which the court accordingly held to have been waived.

Expert Clothing Service & Sales Ltd v. Hillgate House Ltd, [1986] Ch. 340, is authority for the proposition, if one is needed, that negotiations, without more, cannot prejudice a party’s substantive rights.

Crucially, however, Cambridge did not need to make a choice at all until immediately before completion. But, of course, completion never took place.

Accordingly, in my judgment, the claimant would have failed under this head.

The same facts formed the basis for this head with the sole additional assertion in order to perfect it that CCG had paid £15,575.45 plus VAT on its behalf for the work done by its solicitors in and about the negotiations.

It is trite law that mere silence in the absence of a duty to speak does not amount to a representation.

It follows from my previous holding in relation to waiver by election that neither Cambridge nor the defendants were under any duty at any time to communicate that they did not intend to take a point on the notice.

Accordingly, in my judgment, the claimant would also have failed under this head.

Given the common ground in this case, and my findings of fact, it is clear that both parties to the lease understood that the claimant would not be trading at the demised unit but rather that either CCG or CCL would be in occupation, trading there and paying or at least funding the rent. By parity of reasoning, they must also have understood and shared a common assumption about the probable consequences irrespective of the terms of the lease and the option conditions. A particular consequence which would have been obvious to both of them would have been, and I so find, that if this state of affairs continued it could not in good faith be relied upon in order to challenge the legal efficacy of an exercise of the option.

The issue for resolution in this scenario is whether it would indeed have been unjust to allow Corston and likewise its successors in title, Cambridge and then the defendants, to go back on this assumption. See, per Lord Steyn, at page 913D-F in Republic of India v. India Steamship Company Ltd (No.2), [1998] AC 878.

Whether going back on a shared assumption is unjust or not involves, as I see it, a test of unconscionablility, which in this case would be best judged by reference to the degree of prejudice which the reneging would occasion to the claimant.

As to this, the answer is, in my judgment, pretty obvious. The prejudice would clearly be very substantial: the claimant would not get a new lease, CCG’s business would be disrupted, perhaps ruined.

Accordingly, in my judgment, the claimant would have succeeded under this head.

The claim succeeds. The defendants will grant the claimant a lease in the terms of the prayer. I shall hear counsel as to any matters arising on the precise terms of the order and costs.