Farah v Moody and another

Tenants renting property and negotiating lease of adjoining property – Landlord constructing passageway for easy access between properties – Lease of adjoining property not being granted – Whether agreement by tenants to reimburse landlord costs of abortive construction work and legal fees if lease not granted subject to contract and not binding – County court holding tenants liable to reimburse landlord – Court of Appeal dismissing tenants’ appeal The tenants’ held a lease of premises from which they ran a café business called the Legend Café Bar (the café ). The café and two shop units (shop A and B) were in premises owned by the landlord. Shop A immediately adjoined the café and shop B was one unit away. In 1995 the tenants informed the landlord that they also wished to take an assignment of a lease of shop A. The tenants asked the landlord to provide a passageway from the café to shop A so that they could have easy access between the two premises. The landlord wrote a letter dated May 9 1995 to the tenants which was headed “Without prejudice and subject to contract” and which stated in para 1(i) that: “We will pay for our own legal fees in the matter except that if you should withdraw then you will have to pay all our legal fees as well and also the costs of all abortive construction works and their reinstatement to the condition as if the shop were to be used by others”. The tenants’ reply, dated May 10 1995, was headed, “The contents of this letter are subject to contract” and confirmed that the contents of the landlord’s letter were satisfactory. The landlord constructed a passageway between shop A and the café. However, the parties could not agree the terms of the lease which was never granted. The landlord issued proceedings claiming the costs of carrying out the construction and reinstatement of the works together with his legal costs. The tenants contended that everything in the letters were subject to contract and therefore as there was never any concluded bargain there were no binding obligations upon which the landlord could rely. The county court held para 1(i) could easily be separated from the subject to contract umbrella because if it was read as being subject to contract it did not make commercial sense. The tenants appealed. Held The tenants’ appeal was dismissed. The letters were to be read as keeping open negotiations. A commercial construction was to be given to para 1(i) because it was meaningless if it was read as being subject to contract. Accordingly, it was separate from the subject to contract umbrella. The county court had made its conclusion on the particular fact that para 1(i) would not have made commercial sense if constructed as being subject to contract and the decision therefore could not be faulted. Attorney-General of Hong Kong v Humphreys Estate (Queen’s Gardens) Ltd [1987] 1 AC 114, considered. Christian Sweeney (instructed by Harold G Walker & Co, of Parkstone) appeared for the appellants; Sarah Ferrrari (instructed by Gersten & Nixon) appeared for the respondent.