Ultimate Leisure Ltd and another v Tindle and another

Lord Justice Chadwick: 1. This is an appeal from an order made on 29 November 2006 by Patten J, sitting as Vice Chancellor of the County Palatine of Lancaster, in the Newcastle-Upon-Tyne District Registry of the Chancery Division on an application by the claimants for summary judgment in proceedings brought for declarations in respect of an option agreement dated 11 August 2005, in respect of premises known as Royal Court and Bigg Market,  Newcastle-Upon Tyne.  The first claimant, Ultimate Leisure Limited, is the registered proprietor of the freehold interest of the premises which are the subject of the option agreement.  The second claimant, Buildsense Limited, a wholly owned subsidiary of Ultimate Leisure, is the registered proprietor of the leasehold interest in a substantial part of those premises.  The lease under which Buildsense holds that interest was granted by Ultimate Leisure on 15 July 1999, for a term of 99 years from 1 June 1999, at a peppercorn rent. The option agreement dated 11 August 2005 was made between (1) Ultimate Leisure, (2) Buildsense and (3) Mr Alastair Tindle and Mr Peter Stienlett, described together as “the Buyer”.  Under that agreement, the Buyer was granted an option to purchase the freehold interest of part of the premises, at a price of £75,000.  The consideration for the grant of the option was £1,000.  The option was exercisable by the service on Ultimate Leisure (described as the Seller) of a notice in writing in the form set out in Schedule 4 to the agreement at any time within a period of eighteen months from the date of the agreement.  The Buyer sought to exercise that option by the service of a notice in the prescribed form on 7 February 2006 — that is to say, well within the option period.  The Seller contends (no doubt upon advice) that notwithstanding the terms of the option agreement and the notice served under that agreement, it is not obliged to complete the sale, and it can terminate the option agreement.  The foundation upon which that contention was based is clause 4.1 in the option agreement.  The clause is in these terms, so far as material: “4.1.  Immediately prior to completion and conditional upon the same the Lessee shall surrender its interest in the Leasehold Property to the Seller such surrender to be effected in accordance with the terms  of an agreed form of Deed of Surrender a copy of which is annexed hereto or in such other form as shall be agreed by the parties to this Agreement acting reasonably and the Seller and the Buyer shall execute and deliver to each other the Lease and the Counterpart thereof respectively and the Transfer”. 5.      In that context, the lessee is Buildsense Limited.  The leasehold property is the property demised by the lease on 15 July 1999 and comprised in the title, in respect of which Buildsense is the registered proprietor.  The Lease — perhaps confusingly — is not that lease.  The Lease, for the purposes of Clause 4.1, is a new lease of property described as the new leasehold property and defined in Clause 1 of the option agreement.  The new lease is to be granted by the Seller as landlord to the Buyer as tenant for a term of 999 years.  It is said on behalf of the Seller that that clause (Clause 4.1) constitutes an agreement by Buildsense as lessee to surrender part of its leasehold interest; that that agreement falls within Section 38(1) of the Landlord and Tenant Act 1954; and that, accordingly, the agreement is void and to no effect.  Section 38(1) of the 1954 Act is in these terms: “38(1).  Any agreement relating to a tenancy to which this Part of this Act applies (whether contained in the instrument creating the tenancy or not) shall be void (except as provided by section 38A of this Act) insofar as it purports to preclude the tenant from making an application or request under this Part of this Act or provides for the termination or the surrender of the tenancy in the event of his making such an application or request or for the imposition of any penalty or disability on the tenant in that event”. 7.      Section 38A of the 1954 Act, to which 38(1) is made subject, was brought into force by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (SI2003/3096).  The section provides, at subsection (2), that parties who are the landlord and the tenant in relation to a tenancy to which Part II of this Act applies, may agree that the tenancy shall be surrendered on such date or in such circumstances as may be specified in the agreement, and on such terms, if any, as may be so specified.  But subsection 38(4) provides that an agreement under subsection (2) shall be void unless (a) the landlord has served on the tenant a notice in the form (or substantially in the form) set out in schedule 3 to the 2003 order; and (b) the requirement specified in schedule 4 of that order had been met.  The principal requirement in schedule 4, in the present context, is that the notice to be served under section 38(A)(4) (a) must be served on the tenant not less than fourteen days before the tenant enters into the agreement under section 38(A)(2); or, if earlier, becomes contractually bound to do so.  If that is not done, then the tenant must make a statutory declaration in the form prescribed.  A notice in the form described in schedule 3 to the 2003 order could have been served by the landlord on the tenant in this case; but was not served.   It is necessary, also, to have in mind certain other provisions of the option agreement.  Clause 5 of the option agreement incorporates into the contract the Standard Commercial Property Conditions (second edition), insofar as not inconsistent with or modified by other clauses.  Clause 8 of the option agreement, under the heading “Deducing Title”, provides that the seller’s title to the property has been deduced via solicitors before the date of the contract.  Documents of title, copies of which had been given to the buyer’s solicitors were listed in schedules 2 and 3.  Schedule 3 of the agreement lists, as documents of title, the registers of the title number comprising the freehold of the property, the lease of the new leasehold of the property, and the deed of surrender of the existing lease of the property, amongst other documents.  Copies of those documents were annexed to the agreement.  Clause 10 of the option agreement provides that the Seller will sell the property free from encumbrances, other than certain specified matters.  Those matters include: “10.1.1 Any matters, other than the Charge, contained or referred to in the entries or records made in registers maintained by HM Land Registry [under the freehold title];          … 10.1.4 any matters, other than the Charge, disclosed or which would have been disclosed by the searches and enquiries which a prudent buyer would have made before entering into this contract;          … 10.1.7 any matters disclosed in the documents [of title] listed in Schedule 3”. 10.  The effect of those provisions — as the judge held and as it seems to me — is that the Seller’s obligation is to make title free from the 1999 lease.  That obligation arises because the obligations on completion include, by virtue of condition 8.5.1 of the Standard Commercial Property Conditions (second edition), the obligation to hand over on completion the documents of title, one of which is the deed of surrender.  Reading the option agreement as a whole – and, in particular, reading clause 8 with clause 9 (the obligation to transfer with full title guarantee) and the matters in Clause 10 — it is clear that the documents of title listed in Schedule 3 are to be handed over on completion, and that the seller is to sell the property free from the encumbrances which the deed of surrender would eliminate.   11.  These proceedings were commenced by a claim form issued under CPR/Pt7 on 6 March 2006.  The claimants sought declarations in the following terms: “(1) A declaration that the terms of clause 4.1 constitutes an agreement by the Second Claimant to surrender the Leasehold Property and is void being contrary to section 38(1) of the Landlord and Tenant Act 1954; (2) A declaration that the Option or the agreement arising on its exercise is void and of no effect;  (3) Alternatively, a declaration that completion of the Option or any agreement arising on its  exercise under the Option Agreement is conditional upon the surrender by the Second Claimant [that is, Buildsense] of the Leasehold Property; (4) A declaration that, if and in so far as the conditions contained within clause 4.1 is incapable of fulfilment, it is an implied term of the Option Agreement that either party can terminate the Option upon reasonable notice or any agreement arising out of the exercise of the Option by service of a notice within a reasonable time of the date specified for completion of the Option Agreement”. 12.  The defendants’ response was to seek declarations by way of counterclaim, which included (1) a declaration that the provisions of the 1954 Act would not apply to the agreement to surrender as between the first and second claimants, and the agreement by the second claimant to surrender the leasehold property is valid and enforceable, and (2) a declaration that the option to purchase the property at the purchase price was valid and enforceable, and (3) a declaration that it is an implied term of the option agreement that both the first and the second claimants would use reasonable endeavours to secure the surrender by the second claimant of the leasehold property.  A declaration was sought to the effect that the surrender by the second claimant of the leasehold property is conditional upon the completion of the sale of the property at the purchase price.  13.  By an application notice dated 10 August 2006, the claimants sought summary judgment in substantially the form of the declarations set out in the claim form.  That application for summary judgment came before Patten J on 29 November 2006.  He dismissed the application  At paragraph 12 of his judgment, he identified the issues for decision: first, whether Part II of the 1954 Act applied to the lease at all; if so, second, whether the agreement contained in Clause 4.1 of the Option Agreement was an agreement falling within Section 38(1) of the Act; if so, third, what effect Section 38.1 had upon the validity or enforceability of the contract for the sale of the freehold, which came into existence as part of the exercise of the option.  14.  The judge determined the first and second of those issues in favour of the claimants.  Although his decision on those issues was challenged in a respondents’ notice filed on 2 April 2007, that challenge was not pursued at the hearing of this appeal.  We are concerned only with the judge’s determination on the third of the three issues which he identified.  15.  The judge addressed that issue at paragraphs [22] to [27] of his judgment.  His reasoning may, I think, fairly be summarised as follows: First, the effect of section 38(1) of the 1954 Act was to render Clause 4.1 of the option agreement void; but the section had no wider effect on the option agreement. Second, the enforceability of the contract arising from the exercise of the option — and in particular, the enforceability of the obligation imposed on the Seller by clause 10 of the option agreement to make title to the property sold free of the 1999 lease — turns on issues of construction.  As the judge put it at paragraph [23] of his judgment: “…the main issue between the parties is whether the contract should be read as imposing upon the first Claimant the obligation of securing the surrender of the lease as part of the making of title and with it the risk of any statutory invalidity, or whether the first Claimant’s obligation to complete in accordance with Clause 10 has to be read as conditional upon the enforceability of Clause 4.1”. 16.  Third, clause 10 was not stated to be conditional on any other event or the performance of any other provision in the contract.  Clause 4.1 provided that surrender of the 1999 lease is conditional upon completion, but it does not make the obligation to execute the transfer of the freehold conditional upon surrender of the leasehold interest.  Again, as the judge put it at paragraph [25]: “As a matter of ordinary language, Clause 4.1 contemplates all three documents — the deed of surrender, the transfer and the lease — being prepared in readiness for completion and exchanged or delivered on completion.  In my judgment it does not specify or attempt to deal with the consequences of a failure by any party to deliver any one of those documents”. Absent section 38, a failure by the second claimant to surrender its lease, and failure by the first claimant to surrender the property to the defendants free of the lease, would be breaches of contract for which specific performance or damages would be available remedies. 17.  Fourth, application of section 38 of the 1954 Act to the agreement does not alter this.  The judge saw no reason why the option agreement should not mean what it said.  He held that it was relevant to keep in mind that the Seller had it within its power to serve on Buildsense, the lessee, a notice under Section 38A which would have avoided the difficulties caused by Section 38(1).  Procuring a valid surrender was part of the seller’s obligation to make title under clause 10; and not a condition of precedent to a liability arising under that clause.  18.  For those reasons, the judge simply the claimants’ application for summary judgment.  Permission to appeal from the order of 29 November 2006 was granted by Arden LJ on 12 March 2007.  The grounds of appeal annexed to the appellant’s notice, filed on 20 December 2006, advanced these contentions: (1) that the judge was wrong to hold that completion of the agreement for sale was not conditional upon a surrender of the 1999 leasehold interest by the lessee; and (2) the judge should have found that completion of the agreement was so conditional; and that, as such surrender could not be enforced, completion of the contract of sale could not be effected. 19.  It is, I think, convenient to begin consideration of those contentions by returning to the language in clause 4.1 of the option agreement.  As drawn, the clause requires that immediately prior to completion: (i) the Lessee (Buildsense) shall surrender its interest in the leasehold property under the 1999 lease to the Seller (Ultimate Leisure) — the surrender to be in the terms of the agreed deed of surrender, annexed to the option agreement, or in such other form as the parties to the agreement which would include the buyer might agree; (ii) the Seller and the Buyer are to execute and to deliver to each other the new lease (that is, the lease of the freehold property defined in clause 1) and the counterpart; and (iii) the Seller and the Buyer are to execute and deliver the transfer.  20.  The question raised is what is meant by the phrase which appears in the opening words of that clause: “…and conditional upon the same”.  In that context, “the same” clearly refers to completion.  The effect of those words is to make the obligations in clause 4.1 conditional upon completion taking place.  The words are not apt to make completion conditional upon the matters in clause 4.1 having taken place.  Clearly, the parties contemplated that they would happen at the same time.  21.  I turn then to consider what the effect of Section 38(1) of the 1954 Act is upon the obligations in clause 4.1 of the option agreement.  The following matters are, I think, clear.  First, section 38(1) has no effect on the obligation of the Seller and the Buyer to execute and to deliver to each other the new lease and counterpart or the transfer.  It has no such effect because there is nothing in that obligation which purports to preclude the tenant from making an application or request for a new tenancy under Part II of the 1954 Act, or which provides for the termination or surrender of the existing 1999 tenancy in the event that the tenant does make such an application or request.  Second, it seems to me plain that there is nothing in Section 38(1) which precludes Buildsense, as the Lessee, from executing a Deed of Surrender if it chooses to do so.  Section 38(1) does not make the surrender itself void or unlawful; it makes void an agreement between the parties to surrender.  22.  Third, the obligation on the Lessee to surrender its interest in the leasehold property to the Seller is within Section 38(1) (see the decision of this court in Joseph v Joseph and Anr [1967] 1 Ch 78 CA).  That is because the obligation to surrender does purport to preclude the tenant from making an application or request for a new tenancy under the Act.  Fourth, the effect of section 38(1) is to render void any obligation owed by the Lessee (Buildsense) to the buyer to execute a surrender of its interest in the leasehold property under 1999 lease.  But, fifth, there is nothing in Section 38(1) which has the effect of rendering void the obligation on the Seller (Ultimate Leisure), wherever it may appear in that open agreement, to deliver an executed deed of surrender at completion.  The reason for that is that the obligation on the Seller to deliver and execute a deed of surrender is not an obligation which seeks to prevent the tenant when making an application for a new tenancy.  The Seller’s obligation is not the obligation at which section 38(1) is aimed.  23.  The position therefore, as it seems to me, is that neither the Buyer nor the Seller could enforce against Buildsense the obligation — which would otherwise be imposed by Clause 4.1 — to surrender its interest in the leasehold property.  But the section goes no further than that; in particular, it does not purport to have the effect of affecting the obligations as between Ultimate Leisure and the Buyer.   24.  The question, then, is what are the obligations between Ultimate Leisure and the Buyer?  As I say, the Seller’s obligation are to make title, in accordance with Clause 8 of the option agreement; to sell the property free from encumbrances – that is to say, pre-form the 1999 lease; and (under condition 8.5.1 in the Standard Commercial Property Conditions (second edition)) to deliver on completion the documents of title, which include the deed of surrender, as specifically set out in schedule 3 to the option agreement and a copy of which was annexed to the option agreement.  25.  If the Seller is unable to comply with those obligations, then, prima facie at least, it is in breach of its obligations under the contract of sale arising from the exercise of the option.  It is no answer to that breach to say that clause 4.1 is not enforceable by the Seller against the Lessee.  The relevant question, in the event that the Seller failed to deliver a properly executed Deed of Surrender (that is, a deed executed by Buildsense), would be whether it was within the seller’s power to do that.  If it were not in the Seller’s power, then the buyer might be faced with either taking the title that was offered and suing for damages, or treating the agreement as terminated by breach.  If it were in the Seller’s power to procure execution of the deed of surrender, then, as it seems to me, the Buyer could ask for a specific performance of the contract of sale; and that would include an obligation on the Seller to use his powers to ensure that an executed deed of surrender was available. 26.  In the circumstances that the Lessee (Buildsense) is the wholly owned subsidiary of the Seller, it seems to me idle to pretend that it is not within the Seller’s power to produce a deed of surrender if it chooses to do so.  As things stand at the moment, it does not choose to do so; because (no doubt for commercial reasons which appear sensible to it) it prefers not to honour its obligations under the option agreement.  But that is for future consideration.  The only matter we are concerned with is whether the judge was correct to dismiss the application for summary judgment.  In my opinion he clearly was, and I would dismiss this appeal. Lord Justice May:  27.  I agree that this appeal should be dismissed for the reasons which Chadwick LJ has given.  I gratefully adopt his account of the facts and circumstances of the appeal.  The judge decided that although Section 38 of the 1954 Act did apply to render Clause 4.1 of the Option Agreement void, this did not affect the first claimant’s obligation under Clause 10 of the Option Agreement to sell the property free from encumbrances other than those listed in Clause 10.  Those listed plainly do not include a let-out for not getting rid of the second claimant’s relevant leasehold interest, because Clause 10.1.7 directs attention to the documents of title listed in Schedule 3, which include the Deed of Surrender of the second claimant’s relevant leasehold property, which by Clause 8 of the Option Agreement, under the heading “Deducing Title”, is listed as one of the documents of title.  Clause 9.1 requires the seller to transfer the property with full title guarantee.  Clause 4.1 of the Option Agreement was essentially an agreement between the two claimants.  The fact that, as between the two of them, the agreement to surrender was technically void does not, in my judgment, either release the seller from performing his explicit obligations to the buyer under the Option Agreement, nor, as a matter of construction nor implication, disentitle the buyer from requiring the seller to complete in accordance with the terms of the Option Agreement.  The judge was right so to decide for the reasons he gave.  28.  This is my view, irrespective of the reinforcing fact that the second claimant is the wholly owned subsidiary of the first claimant.  It is wholly within the first claimant’s practical power to require the second claimant to make an agreement under Section 38(A)(2) of the 1954 Act, or, more simply, just to require the second claimant to surrender the relevant leasehold interest, irrespective of the fact that Clause 4.1 is void.  It seems to me that the fact that Clause 4.1 is technically void would only have practical relevance if the second claimant were entitled, as against its wholly owning parent company, to insist that, because the clause is void, it is not obliged to surrender its relevant leasehold interest.  This the second claimant cannot do, since ownership of all its shares gives the first claimant complete control of its decisions if the first claimant chooses to assert that control. Lord Justice Moore-Bick:  29.  I agree that the appeal should be dismissed for the reasons given by my Lord Chadwick LJ.  Order: Appeal dismissed