Lease of commercial premises – Underlease – Licence to underlet containing requirement for fourth defendant undertenant to take new lease in event of disclaimer of headlease by liquidators of head tenant – Surrender of underlease prior to disclaimer of headlease – Whether undertenant required to take new lease of premises from claimant landlord – Whether surrender breach of covenant against parting with possession or waiving covenants in underlease – Judgment for defendants
The claimant was the landlord of commercial premises of which the first defendant held a headlease for a term of 25 years from 1992. In 2004, the first defendant underlet the premises to the fourth defendant with the licence of the claimant; the fifth defendant guaranteed the fourth defendant’s obligations under the underlease. The licence to underlet provided that in certain “events of default”, including the disclaimer of the headlease by liquidators of the tenant, the fourth and fifth defendants could be required to take a new lease of the premises and to pay the claimant’s associated solicitor’s costs. It further provided that the first defendant was not to waive the provisions and covenants contained in the underlease without the claimant’s written consent and was to enforce them on demand by the claimant in the event of any breach (the waiver covenant).
In June 2008, the first defendant went into voluntary liquidation. In September of that year, and unknown to the claimant, the first defendant accepted a surrender of the underlease in return for a payment of £100,000. In October, the second and third defendant liquidators disclaimed the headlease. The claimant served a notice requiring the fourth and fifth defendants to take a new lease. The defendants contended that the notice was of no effect since the underlease had been surrendered prior to the event of default relied on by the claimant.
The claimant brought proceedings in which it claimed that the surrender had breached the obligations owed to it by the first and fourth defendants, namely: (i) a covenant in the underlease against assignment, underletting or parting with possession of the premises (the alienation covenant); and (ii) the waiver clause in the licence to underlet.
On a trial of preliminary issues, the claimant contended that the structure of the underletting generally, and the reason for the alienation covenant and waiver clause, was to preserve value in the subtenant’s covenants and the underlease and that the alienation covenant was intended to prohibit all dealings in the demised premises save for those expressly permitted by the terms of the underlease.
Held: Judgment was given for the defendants.
(1) The alienation covenant in the underlease did not no on its face refer to surrender. It was a common form of covenant, the wording of which had been built up over the years and that was inserted into all commercial leases. It restrained assignment, underletting, the sharing of occupation or holding the premises on trust. Although a tenant, on a surrender, had to give up possession to the landlord, such consensual arrangements were not intended to be caught by the covenant; where it appeared in a simple transaction between two parties, the common form of wording did not make a surrender, or the acceptance of such, a breach of covenant. The clause was not aimed at surrender.
The circumstances in which the underlease had been made in the instant case were not such as to alter the plain meaning of the common-form covenant or show that it was intended to bear a different or wider meaning than it ordinarily did. The claimant’s argument that the covenant prohibited all dealings in the demised premises save those expressly permitted by the terms of the underlease was back to front since the law of landlord and tenant was that the tenant could generally do anything except that which was prohibited. The terms of the licence to underlet, and the covenants therein, did not demand different intepretation. Nor was it possible to posit a general intention to preserve value as a starting point from which to reach an unusual construction of the common-form covenant; it was not a case where, construed in the ordinary way, the covenant did not make commercial sense. Had it been intended to restrain surrenders, an express provision to that effect could have been included; the claimant had failed to provide for a breach to occur in the event of surrender.
(2) Likewise, the waiver clause in the licence to underlet was not on its face a covenant against accepting a surrender of the underlease, but was a conventional covenant not to waive the covenants in the underlease and to enforce them on demand by the landlord in the event of a breach by the undertenant. The requirement to enforce the covenants remained operative only so long as the underlease was in existence. It was not implicit in the waiver clause that the first defendant had to keep the underlease alive for the entire term. A surrender was not in any normal sense a waiver of the terms in a lease and was not within the intendment of the waiver clause. Although the release and surrender had terminated all liability under the covenants of the underlease, that did not constitute a waiver of those covenants. The waiver clause contemplated a waiver occurring while the covenants subsisted, before the acceptance of the surrender. A prohibition against surrender could not be achieved by the general words of that clause; if surrender was something the claimant sought to prohibit, it should have made that clear.
Timothy Fancourt QC (instructed by DLA Piper UK LLP) appeared for the claimant; Katharine Holland (instructed by Pinsent Masons, of Leeds) appeared for the first to third defendants; Edward Cole (instructed by Muckle LLP, of Newcastle upon Tyne) appeared for the fourth and fifth defendants.
Sally Dobson, barrister
