An increasing number of property owners and occupiers are leaving properties that they no longer require, or can no longer afford. In Akzo Nobel UK Ltd v Arista Tubes Ltd [2010] EWCA Civ 28; [2010] PLSCS 33, the Court of Appeal was asked to decide whether a buyer was bound by an agreement to take an underlease that had not been completed.
In 1998, the parties entered into an agreement for the sale and purchase of a business, but needed the superior landlord’s consent to complete an underlease of the premises used by the business. Pending the grant of a licence to underlet, the seller allowed the buyer into occupation as a licensee. The parties agreed that, if the requisite consent was not obtained within 12 months, either party could serve three months’ notice to terminate their agreement.
In 2007, the buyer served a notice to terminate the agreement. The notice galvanised the seller into action. It obtained the requisite licence to underlet and issued proceedings for specific performance of the agreement to grant the underlease. It claimed that its obligation to obtain a licence to underlet continued until the end of the notice period – as did the buyer’s obligation to deliver a duly executed counterpart of the underlease.
The Court of Appeal disagreed. Their lordships noted that the premises were used for industrial purposes and would take time to vacate. If the seller’s interpretation were correct and it could trigger completion at any time during the notice period, neither party could be certain whether the buyer would stay or go until the last moment of the notice period. The court ruled that it would be surprising if this accurately reflected the parties’ intentions.
The case turned on the type of notice that had been served. The court ruled that the buyer had served a notice terminating the contract (as opposed to a notice to complete, giving the seller a last opportunity to obtain the landlord’s consent so that completion could take place). In the absence of contractual provisions to the contrary or a fresh agreement between the parties, it would be unusual for a notice terminating contractual obligations to have no legal effect before the notice expired. In addition, once given, such a notice cannot usually be unilaterally revoked or reversed. Consequently, the notice was effective to terminate the agreement and neither party could require completion of the underlease.
Commercial reality often dictates the pace when businesses are bought and sold. However, this case illustrates the dangers of exchanging contracts for the sale and purchase of a business in a hurry and of treating the deal as done and dusted, even though the conveyancing has yet to be completed.
Where time permits, it is advisable to obtain the landlord’s consent before transferring a business that is tied to leasehold premises. If the parties need to move more quickly, it is usually in both their interests to deal with any outstanding matters as soon as possible after the buyer assumes control of the business.
Allyson Colby is a property law consultant
