Commercial lease – Rent increase – Construction of agreement – Appellants providing finance for development of Bluewater shopping centre – Return on investment partly consisting of rents from respondents under management lease of centre – Rent initially to be 15% of net rents received by respondents from occupational tenants of retail units – Provision for appellants to require payment of further 15% in event that further net rents becoming available to respondents by exercise of certain options – Whether respondents entitled to additional 15% where options not exercised but available net rents increasing by other means – Appeal dismissed
The first appellant was one of the investors in the Bluewater shopping centre near Dartford, Kent, developed by the respondents pursuant to legal and financial arrangements put in place in 1996. By those arrangements, the first appellant agreed to invest a total of £103m, plus VAT, in the project, with a syndicate of banks providing a further £375m. Repayment and a return on investors’ finance was to be achieved by the grant of a chain of leases out of the respondents’ freehold interest; these were to comprise a ground lease of the centre in favour of the banks, a headlease from the banks to the respondents, a lease from the respondents to the first appellant and a further “management lease” from the first appellant to the respondents, who would in turn grant occupational leases to tenants of the individual retail units. The financial arrangements also included options to commute the respondents’ rent under the headlease into a lump sum in place of a percentage of net rents from the units. Certain of those options were exercisable by the respondents while another was exercisable by one of the banks.
The rent payable to the first appellant under the management lease was initially to include 15% of the net rents received by the respondent from the tenants of the units. There was further provision, in the tenth schedule, for the first appellant to require an additional 15% in the event that the respondents notified it: (i) that they were considering exercising, or had exercised, one of their options regarding the headlease rent; or (ii) if they had not exercised any of their options by the end of September 2011, that the bank had exercised its own option.
By the time the management lease was granted in 1998, the bank’s option had been cancelled as part of restructuring arrangements made to take account of changes to the tax position. As a result of that restructuring, the greater part of the banks’ investment was no longer financed by net rents from the units but was converted into standard debt facilities, so releasing an additional 55% of the net rents for disposal by the respondents. However, no amendment was made to the tenth schedule. From 2005, the first appellant’s rights in the centre were held on trust for it by the second and third appellants.
The respondents subsequently applied to the court for declarations that, since they had not exercised any of their options by the end of September 2011 and the bank’s option had been cancelled, the first appellant’s right to increase the rent under the management lease was no longer capable of being exercised. The first appellant contended that it was entitled to the increase in the events that had happened, including the restructuring; it submitted that the tenth schedule, read according to its commercial purpose, was a mechanism for it to obtain a further 15% share of net rents if and when an event occurred that released to the respondents that or a greater proportion of the net rents.
In the court below, the judge found in favour of the respondents, holding that the common intention of the parties was that the first appellant’s right to a rent increase should depend wholly on the provisions of the tenth schedule as drafted and executed. The appellants appealed.
Held: The appeal was allowed in part.
There was no ambiguity in the language of the tenth schedule to the management lease, the provisions of which were clear and comprehensible. Nor was any ambiguity introduced when those provisions were considered in the light of the admissible background facts at the time the management lease was executed. It was not possible to say that there had been a mistake or that something had gone wrong with the language. Although, on the evidence, it had been considered very likely in 1996 that one of the options would be exercised, that had not been certain to occur. The effect of the first appellant’s argument would be to convert what had previously been a conditional right to a further 15% of net rents, dependent on the decisions of either the respondents or the relevant bank, into an absolute right. On that argument, the first appellant would become unconditionally entitled to a further 15% of net rents at the end of September 2011 whether or not one of the respondents’ options was exercised before then. The change from a conditional right, where the condition might or might not occur, to an unconditional entitlement, would involve an impermissible re-writing of the contract rather than its interpretation.
An important part of the background to the management lease was the agreement of 1996 pursuant to which it was granted. The language of the tenth schedule, read literally, was entirely apt in 1996. Subject to minor changes, the management lease granted in 1998 was in the same form as had previously been agreed and the tenth schedule was in identical language. It was not possible to conclude that, despite the retention of the original language, the tenth schedule had dramatically changed its meaning between 1996 and 1998.
Contrary to the appellants’ contentions, the commercial purpose of the tenth schedule, objectively ascertained, was not to ensure that if, by the end of September 2011, the respondents had become entitled to dispose of at least an additional 15% of the net rents, it would then be obliged to offer that share to the first appellant. The respondents’ and the bank’s options were the only routes contemplated at the date of the 1996 agreement for obtaining further shares of net rents for distribution. By the time the management lease was executed in 1998, the restructuring had made it less likely that one of the respondents’ options would be exercised but it was still not inconceivable that that would occur. Moreover, the first appellant had been involved in that restructuring and had known, at the time the management lease was executed, that the bank’s option would be cancelled. The first respondent’s right to a further 15% of net rents was not intended to apply irrespective of the way in which any additional rents became available for distribution. The restructuring, including the cancellation of the bank’s option, was not in any meaningful or relevant way analogous to the exercise of that option. Accordingly, the judge had correctly concluded that, in the circumstances, the first appellant was not entitled to a further 15% of net rents.
Alain Choo Choy QC, Philomena Harrison and Laurie Sher (instructed by Hogan Lovells International LLP) appeared for the appellants; Robin Dicker QC and Julian Greenhill (instructed by Linklaters LLP) appeared for the respondent.
Sally Dobson, barrister