Landlord and tenant – Break clause – Conditions – Rent – Lease of commercial premises – Break clause exercisable by appellant tenant on fulfilment of certain conditions including payment to respondent landlords of all rent due up to break date – Appellant paying full quarter’s rent in advance – Whether entitled to repayment of rent for part of quarter falling after break date – Whether entitled to recover insurance and service charge payments on same basis – Appeal dismissed
The respondents were the landlords and the appellant was the tenant under leases of four floors of an office building in London W2, for terms of 12 years to February 2018, which were contracted out of the security of tenure provisions in Part II of the Landlord and Tenant Act 1954. The relevant terms of the leases had been restated in a deed of variation dated January 2010. A “basic rent” of £919,800 pa plus VAT, subject to periodic reviews, was payable “yearly and proportionately for any part of a year by equal quarterly instalments in advance on the Quarter days”. The appellant was also liable to pay a car park licence fee, insurance costs representing a fair proportion of the premiums payable by the respondents for insuring the building, and a service charge.
In July 2011, the appellant gave notice to the respondents to terminate the lease in January 2012 pursuant to a tenant’s break clause. The successful exercise of the clause depended on the fulfilment of certain conditions prescribed by the lease, including the absence of any arrears of rent at the break date and the payment to the respondents of a further break premium of £919,800 plus VAT. In compliance with those conditions, the appellant paid an amount invoiced by the respondents for insurance for the period from July 2011 to June 2012, plus a full quarter’s basic rent, car park licence fee and service charge for the quarter starting in December 2011, and the break premium.
The appellant later succeeded in a claim for repayment of those sums to the extent that they related to the period after termination of the lease, on the ground that a term should be implied that the respondents would repay an apportioned part of those sums for the period after the break date: see [2013] EWHC 1279 (Ch). However, that decision was subsequently reversed by the Court of Appeal: see [2014] EWCA Civ 603; [2014] 2 EGLR 48; [2014] EGILR 32. By that time, the respondents were no longer disputing the appellant’s right to repayment of service charges for services not provided by the break date; the Court of Appeal ‘s decision therefore related only to the basic rent, insurance charges and car park fees. The appellant appealed to the Supreme Court.
Held: The appeal was dismissed.
(1) The judicial approach to the implication of contractual terms represented a clear, consistent and principled approach under which a term would only be implied if it satisfied the test of business necessity or was so obvious that it went without saying. The implication of a term was not critically dependent on proof of the parties’ actual intentions when negotiating the contract; instead, when asking what the parties would have agreed, the answer was determined not strictly by the hypothetical answer of the actual parties but by the answer which would have been given by notional reasonable people in the position of the parties at the time of contracting. A term should not be implied into a detailed commercial contract merely because it appeared fair or because the court considered that the parties would have agreed it had it been suggested to them; those were necessary, but not sufficient, grounds for including a term. The proposed term had to be reasonable and equitable although, if the term met the other requirements for inclusion, it was unlikely that it would not also be reasonable and equitable. The tests of business necessity and obviousness were alternatives, although, in practice, it would rare for only one of them to be satisfied in a given case. Deciding whether a term was necessary for business efficacy involved a value judgment; the test was not one of absolute necessity but of whether, without the term, the contract would lack commercial or practical coherence: BP Refinery (Westernport) Pty Ltd v Shire of Hastings Council (1977) 52 ALJR 20, Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 and Atkins International HA v Islamic Republic of Iran Shipping Lines (the APJ Priti) [1987] 2 Lloyd’s Rep 37 applied.
(2) The test of necessity was not diluted if the court took the approach of asking whether a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances, would understand a term to be implied. The reasonable reader was to be treated as reading the contract at the time when it was made and would have to consider the term to be so obvious as to go without saying or to be necessary for business efficacy: Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988 considered. The judgment in Belize Telecom was not to be read as involving any relaxation of the traditional, highly restrictive approach to implication of terms. While the exercises of construing the words used by the parties in the contract and implying terms into the contract both involved determining the scope and meaning of the contract, so were both part of the process of “construction” in the wide sense, the implication of terms was separate and distinct from the more general process of interpretation and more stringent rules continued to apply to it.
(3) The terms of the parties’ lease had to be considered against the established legal background, including the principle that rent, whether payable in arrears or in advance, was not apportionable in time under common law. The variation of that position under section 2 of the Apportionment Act 1870 applied only to rent payable in arrears and not to rent payable in advance: Ellis v Rowbotham [1900] 1 QB 740 approved. The implied term for which the appellant contended could not stand in the face of the clear and consistent line of judicial decisions which formed the backcloth against which the terms of the lease were agreed. Save in a very clear case, it would be wrong to attribute to a landlord and a tenant, particularly when they had entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent had been so long and clearly established. Since the effect of the case law was clearly that rent payable and paid in advance could be retained by the landlord, save in very exceptional circumstances such as where the contract could not work or would lead to an absurdity, express words would be needed before it would be right to imply a term to the contrary. A refusal to imply the suggested term in the instant case would not render the contract unworkable or lead to a result that was absurd, commercially or otherwise.
Guy Fetherstonhaugh QC and Kester Lees (instructed by King & Wood Mallesons LLP) appeared for the appellant; Nicholas Dowding QC and Mark Sefton (instructed by Allen & Overy LLP) appeared for the respondent.
Sally Dobson, barrister
