Development lease reserving rent according to rents receivable under subleases – Sublease rendered onerous by later slump in rental values – Scheme to extinguish sublease by bringing about merger with headlease – Whether scheme fell within prohibition of arrangements to ‘commute’ rent payable under subleases
On August 12 1985 the Drapers Co, the appellants, granted a 125-year lease of offices in Fleet Street, London, on terms that the lessee, the developers, would redevelop and pay a yearly rent of £50,000 or 13.89% of rents to be received by subletting, whichever was the higher. Various provisions sought to protect the ‘equity sharing’ character of the lease including clause 2.22(f) which prohibited the lessee from entering into any arrangement ‘for commutation in whole or in part of any annual rent . . . payable on any underletting . . . in consideration of a lump sum of money’. On June 30 1988 the developers sublet nearly all the premises to Huntsmoor Nominees Ltd, Huntsmoor, for a term of 25 years at a rent of £972,500 pa (£48 per sq ft) with five-year reviews. On May 31 1991 the developers assigned the headlease to Hypo Property Investments Ltd , (“Hypo”).
On April 6 1993 Huntsmoor assigned the underlease to Harmsworth Properties Ltd, Harmsworth, an associate company of the respondents, by which time rental values had slumped to around £18 per sq ft. Anxious to shed an onerous commitment (exacerbated by tax considerations and constraints on further subletting) the Associated Newspapers Group devised a plan for extinguishing the sublease by process of merger with the headlease and hopefully avoiding any breach the terms of the headlease. On September 22 1994 Hypo assigned the headlease to Associated Newspapers Property Ltd (‘Property’) on terms that payment of £550,000 of the £12m purchase price would depend on the success of legal proceedings to test objections raised by the appellants. Thereafter steps were taken to vest the underlease in Associated Newspapers Holdings Ltd (‘Holdings’) and to execute a declaration of trust whereby Holdings became sole owner in equity of the headlease, the intention being that Holdings would require Property to convey once the objections of the appellants had been overcome. Pursuant to the agreement with Hypo, declarations were sought successfully by Property and Holdings that such a conveyance would: (i) not amount to a breach of the terms of the headlease; (ii) cause the merger of the underlease into the headlease. The Drapers Co appealed, contending that such conveyance would contravene clause 2.22(f).
Held The appeal was dismissed.
1. The judge was right in finding no ‘commutation’ for the purpose of clause 2.22(f) or otherwise without replacement of an obligation to pay a periodic sum by an obligation to pay a lump sum. The sums payable by Property to Hypo were no substitute for the rent payable by Holdings.
2. Since the headlease had legislated specifically against dispositions which might otherwise defeat the underlying rent sharing purpose that purpose could no be invoked to extend clause 2.22(f) beyond its literal meaning: contrast British Railways Board v Elgar House Ltd (1969) 209 EG 1313 and Freehold and Leasehold Shop Properties Ltd v Friends Provident Life Office [1984] 2 EGLR 133. There being no contrary intention the resulting merger would extinguish the underlease: see Blackstone, Commentaries.
Jonathan Gaunt QC and Martin Dray (Instructed by Bircham & Co) appeared for the appellants; Kim Lewison QC (instructed by Freshfields) appeared for the respondents.
