Landlord and tenant — Collateral contract — Dilapidations — Whether tenant entering into lease in return for assurance that no terminal schedule of dilapidations would be served at its end — Whether proviso in lease agreed as substitute for assurance — Whether position affected by conduct of negotiations “subject to formal deed”
In 2001, the defendant tenant entered into negotiations with its then landlord, the claimant’s predecessor in title, for a surrender of its business lease of a building and the grant of a new short lease of part of the premises. The defendant aimed to achieve a clean break on termination, free from any outstanding dilapidations liability. It expressed concern at certain provisions in the draft lease, which contained repairing covenants that were supported, in clause 2.6, by a right of entry and inspection in favour of the landlord. The landlord addressed the defendant’s concerns by a letter assuring it that a terminal schedule of dilapidations would not be served at the end of the new lease. A lease was finally executed in early 2002, in the terms of the draft, save that clause 2.6 was amended to include a proviso that “any action taken by the Lessors upon entering the said premises will not result in the Lessors serving an interim or final schedule of dilapidations”.
In 2004, the defendant terminated the 2002 lease by exercising a tenant’s break clause. The landlord subsequently sold the building to the claimant, along with an assignment of any cause of action that it might have against the defendant for disrepair. On a trial of a preliminary issue, the defendant contended that there was no cause of action for the claimant to enforce. It argued that the negotiations prior to the grant of the 2002 lease had given rise to a collateral contract by which the landlord had relinquished any right to enforce the rep airing covenants after the termination of the lease; in the alternative, it alleged proprietary estoppel. The claimant contended that the defendant had accepted the amendment to clause 2.6 as a substitute for the landlord’s assurance that there would be no schedule of dilapidations.
Held: The claim was dismissed.
(1) The landlord was bound by its assurance to the defendant that it would not serve a terminal schedule of dilapidations at the end of the lease. A collateral contract arises where one party agrees to enter into a lease on the condition that the other party agrees not to enforce some provision of it in specific circumstances; the consideration for the latter’s promise is the former’s agreement to execute the lease. The landlord’s assurance was not overridden by the proviso to clause 2.6. That proviso was no substitute for the assurance, since the protection that it gave to the defendant was illusory: the landlord would have no need to rely upon the right to inspect during the term to prepare a schedule of dilapidations if it could wait and inspect the premises in the condition in which they were left upon the tenant’s actual departure. (2) It made no difference to the outcome that the parties’ negotiations had been conducted “subject to formal deed”. The “subject to contract” principle allows a party to walk away at any stage prior to the conclusion of a formal contract or lease, but has no application to a case in which the contract or lease that was the subject of the negotiations has been executed. If a party makes a promise during negotiations, the consideration for which or reliance upon which consists of the promisee making the very contract that was being negotiated, the proviso becomes enforceable regardless of the parties’ use of the “subject to contract” label.
The following cases are referred to in this report.
Brikom Investments Ltd v Carr [1979] QB 467; [1979] 2 WLR 737; [1979] 2 All ER 753; (1979) 38 P&CR 326; [1979] 2 EGLR 36; 251 EG 359, CA
City & Westminster Properties (1934) Ltd v Mudd [1959] Ch 129; [1958] 3 WLR 312; [1958] 2 All ER 733, Ch
Cohen v Nessdale Ltd [1982] 2 All ER 97; [1982] 1 EGLR 160; (1982) 262 EG 437, CA
Derby & Co Ltd v ITC Pension Trust Ltd [1977] 2 All ER 890; [1978] 1 EGLR 38; (1977) 245 EG 569
Henderson v Arthur [1907] 1 KB 10
Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611; [2000] 3 EGLR 31; [2000] 41 EG 209
James v Heim Gallery (London) Ltd (1980) 41 P&CR 269; [1980] 2 EGLR 119; 256 EG 819, CA
London & Regional Investments Ltd v TBI plc [2002] EWCA Civ 355
This was the trial of a preliminary issue in a claim by the claimant, Business Environment Bow Lane Ltd, against the defendant, Deanwater Estates Ltd, for damages for dilapidations on the termination of a lease.
Mark Warwick (instructed by Howard Kennedy) appeared for the claimant; Jonathan Ferris (instructed by Michael Conn Goldsobel) represented the defendant.
Giving judgment, Briggs J said:
[1] This is the trial of a preliminary issue in a claim for damages for breach of repairing covenants in a lease granted on 18 January 2002, which I will call the 2002 lease. It was terminated on 25 December 2004 by the exercise of a lessee’s break clause. The claimant (Business Environment Bow Lane Ltd) is the assignee of the alleged cause of action, pursuant to a deed of assignment dated 6 April 2005 in connection with its acquisition of a long lease of the property at 73 Watling Street, London EC4, from the landlords under the 2002 lease, Lionbrook Property Partnership Nominee No 1 Ltd and Lionbrook Property Partnership Nominee No 2 Ltd, to both of which I will refer as Lionbrook. The property included the demised premises under the 2002 lease.
[2] The defendant, Deanwater Estates Ltd, formerly known as Gooch Webster Ltd, was the lessee under the 2002 lease and claims that, by reason of a collateral contract or promissory estoppel, its landlord, Lionbrook, had no right to enforce the repairing covenants after the termination of the lease and, therefore, no cause of action to |page:38| assign to the claimant. It is common ground that if Lionbrook had no such right after the termination of the 2002 lease, the claimant can be in no better position by virtue of the assignment.
[3] The question of whether the claimant’s claim is disabled by a collateral contract or promissory estoppel was ordered to be tried as a preliminary issue by Master Moncaster on 12 June 2006. The evidence upon which this defence is based consists of correspondence, including e-mails, passing between the parties’ representatives and between their solicitors during the negotiations leading up to the grant of the 2002 lease on 18 January 2002.
[4] The defendant called its representative at the time, a Mr Martin Chilcott, who was then a director of the defendant but who retired in April 2005. He verified the relevant documents, but, frankly, acknowledged that he had no relevant recollection of the material events beyond that disclosed by the documents themselves. In its turn, the claimant called its director, Mr Colin Anthony Gershinson, but since he and his company had no connection with the property or with the parties to the lease at the material time (in other words, before 18 January 2002), he had nothing of value to contribute either. The defence therefore stands or falls on the documents.
[5] The law relating to collateral contracts and promissory estoppel is well settled, in particular in its relationship with leases. The starting point is that where parties create the relationship of landlord and tenant between themselves by the execution of a lease, the terms of that relationship are to be derived exclusively from the lease itself, including, for that purpose, any implied terms. The parole evidence rule applies as much to a lease as to any written contract, and, in general, a party to a lease is not permitted to prove that some aspect of its relationship is governed by a prior oral (or for that matter written) agreement in a manner contradicted by the provisions later made in the lease itself: see, for example, Henderson v Arthur [1907] 1 KB 10. The maintenance of that healthy principle is of particular importance in relation to leases because of the inherent and commonplace transferability of the rights and interests of the parties. It means that a lease will frequently regulate the relationship between persons who had nothing whatsoever to do with its negotiation, and who acquire their interests in ignorance of what took place.
[6] Nevertheless there are well-recognised exceptions to that principle, including rectification, collateral contract and estoppel: see, for example, Dowding and Reynolds on Dilapidations (3rd ed), in para 4.17, Lewison on the Interpretation of Contracts (3rd ed), at pp72 and 79, and Chitty on Contracts (29th ed), in para 12-103.
[7] A collateral contract may arise where one party (I will call it party A) says that it will enter into the written contract or, as here, into the lease, only if the other party, party B, agrees not to enforce some provision of it against it in specific circumstances. The consideration for party B’s promise is party A’s agreement to execute the lease. The best-known reported example of such a collateral contract is to be found in the decision of Harman J in City & Westminster Properties (1934) Ltd v Mudd [1959] 1 Ch 129, in which, although the case was argued in promissory estoppel, Harman J described the facts, at pp145-146, as showing that there was:
a clear contract acted upon by the defendant to his detriment…
… by executing the lease. Another example is the decision of the Court of Appeal in Brikom Investments Ltd v Carr [1979] QB 467*.
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* Editor’s note: Also reported at [1979] 2 EGLR 36
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[8] More recently, in Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611†, Lightman J identified the key distinguishing features of the collateral warranty in the following passage, at p615:
10. The relevant legal principles regarding the recognition of the pre-contractual promises or assurances as collateral warranties may be stated as follows:
(1) a pre-contractual statement will only be treated as having contractual effect if the evidence shows that parties intended this to be the case. Intention is a question of fact to be decided by looking at the totality of the evidence;
(2) the test is the ordinary objective test for the formation of a contract: what is relevant is not the subjective thought of one party but what a reasonable outside observer would infer from all the circumstances;
(3) in deciding the question of intention, one important consideration will be whether the statement is followed by further negotiations and a written contract not containing any term corresponding to the statement. In such a case, it will be harder to infer that the statement was intended to have a contractual effect because the prima facie assumption will be that the written contract includes all the terms the parties wanted to be binding between them;
(4) a further important factor will be the lapse of time between the statement and the making of the formal contract. The longer the interval, the greater the presumption must be that the parties did not intend the statement to have contractual effect in relation to a subsequent deal;
(5) a representation of fact is much more likely intended to have contractual effect than a statement of future fact or a future forecast.
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† Editor’s note: Also reported at [2000] 3 EGLR 31
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[9] The most comprehensive recent statement of the closely related doctrine of promissory estoppel is to be found in the following passage from the judgment of Oliver J in James v Heim Gallery (London) Ltd (1980) 41 P&CR 269*, at p280. He said:
In order to found a promissory estoppel, there has first to be found some clear and unequivocal representation, either by words or conduct, that that party claimed to be estopped will not rely upon his strict contractual rights. Secondly, the representation must be made with the intention, or at least the knowledge that it is to be acted upon by the other party by altering his legal position; and thirdly, he must so alter his legal position in reliance upon the representation in such a way that it would be inequitable, or unfair, to permit the party claimed to be estopped from departing from the representation.
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* Editor’s note: Also reported at [1980] 2 EGLR 119
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[10] In a case where the detriment or alteration of position consists of party A’s execution of the written agreement that party B promises not fully to enforce, the doctrines of promissory estoppel and collateral contract become almost indistinguishable, as indeed they were in both City & Westminster and Brikom.
[11] It is suggested in a footnote by the editors of Chitty on Contracts (29th ed) that, where reliance is placed upon precontract rather than post-contract assurances, recourse must be had solely to collateral contract rather than to proprietary estoppel. I have not found it necessary to decide whether that is so but there are dicta in Brikom that suggest otherwise.
[12] In the present case, the communications relied upon by the defendant occurred while the parties (that is, Lionbrook and the defendant) were negotiating mainly, but not exclusively, through solicitors, expressly subject to formal deed that is the equivalent of the familiar badge “subject to contract” where no separate written agreement is contemplated prior to the execution of a lease. “Subject to contract” or its leasehold equivalent, has a well-settled meaning. In London & Regional Investments Ltd v TBI plc [2002] EWCA Civ 355, an unreported decision of the Court of Appeal on 22 March 2002, the Court of Appeal approved the following dictum, again by Oliver J, in Derby & Co Ltd v ITC Pension Trust Ltd [1977] 2 All ER 890†, at p896. Oliver J said:
where parties negotiate on a basis “subject to contract” everybody knows there is a risk that, at the end of the day, either side may back out of the negotiations, up to the point where leases are exchanged. I do not think that a party who on the other side not to back out can be said to have estopped that party from backing out simply because he has not done something which he might have done in the intervening period.
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† Editor’s note: Also reported at [1978] 1 EGLR 38
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[13] The particular assurances relied upon in the present case are, as would appear, contained in documents not themselves marked “subject to formal deed” or “subject to contract”, but it is clear, for example, from the Court of Appeal’s decision in Cohen v Nessdale Ltd [1982] |page:39| 2 All ER 97* that once negotiations are proceeding under the “subject to contract” umbrella, they are assumed so to continue prior to contract unless the parties expressly or by necessary implication agree to the contrary. The “subject to contract” principle is, as appears from Oliver J’s dictum, designed to protect a party from becoming bound either contractually or by way of constructive trust or by the application of promissory estoppel prior to the making of a formal contract or lease so as to be free to walk away from negotiations at any stage.
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* Editor’s note: Also reported at [1982] 1 EGLR 160
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[14] In my judgment, it has no application to a case such as the present, where the contract or lease (the subject of the negotiations) has actually ensued. If a party makes a promise in “subject to contract” negotiations, the consideration for which or reliance upon which consists of the promisee making the very contract being negotiated, the proviso becomes enforceable, either by way of collateral contract or promissory estoppel, regardless of the parties’ use of the “subject to contract” label. Putting it another way, it is a necessary implication from what they have done that the promise is not deprived by that label of legal effect.
[15] I now turn to describe the facts. Prior to the execution of the 2002 lease, the defendant was the business tenant within the meaning of Part 1 of the Landlord and Tenant Act 1954 (the 1954 Act) of the whole of the building known as 7 Bow Lane and 73 Watling Street, London EC4, pursuant to a lease (the 1980 lease) dated 22 April 1980 for 25 years from 25 December 1979, granted by the Church Commissioners to partners in the well-known firm of estate agents and surveyors then known as Gooch & Wagstaff. Subject to extensions under Part II of the 1954 Act, the lease was therefore due to terminate on 25 December 2004. The defendant, formerly known as Gooch Webster Ltd, took an assignment of the residue of the term on around 25 August 1998.
[16] By 1997, the freehold reversion on the 1980 lease was vested in a company that, like the parties, I shall call Bastionen. Various unsuccessful attempts to negotiate a surrender of the 1980 lease on payment of a reverse premium took place between mid-1997 and April 2000, after which Bastionen sold the building to Lionbrook. A feature of those negotiations was that the defendant and its predecessors sought a clean break on termination free from any outstanding dilapidations liability. Negotiations resumed in late 2001 between the defendant and Lionbrook, not this time for an outright surrender but for a surrender of the 1980 lease, coupled with the grant of a new short lease of part of the building.
[17] Prior to the instruction of solicitors, the negotiators were Mr Chilcott, of Gooch Webster (as the defendant was then known), and a Mr Simon Latham, of Baring Houston & Saunders Investment Management Ltd. The defendant’s understanding of the negotiations as at the beginning of October 2001 were set out by Mr Chilcott in a “subject to contract” heads of terms letter to Mr Latham of 10 October 2001, and I shall read the material parts of that letter. Under the heading “73 Watling Street, London EC4” it begins:
I refer to our various conversations in connection with the above property and following our most recent conversation I have now had an opportunity of discussing the basis of the proposed transaction with various colleagues. In principle we are prepared to proceed subject to contract and I set down below my understanding of the provisional agreement which we have reached.
Then there is a heading “surrender of lease”.
Gooch Webster Ltd will surrender the lease dated 22 April 1980 on the property known as 7 Bow Lane and 73 Watling Street, London, EC4. At that time all liabilities under the terms of that lease will cease. Contemporaneously Gooch Webster Ltd will enter into a new lease on terms set out below.
I leave out one paragraph and go to the heading “Lease”.
A lease will be granted for a term of 5 years from the 25 December 2001 or such earlier date as can be agreed, subject to a tenant’s only option to determine the lease on six months notice prior to the 25 December 2004. If this option is exercised by Gooch Webster Ltd all existing and future contingent liabilities will cease and any sub-tenants in place will become the direct responsibility of the landlord. The lease will be drawn on internal repairing and insuring covenants. Gooch Webster will retain responsibility for maintaining but not replacing any plant and machinery including boiler, lift and other plant solely serving the upper parts of the building.
Then, under the heading “Rental”:
£300,000 pa exclusive of rates.
And then, under the heading “Rent free period”, it continues:
A rent free period of five calendar months will be granted from the commencement of the new lease.
And under “Alienation”:
The tenant will have normal rights of alienation to sub-let in part or whole and to assign the whole. Other covenants in the lease will follow the basis of the original lease.
Then, under “Other terms”:
The new lease will be contracted out of the Landlord & Tenant Act 1954 (as amended) and the end or sooner determination of the term there will be no liability for dilapidations or reinstatement.
[18] Mr Latham replied by e-mail, not mentioning dilapidations. The parties instructed solicitors. Lionbrook instructed Dechert, where a Ms Kate Potts had responsibility. The defendant instructed William Sturgess & Co, where the matter was handled by a Mr Tony Tuthill. Late on 19 October, Mr Latham e-mailed Mr Chilcott and the first paragraph of this e-mail reads as follows:
I have just had a meeting with Dechert on the above re the lease and other documents. These will be with your lawyers next week. I can confirm that I am happy with the broad heads of terms which now include an external repairing obligation as we discussed.
[19] On 22 October, Ms Potts of Dechert wrote to Mr Tuthill at William Sturgess expressly subject to formal deed as follows:
Following correspondence and a meeting with my client I understand that the structure of this transaction has changed and that our client is now to proceed with the granting of a lease to your client.
I miss out two paragraphs, and it concludes:
I am just preparing a draft lease for your approval. I do not anticipate that the negotiation of the new lease will be a lengthy one as the lease to be granted is based largely on both your clients existing lease and the lease which was previously to be granted to 110 Limited, copies of both of which you already have. I will send this through to you shortly.
[20] On 24 October, as promised, she sent a draft lease to Mr Tuthill, who passed it on to Mr Chilcott. The draft contained detailed repairing covenants requiring the premises to be kept and, therefore, by implication put, in good and substantial repair, including any necessary rebuilding or renewal and contained nothing derogating from a full dilapidations responsibility on the tenant on termination. On 12 November, Mr Chilcott responded to Mr Tuthill with detailed page-by-page comments on the draft lease. I must read two of those. In relation to p4, under the heading “repairing requirements”, Mr Tuthill wrote:
The wording of the Draft Lease appears to put a more onerous responsibility upon us than has been agreed. As noted above we are purely to be responsible for keeping the premises in repair and there is to be no replacement or renewal. Specifically, and I cannot see it noted in the documentation there is to be no responsibility for dilapidation’s at the end of the term. This must be absolutely clear in the documentation. We will deliver up at the end or sooner a determination of the lease, with the building as is both internally and externally. …
And, at p5:
We will not be liable for redecorating the premises in the last year of the term specifically. |page:40|
Then, at p7:
You will need to qualify the rights of entry by the landlord to repair as we do not wish for:
(a) Any interim schedules of dilapidation’s to be served
(b) The Landlords to insist that we carry out works or items of repair that we do not consider necessary or appropriate.
Although the drafts still contained no derogation from a terminal dilapidations liability, Mr Tuthill’s letter went no further than I have read out in dealing with that aspect of the matter.
[21] Ms Potts replied on 20 November with a further draft, accepting some but not all of Mr Tuthill’s observation on the repairing covenants. On 29 November, Mr Tuthill wrote to Ms Potts with further detailed comments on the then travelling draft. I read from the bottom of the second page of the letter:
My clients have emphasised once again that they are entering into this arrangement with your clients on the clear understanding that their liabilities in respect of repair and maintenance etc are kept to a bare minimum and that your clients, for instance, will not be spending the term of this lease making inspections and serving interim schedules for dilapidations on my clients. This was most definitely a quid pro quo for my clients excepting that the new lease is going to be subject to a s38 order. [That is of course a reference to section 38 of the Landlord and Tenant Act.] Whilst your clients have accepted now that the repairing liability should be limited to that of a good and tenantable nature, my clients remain concerned about the ability to enter and serve schedules of dilaps. I have therefore suggested to my clients, and I think that they would accept, that there should be a letter issued by your clients to my clients at completion of the lease along the lines of the draft enclosed. Can you please take your clients instructions on that. You will see that it would be personal to Gooch Webster Limited.
[22] And there then follows the proposed side letter, which is addressed to Gooch Webster Ltd on the heading of Lionbrook paper and it reads:
Dear Sirs
Lease dated… (and at that stage it was still blank) December 2001 between ourselves and yourselves 73 Watling Street and 7 Bow Lane London EC4. In consideration of your today completing this lease we confirm that so long as Gooch Webster Limited remain the lessee under the lease we will not, in respect of those parts of the premises demised by the lease and which Gooch Webster have not underlet:
1. exercise our rights of entry under clause 2(6) of the lease
2. require you to carry out any rectification or dilapidations at the end of the term of the lease (however it comes to an end)
unless in either case we have justifiable cause for concern that your repairing covenants under the lease are not being or have not been materially and substantially complied with. We are further concerned but will use our best endeavours to procure the issue to you of a letter in terms similar to this letter (mutatis mutandis) upon any disposal (including the grant of an overriding lease) of our interest in the premises demised by the lease or any part of them.
[23] At 3.15pm on 3 December, having received a further draft lease, Mr Tuthill e-mailed Ms Potts as follows:
I have checked through the clean draft lease and as far as I am concerned it is OK SUBJECT however to your agreeing the draft side letter on which you make no comment in your letter of Friday.
[24] That provoked an immediate response from Ms Potts in the following terms:
I am instructed that my client will not accept the side letter in any form. We fail to see how this can still be a concern of yourclient following the negotiation of the lease and in particular the removal of any provision for your client to be responsible for the preparation and service of any schedule. With regard to the approval of the lease, your client has indicated to my client that the lease is agreed. Please therefore let me know as soon as possible that the lease is in an agreed form so that I may prepare engrossments for execution.
That letter was not marked “subject to formal deed” as all the earlier letters had been but it is common ground that the “subject to contract” umbrella continued to apply.
[25] On 4 December, Mr Tuthill replied, referring to the letter that I have just read, and after another matter that is not relevant continued as follows:
The more difficult point remains the repairing covenant. On this there are two elements which I think have been made clear from the outset:
1. My clients do not want your clients exercising rights of entry every five minutes to inspect the property and serve notice requiring works to be done.
2. There is to be no terminal schedule of dilapidations.
Unfortunately I do not have the original travelling draft lease with me; you are still retaining that I think but I believe that my amendments reflected these points.
He continues:
On the first of these, as an alternative to removing any rights of entry I suggested a form of side letter which would entitle your clients to exercise their rights of entry to inspect and serve notices of wants of repair only in circumstances where there is justifiable cause for concern that my clients repairing covenants are not being materially and substantially complied with. I believe that this represents a fair approach to this particular problem. The second point is by no means addressed by the removal of any provision for my clients “to be responsible for the preparation and service of any schedule”. All you have done is to remove the tenants liability for paying the costs specifically of a terminal schedule of dilapidations although paragraph (a) on page 18 even with that deletion does not preclude the possibility of the landlord serving a notice at the last minute and charging the tenant for it. This is not the same as agreeing, as I understand the parties have, that there will be no terminal dilapidations liability. I did incorporate appropriate provisions in the earlier travelling draft but these seem to have fallen by the wayside. I am prepared, however, for this point to be covered in the proposed side letter which I repeat is intended to be personal to my clients. I suggest, therefore, a revised version of the letter as enclosed. I am copying this to my clients so that they may take up this matter with your clients.
No copy of the revised side-letter, apparently sent with this letter, has survived.
[26] Ms Potts replied on the same day, again not marked “subject to contract” but still under the “subject to contract” umbrella. The relevant paragraph in her reply is as follows:
As indicated in my fax of yesterday, my client is not prepared to accept your client’s obligations being limited by way of the side letter. The nature of this transaction is to be one of flexibility and co-operation. My client is concerned that your client has these worries about my client’s management of the property. Clause 6 of the lease is entirely standard and my client merely requires this position to ensure that your client is complying with its covenants under the lease. My client does not have time to attend the property “every 5 minutes” as indicated in your letter. Your comments as to my clients intentions are not within the spirit of this transaction. My client has already indicated to your client that a terminal schedule of dilapidations will not be served and this should be satisfactory comfort for your client.
The final sentence of the paragraph that I have just read is the communication principally relied upon by the defendant.
[27] Evidently concerned by the impasse reached between the solicitors on the dilapidations issue, Mr Chilcott wrote on the same day to Mr Latham, as follows:
Following on from our e-mails yesterday there still appear to be some outstanding issues on the lease and I have copy correspondence from both my solicitor and Decherts. These centre around two issues which I thought we had agreed. Firstly that there is to be no liability for dilapidation’s at the end or sooner determination of the term, which was in the original Heads of Terms which we agreed. The second point is the ability of you and your clients to enter upon the premises almost at any time to serve interim schedule of dilapidation’s or to enforce us to carry out our works. The essence of the deal was, as you will recall, that we would keep the premises in good and tenantable repair during the currency of the lease, but there would be no liabilities beyond this. The side letter proposed, in my view, covers this point.
Later in the letter, he says:
I do hope at this late stage that we can resolve all these outstanding issues, which in any event are in my view reflected in our Heads of Terms. |page:41|
And that I take to be a reference to the heads of terms letter, the principal parts of which I have already read. I also infer that Mr Chilcott’s reference to having copy correspondence from his solicitor and Dechert included a reference to the letters of Dechert that I have just read. It is apparent that in the second paragraph of the letter he was referring to the same two points of concern expressed on his behalf by Mr Tuthill in reverse order.
[28] Mr Latham replied by e-mail on 5 December at 11.19am, as follows:
I refer to your letter. I really do believe you are making something out of nothing on the dilapidation’s issue and seem to be suggesting that I would have nothing better to do than worry about your repairing obligations!!! However in order to move matters along I have asked Dechert to change the provision to specifically exclude interim and final schedules. I am not however prepared to give up the right to inspect to ensure you are meeting the requirements of the watered down repairing obligations. This is only standard practice.
[29] On 5 December, Ms Potts wrote again to Mr Tuthill, after taking further instructions, as follows:
I write further to my letter of yesterday’s date. I have taken my client’s further instructions with regard to your letter and understand my client has also had further correspondence and discussions with your client.
There was no evidence that there was any oral discussion beyond this reference in the letter, and if there was, nothing turns on it.
Therefore I have the following points to make:
1. (the first point I can leave out as being irrelevant).
2. My client has accepted that clause 2(6) of the lease may be amended with the addition of the following words at the end of the clause: “provided that any action taken by the Lessors upon entering the said premises will not result in the Lessors serving an interim or final schedule of dilapidations”.
I am missing out the next paragraph, and she continues:
In view of my client’s willingness to co-operate with your client, the lease should therefore now be agreed. Please confirm by close of business today this is the case so that I may prepare engrossments for execution.
[30] It is necessary at this stage to look at the whole of the repairing covenants in the then draft lease, which were set out in clauses 2.5 and 2.6:
(5)(a) From time to time and at all times during the said term to keep the said property (including all landlord’s fixtures and fittings plant machinery apparatus and appurtenances thereto belonging) in good and tenantable repair and condition (damage by any of the Insured Risks as defined in clause 2(15) excepted save to the extent that the policy of insurance effected by the Lessors pursuant to this lease shall have been vitiated in consequence of any act neglect or default of the Lessee, any undertenant or other occupier or their respective servants or agents or any person on the said property with the actual or implied authority of any of them)
(b) Subject to the terms of clause 4(7) to deliver up the same to the Lessors in such good and tenantable repair and condition as shall accord with the order covenants on the part of the Lessee herein contained at the expiration or sooner determination of the said term
(c) At the end or sooner determination of the said term if so required by notice in writing form the Lessors to remove from the said property all tenants trade fixtures and fittings and to make good to the satisfaction of the Lessors all damage caused to the said property by such removal
(d) For the avoidance of doubt the Lessee shall not be required to renew replace or rebuild any part of the structure of the said property nor to renew replace or rebuild any non-structural parts of the said property save as part of the Lessees repairing obligations pursuant to clause 2(5)(a).
(6) To permit the surveyors of the Lessors or their agents or either of them with or without workmen and others at all reasonable times upon giving to the Lessee prior notice thereof (except in the case of emergency) to enter upon the said property for the purpose of examining the state and condition thereof and in case any defect or want of reparation shall appear and shall represent a breach of the Lessee’s covenants in the Lease the Lessee will upon notice thereof in writing being given to him or left upon the said property cause the same to be repaired in compliance with the aforesaid covenants in that behalf within three calendar months next after the date of such notice and also that if the Lessee shall not within one month after the service of such notice commence and proceed diligently with the execution of such repairs (but without prejudice to the right of re-entry under the clause in that behalf hereinafter contained and to any other rights of the Lessors with regard thereto) then to permit the Lessors with workmen and others to enter into and upon the said property and to execute such repairs and so that the cost thereof with interest thereon from the date of demand for recovery by the Lessors to the date of payment by the Lessee at a rate equal to Four per centum per annum above the base rate from time to time in force of National Westminster Bank PLC (or if such base rate shall for any reason cease to be used or published then the interest shall be calculated by reference to such other comparable rate as the Lessors may specify) and calculated from day to day shall be a debt due from the Lessee to the Lessors and forthwith recoverable by action…
[31] Clause 2.6 was a form of Jarvis v Harris clause, which had nothing to do with terminal dilapidations or final schedules of dilapidations prior to the proposed addition of the proviso, and its then form was the cause of the first, rather than the second, of Mr Tuthill’s two concerns in his letter of 4 December. Mr Tuthill replied to Ms Potts’ letter on 6 December in the following terms:
Thank you for your letter of 4 December received yesterday when I was unfortunately at home nursing a heavy cold. Your fax of yesterday (that is a reference to her letter of 5 December) overtakes much of what was said in your letter and I can confirm my advice to my clients to accept your amendment to clause 2.6. So far as I am concerned therefore you may prepare the engrossments and, presumably, send off the Court Application.
[32] On the same day, Ms Potts confirmed that she had made the amendments to the lease in accordance with the points numbered one and two of her fax of 5 December, and there the negotiations ended. The 2002 lease was executed with clauses 2.5 and 2.6, as amended by the addition of the proviso, on 18 January 2002.
[33] The rest of the story can be briefly told. On 9 June 2004, the defendant served its break notice to determine the 2002 lease on 25 December 2004. By then, Lionbrook was in negotiations for a sale of the building to the claimant. It instructed Macfarlanes and Howard Kennedy respectively. On 1 July 2004, among preliminary inquiries, Howard Kennedy asked Macfarlanes the following questions among others:
1. As I’m sure you’ll agree, the lease to Gooch Webster is not particularly well drafted in that the extent of the demise is not particularly clear which therefore makes it difficult to pinpoint the extent of the tenant’s repairing obligation. I am of the view that the tenant is liable to repair the whole ie internal and external, structural and non-structural parts. However, it would be useful to know if you/your clients have the same interpretation.
…
5. I have received a copy of the Break Notice served by Gooch Webster. Has there been any further correspondence in that regard? If so, please may I have copies. Additionally, what has been done, if anything, as regards preparation and service of any terminal schedule of dilapidations? Please advise.
[34] On 23 August, Macfarlanes replied:
The Seller’s understanding is that the tenant is not intended to be liable for repairs to the structural parts.
And to the fifth question:
There has been no further correspondence with Gooch Webster or their solicitors regarding the break notice which they have served. Nothing has been or will be done to prepare a terminal schedule of dilapidations: the Seller’s understanding is that the landlord does not have a right to do this.
On the next day, Howard Kennedy asked:
Why does your client believe they have no right to serve a terminal schedule of dilapidations?
[35] On 27 September, Macfarlanes replied:
The tenant has advised the Seller that it believes that the landlord has no right to serve a terminal schedule of dilapidations under the lease, but please rely on your interpretation of the lease.
[36] The claimant made no inquiry of the defendant and took a long lease of the building and an assignment after termination of the 2002 lease of the assumed claim to damages, relying upon its |page:42| interpretation of the 2002 lease in ignorance of what had passed between the defendant and Lionbrook in negotiations in 2001.
[37] On 14 April 2005, the claimant served a terminal schedule of dilapidations on the defendant and this action inevitably followed. I now analyse the legal consequences.
[38] It is common ground that the 2002 lease contains nothing prohibiting Lionbrook from pursuing a claim for damages for breach of the defendant’s repairing obligations in clause 2.5 of the lease after termination, or from doing so by the service of a terminal schedule of dilapidations, or final schedule of dilapidations, the two being synonymous. All that the proviso to clause 2.6 does in relation to a final schedule is to prevent such a schedule from being based upon an inspection made by entry during the term. The terminal schedule served in April 2005 was the result of inspection after termination.
[39] In my judgment, the starting point is to recall Mr Tuthill’s two concerns in his letter of 4 December 2001, namely: (i) the use of rights of entry during the term in clause 2.6 as then drafted; and (ii) the prevention of any final schedule of dilapidations. By then, the parties had clearly equated the machinery of a schedule with the underlying right. In other words, Mr Tuthill meant that there should be no liability for disrepair at the end of the term; not merely that a schedule of dilapidations could not be used as the mechanism for enforcing it.
[40] It is evident that, as at 4 December 2001, Lionbrook had given the defendant an assurance that it would not serve a terminal schedule of dilapidations and that Lionbrook, by its solicitor, regarded that as a sufficient assurance that the second of Mr Tuthill’s two concerns in his letter of that date (that is, that there should be no terminal schedule of dilapidations) had been met. The final sentence of the paragraph of Dechert’s letter of that date, which I have quoted, makes that clear. The earlier reference to clause 6 addressed the first of Mr Tuthill’s concerns.
[41] Had matters rested there, I consider that there would clearly have been a good collateral contract or promissory estoppel sufficient to afford the defendant a complete defence to this claim. However, matters did not rest there. Mr Chilcott’s letter to Mr Latham demonstrated that the defendant was unhappy with Dechert’s then stance in relation to both of Mr Tuthill’s two concerns. Mr Latham’s response suggests that he was going to instruct Dechert to make amendments to the draft lease to deal with both concerns. He said:
… I have asked Dechert to change the provision to specifically exclude interim and final schedules. I am not however prepared to give up the right to inspect to ensure you are meeting the requirements of the watered down repairing obligations.
There is no hint in his e-mail of any intent to backtrack on the assurance already communicated by Dechert to Mr Tuthill that a terminal schedule would not be served.
[42] The amendment to clause 2.6 actually made by Ms Potts came nowhere near converting that assurance into a term of the lease. All it did was to go some small way towards dealing with Mr Tuthill’s other concern about the use of clause 2.6 every five minutes followed by notices requiring works to be done during the term. Nevertheless, Mr Tuthill advised his clients to accept the amendment and although privilege has not been further waived, it is clear that the defendant did so, thereby precluding any claim for rectification.
[43] The critical question, in my judgment, is whether, as the claimant now alleges, the defendant negotiated an exchange of the previously proffered assurance that there would be no terminal schedule for an amendment to clause 2.6 that, in the event, gave them nothing of any substance with which to prevent such a terminal schedule being served. Or whether, on the other hand, the assurance remained in place, notwithstanding that amendment. The amendment paid a sort of lip-service to Mr Latham’s statement that he was instructing Dechert to exclude interim and final schedules, but the exclusion of a final schedule from one of the consequences that might flow from an entry during the term under clause 2.6 was, in substance, worthless. The answer to that question must be derived from a review of the inter-party communications between 4 and 6 December 2001 that I have already quoted in full.
[44] In my judgment, the critical part of that analysis is whether the proviso to clause 2.6 makes more sense as an adjunct to a continuing assurance or as the substitute for it. This approach is, I believe, consistent with the third of Lightman J’s five probanda for the existence of a collateral contract in Inntrepreneur.
[45] The proviso makes precious little sense as a substitute for the assurance. The protection that it purports to provide is illusory. Why should the landlord rely upon a Jarvis v Harris inspection during the term under clause 2.6 as the basis for a final schedule, rather than wait and inspect the premises in the condition in which they are actually left on the tenant’s departure?
[46] The proviso is not entirely happy as an adjunct to an unqualified assurance that there will be no final schedule because then the words “or final” in the proviso are, at first sight, surplusage. However, with a little imagination, the proviso can be seen to make some sense as an adjunct to a continuing assurance in the context of Mr Latham’s professed determination to retain a right to inspect to check that the defendant was complying with repairing obligations during the term. It could mean that the proviso was designed to prevent Lionbrook from going back on a continuing promise not to serve a final schedule, relying upon evidence of breach of covenant discovered during the term as an excuse for departing from its promise. That gives full effect to the words of the proviso and leaves in place the assurance expressed in Dechert’s letter only the previous day.
[47] I have found this a very difficult question and I admit that my mind has wavered on it more than once. I have, in particular, been concerned not to override the express bargain of the parties by a collateral contract or estoppel founded on less than clear evidence. However, the evidence of what the parties said and did is clear and precise. The uncertainty lies in what they meant.
[48] In the end, I have, on the narrowest of balances, come to the conclusion that the assurance given (or at least recorded) in Dechert’s letter of 4 December was not (and was not intended to be) overridden by the amendment to clause 2.6 proposed on 5 December and accepted on 6 December. Subsequent events, in particular the replies to inquiries given by Macfarlanes to Howard Kennedy on Lionbrook’s behalf, suggest, on balance, that both Lionbrook and the defendant regarded that assurance as continuing; at least as a personal bond between the two companies.
[49] Subsequent conduct may be admissible on an estoppel analysis because estoppel addresses the conscience of the promisor, but hardly on a contractual inquiry. Accordingly, I treat it as no more than slight comfort that my conclusion, based as it is upon the contemporaneous documents, is correct. Equally, the decision of the claimant not to inquire why the defendant considered there to be no right for the landlord to serve a final schedule leaves me with no concern that my conclusion causes an innocent third party an injustice. The claimant was notified that the defendant asserted a right hostile to the cause of action that the claimant wished to acquire and no inquiry of the defendant was made. The claimant therefore took the risk.
[50] I therefore decide the preliminary issue in favour of the defendant with the consequence that, unless I have missed anything, the claim must be dismissed.
[51] I am asked to give permission to appeal. In my judgment, this is a case where I should give permission to appeal on the ground that an appeal would have a reasonable (that is, more than fanciful) prospect of success. I should make it clear that I do not regard this as a case in which any uncertainties in the relevant law have caused the difficulty to which I have referred in my judgment, but simply that upon the facts that appear fully from documents (and which would, therefore, appear as fully to the Court of Appeal as they have appeared to me), I have found it to be a very difficult decision. In those circumstances, as it seems to me, the Court of Appeal is as well placed to form its own view as to the correct answer to this issue as I have been, and it follows from the fact that I have found it to be a difficult question that there |page:43| is a contrary view that might succeed. In those circumstances, I give permission to appeal.
Claim dismissed.
