NEUTRAL CITATION NUMBER: 2012 EWHC 3710 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Case No: HC12A03898
The Rolls Building
7 Rolls Buildings
Fetter Lane
London
EC4A 1NL
Thursday, 13th December 2012
Before:
THE HONOURABLE MR JUSTICE VOS
B E T W E E N:
CANONICAL UK LTD
and
TST MILLBANK LLC
Transcript from a recording by Ubiqus
Clifford’s Inn, Fetter Lane, London EC4A 1LD
Tel: 020 7269 0370
MR GUY FETHERSTONHAUGH QC appeared on behalf of the Claimant
MR JONATHAN SMALL QC appeared on behalf of the Respondent
JUDGMENT
(approved)
MR JUSTICE VOS:
Introduction
1. On 17th February 2012 the claimant tenant Canonical UK Ltd (‘Canonical’ or ‘the tenant’) served notice on the defendant landlord TST Millbank LLC (‘TST’ or ‘the landlord’) to terminate an underlease dated 15th February 2007 (‘the lease’) pursuant to a break-clause on 22nd August 2012. The issue in this expedited trial is whether in the events which have happened the lease has indeed terminated as the tenant intends, or whether, as the landlord says, it has not, essentially because the tenant has failed to pay one month’s rent by way of reverse premium provided for in the break-clause.
2. The facts are not in dispute and there has been no live evidence. In essence there are two main questions before me, first as to the proper construction of the reddendum in the lease taken together with the break-clause itself, and secondly as to the question of appropriation. That latter issue arises because the tenant paid a whole quarter’s rent for Midsummer Day 2012, when the lease was to terminate during the quarter if the break-clause operated on 22nd August 2012. When it paid the rent the payment advice said the tenant was paying the invoice for the quarter’s rent, but it now says that only two months’ rent or so was due, so that the remaining money must be taken to be attributed to the reverse premium payable under the break-clause.
3. This is a hard case for both sides. The tenant is a company which develops free open-source software and needs to know if it has successfully broken the lease because its future business depends on using its resources elsewhere. The landlord in these poor economic times seeks to use any argument it properly can to keep its buildings tenanted. Before dealing with these knotty issues I shall set out briefly the chronological background, the relevant terms of the lease and the relevant parts of the evidence.
Chronological and other background
4. On 15th February 2007 TST granted Canonical the lease of premises on the 27th floor of the Millbank Tower, Millbank, London SW1 (‘the premises’) for a term of 10 years expiring on 14th February 2017 at an initial annual rent of £360,306. Clause 8 of the lease contained a tenant’s option for early termination, (‘the original break-clause’) which depended upon it complying with certain conditions. The break-clause originally provided for the termination date to be 15th February 2012. On 11th August 2011 the parties entered into a deed varying the lease which substituted a new break-clause (‘the new break-clause’) for the original break-clause. The new break-clause allowed for termination at any time up to and including 15th February 2013 upon service of not less than six months’ notice and satisfaction of various conditions including the payment of rents ‘up to and including’ the break-date, the tenant not being ‘materially in breach’ of any of its covenants at the break-date and the payment of either three months’ (for a break-date on or before 14th August 2012) or one month’s (for a break-date after 14th August 2012) yearly rent.
5. On 17th February 2012 the claimant served notice on the defendant to terminate the lease on 22nd August 2012. On 7th June 2012 CBRE on behalf of the landlord invoiced the tenant by an invoice numbered 0082-002918 for a quarter’s rent in advance plus Value Added Tax and a quarter’s service charge in advance plus Value Added Tax totalling the sum of £125,141.40. On 29th June 2012 the claimant paid the defendant the sum of £125,141.40. RBS’s payment credit advice to CBRE gave a reference referring to, ‘Payment details: /RFB/Canonical UK Ltd inv. 0082002918’. RBS is the landlord’s agent’s bank. The claimant vacated the premises by 22nd August 2012.
6. On 3rd September 2012 the defendant’s solicitors wrote to the claimant contending that the lease had not come to an end on 22nd August 2012 because, amongst other reasons, the claimant had failed to pay one month’s rent required by clause 8. On 8th October 2012 the tenant’s Part 8 claim form was issued seeking a declaration that the tenant had successfully complied with the conditions required to terminate the lease. On 17th October 2012 Mr Justice Newey ordered that the trial should be expedited and should take place between 1st November and 14th December 2012. It is for that reason that it has come on before me today. On 3rd December 2012 the tenant’s solicitors wrote to the landlord’s solicitors suggesting that the issue to be resolved at trial was,
“Whether on a true construction of the lease (as amended by the deed of variation) the payment made by the claimant [on 29th June 2012] was sufficient to discharge the conditions of the break option set out in clauses 8.1.1 [8.1.2] and 8.1.3(b) of the lease.”
The relevant terms of the lease
7. Clause 3 of the lease provided that:-
“The Landlord at the request of the Guarantor demises unto the Tenant all that the Premises … To hold the Premises unto the Tenant… for the Term… Yielding and paying therefor:
First yearly and proportionately for any part of a year the Yearly Rent specified in paragraph 8 of the Particulars (subject to review in accordance with Schedule 6) by equal quarterly payments to be made in advance on the usual quarter days in every year the first such payment or a proportionate part thereof (being a proportionate payment in respect of the period commencing on the Rent Commencement Date specified in paragraph 9 of the Particulars and ending on the day before the next succeeding quarter day) to be paid on the Rent Commencement Date.
Secondly as additional rent yearly and proportionately for any Service Period the Service Rent in accordance with the provisions of clause 6 including the Interim Sum on account of equal quarterly payments to be made in advance on the usual quarter days in every year the first such payment or a proportionate part of it (being a proportionate payment in respect of the period commencing on the date hereof and ending on the day being the next succeeding quarter day) to be paid on the date hereof. …
Fifthly as additional rent on demand (in addition and without prejudice to the landlord’s right of re-entry and any other right) interest at the Stipulated Rate on any sum owed by the Tenant to the Landlord whether as rent or otherwise…’
8. Paragraph 6 of the Particulars to the lease defines the “Term” as: “10 YEARS from and including the Term Commencement Date [15th February 2007] and expiring on and including 14 February 2017”.
9. The tenant’s covenants provided for in clause 4 of the lease provide in part as follows:-
“The Tenant hereby covenants with the Landlord:
4.1 Rent
To pay the rents reserved by this Lease on the days and in the manner set out in clause 3 without deduction or set-off and (unless for the time being the Landlord shall have required in writing to the contrary) to pay the rent first reserved (together with any sum in respect of the rent sixthly reserved as may be applicable thereto) by bankers standing order to such bank as the Landlord may from time to time nominate”.
The new break-clause
10. The new break-clause provided as follows:-
“8. Break Option.
8.1 If the Tenant wishes to determine this lease at any time up to and including 15 February 2013 (the ‘Break Period’) and gives to the Landlord not less than 6 months’ prior written notice to that effect (the date of expiry of the said notice during the Break Period being deemed the ‘Break Date’) and provided that the Tenant –
8.1.1 has paid the Yearly Rent and other monies reserved as rent under clause 3 of this Lease up to and including the Break Date;
8.1.2 is not materially in breach of any of the covenants on its part contained in this Lease at the Break Date, and
8.1.3 has paid the Landlord in cleared funds on or before the Break Date-
(a) a sum equivalent to 3 months’ Yearly Rent if the Break Date is prior to or on 14 August 2012; or
(b) a sum equivalent to 1 month’s Yearly Rent if the Break Date is on or after 15 August 2012,
Then on the Break Date this Lease shall cease and determine and the Tenant shall yield up the Premises in accordance with the covenants on its behalf in this Lease but without prejudice to the rights and remedies of either party in relation to any antecedent claim for breach of the covenants and conditions contained in this Lease.”
11. It is to be noted that the original break-clause was similar to the new break-clause save that it excluded the words, ‘at any time up to and including 15th February 2013’ in clause 8.1 and excluded the condition concerning the payment of the reverse premium.
The evidence
12. Mr Roger Thornton’s evidence for the landlord includes the following paragraphs:-
“6. The claimant did not comply with any of the above conditions [in the new break-clause]. Instead I am informed by Natalie Valentine of CBRE Ltd (the defendant’s agents) that what occurred was as follows. On 7th June 2012 a demand was sent to the claimant for the June quarter’s rent and service charge… it would be noted that the invoice number for this demand was 0082-002918. Rent was due on the usual June quarter-day namely 24th June 2012. However, as can be seen from the payment credit advice received from CBRE’s bank (RBS), payment was in fact only received on 29th June 2012…
8. However it is clear that the claimant did in fact intend to pay the full amount of rent (and service charge) demanded albeit late. It is the defendant’s case that payment of this full amount was properly required under the terms of the lease… Indeed it will be noted that the payment credit advice makes specific reference to the invoice number thereby indicating that the intention of the payer was to discharge the full June quarter’s invoice. …
10. It is clear that the claimant did not intend the payment made on 29th June 2012 to represent the one month’s extra payment. As stated above, the payment was made expressly to discharge the June demand for rent and service charge, as is recognised in paragraph 12 of the claim form. If one were to apportion the sum demanded from and including 24th June 2012 to and including 22nd August 2012 and then add to that a further sum representing one month’s worth of rent, one would pay a sum of £112,465.58 rather than the rent and service charge demanded (£125,141.40). (By my calculation there are 60 days between 24th June and 22nd August 2012 (both inclusive) and so a time apportionment of the sum demanded would result in payment of £82,284.76. The yearly rent was £367,200. I calculate one month’s worth of this (30 days) to be £30,180.82)…”
13. In response Miss Jane Elizabeth Silber a director of Canonical made her second witness statement which included the following paragraph 10:-
“In so far as the claimant’s intention to terminate the lease is relevant however, it is worth adding the following to the factual summary at paragraphs four and five of Mr Thornton’s witness statement: between service of the break notice on 17th February 2012 and the break-date on 22nd August 2012 the claimant:
(a) allowed the defendant to conduct viewings of the premises to prospective new tenants,
(b) carried out substantial works of repair and re-instatement of the premises,
(c) negotiated with the defendant payment to it of the sum of £17,500 in lieu of re-carpeting the premises,
(d) vacated the premises and moved to new offices, and
(e) returned its cards giving access to the premises to the defendant.
I note that Mr Thornton does not suggest in those circumstances that the defendant was in any doubt that the claimant intended to comply with the conditions precedent in order to terminate the lease on 22nd August 2012.”
The parties’ arguments
14. The tenant argues that on a proper construction of the reddendum and the new break-clause the words, ‘yearly and proportionately for any part of a year’ are to be construed as meaning that the payment to be made up to the service of the break notice is only up to the date of the termination. It is axiomatic that the rent is only payable for use and occupation of the premises and that it is not payable for any period longer than that occupation. The tenant submits that any other construction confuses the mechanism for the payment of rent with the provision determining for what period it must be paid. When the payment was made on 29th June 2012 only rent up to 22nd August 2012 was due, so the balance must be regarded as payment of the only other outstanding potential liability namely the one month’s reverse premium even though nothing to that effect was said at the time.
15. The landlord’s case is that:
(1) On the proper construction of the reddendum and the new break-clause the full quarter’s rent was due on 24th June 2012 and so no further payment being made, the claimant was not in credit at the time of the break-date.
(2) Mr Jonathan Small QC for the landlord submits that the authorities have been clear since Capital and City Holdings Ltd v Dean Warburg Ltd [1989] EGLR 90 that reddendums in this or similar form mean that the quarter’s rent is payable whether or not there is a termination during the quarter. The fact that the Capital and City case concerns a subsequent forfeiture does not affect its ratio. He relies also on a trilogy of very recent cases to the same effect.
(3) In any event the landlord says that the claimant did not pay the month’s rent by way of reverse premium. Instead the claimant appropriated its payment to the rent demand. The claimant did not purport to pay the reverse premium and the defendant did not understand it to have been paid.
Authorities
16. The tenant relies on a series of cases denominating rent as being payment for occupation of land that is only payable in respect of the period of occupation: see York v Casey [1998] 2 EGLR 25 per Peter Gibson LJ at page 28, Evershed LJ in Property Holding Company v Clark [1948] 1 KB 630 at pages 648-649, Nourse LJ in Escalus Properties v Robinson [1996] QB 231 at page 243 and Lord Diplock in United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 at page 935. As it seems to me, these cases are not in doubt but the question here is not whether ultimately the tenant must pay more than the rent due for the period of its occupation. That might be an issue if the tenant had overpaid and claimed the overpayment back whether in restitution or otherwise. What is in issue here is the true meaning of the contract between the parties. It could provide for a quarterly payment in advance, even after the service of a break notice, and it could provide otherwise. I shall in due course have to decide which of the two constructions is correct.
17. In Capital and City Holdings Ltd v. Dean Warburg Ltd supra the question was whether the reddendum meant that the tenant had to pay the entire quarter’s rent irrespective of whether there was a forfeiture terminating the lease during the quarter. It was held by the Court of Appeal that it did. The reddendum in question was set out at page 92D (first column) in the report as follows:-
“…yielding and paying therefor during the term… yearly (and proportionately for any part of a year) the rent which shall be payable by equal quarterly payments in advance on the quarter days, the first of such payments or a proportionate part thereof to be due on the date specified in the particulars and to be in respect of the period therein mentioned…”
Ralph Gibson LJ (with whom Nicholls LJ agreed) said this at page 92D-F:-
“The term was from July 7, 1987 to June 23, 1991. The quarter days were stated to be March 25, June 24, September 29, and December 25, in each year. The tenant covenanted to pay the rent at the times and in the manner provided. Mr Jones argued that, despite the clear obligation to pay a quarter’s rent on December 25, 1987, the words “proportionately for any part of a year” and “or a proportionate part thereof” caused that liability to be reduced by the serving of the writ. I do not agree. It seems to me that the references to the proportionate part of a year were included to deal with the fact that the term commenced on July 7, and called for a proportionate payment down to the first following quarter day. The presence of those words does not, in my judgment, modify in any way the obligation imposed by the lease on the tenant to pay a full quarter’s rent on December 25, 1987. It is common ground that the plaintiff gave proper credit in respect of the sums received on December 25 1987…”
18. The argument between the parties before me is about whether that case is authority for the meaning of the words in a case other than forfeiture. Mr Fetherstonhaugh QC for the tenant said that it was distinguishable because there it was unknown whether a forfeiture might take place during the quarter so looked at, as at the quarter-day, it was obvious that the full quarter’s rent was payable. Here the break notice has been served before the quarter-day which made all the difference and brought into play the terms of the break-clause upon which he places reliance.
19. The next case was Re a Company [2006] EWHC 3436 (Ch) [2007] BPIR 1 where Pumfrey J, as he then was, decided whether a tenant was permitted to apportion rent so as to comply with a break-clause in the context of an injunction to restrain a winding-up petition. The break-clause provided:-
“If the tenant wishes to determine this lease then it gives to the landlord not less than nine months’ written notice within five working days of either of the third or sixth anniversary of this lease and that with and up to the time of the determination pays the lease rents and substantially performs and observes the covenants contained in this lease then on expiry of the notice the term is to cease and determine immediately but without prejudice to any rights or remedies that may have accrued.”
20. Pumfrey J held that he was bound by the decision of the Court of Appeal in Capital and City Holdings Ltd v. Dean Warburg supra. The tenant says that this case is of no importance here because the parties had provided that rent was only due and payable up to the break-date.
21. In QuirkCo Investments Ltd v. Aspray Transport Ltd L&TR 19 His Honour Judge Keyser QC sitting in the Chancery Division, Leeds District Registry, as a judge of the High Court, decided that a tenant was not entitled to recover the balance of a quarter’s rent that was referable to the period after the break-date. The break-clause stipulated that:-
“6.11.2 This lease shall only determine as a result of notice served by the lessee under this sub-clause if at the time of expiring of such notice: 6.11.2.1 there are no arrears of rents reserved or any other sum payable under this lease.”
22. Judge Keyser followed the Court of Appeal in Capital and City, regarding the case as decisive. He held that the words of apportionment in the reddendum dealt merely with the liability of the tenant at the beginning and end of the term. He said this at paragraphs 61-64 of his judgment:-
“61. The claim at point (3) [the claim for repayment in respect of the rent attributable to the period after the determination] rests on the contention that, upon the determination of the lease on 18th December 2010 pursuant to the valid exercise of the option under the break-clause, the lessee became entitled to restitution of that part of the rent paid in advance on the previous quarter day which was attributable to the few days of the quarter that post-dated the determination of the lease. That entitlement is said to arise either as a matter of the true construction of clause 2.2 of the lease or under the general law of unjust enrichment – presumably on the ground of failure of consideration.
62. No authority was cited in direct support of the defendant’s contention. The reason for that, in my judgment, is that the contention is unsound.
63. The common law does not permit apportionment of rent in respect of time. The Apportionment Act 1870 does not affect the date on which rent is payable and does not authorise apportionment in respect of time of rent payable in advance. The general principle is that rent payable in advance is payable in full on the due date, notwithstanding that the lease subsequently determines before the expiry of its term: see, for example, Ellis v Rowbotham [1900] 1 Q.B. 740 and Canas Property Co. v K.L. Television Services [1970] 2 Q.B. 433. I do not consider that the case of termination of a lease by the lessee’s exercise of a contractual option is properly to be treated differently; rights of restitution for failure of consideration do not depend on the absence of fault of the claimant: see, for example, Dies v British and International Mining and Finance Corp Ltd 1939] 1 K.B. 724. The landlord’s entitlement to recover as rent the full amount due in advance, notwithstanding the subsequent termination of the lease before the expiry of the term, is sufficiently explained by the fact that the contractual obligation to pay the rent had accrued before termination and that the law of unjust enrichment does not operate to circumvent the scheme of obligations and entitlements contained in a valid contract.
64. A claim for recovery of the rent referable to the period between the termination of the lease and the end of the quarter must therefore rest on the terms of the lease itself. Clause 2.2 is set out in paragraph nine above. Mr Stockill relies particularly on the words: “and so in proportion for any period less than a year” In my judgment the words will not bear that reliance. In Capital and City Holdings Ltd v Dean Warburg… it was argued that, upon the true construction of the under-lease, the under-lessee was not liable for rent in respect of any period of time after the date of termination of the under-lease by forfeiture. The words relied upon were [see above]. Ralph Gibson LJ, with whom Nicholls LJ agreed, said at 351 [see above].
Similarly in the present case, the term of the lease was from 18th December 2000 until 17th December 2015 and the rent was due on the usual quarter days. I consider that the words relied on by Mr Stockill do no more than deal with the fact that the commencement and expiry of the term did not coincide with the quarter days, so that proportionate payments would be required at either end of the lease. No such proportionate payment would be required in respect of the break clause, because the validity of the exercise of the option under that clause would not be capable of ascertainment at the preceding quarter day and because the lease makes no provision for a proportionate payment or for the pro rata recovery of any moneys attributable to the period after the expiry of the notice under the break clause.”
23. In PCE Investors Ltd v. Cancer Research UK [2012] 2 P&CR 5 Peter Smith J held that the full quarter’s rent was payable even when a break-clause was due to operate in the middle of it. His main reason was that business contracts required a level of certainty. The appeal in that case is listed as I am informed for early February 2013. The relevant break-clause condition stipulated in relation to a break-clause date of 11th October 2010 that, ‘the tenant must have paid the rents reserved and demanded by this lease up to the termination date.’ The relevant reddendum provided as set out at paragraph 31 of the learned judge’s judgment that the property was:-
“demised for the term subject to the yearly rent of £190,000 “payable by equal quarterly payments in advance on the usual quarter day in every year the first such payment to be made on the rent commencement date and to be in respect of the period from and including the rent commencement date until the next following quarter day”.”
Peter Smith J said this:-
“29. It seems to me that the most important matter from a business point of view is certainty. The tenant will want to know precisely what obligations fall on him during the lease and upon its termination. The case for the tenant is of course that once it has given the notice it is only obligated to pay the rent for the period which ran from the usual September quarter day to the termination date.
35. On 29th September 2010 whilst the underlease was still subsisting an obligation fell to pay the next quarter of the annual rent. Obviously that extended to the period ending on 25th December 2010 but the obligation subsisted at the time that the rent fell due on 29th September 2010. That is an obligation that is reserved under clause 11.2 and is due on that date. On that date of course it cannot be said with certainty that the underlease will terminate on 11th October 2010. The tenant might be in breach of some other provision. That can only be determined after the event and I cannot see that it is right as a matter of construction that the clear obligation on 29th September 2010 to pay a full quarter’s rent can somehow be retrospectively reduced merely because an event after that date operates to terminate the underlease from that future date. It is true that the obligation is to pay the rents up to the termination date but that does not in my view assist the tenant. A quarter’s rent fell due on 29th September 2010. I do not accept that those words make it unnecessary if the intention was that rents related to a period after the termination date needed to be paid.
36. Conversely it seems to me that the simple straightforward construction namely that all obligations under the lease subsist until an actual termination of it is anything other than a sensible business sense. A tenant knows precisely what it has to do. If for example the tenant tendered the short rent (as happened here) and for some reason the underlease did not terminate it would become under an obligation to make up the shortfall and would on this analysis be retrospectively in breach of the obligation to pay the full quarter on 29th September 2010. That seems to me to be the type of uncertainty which a businessman would find unsatisfactory…
49… The underlease contains a bundle of rights and obligations on both sides and as part of that in my view the tenant agreed to pay rent in advance as part of the overall consideration for obtaining the underlease from the landlord. Merely because the provisions obligate him to pay rent in advance even after the termination date does not mean that there is a failure of consideration as regards that payment merely because beneficial use of the premises is not taken. One looks at the overall package in the underlease and the tenant obtained consideration in the form of the entirety of the underlease. In my view therefore the premise of Hodgson CJ’s judgment is wrong and I would not accept it.
50. The second case I was referred to was the decision of Pumfrey J in Company (No.0005945 of 2006)…. That was a decision delivered by Mr Justice Pumfrey in the vacation when he was clearly sitting in the interim as judge. It concerned an application to restrain the presentation of a winding-up petition for unpaid rent. The issue was whether or not rent was payable for periods after the relevant lease had been terminated under a break-clause… He held himself bound by the decision of Capital and City Holdings… as set out in his judgment at paragraphs 13-16. That decision concerned a forfeiture clause and on this issue the Court of Appeal followed the earlier decision in the Court of Appeal of Canas (above)…The case is persuasive authority of the proposition that where a break-clause has been exercised and rent is payable in advance, the full amount of the rent is payable even if it covers a period after the termination date. However as I have said above, it is dangerous to rely on decisions which involve different principles and involve the construction of different documents. I do not find Pumfrey J’s judgment therefore of assistance or of any relevance to the question I am asked to answer based on the construction of the Underlease.
51. The third case referred to by Mr Jourdan QC in this part of his submissions was the Quirkco case above mentioned. As I have said the learned Judge there decided that the rent was payable for the period after the termination of the break clause on summary judgment. He rejected an argument based on unjust enrichment on the grounds of failure consideration but the Ocelota case was not cited to him. He also followed the cases on forfeiture and noted the fact that the common law did not permit apportionment nor did the Apportionment Act 1870 in respect of rent payable in advance.
52. Once again in my view it would be inappropriate to follow that decision merely because it is a decision on a break-clause where the rent is payable in advance.
53. I accept however that those two decisions are indicative of the approach.
Conclusion on question (1)
54. In my view the position on the construction of the underlease is quite clear. A full quarter’s rent fell due on the September quarter day. That was payable in advance and on that day it could not be certain that the lease would terminate on the termination date. There is a commercial and sensible certainty in requiring all obligations to operate until the very date of termination but not be retrospectively changed if an early termination occurs. For the tenant to succeed it seems to me that the obligation to pay rent on the September quarter day as contended for by it requires the underlease to be rewritten to include a variation of covenant 4.1 of the tenant’s covenants to read “to pay the yearly rent as reserved herein ….. unless this underlease is subsequently terminated after the days when rent was payable in advance.” I can see no justification for any such rewriting of the Underlease. There is no ambiguity and no difficulty in my view.”
24. The tenant argues that this case defeats the clear words of the break-clause and starts by assuming what it sets out to prove namely that the lease will not terminate if, at the break-date, the full quarter’s rent has not been paid.
Appropriation
25. In Thomas v. Ken Thomas Ltd [2007] 1 EGLR 31 the claimant landlord sought to appropriate a payment made by the defendant tenant to a previous month’s rental liability (for November 2004) so that it could forfeit for non-payment of the current month’s rent. The landlord failed because the tenant had specified that its payment was in respect of the current quarter. Neuberger LJ referring to Chitty on Contracts 29th Edition volume one at paragraphs 21.059-21.061 with whom Mummery and Jacob LJJ agreed said this in paragraph 28 of his judgment:-
“In relation to the two payments made in December 2004, the position is as follows: (1) One must decide whether the payments were in respect of the November rent or the December rent. The answer must be the same for both landlord and tenant. (2) It is just as unrealistic from the tenant’s point of view to treat the payments as having been paid in respect of the November rent as it is from the landlord’s point of view to treat them as having been accepted in respect of the December rent. (3) Therefore, there must be a machinery for deciding whose viewpoint prevails, and the machinery is to be found in the law of appropriation. (4) That law, properly applied, shows that, if he exercises the right, it is the tenant debtor who can appropriate, and that it is only if he does not do so that the creditor landlord is entitled to appropriate. (5) If the creditor landlord is unhappy with the appropriation to the extent of not being prepared to accept the money on the basis that it is offered, he can refuse it or if, as in this case, it is paid by CHAPS or a similar system, he can return it within a reasonable time. (6) Once the money is accepted or retained on the basis selected by the tenant, then, subject to any question of contrary agreement, estoppel or the like, the recipient of the money, the landlord, is as a matter of law fixed with the appropriation — and with its consequences in terms of waiver of forfeiture, which do not depend on what he intended.”
Issue One: Was the full quarter’s rent due on 29th June 2012?
26. I start with the proper construction of the lease. It is to be noted that one should not confuse, as Mr Fetherstonhaugh reminds me, the mechanisms of payment with the clauses that provide for precisely what rent must be paid. But one must also remember that leases are to be construed strictly and that business certainly is desirable for all parties. Mr Small reminded me that the form of the reddendum in this case is very common now and has no doubt been utilised since the Capital and City case in the knowledge of what that case said it meant. He showed me drafts contained in Ross on Commercial Leases which all contain a similar formulation to the words: ‘proportionately for any part of a year’ in the lease before me. Many of them read: ‘proportionately for any period of less than a year’ in the precedents. Mr Small also drew my attention to three cases emphasising the desirability of certainty and of construing the same words with consistent meanings, even though of course (i) each document must be construed on its own terms, and (ii) cases on construction in respect of one document are not binding on a subsequent court construing another document. The three cases to which he referred were as follows: (1) Neuberger LJ in Akici v. LR Butlin Ltd [2006] 1 WLR 2001 at paragraph 24, (2) Norwich Union Life & Pensions Ltd v. Linpac Mouldings Ltd [2009] EWHC 1602 (Ch) per Lewison J at paragraph 59, and (3) that same case on appeal reported at [2010] EWCA Civ 395 at paragraph 48 per Etherton LJ.
27. As it seems to me, the words of the reddendum are not just about the mechanics of payment. Clause 4.1 provides the tenant’s covenant to pay the rent. The words of clause 3 provide what rent is to be paid and when. As I have said, if the lease provides for the rent to be paid beyond what is due, there is a further question, which is beyond the scope of this case, as to the procedure, if any, for recovery of excessive payments made. That may well engage the principle Mr Fetherstonhaugh emphasised about rent being due only for the periods in occupation. Left to my own devices and free of any authority, I would hold that the words, ‘yearly and proportionately for any part of a year’ in the reddendum in this case refer to both the beginning and end of the lease, since in this case the lease was to expire by effluxion of time in the middle of a quarter. The question then is whether those words apply also to a quarter in which a break-date falls. There is no binding authority here because (1) Capital & City was a case about forfeiture and the termination was unknown as at the quarter-day, and (2) PCE is only persuasive authority, and the reddendum there had no similar words of apportionment. The break-clause was also not identical.
28. As it seems to me, however, the condition in the new break-clause cannot be used to alter the meaning of the reddendum because it is just that, a condition. It simply says that, ‘Provided the tenant has paid the yearly rent up to and including the break-date’ the lease shall terminate. It does not say, although it could have, that if a break notice is served, only an apportioned part of the rent payable for the quarter in which it expires is payable. The reddendum on the other hand is clear; it says that on each quarter-day a quarter’s rent must be paid, the apportionment wording allowing a reduction where the term starts or expires in the middle. I thought, when the argument commenced, that the service of a break notice might be regarded as representing the state of affairs established by the parties as prevailing as at the quarter-day, so that they could be taken to have assumed, a notice having been served, that the lease would end on 22nd August 2012. That seems now to me to be too simplistic. It is wrong to say that either state of affairs is prevailing. A notice has been served identifying the tenant’s wish to terminate as at 22nd August 2012, but the tenant may if it wishes not comply with the conditions in the break-clause in which case the notice would have no effect. It would be as if it had been written in water. Neither can it be assumed that the conditions will not be complied with. It is simply unknown whether the lease will end in the middle of the quarter, just as it was in Capital & City. Thus the words must be given their natural meaning, assuming nothing. Assuming nothing, the reddendum requires a quarter’s rent to be paid on the midsummer quarter-day. The words “proportionately for any part of a year” even taken together with the provisions of the break clause cannot be taken as reducing the rent otherwise payable after a break notice has been served, just because the lease may end in the middle of that quarter. The authorities give some support to the approach that I would otherwise have wished to adopt as a matter of pure construction.
29. It is said that this construction is unfair and unreasonable because it is not clear what will happen to the excess rent paid and because it gives inadequate weight to the words in clause 8.1.1 that rent is to be paid only ‘up to and including the break date.’ But that is not what clause 8.1.1 provides. It simply says, as I have said, that if rent is paid up to and including the break-date (and the other conditions are met) the lease will terminate on 22nd August 2012.
30. The outcome seems harsh on the tenant, but in reality it should not be regarded as harsh, because the meaning of such clauses was reasonably well known even before the lease was entered into. Business certainty is, as Peter Smith J said, important. The effect of the break-clause is simply unknown as at the quarter-day and in my judgment the full quarter’s rent must be paid leaving it to be later determined whether the excess rent is repayable. The alternative construction leads to uncertainty not only as to what will happen on 22nd August 2012 but also as to how the balance of the quarter’s rent will be paid if the lease does not terminate. True, the additional rent for the period after 22nd August 2012 can be collected as rent in arrear with interest, but the mechanism for payment has passed and on my analysis not properly been complied with. It is true, as Mr Fetherstonhaugh submits, that service charges and insurance are also payable for periods that the tenant will not be in occupation, but if his construction is wrong, but that will be the case with rent as well, so the point is largely neutral.
31. I have taken into account the evidence that I have already set out in Miss Silber’s statement that the parties were fully aware that it was the tenant’s intention to terminate the lease and that numerous other steps had been taken towards that end. But that evidence does not seem to me to have any impact on the proper construction of the lease. It was up to the tenant to comply strictly with the conditions of the new break-clause if it wished to take advantage of that clause in accordance with its terms.
32. This being my decision the question of appropriation is irrelevant but in deference to the argument of counsel I will say something about it anyway.
Issue 2: Was the payment made on 29th June 2012 appropriated by the tenant to the full quarter’s rent shown on the invoice?
33. The tenant contends that the appropriation is inappropriate because the tenant had only ‘one liability to discharge’ namely the rent ‘up to and including the break date’, and one payment which it was free to make at any time prior to the break date, namely the reverse premium.
34. The landlord argues that it demanded rent on 7th June 2012 under an invoice with a specific reference number. The sum demanded was paid, citing the relevant invoice number. On that basis, by necessary implication, the tenant appropriated the payment to the demand for the full quarter’s rent. See generally Chitty on Contracts volume 1, 31st edition, paragraphs 21.060-061.
35. Mr Small submitted also that it was wrong to say that the principle of appropriation shown in the case of Thomas v. Ken Thomas supra could apply only to debts and only to cases where there were two existing liabilities, as Mr Fetherstonhaugh argued. He said that the principle could apply in any case in which the question was: to what liability is a payment to be appropriated? For example, if Mr Fetherstonhaugh was right on construction, the payment here could very well have been intended by the tenant to be held by the landlord in case the lease continued as the balance of the quarter’s rent due after the expected termination.
36. As it seems to me, Mr Small has the best of this argument too. The payment was clearly attributed by the tenant to the invoice, otherwise the payment advice would not have mentioned the invoice number. The landlord could not know that it was intended to cover the reverse premium. The tenant simply never said so. It would have been easy enough for it to have done so. In these circumstances it seems to me that, even if the proper construction of the lease were as Mr Fetherstonhaugh contended, the payment that was made by the tenant on 29th June 2012 was a payment in respect of the entirety of the invoice of 7th June 2012 and in respect of the entirety of the quarter’s rent due as at 24th June 2012 and cannot be regarded as a payment of the reverse premium.
Conclusions
37. I conclude therefore that on a proper construction of the lease a full quarter’s rent was due on the June 2012 quarter-day. That payment was duly made shortly after that date. The reverse premium was not, therefore, paid. In consequence, the conditions for determination of the lease were not met. In the circumstances the claim must be dismissed.
38. I will hear counsel on the form of any order and the question of costs.
MR SMALL: My Lord, thank you. Behind tab six of the bundle is my client’s acknowledgement of service where my solicitors have asked for a declaration that the lease continues and I’d ask that the Court make a declaration. My learned friend and I can no doubt agree a suitable form of words if Your Lordship indicates that you’re happy to make a declaration along those lines?
MR JUSTICE VOS: Mr Fetherstonhaugh?
MR FETHERSTONHAUGH: My Lord, I can’t resist that.
MR JUSTICE VOS: Very well, Mr Small, will you please draft something and let Mr Fetherstonhaugh see it and agree it?
MR SMALL: Of course.
MR JUSTICE VOS: I would like an agreed minute.
MR FETHERSTONHAUGH: Yes, of course.
MR SMALL: My Lord, I would also ask for my costs of this application.
MR JUSTICE VOS: Mr Fetherstonhaugh, you cannot really resist that, can you?
MR FETHERSTONHAUGH: My Lord, I can’t. There is a schedule and I have a couple of points on that. My Lord, before I come to that might I ask for permission to appeal? My Lord, the intention being-
MR JUSTICE VOS: Yes.
MR FETHERSTONHAUGH: -to catch up with the other appeal?
MR JUSTICE VOS: Mr Small?
MR SMALL: I don’t think, since the Court of Appeal have granted permission to appeal on the PCE case that I could sensibly argue that it wasn’t reasonably arguable beyond this point, but of course there is another point to this case, namely the further question of appropriation. The question of appropriation is a fairly straightforward point which Your Lordship despatched very quickly and in my submission it is unlikely that that is something which is going to attract the attention of the Court of Appeal sufficient to make it worth granting permission to appeal.
MR JUSTICE VOS: You want to appeal, Mr Fetherstonhaugh, do you?
MR FETHERSTONHAUGH: Yes, please.
MR JUSTICE VOS: It is worth a lot of money to your client?
MR FETHERSTONHAUGH: Yes, it is.
MR JUSTICE VOS: No, I shall give permission to appeal on both points.
MR FETHERSTONHAUGH: My Lord, I’m very much obliged.
MR JUSTICE VOS: And I will also indicate that if the Court of Appeal thinks it appropriate, I would have thought it appropriate for expedition to be granted.
MR FETHERSTONHAUGH: My Lord, that’s very helpful.
MR JUSTICE VOS: And for it to come on at the same time as the PCE case, but it is entirely a matter for the Court of Appeal to decide what it wants to do with it. I will give permission to appeal to facilitate that approach.
MR FETHERSTONHAUGH: My Lord, that’s very kind of you.
MR SMALL: My Lord, thank you. We do have a schedule of costs, I don’t know if Your Lordship-
MR JUSTICE VOS: I have not seen it yet.
MR SMALL: -has that? If I could just hand up my schedule of costs and my learned friend’s schedule of costs? One is three times the extent of the other. My schedule of costs claims a total of-
MR JUSTICE VOS: £48,000, is that you?
MR SMALL: -claims a total of £18,000 solicitor’s costs and then my fees totalling up at £48,032-
MR JUSTICE VOS: And they claim more, do they?
MR SMALL: They claim substantially more. For reasons that-
MR JUSTICE VOS: How does that affect me? I am only looking at your bill.
MR SMALL: The reason why it affects you, My Lord-
MR JUSTICE VOS: Do you want sympathy, Mr Small?
MR SMALL: No I don’t want sympathy because I’m not the person that has to pay the claimant’s bill, but in circumstances where they’ve managed to charge their clients £125,000-
MR JUSTICE VOS: Yes, well shall we hear what Mr Fetherstonhaugh says about your bill before-
MR SMALL: Yes.
MR JUSTICE VOS: -we start comparing it with his?
MR FETHERSTONHAUGH: My Lord, not a great deal.
MR JUSTICE VOS: I note, Mr Fetherstonhaugh, that your skeleton argument was about five times as long as your opponent’s and he said in the first paragraph, ‘I assume my opponent will do all the work.’
MR FETHERSTONHAUGH: My Lord, when one takes off-
MR JUSTICE VOS: Which you did, if I may say so.
MR FETHERSTONHAUGH: Well, My Lord, I’m very grateful. My Lord, when one takes off the refresher which is part of my fee, I end up very much cheaper than my learned friend despite the extra work. My Lord, I won’t go to-
MR JUSTICE VOS: It may [inaudible]-
MR FETHERSTONHAUGH: -My Lord, but those are services for later. I won’t get drawn into bill comparisons.
MR JUSTICE VOS: Can you get VAT because presumably you are registered?
MR FETHERSTONHAUGH: Yes, My Lord, we can.
MR JUSTICE VOS: So you do not get VAT?
MR FETHERSTONHAUGH: We do get VAT, My Lord.
MR JUSTICE VOS: No, it is covered, it means that they are registered, your client is registered for VAT-
MR FETHERSTONHAUGH: That’s right.
MR JUSTICE VOS: -and can reclaim it so-
MR FETHERSTONHAUGH: My Lord, that’s right.
MR JUSTICE VOS: -so it is £40,000. What is your complaint about it?
MR FETHERSTONHAUGH: My Lord, it’s not a complaint it’s an observation in relation to…if Your Lordship looks down the page with, ‘statement of costs, summary assessment’ at the top-
MR JUSTICE VOS: Mm-hmm.
MR FETHERSTONHAUGH: -to ‘other work’ which is about six-
MR JUSTICE VOS: Yes.
MR FETHERSTONHAUGH: -rows down, 5.18 hours at £300 and then that’s added to by the supplementary which puts on another hour or so. The total for all that lot, My Lord, is just short of I think £2,000. Well, we don’t know what that’s for, it’s not specified at all. That’s the only observation I have.
MR JUSTICE VOS: Do you know, Mr Small?
MR SMALL: I will take instructions, if I may? My Lord, I’m instructed that that included meetings with the client and attendances at court to file documents.
MR JUSTICE VOS: I saw that. Right, anything else, Mr Fetherstonhaugh?
MR FETHERSTONHAUGH: My Lord, no, save in relation to the time for payment. My Lord, the appeal that, if we manage to get it on and it’s coming up very fast, I’m instructed to ask Your Lordship’s indulgence of putting back the time for payment until after the appeal.
MR JUSTICE VOS: Right, okay. You have asked. Right. I am now considering the question of costs. It seems to me that the landlord’s bill of costs is entirely reasonable, indeed relatively modest in the context of the scale of this litigation. I intend to allow almost the entirety of it in the sum of £40,000. That sum must be paid not later than 14th February 2013, a date chosen immediately after the appeal so that if the appeal is not successful the money will have to be paid, if it is successful it will not have to be paid. In the exceptional circumstances of this case that does seem to be a reasonable accommodation, albeit that normally such bills must be paid whether or not there is to be an appeal.
Can I say also that I would be extremely grateful if the parties could commission a transcript of my judgment urgently.
MR FETHERSTONHAUGH: Yes.
MR JUSTICE VOS: It would be marvellous if you could persuade the transcript-writers to let me see it before Christmas; that would help you as well. Can you also make sure please that the transcript-writers are provided with a full set of documents so that they can check the quotations from the documents. It is simply not appropriate to ask the judge to do that; there are plenty of quotations in this judgment and it is very difficult to check them myself. So if you provide them with this small bundle of documents they will hopefully provide a reasonable transcript for me to check.
MR FETHERSTONHAUGH: My Lord, thank you very much indeed. Of course.
MR JUSTICE VOS: The quicker you do it and the more you, if I may say so, bully them to get it done before Christmas, the more likely you are to persuade the Court of Appeal that it should come on on 7th February, otherwise it is simply going to be too late.
MR FETHERSTONHAUGH: My Lord, I take your point. Thank you very much.
MR SMALL: My Lord, the costs, did you say £40,000?
MR JUSTICE VOS: Yes.
MR SMALL: Because you also said just before that you were going to allow it in its entirety.
MR JUSTICE VOS: Well, in its entirety except the £28.00
MR SMALL: My Lord, the costs bill is £48,032-
MR JUSTICE VOS: And that is VAT.
MR SMALL: Oh, Your Lordship-
MR JUSTICE VOS: You do not get VAT, you can reclaim that.
MR SMALL: Ah.
MR JUSTICE VOS: You are registered for VAT?
MR SMALL: If Your Lordship could bear with me for one second?
Pause.
MR JUSTICE VOS: You are registered for VAT because you claimed VAT on the rent.
MR SMALL: I am so sorry, My Lord, I hadn’t… thank you.
MR JUSTICE VOS: Very good. Thank you both for an interesting day.
End of proceedings.
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