Business tenancy – Break clause — Constructive trust – Respondent landlords serving notice to operate break clause – Respondents opposing new tenancy on ground of intention to develop building – Appellant tenants resisting exercise of break clause — Whether judge entitled to dismiss appellants’ claim based on constructive trust and/or estoppel — Appeal dismissed
The appellant tenants and the respondent landlords originally comprised a group whose interests included the ownership of commercial premises and the operation of an amusement arcade on the ground floor. Following an extensive demerger, the respondents became the landlords of the premises and the appellants became tenants of the ground floor. The upper floors were vacant and in a poor state of repair.
Following the demerger, the respondents served notice on the appellants under a break clause in the lease and opposed the grant of a new tenancy, They wished to carry out an extensive conversion and development of the building by converting the ground floor and basement into three retail or restaurant units and converting the upper parts into a 157 bedroom hotel. The respondents had obtained planning permission for that development and had pre-let the ground floor and basement units.
The appellants claimed that the respondents were not entitled to operate the break clause in the lease insofar as it would end their right to trade from the ground floor until the end of the lease. They claimed that a binding oral agreement reached between the parties in February 2009 prevented the respondents from operating the break clause; alternatively, equitable principles as to estoppel and constructive trust prevented them relying on the clause.
The appellants argued that the respondents held the freehold on constructive trust to give effect to the parties’ common intention that the appellants would remain as ground floor tenants, making it unconscionable for them to operate the clause; that trust was a common intention constructive trust of the type in Pallant v Morgan [1953] Ch 43, as explained in Banner Homes Holdings Ltd (formerly Banner Homes Group Plc) v Luff Developments Ltd (No2) [2000] PLSCS 16, [2000] EGCS 15.
The judge took the view that, on the facts, the respondents had been entitled to operate the break clause and ordered that the tenancy be terminated in accordance with section 64 of the Landlord and Tenant Act 1954 without the grant of a new tenancy: [2011] EWHC 803 (Ch). The appellants appealed, contending that the requirements for a constructive trust or estoppel had not been met.
Held: The appeal was dismissed.
(1) The reasoning in the Banner Homes case was firmly based on a common intention constructive trust of the kind enunciated by the House of Lords in Gissing v Gissing [1971] AC 886. Although later cases indicated that such trusts might be limited in future to family cases, the position was not so clear as to make it possible for the Court of Appeal to hold that Banner Homes could not stand with higher authorities and to treat that decision as not binding in the present case: Banner Homes Holdings Ltd (formerly Banner Homes Group Plc) v Luff Developments Ltd (No2) [2000] PLSCS 16; [2000] EGCS 15; [2000] Ch 372 applied; Cobbe v Yeoman’s Row Management Ltd [2008] 3 EGLR 31, [2008] PLSCS 227, [2008] 31 EG 88 (CS) followed; Gissing v Gissing [1971] AC 886, Stack v Dowden [2007] PLSCS 82, [2007] 18 EG 153 (CS) and Jones v Kernott [2011] PLSCS 264, [2011] 46 EG 104 (CS) considered.
(2) therefore, applying the requirements for a common intention constructive trust, the critical question was whether the respondents’ conduct had been unconscionable, The judge had been right to conclude that the respondents were not guilty of unconscionable conduct such as to raise an equity against them. The alleged constructive trust was one under which the respondents were precluded from exercising the break clause so as to terminate the appellants’ right to remain on the ground floor. On the facts, the judge had been entitled to find that there had never been any assurance by the respondents that the break clause would not be operated in that way. The problem that had arisen for the appellants was due to their own carelessness in not checking the terms of the lease. Since the respondents had been unaware that the appellants had been labouring under a misapprehension as to the terms of the lease, their conduct could not have been unconscionable and the judge had been right to dismiss the claim.
Furthermore, on the fact, the judge had been entitled to find that no agreement had been reached in February. The absence of agreement on critical parts of the commercial deal showed that there had never been a common intention to enter into a legal commitment. Both sides had intended that all aspects of the demerger should be embodied later in formal contractual documentation.
(3) The main elements of the doctrine of proprietary estoppel were a representation or assurance made to the claimant, reliance on it by the claimant and detriment to the claimant in consequence of his reasonable reliance. On the evidence, the judge had been right to conclude that none of those requirements were satisfied in the present case. Further, as the parties had never reached agreement on the vital question of the physical extent of the continuing demise of the ground floor or discussed the duration of any leasehold interest the appellants would continue to enjoy outside the terms of the lease, it was impossible to regard the appellants as having an expectation of ‘a certain interest in land’ which was a requirement of proprietary estoppel. At no time between February 2009 and completion of the demerger had they expected to be entitled to remain in possession of the ground floor save pursuant to a lease, the vital terms of which had still to be negotiated and agreed.
Michael Driscoll QC and Ciaran Keller (instructed by Pinsent Masons LLP) appeared for the appellants; Romie Tager QC and Justin Kitson (instructed by Addleshaw Goddard LLP) appeared for the respondents.
Eileen O’Grady, barrister
