The litigation in Co-Operative Bank plc v Hayes Freehold Ltd (in liquidation) [2017] EWHC 1820 (Ch) concerned the validity and the effect of a composite deed of surrender of commercial premises. Several parties were involved because there was a headlease and an underlease. The tenants had purported to surrender both leases in return for unconditional and irrevocable releases from liability in favour of both themselves and the undertenant’s guarantor.
The freeholder’s lender drew attention to its charge, which provided that the bank’s consent was required before any dealing with or surrender of the headlease. It complained that it had not consented to the transaction and claimed that the deed of surrender was, therefore, void as against the bank.
Deutsche Bank claimed that, if the surrender of its headlease was ineffective, then the undertenant and its guarantor also remained liable on the underlease. It was commercially inconceivable that it had intended to release the undertenant and its guarantor while continuing to remain liable under the headlease itself. Therefore, so the argument went, the surrender of the underlease and release of the undertenant’s guarantor were subject to an implied condition precedent that the surrender of Deutsche Bank’s headlease was also valid.
In interim proceedings between the parties, the high court accepted that there was an implied condition precedent that prevented the contract from coming into effect but, at trial, Mr Justice Henry Carr disagreed. This would contradict an express term of the contract, which provided for the “unconditional” release of the guarantor. The provision releasing the guarantor would have to be rewritten so that it became conditional on the effective surrender of the headlease – and that would not be consistent with the express terms of the parties’ agreement. Consequently, it was impossible to imply such a term into the deed of surrender: see Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742.
Was Deutsche Bank entitled to rescind the deed for unilateral mistake? Pitt v Holt [2013] 2 AC 108; [2013] UKSC 26 confirmed that it is possible to rescind a gift where there has been a unilateral mistake in circumstances where it would not be possible to rescind a contract – and Deutsche Bank argued that no consideration had been given for the release of the guarantee. But the judge refused to accept that Deutsche Bank had made a gift, or a voluntary disposition. It had accepted a surrender of its tenant’s underlease, and in return, had been released from its covenants as landlord under the underlease.
The judge went on to dismiss claims for rescission on various other grounds – leaving Deutsche Bank to make a negligence claim against its solicitors, who had omitted to make the appropriate searches before advising, definitively, that the surrender of the headlease would be effective.
Allyson Colby is a property law consultant
