Most commercial leases prevent the tenant from assigning, underletting, or parting with or sharing possession or occupation of its premises without the landlord’s consent. However, tenants who take long leases of premises with the intention of underletting the premises as a whole, or in parts, will require alienation provisions to suit their particular needs.
Lunar Office SARL v Warborough Investments Ltd [2017] EWHC 19 (Ch); [2017] PLSCS 8 concerned the meaning of the alienation provisions in a 99-year lease of premises comprising four self-contained shops with offices above them, and two further office blocks in the courtyard at the rear. The lease prohibited underlettings of parts that did not comprise complete floors or shop units. It was also a condition that underlettings of the whole, or parts, were to be for terms of at least 10 years. Furthermore, the rents and covenants were to “accord with the principles of good estate management and with the duty of managing the demised premises to the best commercial advantage of the parties hereto”. A separate provision prohibited the tenant from underletting except at a rent that represented the best rent reasonably obtainable for the premises without the landlord’s consent.
The question for the court was: were these provisions cumulative? Or were they free-standing requirements (so that, if the initial conditions were not satisfied, it remained possible for the tenant to underlet if it charged the best rent reasonably obtainable for the premises and obtained the landlord’s consent before underletting)?
The judge began by saying that neither side was obviously right or wrong. He accepted that the landlord might wish to avoid an undisciplined patchwork of underlettings, because it might find itself as the direct landlord of the sub-tenants if the tenant were to become insolvent. However, the language and structure of the covenants dictated that they should be read as alternatives.
There was no linking language between the clauses. Furthermore, they imposed different and potentially conflicting requirements. The judge also noted that, if the provisions were to be read cumulatively, the tenant would be unable to grant new underleases in the final ten years of the term, since it would always be a condition of any permitted underletting that the underlease should be for a minimum of 10 years.
The context was also important. The lease was for 99 years. The tenant had invested a substantial amount in the property and, given that the premises included offices and shops, it was clear that the parties had contemplated that the tenant would be able to grant underleases. It would be surprising if the tenant’s ability to underlet were to be as inflexibly and uncommercially circumscribed as the landlord was suggesting.
Reading the provisions cumulatively would tilt the playing field disproportionately and unjustifiably in favour of the landlord, whereas reading the provisions as separate alternatives would achieve balance between the landlord’s need to protect itself against a patchwork of underlettings and the tenant’s need for long-term flexibility.
Allyson Colby is a property law consultant
