Underlease — Commercial premises — Reverse premium — Whether landlord reasonably refused consent to underletting — Whether reverse premium prohibited by lease — Claim allowed
In 1984, the claimant entered into a lease of commercial premises with the defendant’s predecessor in title for a term of 25 years, at £338,000 pa, which was to be reviewed at five-year intervals on an upwards-only basis. The final rent review was in December 2004. Since December 1999, the rent had been £710,000 pa. Clause 3.11 of the headlease provided that, inter alia, an underlease would be granted only if the best rent obtainable in the open market were achieved without the payment of a premium or other capital consideration. It was common ground that the open market letting value of the property was approximately £16 per sq ft, which was significantly less than the rate at which the rent was reserved. The property became surplus to the claimant’s requirements and, from November 2002, it attempted to find an underlessee.
A prospective underlessee agreed to pay rent of £710,000 pa, subject to review in December 2004, in accordance with the headlease. However, as consideration for entering into the underlease, it required, on completion, payment of a premium of £3m. The defendant refused consent to the underletting on the basis that: (i) it was concerned about the financial viability of the proposals; and (ii) the claimant had not secured the best rent obtainable in the open market in accordance with clause 3.11. It argued that the effect of the premium was to reduce the real rent to a level below that of the open market rent.
The claimant sought a declaration, inter alia, that the defendant had unreasonably refused its consent. The preliminary issue was whether a reverse premium (moving from the tenant to the sublessee) was prohibited by the lease.
Held: The claim was allowed.
The underlease that the claimant wished to grant reserved an annual rent that would comply with the headlease. The fact that, in the market, the underlessee had to be paid a premium to induce it to pay that rent did not detract from the amount that was actually reserved by way of rent. The reddendum in the underlease prescribed £710,000 pa, and no less. If the underlessee had paid less than the amount reserved, the underlease would be subject to forfeiture. An assignee of the term of the underlease would be obliged to pay that amount of rent, and an assignee of the reversion would be entitled to recover the full amount.
The payment of a reverse premium to a prospective underlessee in order to secure full liability for a rent equal to, or exceeding, the rent payable under the headlease was not caught by Allied Dunbar Assurance plc v Homebase Ltd [2002] EWCA Civ 666; [2002] 2 EGLR 23, where both the clause in the lease and the commercial circumstances had been entirely different from those in the present case.
In the absence of any argument that the premium was not genuine, it was impermissible for the court to rewrite the underlease and to change the premium into a figure incorporated as rent.
Derek Wood QC (instructed by Herbert Smith) appeared for the claimant; Nikki Singla (instructed by Berwin Leighton Paisner) appeared for the defendant.
Eileen O’Grady, barrister
