Construction of shopping centre — Consortium financed by insurance society — Units remaining unlet — Construction of agreement — Whether society can unilaterally insist that reverse premiums paid to attract tenants to take underleases — High Court ruling in favour of society — Court of Appeal reversing decision — House of Lords upholding Court of Appeal’s decision
This appeal concerned a tripartite development of a new shopping centre at Sutton, Surrey, known as the St Nicholas Centre. The freeholders were Sutton London Borough Council. The development was carried out by a consortium of companies (“the developers”) and financed by Norwich Union Life Insurance Society (“the society”). The construction of the centre was completed but due to the recession many units in the development remained unlet. A question arose whether the society, without any further agreement by the developers, could insist that reverse premiums be paid to attract possible tenants to take underleases of unlet units, the cost of the reverse premiums to be borne wholly by the developers.
The payment of a reverse premium was an advantage to all the participants since it would increase the amount of the rent roll. However, the advantage to any one of the parties was largely dependent upon who had to bear the cost of paying the reverse premium. Under the funding agreement, reverse premiums were expressly made part of the development costs. Since the society had paid its maximum commitment the developers would be bound to pay any further development costs incurred. Accordingly, they would have to bear the whole cost of any reverse premiums. The developers were unwilling to agree to such payments, despite the increase in rental income they might produce. The society on the other hand was anxious to increase the rent roll at no additional cost to itself. The trial judge held in favour of the society, but a majority of the Court of Appeal reversed that decision: see [1993] EGCS 69.
Held The society’s appeal was dismissed.
1. At the time the developers and the society entered into the funding agreement they were bound or to become bound (the developers under the development agreement, the society under the headlease) to grant underleases which complied with the development agreement. Thus, the lettings had to be at open market rent with minimum five-year rent reviews, with no tenant premium being payable and to be in the agreed form of underlease which made no reference to any reverse premium.
2. Under the terms of the funding agreement the incidence of a reverse premium or of the cost of any other incentive paid to a tenant depended upon whether such payment was made before or after the maximum commitment figure which the society was bound to pay to the developers had been reached. If before, the cost would be borne by the society (if it had agreed it) as part of the development costs; if after, the cost would be borne by the developers.
3. The development agreement required an actual agreement as to reverse premiums to be reached between the parties in relation to each underlease.
4. Accordingly, any premium or other capital sum paid by the developers or by the society to any tenant or prospective tenant of any part of the development in connection with the grant of a lease was only to be taken into account as part of the development costs or the society’s expenditure as defined in the agreement if payment had been agreed between th developers, the society, the tenant and the council.
Michael Barnes QC and John Furber (instructed by Speechly Bircham) appeared for the developers; Richard McCombe QC and Christopher Pymont (instructed by the solicitor to Norwich Union Legal Services) appeared for the society.
