Landlord and tenant — Lease — Side letter to lease allowing tenant to surrender on terms — Whether obligation to accept surrender binding on successor in title to reversion
By three
leases dated April 23 1987 M Ltd granted 21-year terms of three commercial
property units to the appellant tenant; the leases containing upwards-only rent
reviews, covenants against assignment and no agreement to surrender during the
terms. By a letter of the same date, expressed to be personal to the tenant, M
Ltd agreed to accept the surrender of the leases within three months of a rent
review date upon certain terms. On November 10 the respondent landlord acquired
the reversion and became the registered proprietor without knowledge of the
side letter. The tenant appealed against the decision of Judge Micklem (sitting
as a judge of the High Court), who held that the terms of the side letter were
personal to M Ltd and not binding on the respondent.
commercial realities of the leases must have involved an intention that the
burden of the letter should pass on the sale of the reversion for otherwise its
purposes could have been defeated almost immediately by the sale of the
reversion. If the nature of a covenant complies with the test in Mayor of
Congleton v Pattison (1808) 10 East 130 and the covenant is
expressed in terms which show that it is intended to be binding on those
entitled to the reversion for the time being, then it falls within section 142
of the Law of Property Act 1925 and is enforceable against a successor in title
to the reversion notwithstanding that the benefit will not pass to any
subsequent tenant. There is no rule that a covenant which is personal to one
party cannot be capable of being a covenant with reference to the
subject-matter of a lease for the purposes of section 142.
The following
cases are referred to in this report.
Congleton
(Mayor of) v Pattison (1808) 10 East 130
Hua Chiao
Commercial Bank Ltd v Chiaphua Industries Ltd [1987]
AC 99; [1987] 2 WLR 179; [1987] 1 All ER 1110, PC
Kumar v Dunning [1989] QB 193; [1987] 3 WLR 1167; [1987] 2 All ER
801; [1987] 2 EGLR 39; (1987) 283 EG 59, CA
Swift
(P&A) Investments v Combined English Stores
Group plc [1989] AC 632; [1988] 3 WLR 313; [1988] 2 All ER 885; [1988] 2
EGLR 67; [1988] 43 EG 73, HL
Weg
Motors Ltd v Hales [1961] Ch 176; [1962] Ch
49; [1961] 3 WLR 558; [1961] 3 All ER 181, CA
This was an
appeal by System Floors Ltd against the decision of Judge Micklem (sitting as a
judge of the High Court), who had dismissed an application that it was entitled
to surrender three leases granted by the second defendant, Midland Oak
Properties Ltd, the reversions to which were acquired by the first defendant,
Ruralpride Ltd.
Kim Lewison QC
and Guy Fetherstonhaugh (instructed by Blythe Liggins, of Leamington Spa)
appeared for the appellant; Jonathan Gaunt QC and Andrew Peebles (instructed by
Franks Charlesly & Co) represented the respondents.
Giving the
first judgment at the invitation of Leggatt LJ, Morritt
LJ said: This is an appeal of the plaintiff, System Floors Ltd, from
the judgment and order of Judge Micklem, sitting as a judge of the High Court,
given on March 22 1993. The case arises in the following circumstances.
On April 23
1987 the second defendant, Midland Oak Properties Ltd, granted to System Floors
Ltd under its then name three leases for terms of 21 years from June 24 1977 of
respectively units 20, 22, 23 and 24 Marlissa Drive, Coventry. The leases were
in common form and, so far as material, contained:
(a) an
upwards-only review of the rent payable thereunder on June 24 1989 and every
three years thereafter;
(b) a covenant
to keep the interior and exterior of the demised premises, including all
machinery and apparatus, in good and substantial repair and condition;
(c) a covenant
not to assign, underlet or part with possession of the demised premises or any
part thereof, subject to a proviso in the case of associated or subsidiary
companies;
(d) no right
in the tenant to surrender the lease during the term thereby created.
On the same
day Midland Oak wrote on its headed paper to System Floors a letter headed ‘Re:
Units 20, 22, 23 and 24 Marlissa Drive, Coventry’, one copy of which was
countersigned by System Floors by way of acknowledgment and agreement. The
letter was in the following terms:
In
consideration of your today taking from us Leases respectively of Units 20, 22
and 23 and 24 Marlissa Drive, Coventry we
hereby agree with you in relation to the Leases as follows:
1. If within
three months after any of the dates for review of rent contained in any of the
Leases or (if later) the date upon which the rent payable from any such review
date shall be agreed or determined in accordance with the Lease you shall
desire to surrender any of the Leases (as a whole but not in part) and if you
shall within three months after such review date or such alternative date as
aforesaid (as to which period of time is of the essence) give to us notice in writing
of your intention so to do, then provided that you
shall have paid the rent and complied in all respects with the covenants on
your behalf contained in the Lease in respect of which the notice is given up
to the date occurring three months after the giving of such notice and shall
deduce a free and unincumbered title to the Lease we will upon the date
occurring three months after such notice accept a surrender of the demised
premises from you and upon expiry of such notice you shall be bound to execute
and deliver to us a Deed of Surrender of the Lease and to pay our solicitors’
reasonable costs and any disbursements incurred in connection therewith. For
the avoidance of doubt it is agreed that the right herein contained may be
exercised in respect of one or more of the Leases on any such date and the
exercise of the right in relation to one or more of the Leases shall not
preclude the exercise of this right in relation to the remaining Leases at any
later of such dates.
You shall not
be responsible under the terms of the repairing covenants contained in the
Leases for any repairs to the main structure of the demised premises which
shall become necessary or any major repairs or replacement of electrical or
mechanical systems therein which shall in either case become necessary arising
from defects in the demised premises or in the said systems due to inadequacy
of the design thereof according to standards generally accepted at the date
hereof, or to faulty materials or defective workmanship in the construction
thereof and neither shall we be entitled to recover any costs in connection
with the repair or remedying of such defects through the service charge
provisions of the Lease provided that the
necessity for such repair or replacement shall not have arisen from any breach
of the covenants therein on the part of the Lessee to be observed and performed
or from any abnormal use of the demised premises or the said systems or from
alterations or additions made by you without our consent required under the
terms of the Lease.
You shall have
the right to underlet the whole of the premises demised by the Leases or in the
case of the Lease of Units 22 and/or 23 separately to an Underlessee or
Underlessees which are previously approved by us in writing (such approval being
neither unreasonably withheld nor delayed) provided
that
(a) If the
proposed Underlessee or Underlessees is/are a limited company suitable personal
sureties are given by two Directors to be approved by us.
(b) The form
of any Underlease is to be previously approved by us and is to contain the same
or similar clauses to the appropriate head Lease.
(c) The
rental payable by any underlessee is to be the market rental value of the
sub-let premises without taking a fine or premium.
4. The terms
and provisions of this letter and the rights granted thereby are personal to
your company and not capable of assignment to any other party and will cease to
have any effect on the determination surrender or expiration of the Leases or
any one of them.
signed by …
On behalf of
Midland Oak Construction Limited.
At all
material times System Floors has been in actual occupation of the demised
premises by itself or its authorised subtenant. On November 10 1987 the first
defendant, Ruralpride Ltd, was registered in HM Land Registry as the proprietor
of the freehold of the land over which the terms had been granted in succession
to Midland Oak. It is common ground for the purposes of this appeal that
Ruralpride did not then know of the letter or its contents.
The question
before the judge, and on this appeal, is whether in those circumstances the
obligations imposed by the letter dated April 23 1987 on Midland Oak now bind
Ruralpride, as the owner of the reversion. The judge concluded that they did
not and System Floors appeals.
The judge
started by setting out the material facts and recorded the argument of counsel
for System Floors that the burden of the obligations had passed to Ruralpride
pursuant to section 142(1) of the Law of Property Act 1925. After quoting that
subsection and referring to a number of authorities thereon, he referred to the
further arguments of counsel for System Floors on section 79(1) of the Law of
Property Act 1925. He then turned to the construction of the letter and
concluded that the obligations imposed by the letter were personal to Midland
Oak. Consequently a contrary intention was expressed so that section 79 of the
Law of Property Act did not apply, leading to the conclusion that the
obligations did not fall within section 142 of the Law of Property Act so as to
cause them to be transmitted to Ruralpride. In the result he made a declaration
that the reversionary interests are not subject to the terms, conditions or
covenants contained in the letter dated April 23 1987.
It seems to me
that the starting point must be the proper construction of the letter. Did it
purport to impose obligations on Midland Oak alone, or on Midland Oak or other
owner for the time being of the reversion? Ruralpride contends for an answer in
the first sense, System Floors for the second. Throughout, the letter refers to
‘you’, ‘yours’, ‘we’ and ‘us’. Moreover, the reference to ‘our solicitors’
reasonable costs’ in para 1, the references to ‘our consent’ in para 2, and the
references to ‘approved by us’ in para 3 all suggest that the obligations are
personal to Midland Oak in the same way that, as expressly provided for in para
4, the benefits are personal to System Floors. These are the points that
appealed to the judge and which have been repeated in argument before us.
However, I do
not think that that construction would give effect to the plain intention of
the parties. The benefit of para 1 of the letter, to take the example which is
most obviously an obligation cast upon the reversioner, could not arise until
after June 24 1989 at the earliest. It was evidently considered that System
Floors should be able to take the benefit of paras 2 and 3 for the rest of the
term, which, if not surrendered, would last until 1998. As there was no
restriction on the ability of Midland Oak to dispose of the reversion, this
plain intention could be immediately defeated by a sale of the reversion or the
grant of a reversionary lease, unless the obligations were undertaken on behalf
of Midland Oak and the persons entitled to the reversion for the time being.
Similarly, Midland Oak would not have wished to be left with an outstanding
contractual obligation to accept a surrender of the lease without the ability
to pass it on to a successor in title to reversion if, after it had sold the
reversion, the original tenant sought to obtain a surrender pursuant to para 1
of the letter. Both those considerations suggest strongly to me that the
commercial realities of the lease, as known to both parties, must have involved
an intention that the burden should pass on the sale of the reversion. This
point was dealt with by the judge at p19B of the transcript, where he said:
I do not find
that argument compelling. It may be that a personal obligation on both sides
was all that the plaintiff was able to prise out of the second defendant in the
negotiations between them; it is mere speculation which cannot, in my judgment,
affect the construction of the words which the parties have actually signed.
But it seems
to me that the words which the parties have used demonstrate the intention to
which I have referred. Moreover, the consideration for the obligations was the
‘taking of the leases’ and the agreement was made ‘in relation to the leases’.
In those leases the lessor is defined as including ‘the person entitled to the
reversion immediately expectant on the term thereby created’ as well as Midland
Oak. If it had been intended that the burden of the obligation of para 1 at
least should not pass to a successor in title to the reversion, it is difficult
to see why that was not made plain in para 4 of the letter which I have quoted
in full.
In these
circumstances, it seems to me to be plain that to give effect to the obvious
intention of the parties, all references in the letter to ‘we’, ‘us’ and ‘our’
must be read as including a reference to the lessor for the time being. With
respect to the judge, I do not think that he attached sufficient importance to
the commercial realities or the commercial and textual contexts in which the
words ‘we’, ‘us’ and ‘our’ were used.
Before the
judge System Floors relied primarily on section 142(1) of the Law of Property
Act 1925. That subsection provides as follows:
The
obligation under a condition or of a covenant entered into by a lessor with
reference to the subject-matter of the lease shall, if and as far as the lessor
has power to bind the reversionary estate immediately expectant on the term
granted by the lease, be annexed and incident to and shall go with that
reversionary estate, or the several parts thereof, notwithstanding severance of
that reversionary estate, and may be taken advantage of and enforced by the
person in whom the term is from time to time vested by conveyance, devolution
in law, or otherwise; and, if and as far as the lessor has power to bind the
person from time to time entitled to that reversionary estate, the obligation
aforesaid may be taken advantage of and entered against any person so entitled.
It is
contended that the obligations undertaken in the letter (and again I speak
primarily of para 1) come within that subsection with the consequence that they
may be enforced against Ruralpride, as the person now entitled to the
reversionary estate. That is disputed by Ruralpride.
It was
established by the decision of this court in Weg Motors Ltd v Hales [1962]
Ch 49, that the subsection applies to promises contained in an independent
document not under seal. In its written submissions Ruralpride sought to
distinguish the case on the basis that in that case the independent document
defined the parties as including their successors in title. But in the view I
take of the construction of the letter in this case, that is not a distinction
which can be drawn. Thus, the subsection may apply notwithstanding that the
obligations are undertaken in a letter. The question is whether the obligations
‘were entered into by a lessor with reference to the subject-matter of the
lease’. In this connection we were referred to a number of authorities on
section 142 in the skeleton arguments produced by the respective parties, its
counterpart, section 141, and the common law principle which preceded them all,
which approved the test enunciated by Bayley J in Mayor of Congleton v Pattison
(1808) 10 East 130 at p138, that:
the covenant
must either affect the land itself during the term, as such as those which
regard the mode of occupation; or it must be such as per se, and not merely
from collateral circumstances, affect the value of the land …
This statement
of principle has been approved by the Privy Council in Hua Chiao Commercial
Bank Ltd v Chiaphua Industries Ltd [1987] AC 99, at p107, the Court
of Appeal in Kumar v Dunning [1989] QB 193* at p201, and the
House of Lords in P&A Swift Investments v Combined English Stores
Group plc [1989] AC 632† at p640.
*Editor’s
note: Also reported at [1987] 2 EGLR 39.
†Editor’s
note: Also reported at [1988] 2 EGLR 67.
It is
submitted on behalf of System Floors that a right in a tenant to require the
lessor to accept the surrender of a lease, to exemption from liability in
respect of certain repairs and a right to underlet plainly satisfy this test.
This is disputed by Ruralpride. They rely on the passage of the speech of Lord
Oliver of Aylmerton in P&A Swift Investments v Combined English
Stores Group plc [1989] AC 632 at p642 where, in connection with the
benefit of a covenant given by a surety to which the common law rule but
neither section 141 nor section 142 applied, he said:
Formulations
of definitive tests are always dangerous, but it seems to me that, without
claiming to expound an exhaustive guide, the following provides a satisfactory
working test for whether, in any given case, a covenant touches and concerns
the land: (1) the covenant benefits only the reversioner for time being, and if
separated from the reversion ceases to be of benefit to the covenantee; (2) the
covenant affects the nature, quality, mode of user or value of the land of the
reversioner; (3) the covenant is not expressed to be personal, (that is to say
neither being given only to a specific reversioner nor in respect of the
obligations only of a specific tenant); (4) the fact that a covenant is to pay
a sum of money will not prevent it from touching and concerning the land so
long as the three foregoing conditions are satisfied and the covenant is
connected with something to be done on, to or in relation to the land.
It is
submitted that the third requirement shows that the obligation cannot touch and
concern the land if either the benefit or the burden is personal to the
covenantee or the covenantor respectively. In this case, it is not in dispute
that the benefit of the obligations is personal to System Floors, because that
is what para 4 provides. Thus, if the submission is a good one, section 142
cannot apply so as to transmit the burden of the covenant to Ruralpride.
At p19G of the
transcript of his judgment, the learned judge decided that:
The fact that
the rights granted by the side letter are expressed to be personal to the
plaintiff is enough under Lord Oliver’s test in P&A Swift Investments
v Combined English Stores Group plc [1981] AC 632 to prevent any of the
obligations in the side letter ‘touching and concerning the land’ and, as that
phrase is used synonymously with the phrase in section 142(1) of the Law of
Property Act 1925 ‘with reference to the subject-matter of the lease’, it
follows that none of the obligations can be ‘obligations under a condition or
covenant entered into by the lessor with reference to the subject-matter of the
lease’ within the words of section 142(1) of the Law of Property Act 1925,
which subsection cannot, therefore, assist the plaintiff.
A fortiori is the parties intended, as I believe they did on the true
construction of that document, that the obligations in the side letter were not
only personal to the plaintiff, but also personal to the second defendant.
System Floors
contends that he was wrong in that respect also. Ruralpride support that part
of the decision as well. Any dictum of Lord Oliver of Aylmerton commands
the greatest respect even when, as here, he does not purport to lay down an
exhaustive test and, indeed, recognises the dangers of attempting to do so.
Nevertheless, I do not think that the burden of a covenant will fail to satisfy
the conditions of section 142 merely because the benefit of it is personal to
the present tenant. The facts here are the converse of those in the case that
Lord Oliver was considering. He was considering whether the benefit of the
covenant of the surety passed to the assignee of the reversion. The conclusion
was that it did because it touched and, concerned the land. There is no
reference to the fact that the burden of the covenant was necessarily personal
to the surety as the only party to the contract. In this case the question is
the exact opposite: does the burden pass when the benefit is personal to the
named covenantee?
In my
judgment, if the nature of the covenant complies with the test propounded by
Bayley J in Congleton v Pattison and the obligation is expressed
in terms which show that it is intended to be binding on those entitled to the
reversion for the time being, then it falls within section 142 notwithstanding
that the benefit will not pass to any subsequent tenant. It is true that
section 142 contains the provision that the obligation ‘may be taken advantage
of and enforced by the person in whom the term is from time to time vested in’.
But, in my judgment, those words, as with those which follow dealing with the
persons against whom the obligation may be enforced, merely indicate the result
in the absence of any provision to the contrary expressed in the obligation
itself and do not express a condition for the application of the section in the
first place. The point is not covered by any authority to which we have been
referred and I know of none. I do not see why the transmission of the burden
should depend on transmissibility of the benefit if all the other conditions
are satisfied when, as the decision in P&A Swift Investments v Combined
English Stores Group plc shows, the transmission of the benefit does not
depend on the transmissibility of the burden. System Floors also relied on
section 79 of the Law of Property Act 1925. Subsection (1) is in the following
terms:
A covenant
relating to any land of a covenantor or capable of being bound by him, shall,
unless a contrary intention is expressed, be deemed to be made by the
covenantor on behalf of himself his successors in title and the persons
deriving title under him or them, and, subject as aforesaid, shall have effect
as if such successors and other persons were expressed.
This
subsection extends to a covenant to do some act relating to the land,
notwithstanding that the subject-matter may not be in existence when the
covenant is made.
In the view
that I take, this point does not arise. But I find it hard to see how it could
assist System Floors. If the letter is to be construed as the judge thought
then it cannot apply. But, if the letter is construed as I think it should be,
then System Floors does not need to rely on the subsection. But, in any event,
the stipulations are not under seal and are not, therefore, covenants within
the ordinary meaning of that word. We have not been referred to any authority
which suggests that the word does not bear its normal meaning in that section.
As I have said, the point does not arise and I say no more about it. For the
reasons that I have attempted to explain, in my judgment, the judge was wrong
in
make the declaration sought.
Agreeing, Millett LJ said: By the side letter
the original landlord agreed: (1) that the tenant should have the right to
surrender the lease on the occasion of a rent review in certain specified
circumstances; (2) that the tenant’s obligations to repair should be modified;
and (3) that the tenant’s obligation not to underlet the demised premises
should be varied. The benefit of these provisions was expressed to be personal
to the original tenant only, not to be capable of assignment to any other party
and to cease to have effect on the determination of any of the four leases that
were being granted. Nothing was said in the side letter as to whether the
provision should be binding upon an assignee of the landlord’s reversion. That
question depends upon the construction of the side letter.
It was argued
that the fact that the provisions in question were contained in a side letter
and not in the leases which were being granted on the very same day should
predispose the court to construe the letter so as to be personal to the two
parties. A side letter, it was said, is not an appropriate way of varying the
terms of the lease. But the fact that two of the three provisions of the side
letter consisted of a modification of the tenant’s covenants in the lease —
covenants the benefit of which was to inure to the landlord from time to time —
points in the other direction. For the reasons given by Morritt LJ I am
satisfied that on the true construction of the side letter the words ‘we’ and
‘our’ were intended to refer to the landlord for the time being. Commercial
realities make that almost inevitable. In my judgment, the commercial realities
in this case are compelling. In the first place, when one considers the
provisions about surrendering the lease, the tenant cannot have been content to
obtain a right which could so easily be circumvented by the landlord. Nor, in
my judgment, would the landlord have been content to enter into a binding
obligation to accept a surrender of the lease whenever it might occur which
would not be binding upon an assignee of the reversion. If that were the case,
then the landlord would be in immediate breach of contract by assigning the
reversion, since he would be putting it out of his power to perform his
obligation or to provide the tenant with another party against whom his right
was enforceable.
Whether the
second and third paragraphs of the side letter are in truth obligations within
the meaning of section 142 of the Law of Property Act 1925 is not a matter with
which we need concern ourselves, since the issue in this case is whether the
first paragraph is binding upon a successor in title of the original landlord.
There can be no doubt that the first paragraph imported an obligation upon the
landlord and purported to import an obligation upon his successor in title to
accept a surrender of the lease in the events specified. Such an obligation, in
my judgment, comes within the terms of section 142.
It was argued
that that section can apply only to obligations which are not only binding or
successors in title of the landlord but also purport to inure for the benefit
of successors in title of the tenant. It was argued that a covenant which is
personal to one party cannot be capable of being a covenant with reference to
the subject-matter of the lease, since it does not purport to bind or inure for
the benefit of the other. I know of no rule of law to that effect. There is
nothing in the section to suggest it and, in my judgment, there is no warrant
for it in the authorities. I agree with Morritt’s analysis of Lord Oliver’s
speech in P&A Swift Investments v Combined English Stores Group
plc [1989] AC 632. I do not believe that Lord Oliver was intending to lay
down any rule of law to the effect suggested.
In the course
of argument an attempt was made to fasten upon the words of section 142(1):
… and may be
taken advantage of and enforced by the person in whom the term is from time to
time vested by conveyance, devolution in law, or otherwise …
It was argued
that the section not only makes the burden of the landlord’s obligations run
with the reversion but also makes the benefit of those covenants run with the
lease. Accordingly, it was submitted, there are only two possibilities: either
the section overrides the lease (or in this case the express terms of the side
letter), so as to make the benefit of the side letter inure for the benefit of
successors in title of the original tenant contrary to express intention of the
parties; or the side letter is outside the section altogether. In my judgment,
the argument is fallacious. The words:
… and may be
taken advantage of and enforced by the person in whom the term is from time to
time vested …
mean may be
taken advantage of and enforced by that person according to its tenor.
For these
reasons I agree that this appeal should be allowed.
Leggatt LJ agreed
and did not add anything.
Appeal
allowed with costs.
