Option for renewal of lease of business premises–Effect of non-registration under Land Charges Act 1925–Beesly v Hallwood Estates–Parties unaware of invalidity of option–Doctrine of equitable estoppel–Transactions carried out and expenditure incurred on assumption of validity–Three leases affected by clause in one of them providing for exercise of option–Whether party alleged to be estopped must have been aware of his strict rights and also of the other party’s belief that they would not be enforced–Broader principle that party will be estopped if in the circumstances the assertion of his strict rights would be unconscionable–Judge’s review of authorities and application to complex situation
These
proceedings were concerned with the determination of questions preliminary to
the hearing of summonses claiming new leases under the Landlord and Tenant Act
1954. These questions related to claims for specific performance and
appropriate declaratory relief by two plaintiffs, Taylor Fashions Ltd and Old
& Campbell Ltd against the defendants, Liverpool Victoria Friendly Society.
The plaintiffs were the tenants of the defendants at commercial premises in
Bournemouth, Taylor Fashions Ltd being tenants of 22 Westover Road and Old
& Campbell Ltd being tenants of 20 and 21 Westover Road. The leases of the
three premises had a common link, which was the central issue of the present
litigation, namely, an option to renew the lease of no 22. This option was
invalid because of non-registration under the Land Charges Act 1925, but its
relevance to claims for equitable relief was the subject of much of the
argument in the case.
R R F Scott QC
and J S Trenhaile (instructed by Philip G Jacobs, of Bournemouth) appeared on
behalf of the plaintiffs, Taylor Fashions Ltd; Michael Essayan QC and J R Reid
(instructed by Allin & Watts, of Bournemouth) appeared on behalf of the
plaintiffs, Old & Campbell Ltd: P J Millett QC and G W Jaques (instructed
by J Tickle & Co) represented the defendants in each case.
Giving
judgment, OLIVER J said that he had before him two summonses, both claiming new
leases under the Landlord and Tenant Act 1954, but these summonses had not yet
been adjourned into court because it was necessary first to determine claims made
by the plaintiffs for specific performance and other relief. The background was
as follows. The summonses under the 1954 Act related to claims for new leases
of business premises in Bournemouth known as 20, 21 and 22 Westover Road. The
plaintiffs in the first summons were Taylor Fashions Ltd (‘Taylors’), the
tenants of no 22. The plaintiffs in the second summons were Old & Campbell
Ltd (‘Oids’), the tenants of nos 20 and 21. The defendants to both summonses
were the Liverpool Victoria Friendly Society, the freeholders and the landlords
of the plaintiffs.
The present
judgment was concerned with the plaintiffs’ primary claims, not with the 1954
Act summonses. It would be seen that a question at the root of the matters with
which he (his Lordship) had to deal was the exercisability of an option
contained in the demise of no 22 to renew the term for a further 14 years after
the expiry of the original term in 1976. This question was common to the cases
of both plaintiffs. The defendants claimed that the option was void against
them for want of registration under the Land Charges Act 1925, although apart
from this all the relevant conditions for the exercise of the option had been
fulfilled. The defendants had accordingly declined to renew the leases of nos
20 and 22 and had purported to exercise a right to break the lease of no 21, a
right which only arose upon the non-exercise by Taylors of the option of
renewal in respect of no 22. The defendants had served notices on the
plaintiffs in respect of all three leases, to which the plaintiffs had replied
by the claims for new leases under the 1954 Act already mentioned. The
defendants’ case did not impress one as overburdened with merit, but if they
were right in law, and if there was no equity which assisted the plaintiffs, it
was no part of a judge’s function to impose his own idiosyncratic code of
commercial morality. He was not criticising those who had the conduct of the
defendants’ affairs. They had a fiduciary responsibility for the management of
the affairs of others.
It was
necessary to give more detailed consideration to the factual background. Nos 21
and 22 Westover Road, Bournemouth, consisted of a building of four storeys and
a basement in a favoured part of Bournemouth’s shopping area, both premises
being used as retail clothing stores, no 21 for gentlemen’s tailoring and
outfitting, no 22 as a ladies’ fashion store. Prior to 1949 the building was
owned by Olds, but in 1948 they decided to raise finance by making certain
dispositions. The upshot was that the freehold of nos 21 and 22 became vested
in the defendants, the Liverpool Victoria Friendly Society, subject to a lease
of no 21 back to Olds for 42 years from December 25 1948 and subject to a lease
of no 22 to Taylors (who had acquired the ladies’ fashion business) for 28
years from December 25 1948. The lease of no 22 contained the critical
provision that if the tenants should install a lift in accordance with
permission given in the lease they should, subject to certain conditions as to
the timing of the request and compliance with covenants, have an option for the
renewal of their lease for a further term of 14 years from December 25 1976,
the original date of expiry. The lease of no 21 to Olds for a term of 42 years
from December 25 1948 contained a provision that if the tenants of no 22 should
not exercise their option of renewal for a further 14 years, then the landlords
should have the option of terminating the lease of no 21 at the end of 28
years. In that event both leases would terminate on December 25 1976.
Almost at once
Taylors set about carrying out extensive improvements to no 22 for which they
applied and received the landlords’ consent. They also prepared plans and
obtained estimates for the installation of the lift, involving substantial
expenditure. This was done in the belief that there
with a total term of 32 years. There was no doubt that the defendants knew that
the lift was going to be installed before the work was done and must have been
aware that the existence of the option would be at least a relevant
consideration in Taylors’ undertaking the work and expenditure. The carrying
out of the work was known to and acquiesced in by the defendants. At the time of
the discussions on the siting and construction of the lift and while the work
was being done the defendants did not suspect, and had no reason to suspect,
that there might be a question as to the validity of the option for renewal. If
Taylors had known that there were grounds for contesting such validity they might
(but it was not possible to find as a fact that they would) have decided
not to carry out the work on the lift.
It was
relevant to mention at this point an event which had nothing to do with any of
the parties but which had an important bearing on this litigation. This was the
decision of Buckley J (as he then was) in the case of Beesly v Hallwood
Estates [1960] 1 WLR 549 to the effect that an option to renew contained in
a lease was registrable as a land charge under the Land Charges Act 1925 and
was void against a purchaser of the reversion if not registered. It had to be
recalled that before this decision the view of the legal profession, based no
doubt on the notes in the then current edition of Wolstenholme & Cherry,
was that an option to renew, being a covenant which touched and concerned the
land and therefore ran with the reversion, did not require to be registered in
order to bind a purchaser of the reversion. It is common ground that, so far as
the parties to the present transactions were concerned, the significance of the
decision was not appreciated by anybody. In fact this unconsciousness endured
for a number of years.
The next
transaction which needed to be mentioned was the taking of a lease by Olds of
the adjoining property at no 20 in furtherance of a plan of expansion by Olds.
The lease of no 20 to Olds was tied in with the other leases. It was executed
on March 22 1963 and provided for a term of 14 years with an option to renew for
a further 14 years, with the usual conditions as to prior notice and compliance
with covenants, provided that the option to renew in respect of no 22 had been
exercised. If the tenants of no 22 did not exercise their option then the
option to renew the lease of no 20 was not exercisable by Olds. In committing
themselves to the lease of no 20, and incurring the expenditure which this
involved, Olds were relying on the continued exercisability of the option to
Taylors under the lease of no 22 and they would not have proceeded if they had
been aware that this underlying assumption was invalid. It was also clear that,
at this time, that assumption was shared by the defendants themselves. It was
not until 1975 that they became aware that the option might be void against
them for want of registration.
On June 7 1976
Taylors served notice on the defendants exercising or purporting to exercise
their option to renew in the lease of no 22 and they now claimed specific
performance of that option. Olds now also claimed specific performance of the
option contained in the 1963 lease relating to no 20 and an appropriate
declaration as regards the clause in the lease of 1949 (which provided that if
the option in respect of no 22 was not exercised the landlords could terminate
the lease of no 21 at the end of the original 28 years’ term).
The points
which arose for decision in the light of the record of events were the
following:
(1) Was Taylors’ option, as the defendants now
claimed and the plaintiffs contest, void against the defendants for want of
registration?
(2) If so, were the defendants estopped as
against Taylors from relying on this ground of invalidity having regard to the
expenditure incurred by Taylors with the defendants’ concurrence?
(3) If the option was unenforceable against the
defendants, had it nevertheless been ‘exercised’ for the purpose of the break
and renewal clauses in the lease of 1949 to Olds?
(4) If it had not, were the defendants estopped
as against Olds from relying on the invalidity of an option which in their own
grants they had asserted to be subsisting?
It had been
submitted by Mr Scott, for Taylors, that the Land Charges Act 1925 did not
affect contractual obligations which, ever since the Grantees of Reversions Act
1540, had run with the land and remained binding at law quite regardless of any
question of notice. This view, however, was not tenable so far as options for
renewal were concerned since the decision in Beesly v Hallwood
Estates Ltd above mentioned, a decision which had been accepted as correct
in two Court of Appeal decisions, Greene v Church Commissioners for
England [1974] Ch 467 and Kitney v MEPC Ltd [1977] 1 WLR 981.
It was,
therefore, necessary to approach the case on the footing that, whatever the
parties may have thought, the option to renew was in fact void against the
defendants. That raised the issue of estoppel mentioned in the second and
fourth questions set out above. The relevant principle of estoppel had been
formulated by Mr Essayan as follows: ‘If A, under an expectation created or
encouraged by B that A shall have a certain interest in land, thereafter on the
faith of such expectation and with the knowledge of B and without objection by
him, acts to his detriment in connection with such land, a court of equity will
compel B to give effect to such expectation.’
From here, however, there was a critical division of opinion. The
plaintiffs contended that the court had to look at the conduct of the party
sought to be estopped and ask whether what he was now seeking to do was
unconscionable. The defendants contended that it was an essential feature of
this particular equitable doctrine that the party alleged to be estopped must,
before the assertion that his strict rights could be considered unconscionable,
be aware both of what his strict rights were and of the fact that the other
party is acting in the belief that they will not be enforced against him. The
defendants cited in support of their contention a number of authorities
including the often-cited judgment of Fry J (as he then was) in Willmott
v Barber (1880) 15 Ch D 96 in which he set out what are described as the
five ‘probanda’ for establishing the equitable doctrine which would make it
‘fraudulent’ for a person to insist on his strict legal rights. The authorities,
particularly more recent ones, however, appeared to support a much wider
equitable jurisdiction to interfere in cases where the assertion of strict
legal rights would be regarded by the court as unconscionable.
After an
exhaustive review of the authorities, his Lordship concluded that it was not an
essential element of this category of estoppel that the party estopped,
although he must have known of the other party’s belief, must have known that
that belief was mistaken. In the recent case of Shaw v Applegate
[1977] 1 WLR 970 Buckley LJ at p 978, referring to Fry J’s ‘probanda’ in Willmott
v Barber, said: ‘So I do not, as at present advised, think it is clear
that it is essential to find all the five tests set out by Fry J literally
applicable and satisfied in any particular case. The real test, I think, must
be whether, upon the facts of the particular case, the situation has become
such that it would be dishonest or unconscionable for the plaintiff, or the
person having the right sought to be enforced, to continue to seek to enforce
it.’
The question
therefore was whether, in all the circumstances, it was unconscionable for the
defendants to seek to take advantage of the mistake which, at the material
time, everybody shared. The cases of the two plaintiffs had to be considered
separately.
In the case of
Taylors there were two difficulties. The first was the difficulty of imputing
to the defendants either encouragement or acquiescence in regard to Taylors’
belief
purchasers of the reversion on an existing lease and subject to all its
expressed obligations so far as enforceable against them. In installing the
lift Taylors were simply doing what was contemplated by the lease and the
defendants could not lawfully object to the work and could not be under any
duty to communicate to Taylors what the defendants did not know themselves,
namely, that the option was unenforceable because of non-registration. The
second difficulty was that, although Taylors believed that the option was
valid, it was not possible to say that they would have decided not to do the
work if they had thought otherwise. It was even less possible to say that the
defendants were, or must have been, aware that Taylors would not have done it.
It was therefore necessary, although with some regret, to dismiss Taylors’
claim for specific performance.
The case of
Olds was very different. First of all, the defendants obtained the freehold from
them at a price which was calculated, so far as Olds were concerned, on the
footing that the break clause in the 1949 lease was to operate, and the term of
the leaseback was to be reduced from 42 to 28 years, only in the event of the
non-exercise of an option assumed to be subsisting when the lease was granted.
Secondly, in the 1963 transaction Olds were encouraged by the defendants to
expend a very large sum on no 21, and to take a lease of the adjoining premises
(no 20), upon the faith of the expectation, encouraged by the defendants, that
they would be entitled to renew in a particular event which Olds were invited
to believe was at least possible. It would be most inequitable if the
defendants, having put forward Taylors’ option as a valid option in two
documents, under each of which they were the grantors, and having encouraged
Olds to incur expenditure and alter their position irrevocably by taking
additional premises on the faith of that supposition, were now to be permitted
to resile and to assert, as they wished to do, that they were, and had been all
along, entitled to frustrate the expectation which they themselves created and
that the right which they themselves stated to exist did not, at any material
time, have any existence in fact. It followed that Olds’ claim to specific
performance succeeded.
Two further
points should perhaps be mentioned. It might be that, apart from the kind of
estoppel which had been discussed, the defendants were also estopped, as
regards Olds, by their own deeds. Although estoppel by deed normally arose from
recitals, it could be created by a clear and distinct averment in the operative
part. It was a necessary inference from the wording of the 1963 deed that the
tenants of no 22 had an option. The second point was Mr Essayan’s contention
that in construing the two leases to Olds the references to the tenants of no
22 ‘exercising’ their option could be taken as references to their taking the
necessary steps to give them a contractual right to a new lease, even though it
could not result in a new lease effective against the defendants; the option
could still produce contractual obligations between the original parties.
However, the correct construction appeared to be that ‘exercise’ meant an
effective exercise entitling the tenants of no 22 to a new term.
The result
was, therefore, that (1) the claim of Taylors for specific performance of the
option in the lease of no 22 must be dismissed; (2) there would be a
declaration in favour of Olds that the break clause in the 1949 lease of no 21
was non-operative; and (3) a decree for specific performance of the option for
renewal in the 1963 lease of no 20 to Olds would be granted.
The judge
accordingly ordered that the claim by Taylors for specific performance of the
option to renew in respect of no 22 be dismissed with costs, leaving the issue
under the Landlord and Tenant Act 1954 outstanding. He made a declaration in
favour of Olds that the two notices purporting to be notices under section 25
of the 1954 Act affecting their premises were null and void on the grounds (a)
in respect of no 20, that the plaintiffs had validly exercised their option to
renew the lease, and (b) in respect of no 21, that the defendants’ right to
terminate the tenancy had not arisen; the defendants to pay the costs.
