Tenant holding under short lease having option to buy reversion – Option exercisable during the term – Lease providing for automatic determination should reinstatement be impossible following damage by insured risk – Tenant purporting to exercise option after extensive fire damage – Whether option had already lapsed
On April 21 1994 the plaintiff landlords granted to the defendant tenants a three-year lease, commencing on the date of the grant, of a large two-storey barn standing in 25 acres of land in Tonbridge, Kent. The rent was £40,000 pa, and the lease was excluded by court order from the continuation provisions of the Landlord and Tenant Act 1954. Under the insurance provisions the landlords were obliged to insure against the usual risks and to apply the proceeds to reinstatement. The tenants were required to pay an additional rent equal to the amount of the premiums so paid. Clause 3(2)(e) declared that if it became impossible or impracticable for the landlord to reinstate the premises following damage by an insured risk, then the term would absolutely determine and the insurance proceeds would belong to the landlords absolutely. By clause 5 (for which purposes the parties were referred to as “grantor” and “grantee”) the landlords granted to the tenants the option of buying the freehold reversion at the price of £500,000, such option to be exercisable “during the term of this lease”.
During the night of October 26/27 1996 the barn was effectively destroyed by fire. By letter dated December 11 1996 the landlords’ solicitors notified the tenants that it was impossible to reinstate the premises and that the lease had accordingly determined. The letter went on to declare that the option had lapsed. This was disputed by the tenants, who maintained that the lease had not come to an end. By letter dated April 18 1997 the tenants purported to exercise the option.
In proceedings commenced by the landlords, the tenants contended that no determining event had occurred when they exercised the option because there was no evidence to show that it had become impossible at any time to reinstate the barn. The landlords contended that, on the true construction of clause 3(2)(e), it was enough to show that reinstatement of the barn would (as the tenants had conceded) be neither possible nor practical during the remainder of the term.
Held Judgment was given for the landlords.
The parties could not be taken to have intended that clause 3(2)(e) should only operate in the event of a “permanent impossibility” as, on such a construction, the clause would produce illogical results, particularly if the tenants chose not to exercise the option. It would make no sense to put the landlord under a reinstatement obligation after the expiry of the lease or prevent him, after that time, from keeping the insurance proceeds as allowed for by the clause. Correspondingly, the tenant would need to know that he was relieved from his obligations under the lease. Furthermore, it would be extremely difficult in most cases to say that reinstatement would never be possible or practicable. By contrast, the construction advanced by the landlords was not only logical, but also made for finality and certainty. The fact that clause 5 saw the parties in a vendor-purchaser rather than a lessor-lessee relationship did not weigh sufficiently strongly in favour of the construction advanced by the tenants.
Ann McAllister (instructed by Wilsons, of Salisbury) appeared for the plaintiffs: Daniel Gerrans (instructed by Wilcox & Co) appeared for the defendants.
Alan Cooklin, barrister
