Landlord and tenant — Option agreement for new lease of part of reconstructed premises defectively expressed in exchange of letters — Extent to which courts will go to prevent an agreement from failing through uncertainty, particularly where agreement has been partly performed — Tenants who for 75 years had carried on a business on two floors as a shop selling model railways and the like commenced proceedings for a new tenancy, the landlords having given notice that they would oppose a grant on the ground set out in section 30(1)(f) of the Landlord and Tenant Act 1954 — Negotiations took place with a view to the tenants taking a tenancy in the reconstructed new premises — Letters were exchanged the effect of which was the subject of the present proceedings — The tenants, acting in pursuance of the terms thought to have been agreed, withdrew their application in the Chancery Division and vacated the premises — However, the landlords, having received an offer from third parties to take a lease of the whole premises, wished to accept it and consequently to free themselves from the arrangements made with the tenants — Landlords took out the present summons seeking a declaration that there was no enforceable agreement with the tenants, the transaction set out in the letters being void for uncertainty — Authorities considered, including Sudbrook Trading Ltd v Eggleton — The court concluded that in the present case there had been such a performance on the tenants’ side as to justify a much more liberal approach to the validity of the document than in the case of a purely executory option where nothing but a nominal consideration had been given on either side — The court rejected attacks on the validity of the agreement on the ground of uncertainties in regard to the date of commencement of the term, the amount of rent and the covenants and conditions — The argument on the last point, indeed, was one that ‘offends the court’s conscience’ — Declarations made in favour of tenants
This was an
originating summons brought by the Trustees of the National Deposit Friendly
Society, the landlords, as plaintiffs, against Beatties of London Ltd, the
tenant of the ground-floor shop and part of the basement at 112 and 112a High
Holborn, London WC1, asserting that an exchange of letters did not, owing to
the uncertainty of the terms, result in an enforceable agreement.
Paul de la
Piquerie (instructed by Woolley Tyler & Bury) appeared on behalf of the
plaintiffs; Michael Nield (instructed by Sharpe Pritchard & Co) represented
the defendants.
Giving
judgment, GOULDING J said: This is an originating summons brought by two
companies, NDFS No 1 Trustee Ltd and NDFS No 2 Trustee Ltd described as the
Trustees of the National Deposit Friendly Society, against a company called
Beatties of London Ltd. I shall generally refer to the plaintiffs as ‘the
landlords’ and to the defendant as ‘the tenant’.
In 1982 the
defendant was tenant of the ground-floor shop and part of the basement at 112
and 112a High Holborn under three leases due to expire at Lady Day 1983; the
plaintiffs were landlords of those premises. The tenant and its precedessors in
business had had a model shop, selling model railways and the like, on the site
for some 75 years, and it was the opinion of the tenant’s officers that
valuable goodwill arose from the tenant’s long association with the site. The
building of which the tenant occupied, as I have said, the ground-floor shop
and part of the basement, contained seven floors in all.
On March 9
1982 the landlords served on the tenant a notice under section 25 of the
Landlord and Tenant Act 1954 terminating the tenancy at Lady Day 1983. The
notice said that the landlords would oppose the grant of a new lease and the
ground of opposition given was that specified in para (f) of section 30(1) of
the Act, namely, the intention of the landlords to demolish or reconstruct the
property. The tenant served a counternotice and made an application under the
Act of 1954 in the High Court for a new tenancy. The surveyors of the parties very
sensibly got together with a view to negotiating terms upon which the tenant
might take a tenancy of a similar part of the property when reconstructed. The
parties’ solicitors then corresponded with a view to reducing into an agreed
form the terms that the surveyors had come to. There appear to have been draft
provisions which were modified, and their final form is set out in a letter,
the essential subject-matter of these proceedings, dated November 1 1982, from
the tenant’s solicitors, Smeathmans, to the landlords’ solicitors, Woolley
Tyler & Bury. I will read the whole of that letter:
Dear Sirs,
re 112/112a High Holborn WC1
Further to
our letters of 25th and 29th October, we now set out the agreed terms of the
withdrawal of the proceedings commenced in the High Court of Justice, Chancery
Division Group A 1982 /B No 3468 —
(1) NDFS No 1 Trustee Ltd and NDFS No 2 Trustee
Ltd (the landlord) will grant Beatties of London Ltd (Beatties) an option to
take up a lease of the ground and basement floors of the new building at the
above address in the landlords’ standard form of lease for the above premises
with such amendments as may be mutually agreed between the legal advisers of
the parties.
(2) The lease is to be a full repairing and
insuring lease for 25 years incorporating upward only rent-review revisions in
every 5 years throughout the term.
(3) The rent payable for the first 5-year period
of the lease to be the greater of £33,000 per annum exclusive or such rent as
may be agreed as from the architects certificate of completion.
(4) If the rent is to be negotiated this will be
agreed within three months of the notice. Notice to be served at any time prior
to the architects certificate of completion but not to expire before the issue
of such certificate.
(5) Beatties must confirm in writing that it will
take up the lease howsoever the rent is calculated within one calendar month of
the issue of the architects certificate of completion.
(6) Beatties are to be given a rent-free period
of four months from the date of completion of legal formalities, or its
physical possession of the premises, whichever shall first occur.
(7) Each party is to be responsible for its own
legal costs incurred in connection with the grant of the new lease.
(8) The landlord will not claim any dilapidations
on the expiration of the term of years under which the premises are at present
held.
(9) Beatties will be entitled during the course
of refurbishment works at the premises to display a sign on the premises or on
the hoarding thereof redirecting customers to its new ‘temporary premises’.
(10) The landlords and Beatties’ architects will
confer during the course of refurbishment. Regard will be had to Beatties
general design
ground and basement floors is to be sited at the rear of the premises.
We have, in
the circumstances, instructed our London Agents to arrange for the Consent
Order for the withdrawal of the action to be sent directly to you for you then
to return it to them for filing.
We enclose a
copy of a letter we have written to that firm.
The landlords’
solicitors replied to that letter on November 2 and 1 shall read the reply in
full:
We thank you
for your two letters of the 1st November and confirm the agreed terms as set
out in the longer of these two letters.
Having spoken
again to our Clients’ Architects we confirm that consideration can be given to
a request for a short extension of time for delivery up of possession after the
25th March. No doubt you would agree that to be of any use to your Clients, in
addition to avoiding undue complications for our Clients, the extent of the
extension would need to be agreed well in advance. Our Clients’ architects also
point out that any delay in starting is likely to lead to a delay in finishing
and occupation of the new building and could also affect the amount of the
initial rent. It would therefore be in your Clients’ interest to minimise such
delay. No doubt you will go into this matter further with your Clients and let
us know as soon as possible whether an extension is definitely required and if
so what length is suggested.
That exchange
of letters having taken place, the tenant acted upon the terms agreed. I will
read a paragraph from an affidavit filed on behalf of the landlords to show
their view of what happened. It says:
Pursuant to
the said agreement the defendant duly withdrew its application for the grant of
a new tenancy and vacated the premises. The plaintiffs paid the defendant the
statutory compensation to which it was entitled.
The landlords
are not desirous of giving the tenant an opportunity to take a lease of the
ground floor and basement in the reconstructed building, which is nearing
fitness for occupation. The landlords, very frankly, have told the court that
they have had an offer, which they would like to accept, for a lease of the
entire building. That being so, they would wish to get out of their apparent
agreement with the tenant if they can, and they have taken out this originating
summons to assert that the exchange of letters did not result in the formation
of any binding and enforceable agreement because of the uncertainty of the
provisions they contain. They say that there are three essential matters not provided
for with sufficient certainty. The first is the date of commencement of the
term of 25 years which, under para (2) of the letter of November 1 1982, is to
be granted. The second is the rent provided for by paras (3) and (4) which is
not ascertainable without further agreement; and as an agreement to make an
agreement is an ineffective contract in our law the landlords say there is
again a fatal uncertainty. Third, they say that there was no standard form of
lease for the premises in existence in 1982 and there is not one now, because
they are hoping to let the premises as a single unit. Accordingly, the
essential foundation for ascertaining what covenants and conditions are to be
inserted in the lease is missing and the provisions agreed between the solicitors
are, therefore, again ineffectual.
Now I shall
have to examine those points separately. It is, of course, apparent to anyone
who reads the letter of November 1 and considers its terms with any knowledge
of the law and any concentration of attention that it is a lamentable document.
Even where there is no uncertainty there is a great obscurity and imperfect
expression. However, it was put forward on behalf of the tenant and was plainly
accepted as agreed terms on behalf of the landlords and, it is very important
to observe, upon the strength of the acceptance of those terms, the tenant did
withdraw its application for the grant of new tenancy and gave up the physical
possession of the premises; and also the landlords refrained from making any
dilapidation claims. Whether in the circumstances of the reconstruction very
much could have been obtained under that head I do not know; plainly the tenant
had the benefit of freedom from dilapidation claims as well as the benefit, so
it was thought, of the option to take a lease in the new building.
In approaching
the points taken by the landlords the court is guided by principles to be
collected from decided authorities. First of all, there is the very general
principle applicable to the legal construction of any document stated in Brown
v Gould [1972] Ch 53 by the present Vice-Chancellor [Sir Robert Megarry]
at p 56. He was there dealing with an option to extend the term in a lease, and
he said this:
. . . Stated
briefly, the proper approach, I think, is that the court is reluctant to hold
void for uncertainty any provision that was intended to have legal effect. In
this case it is very properly accepted that the option was intended to have
business efficacy.
That is a very
broad principle, that the court leans against uncertainty, but, of course, a
document may be so obscure and vague that the court cannot save it. However, a
less general principle indicates the degree to which the court will exert
itself in some cases and go beyond the normal approach to such problems. I will
read two statements of that secondary or superimposed principle in quite
different contexts. One is found in a case concerning the sale of goods, British
Bank for Foreign Trade Ltd v Novinex Ltd [1949] 1 KB 623. That was a
decision of the Court of Appeal, which approved a statement made in the court
of first instance by Denning J (as he then was). It is conveniently set out in
the headnote at p 624 of the report:
The court
approved the statement of the trial judge as to the law applicable to the first
point: ‘The principle to be deduced from the cases is that if there is an
essential term which has yet to be agreed and there is no express or implied
provision for its solution, the result in point of law is that there is no
binding contract. In seeing whether there is an implied provision for its
solution, however, there is a difference between an arrangement which is wholly
executory on both sides and one which has been executed on one side or the
other. In the ordinary way, if there is an agreement to supply goods at a price
‘to be agreed’, or to perform services on terms ‘to be agreed’, then, although,
while the matter is still executory, there may be no binding contract,
nevertheless, if it is executed on one side, that is, if the one does his part
without having come to an agreement about the price or the terms, then the law
will say that there is necessarily implied, from the conduct of the parties, a
contract that, in default of agreement, a reasonable sum is to be paid.’
The other
statement I take from a judgment of Templeman LJ (as he then was) in a case of Sudbrook
Trading Ltd v Eggleton [1983] 1 AC 444. The learned lord justice
delivered the judgment of the Court of Appeal in that case, which afterwards
went to the House of Lords, and in his speech in the House of Lords Lord
Fraser, at p 484 of the report, expressly approved the principle as stated by
Templeman LJ in the court below. It was in these terms:
Where an
agreement which would otherwise be unenforceable for want of certainty or
finality in an essential stipulation has been partly performed so that the
intervention of the court is necessary in aid of a grant that has already taken
effect, the court will strain to the utmost to supply the want of certainty
even to the extent of providing a substitute machinery.
There has been
debate before me as to the precise extent of the requirement that an agreement
should have been partly performed so that the intervention of the court is
necessary in aid of a grant that has already taken effect, and reference is
made in that connection to what Goff LJ said in a case of Beer v Bowden,
decided in 1976 but only reported in [1981] 1 WLR 522 (Note). That was a case
of a rent-revision clause in a lease, and the learned lord justice said, at p
525, referring to an earlier decision of King’s Motors (Oxford) Ltd
v Lax [1970] 1 WLR 426:
. . . But
that case, in my judgment, is wholly distinguishable and does not really assist
at all. That was a case of an option to renew, and the exercise of the option could
operate, if at all, only to create a contract. Valid contract it could not be,
because an essential term — namely, the rent — was neither agreed nor
ascertainable. That, in my judgment, poses an entirely different problem from
that which arises where one starts with the premise that there is a subsisting
lease which creates an estate in the land and with the premise that the court
must imply some terms, because it is conceded that rent is payable.
I have been
pressed by Mr de la Piquerie on behalf of the landlords with the view that here
there is no subsisting lease, there is no legal term unless and until the
option is exercised and, therefore, the principle as stated by Templeman LJ is
not really applicable. It is said that we are here more in the position of King’s
Motors (Oxford) Ltd v Lax. It was a case decided by
Burgess V-C in the Palatine Court in Lancashire. It is reported in [1969] 3 All
ER 665. There was a lease for seven years, and then there was a provision:
If the
Tenants shall be desirous of continuing the term hereby created for a further
term of seven years . . . then the Landlords will let the premises to the
Tenants for a further term of seven years at such a rental as may be agreed
upon between the parties. . . .
The learned
Vice-Chancellor decided that not the lease but the clause providing an option
to take a further term was void for uncertainty.
I do not find
the distinction taken by Goff LJ entirely easy to understand, because the
option for a further term in the King’s Motors case did not stand alone
as a contract wholly executory on both sides. It was part of a contract, the
lease, which had in large part been executed on both sides, and the tenant
might well have said: ‘I would not have taken the term of seven years and paid
my rent for these business premises unless I knew that I could have a further
seven years if I needed it’. However, there it is. The King’s Motors
case was cited in the Court of Appeal in the Sudbrook case but not
referred to
report shows, in the House of Lords. I express no view as to whether on its own
facts it was correctly decided or not.
In the present
case it is perfectly true that no legal term of years arises under the
agreement unless and until the option is exercised. None the less, it is to be
noted that the performance of the agreement on the tenant’s side was of a
substantial character. The tenant gave up its whole existing legal claim in
respect of the premises. Whatever its prospects might have been it was a
considerable nuisance to landlords intending to reconstruct. The tenant gave
that up and went out of physical possession, and in view of the long connection
of the tenant’s business with the premises the option was plainly a very
important one in substitution for the abandoned claim to a new lease, and
likely to be exercised. It may be a matter of degree how far the court is to
strive to avoid uncertainty, having regard to the extent to which an agreement
has already been executed on one side or the other. I take the view that there
has here been such performance on the tenant’s side as to justify the court in
a much more liberal approach to the validity of the document than in the case
of a purely executory option where nothing but perhaps a nominal consideration
had been given on either side.
Having
discussed the general principle, I must briefly consider the three points taken
by the landlords.
The first, as
I have said, is that the letters exchanged do not identify the date at which
the 25 years’ term is to begin. It is well established as essential to the
validity of an agreement for a lease that the commencement of the term shall be
certain. That appears from Harvey v Pratt [1965] 1 WLR 1025,
where Lord Denning MR at p 1026 said:
It has been
settled law for all my time that, in order to have a valid agreement for a
lease, it is essential that it should appear, either in express terms or by
reference to some writing which would make it certain, or by reasonable
inference from the language used, on what day the term is to commence.
On the view I
take of the document, there is no real question of uncertainty here. Even
without the special benevolence explained in the Sudbrook case it seems
to me that it is simply a question of interpreting the language so as to see
what is the reasonable inference, to use Lord Denning’s words, as to the
intended commencement. There are two plausible possibilities, at any rate at
first sight. One is to concentrate on para (3) of the letter of November 1,
which says:
The rent
payable for the first 5-year period of the lease to be the greater of £33,000
per annum exclusive or such rent as may be agreed as from the architects
certificate of completion.
It is submitted
by Mr Nield on behalf of the tenant that those words, ‘as from the architects
certificate of completion’, show that the rent is then to become payable. It is
well known that in the absence of any other indication the date when the rent
starts to be payable is when the term is intended to start. An example of that
inference is the case of Wesley v Walker (1878) 38 Law Times 284,
decided by Fry J: There, in a brief memorandum occurred the phrase: ‘Ground
rent commencing on 25th March now ensuing term 99 years’, and the court had no
difficulty in inferring that the 99 years were to commence on the same date as
the ground rent.
However, in
the particular document which I have to consider, a little study makes that
seem an improbable intention. The result would be that almost certainly rent
would be payable before the tenant could get into possession. Not only would
there almost certainly be some physical delay after the architect’s certificate
of completion before the actual taking of possession, but the option might not
even have been exercised, because under para (5) it is within one month after
the certificate that the tenant must confirm that it will take up the lease.
Moreover, the result would be under para (6) that the rent-free priod might
very likely not begin until rent had been for some time payable: there would be
a period of paying rent, then the four months’ rent-free period, and then rent
payable again. That does not seem a very probable intention for business people
dealing with shop property.
Mr de la
Piquerie has suggested two alternative ways of interpreting the words ‘as from
the architects certificate of completion’ in para (3). The one which I think he
preferred was that it indicates the date for ascertaining the proper rent to be
agreed, ie regard is to be had to the conditions at the date of the architect’s
certificate in agreeing that rent and seeing whether it is greater than
£33,000. The other possible view, which gets some encouragement from the terms
of para (4), is that such rent as may be agreed as from the architect’s
certificate of completion merely means that the process of negotiation is to
begin when the certificate of completion is given. I at first was rather
inclined to the latter, but in the end, on repeated reading of the whole
document, I have come to the conclusion that Mr de la Piquerie is right and
that the words ‘as from the architects certificate of completion’ are intended
to indicate to what date the estimation of the agreed rent is to relate.
That,
therefore, disposes of one possible inference as to the commencement of the
term and, then, that being out of the way, it becomes fairly clear that the
clue is given by para (6) which says:
Beatties are
to be given a rent-free period of four months from the date of completion of
legal formalities
which must
mean, I interpose, the execution of the lease
or its
physical possession of the premises, whichever shall first occur.
Businessmen
would, I think, know very well that a rent-free period for this sort of
property is really given for shopfitting and preparing for the retail trade and
it is to coincide with what would otherwise be the first part of the time for
which rent would be paid. Accordingly, in my view, the proper inference from
the whole document, and particularly from para (6), is that if the tenant is
not already in possession the 25 years will begin from the date of the
execution of the lease, otherwise it will be dated back in the lease so that
the 25 years begin from the date when possession was taken. That, as I say,
does not seem to me to require any benevolent construction, but only a somewhat
laborious examination of the document.
The second
point of uncertainty is more serious. If one looks at para (3) alone, at first
sight there is no difficulty. It says:
The rent
payable for the first 5-year period of the lease to be the greater of £33,000
per annum exclusive or such rent as may be agreed as from the architects
certificate of completion.
It looks as
though in default of agreement £33,000 stands and, therefore, there will in the
end be no uncertainty. If a greater rent is agreed, that will be it: if no
greater rent is agreed, £33,000 will stand, and so no uncertainty. But a little
study of the document and a little consideration of the circumstances make that
an impossible interpretation in my view. The tenant could never be expected to
agree to a higher rent than £33,000 if that were to stand in default of
agreement; and the terms of paras (4) and (5) show a clear intention, in my
opinion, that if £33,000 had become too small a rent by the time the
reconstruction was complete a fair rent should (and as I now think) as of that
date be agreed. There is no provision for what is to happen in default of
agreement and thus there is force in the argument that this is no more than an
agreement to agree and, therefore, unenforceable, the essential term of rent
not being specified. However, the bargain having been the subject of part
performance, as I have said, I am of opinion that the court can and should
supply a means of ascertainment by providing that the rent for the first
five-year period is to be the greater of £33,000 per annum or a fair rent as at
the date of the architect’s certificate of completion. There is some precedent
for such an operation in the case which I have already cited of Beer v Bowden.
There the provision for rent was:
Until March
24 1973 . . . the rent of £1,250 per annum and from March 25 1973 such rent as
shall thereupon be agreed between the landlords and the tenant but no account
shall be taken of any improvements carried out by the tenant in computing the
amount of increase, if any, and in any case not less than the yearly rental
payable hereunder. . . .
Goff LJ, at p
527, having said that the court must imply a term in order to give business
efficacy to the contract, said:
It is quite
obvious . . . that the parties intended that the rent should be increased if
the premises appreciated in value and none the less so although they used the
words ‘if any’. They clearly contemplated also, as it seems to me, that the
rent should be increased to such an amount as would be a fair rent for the
premises excluding tenant’s improvements. They failed to agree. There is a
hiatus. As the judge rightly held, that hiatus has to be filled by an implied
term . . . .
Geoffrey Lane
LJ thought that had the case been one of an ordinary commercial contract of
some sort there would be a great deal to be said for the view that from the
date in March 1973 the contract was void for uncertainty, the parties having
failed to agree on a vital term of the contract. But as there was a subsisting
estate and a continuing term of 14 years, in respect of which some rent must be
paid, the learned lord justice said at p 528:
The court should,
if it can, give effect to the intention of the parties as exhibited from the
terms of the agreement itself. That intention was clearly to fix at these
moments of review a fair rent by agreement between the parties, subject to the
provisos which they set out. In the absence of such agreement the court, as is
made quite clear from the decision of this court in Foley v
Classique Coaches Ltd . . ., must try to produce the same effect for the
parties.
Buckley LJ
said at p 528:
It appears to
me that the introduction by implication of a single word in the clause in the
lease relating to the rent to be payable solves the problem of this case; that
is, the insertion of the word ‘fair’ between the words ‘such’ and ‘rent’.
It is true, of
course, that that was a case of a rent-review clause in a subsisting lease with
several years still to run, and I have already mentioned the distinction drawn
by Geoffrey Lane LJ for that reason. But I have already said that I ought, in
my view, in the circumstances of this agreement with which I am dealing, to
adopt a similar approach, in order to prevent injustice arising from the
failure of an agreement which it is impossible to unscramble by remitting the
parties to their original position.
So, finally, I
come to the question of the covenants and conditions to be included in a lease
under the option. Here, the necessity for a liberal approach to save the
contract is most obvious. The landlords accepted with full awareness the form
of words referring to a standard form of lease. Indeed, one of the few
amendments made by their solicitors in settling the draft letter was to that
formula. The existence or non-existence of a standard form is peculiarly within
their own knowledge and control; and then they come to the court, after the tenant
has given its consideration for the option by dropping the claim for a new
lease and going out of possession, and say: ‘Now we have an offer to take the
whole building. In fact there was no standard form in 1982, and now there will
not be a standard form if we can let the whole building in one unit. Therefore,
no standard form, para (1) will not work, the contents of the intended lease
are wholly uncertain, the agreement is void’.
That argument,
to my mind, offends the court’s conscience, and the court must find some way of
supplying the want of the machinery for determining the covenants and
conditions which the parties had contemplated. I think it ought to be done by
declaring that the lease is to be in such form as the landlords may reasonably
require. There is authority of the Court of Appeal that such a formula results
in a sufficiently certain and enforceable agreement: see Sweet & Maxwell
Ltd v Universal Services Ltd [1964] 2 QB 699. Mr de la Piquerie
points out that the court may be forcing a new bargain on the parties because,
he says, standard forms given by landlords to new tenants often make
unreasonable requirements if objectively reviewed. Where the landlord is in a
sufficiently strong position that may well be so. None the less, I think that
in order to avoid the great injustice to the tenant of accepting the landlords’
way of getting out of the agreement the court must risk some minor injustice to
the landlords by denying them an opportunity to obtain unreasonable covenants
or conditions.
There is one
final argument that I must touch on. It is suggested that even if each of the
three steps I have taken would be possible in isolation, the actual cumulative
effort the court has made to prevent the agreement from failing by uncertainty
is beyond reason and an improper extension of the court’s jurisdiction. I think
not. I think that once the position of the parties and the history of the
matter are appreciated the court should not hesitate to take more than one step
to avoid what it sees as an injustice, provided, of course, that it is
satisfied that each step separately is a proper and permissible exercise of its
powers of construction.
Accordingly, I
propose to make declarations in the sense I have indicated. Para (1) of the
summons I shall not accept. Under para (2) I propose that the term of 25 years
to be granted pursuant to the option is to be expressed to commence from the
date of execution of the lease or of the defendant being let into physical
possession of the premises whichever shall first occur. On (3) and (4) I would
propose to declare that the rent reserved is to be a fair rent for the demised
premises as at the date of the architect’s certificate of completion or £33,000
per annum exclusive, if greater. Under para (5) that the lease is to be in such
form as the plaintiffs may reasonably require.
The
plaintiffs were ordered to pay the defendants’ costs. Liberty was given to
apply for the determination of a fair rent or otherwise as to the form of the
lease in default of agreement.
