Update: commercial property

Where a lease or an agreement for lease contains an ambiguity, the court will usually strive for an interpretation that makes commercial sense.

In Akzo Nobel UK v Arista Tubes [2009] EWHC 497 (Ch), by a business purchase agreement Akzo agreed to sell to Arista its manufacturing business. The business was operated from leased premises. Arista was given licence by Akzo to occupy the premises while landlord's consent was sought for the grant of a sublease to Arista, which would be entered into if consent was obtained. Under the agreement, if landlord's consent was not obtained within 12 months, then either party could give three months' notice to terminate the licence.

Seven years later, as consent had still not been obtained, Arista served three months' notice to terminate the licence.

Prior to the expiration of the three-month period, Akzo obtained landlord's consent to the sub-letting and required Arista to complete the sublease. Arista refused, arguing that it was not possible for the obligation to complete and the lease to arise once notice had been given.

The court agreed with Arista. It said that the purpose of the inclusion of the notice provisions in the agreement was to enable the parties to bring to an end their relationship and that it was inconsistent with that purpose to allow an obligation to complete to arise after notice had been served.

Rent reviews

The decision of Nissim v Ablethird [2009] EWHC 585 (Ch) is a further example of the court seeking to make business sense of an ambiguous document. A dispute arose over the interpretation of the rent review provisions in a lease of an amusement arcade. The rent review clause directed that the actual use as an amusement arcade be disregarded and that the open market rental value of the property as a retail shop should first be assessed. The review clause further provided that, once that rent had been assessed, there was then to be added to it a 25 per cent uplift which was to be the rent payable by the tenant. The review clause provided that the uplift provisions were to be assumed not to be contained in the hypothetical lease.

The tenant contended that the presence of the uplift provisions could be taken into account, that the uplift provisions represented as an onerous clause which would reduce the open market rental value of the property and that it was to that reduced rental value that the uplift was to be applied.

The court disagreed with that interpretation. It said that it did not see the commercial sense of that arrangement and did not think that that was what the parties intended to achieve. The court said that it seemed that the parties believed that amusement arcade use was more valuable than retail shop use and that the 25 per cent uplift over retail shop values reflected that view. Therefore, it would be wrong to construe the clause as allowing the uplift provisions to be taken into account in assessing the retail rent.

Arbitrations

Parties to arbitrations would be wary of ignoring the arbitrator's directions (as opposed to complying but reserving their position) simply because they think that he is going wrong. The disgruntled party may find on appeal that, in fact, they were wrong and made their position worse by their conduct. In Bromley Park Garden Estates v Mallen [2009] EWHC 609 (Ch) a dispute arose in a rent review arbitration as to the floor area of the property and as to how the premises were to be valued given its size and shape.

The tenant, in its submissions, sought to rely upon two other arbitration awards and an expert determination in support of its contentions. The landlord, in response to the tenant's submissions, sought disclosure of the submissions and counter-submissions that had been made in the arbitrations and expert determination relied upon by the tenant, but the tenant refused to give disclosure of those documents.

The landlord said that it could not make its counter-submissions until it had seen those documents. However, the arbitrator refused to order disclosure and made his determination in the absence of the landlord's counter-submissions.

The landlord applied to set aside the arbitration award on the basis of section 68 of the Arbitration Act 1996 for serious irregularity in refusing to order disclosure, not allowing further time for the making of counter-submissions and refusing to permit an oral hearing which had also been requested by the landlord.

The court held that there had been no serious irregularity. It said that the documents that were sought to be disclosed were irrelevant and that the landlord had deprived itself of the opportunity of putting in counter-submissions.

The court further said that the arbitrator had been entitled to refuse the request for an oral hearing given the additional costs that would have been incurred as a consequence.

Alienation

It is now well established that only the disclaiming party's obligations come to end on a disclaimer. In Shaw v Doleman [2009] EWCA Civ 283 Ms Shaw, the original tenant of a small retail unit, entered into an authorised guarantee agreement (AGA) with the landlord under which she guaranteed the performance of the lease by a company to whom she was proposing to assign the lease.

Subsequent to the assignment, the assignee fell into financial difficulties and a liquidator was appointed who disclaimed the lease. The landlord sought to recover from Ms Shaw under the AGA the arrears of rent left unpaid by the assignee.

Ms Shaw sought to defend the claim on the basis that, under the AGA, she was liable for the performance of the covenants for the period during which the assignee was bound by the lease covenants and that that period had ended on the disclaimer of the lease.

The court rejected her arguments and followed the decision of the House of Lords in Hindcastle v Barbara Attenborough Associates [1997] AC 70, which had held that a disclaimer did not automatically bring a guarantor's liability to an end. The disclaimer, the court said, ended the assignee's liability but not that of any other party. Thus, Ms Shaw's liability continued.

Surrenders

Surrenders generally end the parties' ongoing and future liabilities but the parties can contract for a different result. In Re Cotswold Co. [2009] All ER (D) 79 (Apr) Cotswold, who held a 15-year lease of a commercial property, began to experience financial difficulties and put forward proposals for a company voluntary arrangement (CVA) under the Insolvency Act 1986.

The landlord of the property submitted a claim in the CVA for rent and service charge. The landlord then sought to mitigate its loss by re-letting the property but before it could do so it had to recover the property. It therefore entered into a deed of surrender with the supervisor of the CVA. The deed included a clause preserving the landlord's claim under the CVA. However, the landlord was not able to secure a new tenant and subsequently sought to pursue in full its claim under the CVA. The supervisor, however, refused to admit the landlord's claim for losses after the date of the surrender on the basis that the surrender extinguished the landlord's claim for future rent and other obligations.

The court held that the deed had expressly preserved the landlord's full claim under the CVA and that there was no ambiguity in it and ordered that the supervisor admit the landlord's claim accordingly.

Break clauses

Break notices continue to trip up unwary tenants. When an error occurs, Manni will not always save the day.

In Prudential Assurance Co. v Excel UK [2009] EWHC 1350 (Ch), Tibbet & Britain Limited (T&B) and Tibbet & Britain Consumer Group Limited (TBCG) were together the tenants of a substantial warehouse. The lease contained a right for the tenants to break the lease on the service of a notice no less than nine months before the break date.

A notice was served by the tenants' solicitors but, in error, the notice only named T&B, not TBCG, as tenant. By the time the mistake had come to light, it was too late for a fresh break notice to be served.

The landlord contended that, as a consequence of the mistake, no valid break notice had been served. The tenants argued that, as the solicitors who had served the notice had authority to act for both T&B and TBCG, a reasonable landlord would have been aware that a mistake had occurred and would have understood the notice to have been served on behalf of both tenants and so the notice was effective. Alternatively, the tenants said, it was clear from correspondence that all parties and their advisers had previously treated T&B as acting for both tenants.

The court, however, held that the break notice was invalid. Applying the test set out in Manni v Eagle Star [1997] AC 749, it did not agree that the reasonable recipient landlord would not have been confused by the reference in the notice only to T&B and would not have questioned whether it was also served on behalf of TBCG.

The court also held that the landlord was not estopped by what had happened from denying that the notice was valid.