England and Wales Court of Appeal (Civil Division) Decisions

Homebase Ltd. & Anor v Allied Dunbar Assurance Plc [2002] EWCA Civ 666 (17th May, 2002)

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR BERNARD LIVESEY QC
(sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand, London, WC2A 2LL
		17 May 2002

Lord Justice Chadwick :

1. This is an appeal against an order made on 11 April 2001 by Mr Bernard Livesey QC, sitting as a Deputy Judge of the High Court in the Chancery Division, in proceedings brought by Allied Dunbar Assurance Plc as landlord of commercial premises at Wolverhampton. The premises are held by the appellant, Homebase Limited, under a lease for a term of 25 years from 24 June 1985. The lease includes a covenant by the tenant not to underlet the premises without first obtaining the consent of the landlord. The covenant is subject to a proviso which is intended to control the terms of any permitted underletting. A proviso of that nature is, I think, in common use in commercial leases – see, for example, the forms of lease in volume 22(2) of The Encyclopedia of Forms and Precedents (fifth edition, 1997 reissue). The appeal raises a short question as to the extent to which the proviso in this lease has effect.
2. The covenant not to underlet is contained in clause 3(32)(C) of the lease. So far as material the clause is in these terms:

“Not to underlet the whole or any part of the demised premises without first obtaining the prior consent of the Landlord (such consent not to be unreasonably withheld or delayed) provided that

(a) . . .

(b) any underlease . . . shall not be granted at a rent of less than the full market rent reasonably obtainable without taking a fine or premium

(c) any such underlease . . . shall contain covenants by the underlessee and its successors in title . . . with the Tenant and its successors in title in the same form (mutatis mutandis) as the covenants on the part of the Tenant contained in this Lease

(d) neither the Tenant nor any person deriving title under it (including any undertenant whether immediate or not) will (but without prejudice to the foregoing) underlet or part with possession of the whole of the premises thereby demised for a term which shall extend beyond any date on which the rent hereby reserved is to be varied as herein provided unless such underletting or parting with possession shall include provisions to the effect that the rent thereby reserved shall be subject to review on the dates on which the rent hereby reserved is to be varied to the intent that the rent reserved on and after any of the dates on which the rent hereby reserved is to be varied shall not be less than the full market rent obtainable without taking a fine or premium in respect of the premises comprised in such underlease calculated as at the dates on which the rent hereby reserved is to be varied . . .

. . .”

3. The covenant contains a qualification, in express terms, that the landlord’s consent is not to be unreasonably withheld. If it had not been expressed that qualification would have been implied – see section 19(1) of the Landlord and Tenant Act 1927. It is not in dispute that the purpose of the proviso which follows was to restrict the circumstances in which the tenant could properly apply for consent to an underletting – see Bocardo SA v S & M Hotels Limited [1980] 1 WLR 17. The principal issue on this appeal is whether the appellant, as tenant, has succeeded in avoiding the restriction which the proviso is intended to impose by including provisions, which (if included as covenants in the proposed underlease and not expressed to be personal to the immediate parties) would fail to meet the requirements of the proviso, in a separate deed collateral to the proposed underlease and expressed to have effect only as between the appellant and the proposed underlessee personally.

The underlying facts

4. The lease was granted to Homebase, then known as Texas Homecare Limited, on 6 January 1986. The premises demised by the lease, Unit 1, Bilston Road, Wolverhampton, were part of what the judge described as “a first generation retail warehouse scheme”. They were used by Homebase as a DIY retail store until the middle of 1998. The lease, together with leases of a number of similar retail stores from which Homebase was then trading, was placed on the market. There was little demand for warehouse units of that type; but, by the end of 1999, the agents had attracted a potential purchaser, Lairdale Limited. Lairdale sold furniture under the trade name “Furniture to Go”.
5. On 17 February 2000 Homebase entered into an agreement for the grant of an underlease of the premises to Lairdale. At that date the yearly rent payable under the headlease was £322,500. The next rent review date was 24 June 2000. Under the rent review provisions in the headlease the rent was to be reviewed (upwards only) to an open market rent - see clause 6.
6. The rent which Lairdale was willing to pay to Homebase for a sub-tenancy of the premises was substantially less than the rent which was then payable under the headlease. That gave rise to an obvious problem. An application to Allied Dunbar for consent to sublet at a rent which was substantially below the passing rent under the headlease would invite a refusal on the ground that the proposed underlease would not comply with the requirement in paragraph (b) of the proviso to clause 3(32)(C). It was not to be expected that, with a rent review imminent, Allied Dunbar would accept that the market rent was less than the current passing rent. Further, it appears that the premises were – or were perceived to be - out of repair and that Lairdale was not prepared to undertake repairing obligations which were as onerous as those in the headlease. An underlease which imposed on the tenant repairing obligations which were less extensive or less onerous than those in the headlease would not comply with the requirement contained in paragraph (c) to the proviso to clause 3(32)(C).
7. It was in those circumstances that Homebase was advised that, if the proposed underletting was to proceed, it was necessary that the arrangements with Lairdale, its proposed sub-tenant, should be set out in two separate documents. It was proposed that there should be an underlease, in the form of a draft annexed to the agreement of 17 February 2000, which (in that form) would satisfy the requirements set out in the proviso to clause 3(32)(C) of the headlease. And there was to be a collateral deed, expressed to be personal to Homebase and Lairdale, which would limit the extent to which the obligations in the underlease would be enforced by Homebase against Lairdale.
8. The mutual obligations to grant and take the underlease were, as might be expected, conditional on Homebase obtaining consent from Allied Dunbar to the proposed underletting. An application for such consent was first made on 20 January 2000. A draft of the proposed collateral deed was sent to Allied Dunbar’s solicitors in March 2000. A revised draft was sent on 4 April 2000. That draft provided that Homebase would indemnify Lairdale for the difference between an initial rent of £100,000 per annum (rising to £200,000 per annum and, thereafter, to £322,500 per annum) and the rent expressed to be payable under the underlease; and that Homebase would indemnify Lairdale against the cost of complying with repairing obligations under the underlease in so far as those obligations would require Lairdale to put the premises in any better condition than that evidenced by a schedule of condition.
9. These proceedings were commenced shortly thereafter. The relief sought was an order restraining Homebase and Lairdale from completing the proposed underlease and the collateral deed. On 9 June 2000 solicitors for Homebase – recognising, perhaps, that there would be difficulties in seeking to support the arrangements if the collateral deed were in the form which had been sent on 4 April 2000 – sent what was described as “an amended version of the Revised Deed”. They wrote: “We await hearing from you regarding your client’s consent to the proposed underletting once you have had an opportunity to consider the same and obtain your client’s instructions”.
10. The draft collateral deed sent on 9 June 2000 contains the following provisions, so far as material:

“2. Homebase hereby undertakes to pay to Lairdale:-

2.1.1 the difference between the rent payable under the terms of the Lease between the Rent Commencement Date and the date which is six months after the Rent Commencement Date and £100,000 per annum; and thereafter

2.1.2 the difference between the rent reserved by the Lease and £200,000 per annum until and including 23 June 2005; and thereafter

2.1.3 the difference between the rent reserved by the Lease and £322,500 per annum; . . .

. . .

2.2 the cost (including all professional and other fees incurred by Lairdale and Homebase and the Superior Landlord) of complying with or paying any damages for any breach of:-

2.2.1 any obligation to put and keep in repair the floor of the premises

2.2.2 any obligation to repair or redecorate the Premises (including any such obligation contained in any licence to underlet which Lairdale enters into) insofar as it would require Lairdale to put the Premises into any better state of repair or condition or decorative repair and decorative condition than that evidenced by the attached Schedule of Condition and whether or not any third party seeks to enforce this obligation against Lairdale; . . .

. . .

6. The rights and obligations of the parties under this Deed are intended to be personal to Homebase and Lairdale and are not intended to affect any other parties including the Superior Landlord and any assignees of the Lease or the Headlease.”

In that context “the Lease” means the underlease to be granted pursuant to the provisions in the agreement of 17 February 2000 – that is to say, an underlease in the terms of the draft annexed to that agreement – and “the Rent Commencement Date” means the date so defined in that agreement – that is to say, 14 June 2000 (being three months and three weeks after the “Access Date”, which was defined as 21 February 2000). “The Premises” means the premises to be demised by the underlease – that is to say, the premises known as Unit 1, Bilston Road, Wolverhampton.

11. The term for which the premises were to be demised by the underlease was to expire on 21 June 2010 – three days before the expiry of the term granted by the headlease. The rent payable under the terms of the underlease was reserved in clause 2 of the draft annexed to the agreement of 17 February 2000:

“(a) until 23 ^rd June 2000 and so in proportion for any less time than a year the yearly rent of three hundred and twenty two thousand five hundred pounds (£322,500) and thereafter during the remainder of the said term such yearly rent as shall be determined pursuant to the provisions of Clause 6 hereof such rents to be paid without any deduction whatsoever by equal quarterly payments in advance on the usual quarter days in every year (whether demanded or not) . . .”

The provisions for rent review contained in clause 6 of the draft underlease, and the rent review dates, are the same, in all material respects, as those in the headlease. The effect would be that, under the provisions in the underlease, the yearly rent reserved from 24 June 2000 would be (i) £322,500 - or such greater sum as might be agreed or determined on a rent review as at that date to be the market rent – and (ii) such greater sum as might be determined on a further review as at 24 June 2005. But the effect of the collateral deed would be that, so long as Lairdale was liable to make those payments of rent under the underlease, Homebase would make reciprocal payments to Lairdale so as reduce the amount actually paid by Lairdale for its occupation of the premises to the equivalent of a yearly rent of (i) £100,000 for the period to 14 December 2000, (ii) £200,000 for the period from 14 December 2000 to 24 June 2005 and (iii) £322,500 for the remainder of the term.

12. The sub-tenant’s repairing obligations are found in the draft underlease at clauses 3(4) (repairs), 3(6) (external decoration), 3(7) (internal decoration) and 3(10) (to yield up in repair and decorative order). In particular, the obligation in clause 3(4) is “well and substantially to repair . . . and keep in good and substantial repair . . . all the demised premises”; and that in clause 3(10) is “At the end . . . of the said term . . . to . . . yield up . . . the demised premises and every part thereof . . .in such good and substantial repair and condition and decorative order as shall be in accordance with the Tenant’s covenants herein contained”. The schedule of condition which was to be attached to the collateral deed is a schedule of the condition of the premises as at 1 February 2000 prepared by Homebase and agreed with surveyors acting for Lairdale. It was sent to the solicitors for Allied Dunbar on 22 May 2000. It discloses numerous defects in the condition of the premises, which, prima facie, it would be the liability of the incoming sub-tenant to remedy under the repairing obligations in the draft underlease. The effect of the collateral deed would be that Homebase would pay to Lairdale the cost of complying with or paying any damages for the breach of those obligations in relation to the floor of the premises and in so far as they required the sub-tenant to put the premises into any better state than they were on 1 February 2000.
13. As I have said, Homebase sought consent for the proposed underlease. Its solicitors’ letter of 9 June 2000 was accompanied by the revised draft of the collateral deed. By that date Allied Dunbar had already commenced these proceedings. The request for consent was refused by letter dated 2 August 2000. The solicitors for Allied Dunbar wrote:

“Our client has confirmed its previous view that the proposed underletting would be in breach of provisos (b), (c) and (d) contained in Section 3(32)(C) of the head lease. This conclusion is based primarily on valuation advice received by it so far as proviso (b) is concerned and on legal advice as far as provisos (c) and (d) are concerned. You are aware of the general nature of our client’s case on the provisos from the correspondence and documents in the proceedings and we need not elaborate further in this letter. We have also explained to you, citing relevant authority, that if the underletting would be in breach of the provisos or any of them our client has no further duty to consider an application for consent.

Nonetheless our client would have refused consent even if the proposed underletting had complied with the provisos. Now that all relevant information is to hand and our client has had a reasonable opportunity to take advice and consider the matter on the basis of that information it seems to us helpful that we should summarise the reasons, which would have led our client to refuse consent when all relevant information was available even if the proposals had complied with the provisos. . . .”

There followed detailed reasons why, even if the requirements of the paragraphs (b), (c) and (d) to the proviso to clause 3(32)(C) of the headlease had been met, consent to subletting would have been withheld. The letter concluded with the observation that:

“. . . if your client’s case and conduct is lawful then there seems little purpose in any landlord putting the common form provisions found in provisos (c), (c) and (d) (sic) into the alienation clause in leases. The provisions could always be circumvented by the device of a supplemental deed such as the various versions which you have put forward. We cannot believe that this is the law.”

14. On 17 February 2001 Lairdale, as it was entitled to do under the terms of the agreement of 17 February 2000, gave notice determining that agreement. Lairdale has taken no further part in these proceedings.

The proceedings before the judge

15. The proceedings came before the judge for trial on 20 February 2001. By then there was no longer a proposal to underlet the premises to Lairdale and the only issue remaining was that raised by Homebase by way of counterclaim under Part 20 of the Civil Procedure Rules: whether Allied Dunbar had withheld consent unreasonably. In that context it is pertinent to have in mind the provisions of sections 1 and 4 of the Landlord and Tenant Act 1988. Section 1 applies where a tenancy includes a covenant on the part of the tenant not to underlet the premises comprised in the tenancy without the consent of the landlord and that covenant is subject to the qualification that consent is not to be unreasonably withheld – see section 1(1). In such a case the landlord owes a duty to the tenant to give consent “except in a case where it is reasonable not to give consent” – see section 1(3)(a). It is for the landlord to show that it was reasonable for him not to give consent – see section 1(6)(c). A landlord’s refusal to give consent, save in a case where it was reasonable not to give consent, is actionable in tort for breach of statutory duty – see section 4 of the Act. It is plain that, if Allied Dunbar in refusing consent to the proposed underletting by its solicitors’ letter of 2 August 2000 were in breach of the duty imposed by section 1(3)(a) of the 1988 Act, the damages recoverable under section 4 of that Act could be substantial.
16. The judge directed himself, correctly, that the first question to consider was whether, in relation to the proposed underletting to Lairdale, the requirements under the proviso to clause 3(32)(C) of the headlease were met. If Homebase were not entitled to seek consent to an underletting in a case where those requirements – or any of them – were not met, Allied Dunbar had come under no obligation to consider whether or not it was reasonable to withhold consent – see the observations of Chief Justice Barwick and Mr Justice Windeyer in the High Court of Australia in Creer and another v P & O Lines of Australia Pty Limited (1971) 125 CLR 84, 87,91, applied in this Court in Bocardo SA v S & M Hotels Ltd and another [1980] 1 WLR 17, 24, 25, 27. The duty to give consent “except in a case where it was reasonable not give consent” - imposed by section 1(3)(a) of the 1988 Act in cases to which that section applied – did not arise.
17. The judge held that the requirement in paragraph (d) of the proviso to clause 3(32)(C) of the headlease was not met. He said this, at paragraph 29 of the written judgment which he handed down on 11 April 2001:

“As regards proviso (d), the rent review provisions, the requirement is that the underletting “shall include provisions” for review “to the intent” that the rent be no less than the full market rent at the date of variation.

As a matter of form, identical rent review provisions are contained in the underlease as in the lease. However, the fact that the rent from 2005 has already been fixed at the rate of £322,500 until the end of the term and therefore will not be reviewed means that the provisions cannot sensibly be regarded as having the necessary intent that the rent should be reviewed to the full market rent in 2005. The provision for review in the underlease is therefore clearly intended so far as the parties to it are concerned to be fictional and nominal.”

It followed that, as the judge put it in paragraph 30 of his judgment:

“. . . on the basis of the non-compliance with proviso (d) alone, the defendant has failed to establish that the condition precedent was fulfilled and that the claimant’s refusal was unjustified.”

Accordingly, he dismissed the counterclaim.

18. The judge rejected the contention, advanced on behalf of Allied Dunbar, that the requirement in paragraph (c) of the proviso to clause 3(32)(C) of the lease was not met. He said this, at paragraph 28 of his judgment:

“. . . The claimant’s argument was that the obligation to repair is diminished by the provision in the [collateral] deed for partial contribution by the defendant.

Despite the submissions of the claimant, it does remain the fact that the underlease contains a covenant to repair in the same form as that in the lease. There is nothing in the underlease which suggests that this obligation is fictional or notional. There is not anything which qualifies the incidence of the obligation. I do not accept that the provision in the [collateral] deed enables the underlessee to avoid the obligation. It would be enforceable against the underlessee by the defendant and its successors in title. As a matter of substance I do not regard the obligation to perform the repairs as in any way diminished by the imposition of a collateral obligation on the underlessor to make a contribution to a part of the cost of those repairs. In the event that the claimant and Lairdale might in unlikely circumstances have come into a direct relationship (as for example on the forfeiture of the Lease) there is nothing in the [collateral] Deed which could be enforced against the claimant or be imported into any new lease which might be granted. I therefore reject the claimant’s submission on this proviso.”

That finding is the subject of a respondent’s notice, lodged on behalf of Allied Dunbar under CPR 52.5.

19. The judge rejected, also, the contention that the requirement under paragraph (b) of the proviso to clause 3(32)(C) of the lease was not met. He accepted that it was unrealistic to regard the underlease and the collateral deed in isolation from each other, to ignore the rebate in the deed and to say that the rent payable was at the rate reserved in the underlease. At paragraph 27 in his judgment, he said this:

“I agree with the claimant’s submission that it cannot be that an entirely fictional calculation using notional figures should be allowed to get around the express provisions in the lease. The argument that the ‘rebate’ is no different from a reverse premium paid by instalments is superficially attractive but wrong.”

He went on to address the question whether the rent, at the effective rate agreed between Homebase and Lairdale, was less than “the full market rent reasonably obtainable without taking a fine or premium” – as required by paragraph (b) of the proviso. He answered that question in the negative. He was satisfied that no higher rent was obtainable in the circumstances. There is no challenge to that conclusion in the respondent’s notice.

20. Having reached the conclusion that the requirement in paragraph (d) of the proviso to clause 3(32)(C) was not met, it was, perhaps, unnecessary for the judge to consider whether Allied Dunbar had established that this was a case where it had been reasonable not to give consent – see sections 1(3)(a) and 1(6)(c) of the 1988 Act. But he thought it appropriate to do so, in case that conclusion were wrong. He directed himself, correctly, that it was enough for the landlord to establish that the decision to withhold consent was one which might be reached by a reasonable landlord in the circumstances – see International Drilling Fluids Limited v Louisville Investments (Uxbridge) Ltd [1986] Ch 513, at page 520. But he was persuaded that the real reason for the refusal of consent in the present case was one which could not be regarded as reasonable. He had referred, when considering whether the rent agreed between Homebase and Lairdale was the full market rent reasonably obtainable, to a report prepared for Allied Dunbar by Green & Partners, retail property consultants, in March 2000. The report had concluded that Homebase had “thoroughly marketed” Unit 1, Bilston Road; and that its efforts to dispose of the headlease “clearly suggests that little alternative demand exists”. In a later passage the author had referred to the “potential disastrous” effect of a subletting of Unit 1 at the rent agreed between Homebase and Lairdale on the forthcoming rent reviews both in relation to Unit 1 and the adjoining property, Unit 2. The judge said this, at paragraph 40 of his judgment:

“. . . where as here the claimant as landlord had the benefit of the views of Green & Partners which I have already quoted, and had a collateral motive to refuse consent irrespective of whether that refusal was reasonable or not, it seems to me that its refusal, in so far as it was driven by considerations as to the appropriate level of rent which I have rejected, could not be regarded as reasonable.”

It is, I think, clear that the judge took the view that, in the light of the Green & Partners’ report, Allied Dunbar had no real belief that the rent agreed between Homebase and Lairdale was below a full market rent. Allied Dunbar’s real concern was that consent to an underlease at that rent would make it impossible to argue for an increase in rent, above the passing rent, on the June 2000 rent review under the head lease of Unit 1 and the parallel lease of Unit 2. To withhold consent on that ground would not be reasonable.

21. The judge’s conclusion that, if the issue whether it was reasonable for consent to the proposed underlease to be withheld arose, Allied Dunbar had not shown that this was a case where it had been reasonable not to give consent is challenged in the respondent’s notice. It is said that it was reasonable not to give consent because of the possible damage to Allied Dunbar’s interest in the reversion caused by the rent payable under the underlease; because of the possible damage to Allied Dunbar’s interest in other premises at the same location; because of the restricted nature of the repairing covenant in the underlease; and because of the limited, and fixed, amount payable on a rent review under the underlease.

This appeal

22. It is not in dispute that, had the draft underlease itself contained a provision that the tenant’s repairing covenant limited the obligation by reference to the state of repair and condition as at 1 February 2000 (the effective date for the purposes of the schedule of condition attached to the collateral deed) and did not extend to the floor, the proposed underlease would not meet the requirement in paragraph (c) of the proviso to clause 3(32)(C) of the head lease. In those circumstances the underlease would not contain covenants by the underlessee and its successors in title “in the same form (mutatis mutandis) as the covenants on the part of the Tenant contained in this Lease”. Nor is it in dispute that, had the draft underlease contained provisions which limited the rent payable from the first review date (24 June 2000) to £100,000 for the period to 14 December 2000 – rising to £200,000 for the period from 14 December 2000 to 24 June 2005 - and from the second review date (24 June 2005) to £322,500 for the remainder of the term, the proposed underlease would not have met the requirement in paragraph (d) of that proviso. The underlease would not then contain provisions for rent review which were intended to have the effect that (on review) the rent reserved should be not less than the full market rent.
23. It is said on behalf of Homebase that the fact that the provisions in relation to repairs and rent which were to be personal to, and have effect only as between, Homebase and Lairdale were to be contained in a separate deed collateral to the proposed underlease is of some significance. I do not agree. The judge held, correctly, that the collateral deed and the underlease were interdependent and must be read together – applying the approach adopted by Lord Templeman in A G Securities v Vaughan, Antoniades v Villiers [1990] 1 AC 417, 460H. There is no challenge to his conclusion on that point. The combined effect of the proposed underlease and the collateral deed, therefore, is as if the relevant provisions had been included in the underlease.
24. Read in that way the provisions of the underlease in respect of the payment of rent (so far as material) are these:

“YIELDING AND PAYING therefor unto the Landlord (a) until 23 June 2000 and so in proportion for any less time than a year the yearly rent of [£322,500] and thereafter during the remainder of the said term such yearly rent as shall be determined pursuant to the provisions of Clause 6 hereof such rents to be paid without any deduction whatsoever . . . PROVIDED that Homebase hereby undertakes to pay to Lairdale (it being intended that such obligation shall be personal to Homebase and Lairdale and not affect any other parties including the Superior Landlord and any assignees of this lease or the Headlease):-

(1) the difference between the rent [hereby reserved] payable . . between [14 June 2000] and [14 December 2000] and £100,000 per annum; and thereafter

(2) the difference between the rent [hereby] reserved . . . and £200,000 per annum until and including 23 June 2005; and thereafter

(3) the difference between the rent [hereby] reserved . . . Lease and £322,500 per annum; . . .”

And, by way of illustration, the tenant’s covenant in the underlease in respect of repair during the term is:

“From time to time and at all times during the said term . . . well and substantially to repair . . . and keep in good and substantial repair and when necessary rebuild reconstruct renew or replace all the demised premises and every part thereof . . . when and as often as occasion shall require . . . PROVIDED that Homebase undertakes to pay to Lairdale (it being intended that such obligation shall be personal to Homebase and Lairdale and not affect any other parties including the Superior Landlord and any assignees of this lease or the Headlease) the cost . . . of complying with or paying any damages for any breach of:-

(1) any obligation to put and keep in repair the floor of the premises

(2) any obligation to repair or redecorate the Premises (including any such obligation contained in any licence to underlet which Lairdale enters into) insofar as it would require Lairdale to put the Premises into any better state of repair or condition or decorative repair and decorative condition than that evidenced by the attached Schedule of Condition and whether or not any third party seeks to enforce this obligation against Lairdale; . . .

25. The judge held, in effect, that an underlease which contained provisions for the payment of rent in the terms which I have set out would meet the requirement in paragraph (b) of the proviso to clause 3(32)(C) of the headlease. But he did not reach that conclusion by ignoring the words which I have placed in italic script. He held (at paragraph 27 of his judgment) that “it is unrealistic to . . . ignore the rebate . . . and say that the rent is the rate reserved in the [redendum] . . . it cannot be that an entirely fictional calculation using notional figures should be allowed to get round the express provisions in the [headlease].” He reached his conclusion, in relation to paragraph (b) of the proviso, by holding, as matter of fact, that the grant of an underlease at a yearly rent of £100,000 (payable from 14 June 2000, rising to £200,000 in December 2000 and to £322,500 in June 2005) was not a grant “at a rent less than the full market rent reasonably obtainable”. The need to adopt a consistent approach required him, as it seems to me, to hold (as he did) that provisions for the payment of rent in the terms which I have set out would not meet the requirement in paragraph (d) of the proviso. As he said, at paragraph 29 of his judgment, the effective rent from June 2005 until the end of the term having been fixed, as between Homebase and Lairdale at £322,500 per annum “the provision for review in the underlease is therefore intended so far as the parties to it are concerned to be fictional and nominal”. There was no evidence upon which he could conclude that a full market rent as at the review date on 24 June 2005 would be less than £322,500.
26. The judge reached the opposite conclusion in relation to the tenant’s covenant to repair. He held, in effect, that an underlease which contained a covenant to repair in the terms which I have set out would meet the requirement in paragraph (c) of the proviso to clause 3(32)(C) of the headlease. He thought that “as a matter of substance . . . the obligation to perform the repairs [is not] in any way diminished by the imposition of a collateral obligation on the underlessor to make a contribution to a part of the cost of those repairs” – see the passage at paragraph 28 of his judgment which I have already set out.
27. The appellant submits that the judge’s conclusion that the provisions for the payment of rent did not meet the requirement in paragraph (d) of the proviso to clause 3(32)(C) of the headlease – and his approach to the question whether those provisions met the requirement in paragraph (b) - are inconsistent with his conclusion that the tenant’s covenant to repair did meet the requirement in paragraph (c) of the proviso. He submits that the conclusion in relation to the tenant’s covenant to repair is correct; and that, accordingly, the approach and the conclusion in relation to rent and rent review must be wrong and should be rejected. The respondent accepts, I think, that it is difficult to reconcile the judge’s approach in relation to paragraphs (b) and (d) with his conclusion in relation to paragraph (c). But it is said that that difficulty should lead the Court to the view that the judge was wrong to reach the conclusion which he did in relation to paragraph (c). As I have said, that point is raised by a respondent’s notice.
28. For my part, I think that there is much force in the submissions that the judge’s conclusions in relation to paragraphs (c) and (d) of the proviso to clause 3(32)(C) of the headlease are mutually inconsistent. It is difficult to see how those conclusions can both be correct. But that provides no answer to the question which of them is wrong. In my view the appeal has to be approached on the basis that either might be correct.
29. The words which I have placed in italic script, when setting out (above) the relevant provisions of the underlease if read together with the collateral deed, include (in each case) the provision, in respect of the undertaking by Homebase, that it is “ intended that such obligation shall be personal to Homebase and Lairdale and not affect any other parties including the Superior Landlord and any assignees of this lease or the Headlease”. That provision reflects clause 6 of the collateral deed. It has not been argued that, absent that provision (or clause 6 of the collateral deed), the provisions of the underlease, read with the collateral deed, would meet the requirements in paragraphs (c) and (d) of the proviso to clause 3(32)(C) of the headlease. It has been recognised – correctly, in my view - that, absent that provision, those requirements would not be met.
30. The proposed underlease, if granted, would be a “new tenancy” for the purposes of the Landlord and Tenant (Covenants) Act 1995 – see section 1 of that Act. The undertaking by Homebase would (in each case) be a “landlord covenant” for those purposes – see section 28(1). But for the provision that the undertaking is to be personal to Homebase and Lairdale, the benefit and burden of that undertaking would pass on an assignment of the premises demised by the underlease or on an assignment of the reversion – see section 3(1)(b) of that Act. So the undertaking to pay the difference between the rent reserved in the underlease and what may be described as the agreed rent – that is to say the £100,000 (or £200,000 or £322,500) per annum – would be enforceable not only against Homebase, but also against its successors in title, and not only by Lairdale, but also by its successors in title. So, also, the undertaking to pay the costs of putting and keeping the floor of the premises in repair, and the costs of carrying out repairs to matters identified in the schedule of condition, would be enforceable by and against successors in title as well as between Homebase and Lairdale.
31. To put the point shortly, an underlease which purported to reserve rent at a rate to be determined on a future rent review, but which provided that, whatever rate might be determined on a review in June 2005, the landlord would repay to the tenant the excess over £322,500 per annum, could not be said to meet the requirement in paragraph (d) of the proviso to clause 3(32)(C) of the headlease that the rent reserved was to be varied on a review “to the intent that” on and after the review date the rent “shall be not less than full market rent obtainable” as at the review date without cogent evidence that the market rent obtainable in June 2005 could not exceed £322,500. Nor could an underlease which required the tenant to put and keep each and every part of the premises in good and substantial repair, but which provided that the landlord would reimburse the tenant for the cost of putting and keeping the floor in repair, or for the cost of putting the premises into better repair than they were on 1 February 2000, be said to met the requirement in paragraph (c) of the proviso that the tenant’s repairing covenant is to be in the same form as that in the headlease. A covenant which requires the tenant to effect repairs at the tenant’s expense is not “in the same form” as a covenant which requires the tenant to effect repairs partly at the expense of the tenant and partly at the expense of the landlord.
32. The short question raised by this appeal, therefore, is whether the inclusion of the provision that the undertakings by Homebase in relation to the reserved rent and the repairing obligations are to be personal to Homebase and Lairdale enables it to be said that an underlease - which (absent that provision) would not meet the requirements of paragraphs (c) and (d) of the proviso to clause 3(32)(C) of the headlease – does meet those requirements.
33. Whatever the position might have been before the enactment of the Landlord and Tenant (Covenants) Act 1995, the effect of a provision that an undertaking or covenant by one of the original parties to a lease granted after that Act came into force on 1 January 1996 - that is to say, a “new tenancy” for the purposes of the 1995 Act - is to be personal as between that party and the other party to the lease is that the undertaking or covenant is not enforceable by or against their successors in title. That is because sections 141 and 142 of the Law of Property Act 1925 do not apply in relation to new tenancies - see section 30(4) of the 1995 Act – and the new regime, introduced by section 3 of the 1995 Act, does not operate in the case of covenants which (in whatever terms) are expressed to be personal to any person – see section 3(6) of that Act. So the question posed in the preceding paragraph may be put in these terms: can it be said that an underlease which contains provisions in relation to the rent reserved and the repairing obligations which are only enforceable as between the original parties meets the requirements of paragraphs (c) and (d) of the proviso to clause 3(32)(C) of the headlease in circumstances where, if those undertakings were enforceable as between the landlord and tenant for the time being, those requirements would not be met?
34. The answer to that question turns on the intention of the original parties to the headlease. Their intention is to be ascertained by construing the relevant provisions in the headlease in context and with a proper regard to the circumstances which they may reasonably be taken to have had in mind.
35. The circumstances which the original parties to the headlease may be taken have had in mind include the obvious fact that the premises were to be occupied for use as a retail warehouse – see clause 3(23) of the headlease – and, having regard to the planning constraints referred to by the judge in paragraph 2 of his judgment, could be expected to be occupied for that purpose by any permitted sub-tenant. It would follow that a tenancy created by any permitted underlease – as well as the tenancy created by the headlease itself - could be expected to be a tenancy to which Part II of the Landlord and Tenant Act 1954 would apply – see section 23(1) of that Act. It would follow, also, that it could be expected that a tenancy created by a permitted underlease would not come to an end upon the determination of the contractual term granted by the underlease (unless by surrender or forfeiture, or by notice to quit given by the sub-tenant). Nor would a tenancy created by a permitted underlease, nor any new tenancy granted upon the termination of that tenancy pursuant to the provisions of Part II of the 1954 Act, come to an end upon the determination (otherwise than by forfeiture) of the headlease – see section 24(1) and (2) of the 1954 Act.
36. The head landlord has an obvious interest to protect in relation to the terms of any tenancy which may be continued, notwithstanding the determination of the intermediate landlord’s interest and after the end of the contractual term granted by the headlease, by the operation of the provisions in section 24(1) of the Act. The head landlord will be “the landlord” for the purposes of that tenancy. And if, in those circumstances, the former sub-tenant applies for a new lease under the Act, the terms of the “current tenancy”, for the purposes of section 35 of the Act, will be the terms of that tenancy. A landlord who gives consent to an underletting of business premises must expect that, on the determination of the tenancy created by the headlease (unless by forfeiture), he may well be in a direct relationship of landlord and tenant with the former sub-tenant upon the terms of the former sub-tenancy; and that the terms of any new tenancy (other than duration and rent) are likely to reflect the terms of the former sub-tenancy. Further, the rent then payable under the former sub-tenancy may well be persuasive evidence – in the context of section 34 of the Act – as to the reasonable open market rent.
37. It is accepted, I think, that the relevant provisions in the headlease – and, in particular, the requirements in the proviso to clause 3(32)(C) - must be construed on the basis that the original parties must be taken to have intended that the landlord should be able to control the terms of a permitted underlease which might, on the termination of the headlease, become the terms of a tenancy under which it would be the immediate landlord of the former sub-tenant. But it is said on behalf of the appellant that the original parties to the head lease are not to be taken to have intended that the landlord should be able to control the terms of an underlease which could not become terms of any tenancy under which it was the immediate landlord of the former sub-tenant. A term of the underlease which was personal as between the intermediate landlord and the former sub-tenant would, necessarily, fall away on the termination of the headlease. The requirements in the proviso to clause 3(32)(C) of the headlease were not intended to apply to such a case.
38. That submission, as it seems to me, is based on two assumptions which cannot be supported. First, it assumes that that a head landlord has no interest in the terms of the underlease as to rent and repairs for so long as the headlease subsists. I can see no basis for that assumption. A head landlord has a commercial interest in the amount of the rent passing under a sub-tenancy for at least two reasons: (i) that the rent payable by the sub-tenant is an obvious source from which its own tenant can fund the rent payable under the headlease and (ii) that the rent payable by the sub-tenant is an obvious comparator to be used on a rent review under the headlease. Further, a head landlord has a commercial interest in the state of repair of the premises to which it has the reversion. It is properly concerned to ensure compliance by its own tenant with the repairing covenants in the headlease; and that interest is served by ensuring that similar covenants are contained in any underlease and are observed by the sub-tenant who is in actual occupation. That is recognised, in the present case, by the requirement in paragraph (f) of the proviso to clause 3(32)(C) of the headlease that the tenant will not waive the covenants to be imposed upon any permitted sub-tenant and that “on any breach thereof the Tenant will forthwith enforce as appropriate such covenants”. In my view it would be wrong to conclude that the original parties to the head lease were not concerned with terms of an underlease which could not become terms of any tenancy which might arise as between the head landlord and a permitted sub-tenant upon the termination of the headlease. There are good reasons why they should be taken to have intended that the repairing covenants to be observed, and the provisions in relation to rent review, should be as fully effective between the original parties to a permitted underlease as they were to be as between either of those parties and the successors in title of the other, or as between their respective successors in title.
39. Second, the submission is based on the assumption that the terms of any tenancy which might arise between the head landlord and a permitted sub-tenant upon the termination of the headlease will be the terms of the permitted underlease. But there is nothing in the headlease which requires that any permitted underlease will be for a contractual term equal (or nearly equal) to the remaining term of the lease. Indeed, paragraph (d) of the proviso to clause 3(32)(C) plainly contemplates that the term of a permitted underlease may not extend beyond the next rent review date under the headlease. The original parties to the headlease must be taken to have been aware of the obvious possibility that the contractual term granted by a permitted underlease would come to an end at a time when “the landlord” in relation to the tenancy created by that lease – within the meaning of section 44 of the 1954 Act – was the tenant under the headlease. In such a case - subject to the provisions in schedule 6 to the Act - the terms of any new tenancy granted by the court under section 29(1) of the Act (other than terms as to the duration thereof and as to the rent payable thereunder) would be such as might be agreed between the intermediate landlord and the sub-tenant or, in default of agreement, as may be determined by the court having regard to “the terms of the current tenancy and to all relevant circumstances” –see section 35 of the Act. So the head landlord is concerned not only with the terms of the underlease itself but also with the terms of any new tenancy between the intermediate landlord and the sub-tenant which may, during the subsistence of the headlease, be granted pursuant to the provisions in Part II of the 1954 Act. The terms of that new tenancy (rather than the terms of the underlease) may well become the terms of any tenancy which arises as between the landlord and the former sub-tenant on the termination of the headlease; the terms of that new tenancy are likely to reflect the terms of the “current tenancy” at the time when the contractual term granted by the underlease comes to an end; and if, at that time, the parties to the current tenancy are the original parties to the underlease (as they may well be) there is an obvious risk that the terms of the current tenancy will be held to be the terms which those parties have agreed should have effect as between themselves.
40. The matters to which I have referred may reasonably be expected to have been in the minds of the original parties to the headlease when they agreed that the landlord should be able to control the terms of any permitted underlease through the requirements contained in the proviso to clause 3(32)(C). It is against that background that the court must address the question whether the original parties to the headlease intended that those requirements need not be met in a case where undertakings in relation to the rent and the repairing obligations inconsistent with the requirements of paragraphs (c) and (d) of that proviso were only enforceable as between the original parties to the underlease. I would answer that question in the negative. I would hold that those requirements are not met in a case where the underlease contains undertakings in relation to the rent and the repairing obligations inconsistent with paragraphs (c) and (d) of that proviso which are only enforceable as between the original parties as well as in a case where those undertakings are enforceable as between whoever may be the landlord and the tenant for the time being.
41. I would dismiss this appeal on that ground.
42. It follows that I take the view that it is unnecessary to consider the question whether it was reasonable for Allied Dunbar not to give consent to the proposed underletting. No duty arose under section 1(3)(a) of the Landlord and Tenant Act 1988 in this case.

Hale LJ:

43. I agree.

Simon Brown LJ:

44. I also agree.
Order: Appeal dismissed with costs. Permission to appeal to the House of Lords refused. (Order does not form part of the approved judgment)