England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		29th November 1999

The claimants, Havant International Holdings Ltd ("HIHL"), is the lessee of commercial premises known as at Units 3/4, Interchange Park (also known as Units 3/4, Robinson Way, Anchorage Park), Havant, ("Units 3/4"), which it holds under a lease made on the 8th July 1986 between Wilson (Connolly) Investments Limited as landlord and IBM United Kingdom Ltd ("IBM") as lessee ("the Units 3/4 Lease"). It is also the lessee of commercial premises known as Unit 5, Interchange Park as aforesaid ("Unit 5"), which it holds under a lease made on the same day, and between the same parties as the Units 3/4 Lease ("the Unit 5 Lease"). Both leases are for a term from the 25th March 1985 to the 25th December 2009.

The Unit 3/4 Lease was subject to a covenant by the lessee not to assign without the prior written consent of the landlord (not to be unreasonably withheld). The Unit 5 Lease contained an absolute prohibition on assignment. Clause 7 of both leases granted to IBM a right to determine the leases on the December quarter-day in 1989, 1994, 1999 and 2004, upon the giving of not more than 18 months' and not less than 12 months' notice. Clause 7 was in materially the same terms in both leases. As the leases originally stood, this right was personal to IBM for so long as it was the original lessee. IBM was also obliged to pay the rent, service charges and other outgoings for a period of 15 months after the determination of the leases pursuant to clause 7, unless the landlord re-let the premises during that period.

By a deed made on the 7th February 1996, between Helical Properties Investment Limited (as Wilson (Connolly) Investments Limited was by then called), IBM as lessee and HIHL as the proposed assignee of the leases ("the deed of variation"), consent was given by the landlord to the assignment of the leases to HIHL, and clause 7 of the leases (inter alia) was varied as therein mentioned. In that deed "Havant" was defined as HIHL, its description as a party to the deed being followed by its company number (company number 2986793).

The varied clause 7 is in the following terms (so far as material) in both leases:

"(1) The Tenant (for the purposes of this clause 7(1) meaning only Havant and IBM in the event that IBM receives and satisfies in full lawful demand from the Landlord for payment or performance of any obligation on the tenant's part contained in this Lease) shall have the right to surrender this Lease (in whole but not in part) on the Twenty-fifth day of December in the years 1989 1994 1999 and 2004 by giving to the Landlord not more than eighteen nor less than twelve months notice in writing to that effect expiring on the relevant surrender date time being of the essence and on such date the Tenant shall offer and the Landlord shall accept from the Tenant the surrender of this Lease so that it shall merge and be extinguished in the reversion immediately expectant thereon whereupon the Landlord shall be granted vacant possession of the demised premises and the parties shall be released from the future performance of the covenants agreements and conditions herein contained but without prejudice to the right of either party against the other in respect of any antecedent breach of any such covenants agreements and conditions

(2) The right of the Tenant to surrender this Lease shall be personal to Havant for (in the case if Havant) so long as its right to occupy the demised premises shall be as first assignee of the demised premises from IBM and to IBM (in the case of IBM) so long as IBM remain liable as original tenant under this Lease and accordingly the right to surrender pursuant to the provisions of this Clause 7 shall cease and be void immediately upon any vesting assignment or other disposition of this Lease to any person other than IBM or upon any subsequent assignment by IBM pursuant to Clause 3(35) hereof save as the same may be exercisable by IBM pursuant to clause 7(1) hereof"

The transfer dated 7th February 1996 in respect of Units 3/4 and the deed of assignment made on the same date of Unit 5 both contain a clause (clause 5) whereby IBM gave HIHL an indemnity ("the IBM indemnity") against all sums payable by HIHL, up to a specified limit, in respect of the payment of rent after determination and terminal dilapidations. The indemnities were dependent upon the leases being determined on the 1999 December quarter-day. The then landlords were not parties to either of these dispositions.

The reversion on the leases was vested in Lionsgate (G) Investment Ltd. ("Lionsgate G") from March 1998 until 21st December 1998. Since 21st December 1998, the reversion has been vested in the defendant. Both Lionsgate G and the defendant retained the same managing agents, Lionsgate Management Ltd. ("Management").

Under cover of a letter from solicitors dated 3rd December 1998, two notices were served on Lionsgate G, both dated 1st December 1998, each pursuant to clause 7(1) of each of the leases. Each of the notices identified the lease in respect of which it was served, and then continued with the following words:

"We Havant International Limited of PO Box 6 Langstone Road Havant Hampshire in which the benefit of the term of years of the Lease is now vested hereby give you notice pursuant to Clause 7(1) of the Lease of our wish to surrender the Lease on the next surrender date, namely 25th December 1999."

The notices referred to "Havant International Limited" ("HIL"), not HIHL. HIL is in fact the wholly owned subsidiary of HIHL and is the main operating company in the group of which HIHL is the ultimate holding company. Further, both notices were expressed to be signed by a director of HIL. The signatory was Mr. Piotr Nahajski, who was indeed a director of HIL, but was not a director of HIHL. The defendant claims that the notices were bad as not having been given by HIHL. HIHL's principal contention is that the notices can and should be construed as having been given by HIHL. Alternatively, HIHL contends that the notices were good as having been given by HIL as agents for HIHL. I propose to consider first the question of construction.

The correct approach to the construction of notices exercising break clauses in leases appears from the majority speeches in Mannai Ltd v Eagle Star Assurance Co. Ltd. [1997] AC 749. In that case a lessee's notice had been to determine a lease "on 12th January 1995." Both the Court of Appeal and the House of Lords held that, on the true construction of the break clause, the lease could only be determined by a notice given to determine it on 13th January 1995. The question which divided the House was whether the notice which had been given could be read as evincing an intention to determine the lease on 13th January 1995. The majority held that it could.

The passages which encapsulate the reasoning of the majority are to be found in the speech of Lord Steyn at page 768 f-g where he adopted the test applied in the Court of Appeal in Dedham Vale Properties Ltd v Mills [1990] 1 WLR 445, at 454 E-G, namely that notices under reserved contractual rights will be valid, even if they contain errors, if they are

"sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate"

and at the same time referred with approval to the test applied by Goulding J. in Carradine Properties Ltd. v Aslam [1976] 1 WLR 442 at 444 ("Is the notice quite clear to a reasonable tenant reading it? Is it plain that he cannot be misled by it?"). Lord Hoffmann, at page 780, adopted the formulation in Carradine as the decisive test. Lord Clyde, at page 782, deployed both formulations.

It has not been suggested before me in argument that there is any difference for present purposes between the Dedham Vale and the Carradine formulations. The debate has centred on two other aspects of the Mannai principle. The first is as to the extent to which evidence of background is admissible in determining whether or not the reasonable recipient could have been misled by it. The second is as to whether there is a category of mistake which is so gross as to be incapable of being overlooked (or interpreted away) by an application of the principle.

Before examining those questions it is necessary to set out certain findings of fact (none of which was as such controversial).

First, Lionsgate G regarded it as obvious from April 1998 onwards that HIHL was going to exercise its right to break the leases as at 31st December. This was conceded by one of the defendant's witnesses (Marcus Watson, an employee of Management), more readily than by the other (Paul Johnson, a partner in Robert Stephens & Co., which acted as managing agents on behalf of Management). I find it to have been the case.

Secondly, Lionsgate G had no reason (apart from any inference which might be drawn from the notices themselves) to suppose that HIHL was not at all material times the lessee of units 3 4 and 5. In particular it had no reason to suppose that HIHL had assigned its interest under either of the leases. An enquiry which HIHL had made of Lionsgate G's predecessor in title as to the possibility of HIHL effecting such an assignment had ceased to be a live issue by the time Lionsgate G acquired the reversion in 1998. I was asked on behalf of HIHL to make the further finding that Lionsgate G actually knew that the leases remained vested in HIHL at the date of the notices, on the basis that rent demands and other relevant notices were sent to HIHL both before and after the date of the notices. That evidence does not in my judgment amount to evidence that Lionsgate G did positively know that the leases remained vested in HIHL. It does, however, establish that this is what Lionsgate G thought (correctly as it happens) was the case.

Thirdly, it was established that Lionsgate G knew, not only the terms of the leases and the deed of variation, but also that HIHL had the benefit of the valuable IBM indemnity in respect of the onerous liabilities following termination under clause 7.

Fourthly, it was established that none of the relevant Lionsgate G personnel had ever heard of a company with the name of HIL or of Mr Nahajski.

Fifthly, it was established that none of the relevant Lionsgate G personnel in fact themselves spotted that the notices were not given by HIHL. They assumed that they had been but, as a matter of routine, passed the notices to Lionsgate G's solicitors to advise on validity. It was after this that the point was taken.

Mr Cherryman for HIHL relied on each of these facts (save the last) as admissible and determinative of the question of whether the notices would have left the reasonable recipient in any reasonable doubt as to who had given the notice; and he relied on the last as offering comfort for the conclusion that no reasonable recipient could or would in fact have been misled. Relying heavily on a passage in Lord Steyn's speech in Mannai page 768 a-b where he refers to the question as being "what reasonable persons, circumstanced as the parties were, would have had in mind" (my emphasis), he submitted that the relevant circumstances here included all that the parties knew, and excluded all that they did not know. They therefore included Lionsgate G's knowledge of all those facts (whether or not derivable from the leases and the deed of variation) which made it (to put it at its lowest) highly unlikely that the notices were intended to be anything other than notices from HIHL.

Mr Talbot, for the defendant, submitted that insofar as the evidence was relied on as indicating Lionsgate G's own corporate state of mind it was plainly inadmissible, and that the bulk of the evidence should therefore be treated as inadmissible. He did, however, himself rely in two respects on evidence of knowledge, actual or presumed, going beyond knowledge derived solely from the terms of the leases and the deed of variation. First, he relied on the fact that in September 1997 HIHL had, by a different firm of solicitors, served a valid break notice in respect of a similar lease of a different unit in the same estate. This, it was suggested, increased the degree of doubt which would have been felt by the reasonable recipient of the December 1998 notices. Secondly he submitted that the reasonable recipient of the notices could be expected to make enquiry as to whether there was in fact in existence a company called HIL with a director named Piotr Nahajski, and would then have learned that such a company, with such a director, did exist.

In my judgment it is quite clear that the Mannai test is an objective one. Lord Steyn was explicit on the point at [1997] AC 749, page 767g:

"the question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The question is how a reasonable recipient would have understood the notices."

He then proceeded, by way of analogy with the rules governing admissibility of evidence in the construction of commercial contracts, to consider what evidence of the contextual scene was admissible, and how much of that admissible evidence might ultimately be allowed to influence the question of interpretation. In Mannai itself the "objective contextual scene" which was allowed to play that role was limited to the terms of the leases. I am unable to read the words "circumstanced as the actual parties were" as admitting evidence the sole function of which is to demonstrate what the parties actually would have thought. This is to make a nonsense of the approach being described as objective, and would render invalid the analogy with the construction of commercial contracts.

I am reinforced in that conclusion by the passages in Lord Hoffmann's speech where he equates the test for admissibility with that which applies to commercial contracts: "Why should the rules for the construction of notices be different from those for the construction of contracts? There seems to me to be no answer to this question." (see page 779h). In the preceding passage he had drawn attention to the inadmissibility in that context of "special kinds of evidence, such as previous negotiations and express declarations of intent", and had also noted that "[i]n practice, the only relevant background will be...the term of the lease itself." Similarly Lord Clyde stressed (at p.782) that the test was objective and that in general "the actual understanding of the parties is beside the point."

I am unable to see what relevance any of the evidence relied on by Mr Cherryman can have to the question of construction unless it be relevant to the question of what Lionsgate G actually thought as a subjective matter when it received the notices. The same applies to Mr Talbot's invocation of the terms of the break notice served in respect of Unit 2 in September 1997. Apart from the presumed knowledge of the terms of the leases and of the deed of variation, none of this evidence should in my judgment be allowed to influence the question of construction.

That conclusion highlights the importance of deciding whether or not the actual existence of HIL as a separate entity, with a director called Mr Piotr Nahajski who was not a director of HIHL, should be admitted as part of the objective contextual background. Without that additional piece of the jigsaw, the reasonable recipient of a notice expressed to have been given by HIL, would not have been in a moment's doubt that he had received a notice from HIHL. The only reasonable explanations for the reference to HIL would have been either that HIHL had changed its corporate name, or that there had been a simple error in the description of HIHL. The idea that some completely different entity was purporting to exercise for its own benefit a contractual right which it did not and could not enjoy, would have been far-fetched.

Once, however, one has identified that HIL is a separate entity and that Mr Nahajski was a director of HIL but not of HIHL, the first of these explanations is displaced as a possible one by another, namely that the reference to HIL throughout the notices was deliberate. This does not remove all ambiguity from the notices since they continue to contain the reference to clause 7(1) of the leases (which can only be a reference to HIHL), but it raises the possibility that an unlawful assignment to HIL had taken place, and that HIL had mistakenly taken the view that the consequence of this was that it, HIL, now enjoyed the right to serve break notices.

I cannot see why one should exclude the evidence of HIL's separate identity in construing the notices or the fact that Mr Nahajski was a director of HIL and not HIHL. Such evidence does not suffer from the vice of being evidence of subjective intention. It is evidence which was (unlike evidence as to whether or not an unlawful assignment had in fact taken place) publicly available. The fact that the relevant Lionsgate G personnel did not know these facts seems to me irrelevant to an objective construction. The question therefore is whether (given this fact) the notices can and should be construed as notices from HIHL.

The Court of Appeal has recently had to consider a somewhat similar question to that which confronts me. In Lemmerbell Ltd v. Britannia LAS Direct Ltd [1998] 3 EGLR 67, there had been a lease between the claimant landlord and the defendant lessee ("Direct") which contained a provision entitling the lessee to break the lease. The lease was only assignable with the landlord's consent, and no consent had been given to any assignment. A break notice was served on the landlord by solicitors who described themselves as acting "on behalf of [Life], successors in title to [Direct]". In fact Direct was all along the lessee. The Court of Appeal refused to accept that the reasonable recipient would have understood that the statement that Life was the successor in title to Direct must have been a mistake, and that the notice should be interpreted as having been given on behalf of the lessee Direct. The case is, however, distinguishable from the present, since it is clear that Peter Gibson LJ (with whose judgment Hutchison and Butler-Sloss LJJ agreed) regarded it as critical that Life might have been the party entitled to serve the break notice. This is clear from the passage at p. 71 where he says:

"On the face of each notice, Life was said to be the tenant as successor in title to Direct, and that, if true, could only have come about as a result of an assignment without consent. But such an assignment would be effective to make the assignee the lessee for the purposes of [serving a break notice]. The reasonable recipient could not know, in the absence of proof of the assignment, whether Life was the lessee: it might have been. If Life was not in fact the lessee, but Direct was, the reasonable recipient could not know whether [the solicitors] were authorised by Direct to act for it and to serve the break notice, contrary to the express terms of the notice. To my mind, because it is not obvious from each notice that there was an error in the name of the lessee nor is it obvious who the actual current lessee was nor whether [the solicitors] were duly authorised by anyone other than Life, it is impossible as a matter of construction to cure what we now know to be the defect by substituting Direct for Life as the person on whose behalf [the solicitors] were giving each notice."

(emphasis added)

The distinguishing feature of the case lies in the words which I have italicised. Life, rather than Direct, might have been the lessee with the right to serve the break notice; and this was precisely what was asserted by the terms of the purported notice. The passage cited gives some grounds for supposing that, but for that fact, the Court of Appeal might have been disposed to accept the submission made on behalf of Direct that it was obvious that the solicitors were in error in stating that the notice was served on behalf of Life rather than Direct. In the present case, while HIL could conceivably have been the lessee, there were no conceivable legal circumstances in which it could have asserted a right to serve either of the break notices.

The question therefore resolves to this. Would the reasonable recipient assume that there had been a mistake in the description of the company giving the notice? Or would he entertain, as a matter giving rise at least to a reasonable doubt, the possibility that HIL had taken an unlawful assignment and had done so in the mistaken belief that it had thereby become entitled to the benefit of HIL's personal right? Without claiming to find the answer altogether easy, I have concluded that the latter construction of the notice is not one which would have been seriously entertained by a reasonable recipient. The reasonable recipient would, rather, conclude that a mistake had been made in not naming HIHL as the giver of the notice. The personal nature of HIHL's right (emphasised by the express declaration in the leases as to the avoiding effect of an assignment to any one other than IBM) makes that the only explanation of the notice which carries conviction. If that is correct, the reasonable recipient would also have concluded that the notices had been signed by Mr Nahajski, a director of HIL, because he had been authorised by HIHL to do so. Insofar as the recipient might have been in doubt as to Mr Nahajski's authority in this respect, it would have been entitled to seek proof of that authority from HIHL (which would have been forthcoming).

Mr Talbot's further submission was that the present case involves a category of mistake which was so gross as to be incapable of being overlooked (or interpreted away) by an application of the Mannai principle. I would not disagree with the proposition that there are cases where a notice may be so unambiguously wrong that, in Lord Clyde's words in Mannai at p. 781e, "the validity of the notice cannot be saved by any construction and will have to be regarded as bad". But I do not consider that the mere fact that the ambiguity in the notice goes to the question of who is purporting to give it puts it into some special category. The question in every case is whether, on a fair construction of the notice, it is quite plain that the reasonable recipient cannot be misled by it. For the reasons which I have given, I do not think that a reasonable recipient would have been misled in the present case into thinking that it was HIL rather than HIHL which was purporting to exercise the right.

That conclusion renders it strictly unnecessary for me to consider Mr Cherryman's alternative submission that, assuming the notices on their true construction to be notices by HIL, the landlord could safely act on the notices knowing that HIHL would be bound by the notices from HIL. A similar argument was run (successfully at first instance but unsuccessfully in the Court of Appeal, which had further evidence adduced before it on the question) in Lemmerbell. The evidence relevant to the issue in the present case (largely given by Mr Wilkie the chief executive of both HIHL and HIL) was to the effect that HIHL had taken a decision at its Board meeting on 20th January 1998 to break the Leases and had then instructed Mr Allington (an employee of HIL) to take the steps necessary to implement that decision. HIHL had no employees of its own (apart from two of its directors who were remunerated at the level of HIHL). Mr Allington (in common with other employees of HIL) was only dimly aware of the existence of a separate board of HIHL and had no idea that the leases were vested in HIHL as opposed to HIL. Mr Allington in due course handed the task of instructing solicitors to act in relation to the notices to Mr Atkinson, another HIL employee. Mr Atkinson was not conscious of there being any distinction between HIHL and HIL. So far as he was concerned he was an employee of Xyratex, which was the trading name of the group, but he had no idea of the group structure. He simply supplied the solicitors with a bundle of the relevant deeds, and (given his ignorance of the group structure) had no reason to suppose that the notice was not correctly drafted in the name of HIL. No one (from Mr Wilkie down) ever had an intention that HIL as such should act as HIHL's agent for the purpose of serving the notices. Nor was there any evidence in the dealings between HIHL and Lionsgate G from which it would have been possible for Lionsgate G safely to conclude that HIL had general authority to act for HIHL in relation to the leases. In fact it did not. The fact that Lionsgate G might have deduced, from its actual knowledge of HIHL's intentions, that HIHL would never in practice seek to disown the notices does not mean that it was legally safe to act on the assumption that it would not. Accordingly, had I found against HIHL on the construction issue, I would have been unable to uphold the validity of the notices on this alternative ground.