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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> TCG Pubs Ltd & Anor v The Art Or Mystery of the Girdlers of London [2017] EWHC 772 (Ch) (10 April 2017)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2017/772.html
Cite as: [2017] EWHC 772 (Ch)
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CHANCERY DIVISION
Rolls Building, 7 Rolls Buildings Fetter Lane, London EC4A 1NL |
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B e f o r e :
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| (1) TCG Pubs Limited (in administration) (2) David Christian Chubb and Michael John Andrew Jervis (as Joint Administrators of TCG Pubs Limited) |
Claimants |
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- and – |
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| The Master and Wardens or Governors of the Art or Mystery of the Girdlers of London |
Defendant |
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Mr Christopher Pymont QC and Mr Duncan McCombe (instructed by Hogan Lovells LLP) for the Defendant
Hearing date: 19th January 2017
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Crown Copyright ©
- This case involves a dispute between the claimant tenant (in administration) ("TCG") and the defendant landlord ("the Girdlers") in relation to the proposed assignment of a lease of pub premises known as the Hop Poles, 17/19 King St, London W6. An outline of the dispute, sufficient to understand the facts which are set out below, is as follows. The lease contains a provision prohibiting assignment without the consent of the landlord, such consent not to be unreasonably withheld, but prior to seeking consent the tenant is obliged to offer the lease to the landlord at its market price. In the present case the tenant claims to have made that offer and that the landlord has failed to take it up. The landlord disputes that an appropriate offer was made. Having made the offer, the tenant claims that it has also sought consent to assign. There is a dispute as to whether the tenant (as opposed to the assignee) has sought such consent. If there was an application for consent, there is then a dispute as to whether the landlord is unreasonably withholding it, because the landlord is insisting on a rent deposit or guarantee in respect of the incoming tenant's liabilities.
- Mr Julian Greenhill appeared for TCG and its administrators. Mr Christopher Pymont QC led for the Girdlers. Each of them conducted their respective cases with commendable economy and clarity.
- Relatively brief witness evidence was adduced by each party. They were all professional men. Their respective credibilities were not challenged and I find that they were all doing their honest best in giving their evidence. The witnesses were as follows:
- Mr David Chubb. Mr Chubb is one of the administrators of the tenant company and he gave limited evidence as to the transaction pursuant to which TCG has agreed to sell the lease. There was no real contention about his evidence.
- Mr Lee Medlock. Mr Medlock acts as solicitor to the intended purchaser of the lease, Stonegate Pub Company Ltd ("Stonegate") and gave evidence in a witness statement about some of those dealings. He was not cross-examined.
- Mr Christopher Berry. Mr Berry is a partner in Hogan Lovells International LLP, solicitors acting for the Girdlers both in the conveyancing and in this action. His evidence went to his dealing in relation to the conveyancing, including some of his dealing with his client. I thought he was strikingly straightforward in his evidence.
- Mr Robin Neill. Mr Neill is a member of the Court of Assistants of the Girdlers (essentially the main governing body) and of the property committee which handled the notices and applications by TCG when they were made. He is also a practising barrister, specialising in the construction field. He gave evidence of how the matter was handled within the Girdlers and of the state of knowledge of those directly representing the Girdlers. Again, he was very straightforward about it.
- In the course of considering some of the more refined points that arise in this case I shall have to set and consider some finer detail of the evidence, but the principal factual framework of this dispute is as follows. In what follows any recitation of fact should be taken as a finding by me unless the contrary appears.
- The lease in question is dated 22 June 1987 and was made between the Girdlers as landlord and Watney Combe Reid and Truman Ltd as tenant, for a term of 40 years from 24 June 1987. TCG took the lease by an assignment which was not before the court but as to which there is no dispute. Clause 3 of the lease contained the tenant's covenants. Many of them are what can be regarded as standard and some of them are particular to the use of the premises as a pub. Clause 3(12) contains a number of particular pub-related covenants mixed in with others. Clause 3(12)(I) contains the main clause which lies at the heart of these proceedings, and it is necessary to set out its entire terms:
- It is the words in the second proviso to sub-clause (I) ("PROVIDED NEVERTHELESS") that give rise to the principal issues in this case. I shall return to the wording below when I consider the principal points that arise. For the sake of brevity and clarity I shall refer to this proviso in the lease as "the option clause", without in any way pre-judging the issues that arise in this case.
- The proviso in sub-clause (iii), ostensibly entitling the landlord to require a surety (and which is relied on by the landlord in this case) applies to "such assignment or under-lease" and on one reading of the sub-clause it might be said that it applies only to the matters referred to in that particular sub-clause. However, both parties accepted that the assignment referred to was capable of catching an assignment of the term outside the Watney group and the proviso would thus be capable of applying to the assignment which TCG seeks to make in the present case. I therefore do not have to consider that point of construction.
- Sub-clause (I) does not itself contain the usual express prohibition on assignment without consent, but that comes later in Clause 3. Clause 3(16)(A) and (B) provides that the tenant will not do the following:
- There was a minor dispute between the parties as to whether or not the cross-reference to Clause 3(11) was a correct cross-reference or not. Mr Greenhill submitted it was not; he said it was an obvious mistaken cross-reference to Clause 3(12). He relied on that in support of a point that he made about the Lease, which is that the drafting was not particularly clear or conventional (a point relied on as part of the background to his arguments on construction). Mr Pymont submitted that the cross-reference was correct. Clause 3(11) (which I will not set out in full for reasons of economy) is a fairly standard clause allowing neighbours a licence to enter the demised premises to carry out works of repair, cleansing and the like to their own premises. On that construction the reserved permission in Sub-clause (16)(B) is a reference back merely to the word "licence".
- The argument on this point is not one which actually goes directly to anything in issue in the case, but it seems to me that Mr Greenhill is more likely to be correct about how the clause is intended to work than Mr Pymont. Unless one reads the reference to Clause 3(11) as a mistaken cross-reference to Clause 3(12) the relevant words read as an effective absolute bar on assignment. That plainly was not the intention of the parties. It is clearly intended to be a qualified covenant against assignment, and the qualifications are contained in Clause 3(12), or more precisely in part of it (much of clause 3(12) has nothing to do with assignment or subletting). But however the clause is to be read, it demonstrates unfortunate drafting. If Mr Pymont is right then the apparent absolute bar has to be read subject to an implicit qualification contained in the other provisions which are more directly germane to this dispute. That is not a likely intended drafting technique.
- Immediately before the events which give rise to this action (on 29th September 2015) TCG went into administration. It was a pre-pack administration, under which the administrators entered into a sale based on previous dealings that the directors had had with Stonegate. Stonegate had made an offer for the TCG group in a sum which was considered to be considerably above what a valuation agent had suggested was the open market value (£65,000,000). The total Stonegate offer was, in round terms, almost £104,000,000. The administrators accepted and implemented that offer, receiving a total of £103,340,000, apportioned across 63 properties (freehold and leasehold). The agreement under which some of the assets were sold is called a Business Purchase Agreement and is dated 29th September 2015 ("the BPA"). A number of separate properties and businesses were brought into the overall deal – freehold and leasehold. It will be convenient to defer setting out a number of provisions of the BPA until I consider the points to which they go in this case. For the moment it is sufficient to observe that the BPA, which dealt with the sale of a number of properties, attributed apportioned consideration of £1,700,000 to the Hop Poles and a further £415,084 in relation to chattels and other assets attributable to that pub. For the purposes of this action it is important to note that the consideration apportioned to the Hop Poles was just that – it was an apportionment of the overall consideration determined by the purchaser for the purchaser's own purposes. It does not represent a market sum specifically negotiated in respect of that pub. Mr Chubb explained that he was not concerned with any of the apportionments – it was the overall figure that he was concerned with, and apportionments were a matter for the purchaser. In fact he considered that the purchaser was overall paying a lot more than market value. There had been a previous valuation from Christies which gave an overall sum of £600,000 for the Hop Poles. The £415,000 sum was an apportioned part of the overall value of the businesses, apportioned to the Hop Poles in the same proportions as £1.7m bore to the total apportionment attributable to all the leasehold properties.
- After the BPA was entered into TCG and Stonegate set about procuring an assignment of the various leases, including the Hop Poles lease. On 7th October 2015 Berwin Leighton Paisner ("BLP"), on behalf of the administrators of TCG, wrote concerning the Hop Poles:
- This is the letter relied on by the administrators as being the triggering of the landlord's buyback right under the option clause. They submit that that is all that is required, and, since it was not taken up within 60 days of the next letter, the defendant no longer has an opportunity to buy the Lease back. The defendant says that this letter is not sufficient and that more is required, and in particular a proper formal option document. For ease of reference I shall call this letter "the option letter", again without prejudging its actual effect.
- This letter was followed the next day (8th October 2015) by a letter from Charles Russell Speechlys ("CRS"), acting on behalf of Stonegate, which is said to be a formal application for permission to assign. I shall call this letter "the application letter", once again without prejudging its effect. The letter is headed "In the matter of the Hop Poles, the Lease, and the appointment of administrators" and goes on to say:
- Since this letter was a letter not from the tenant but from the proposed assignee, a question arises in this litigation as to whether it was in fact a proper application for permission to assign made on behalf of the tenant. That involves construing the letter and considering questions of authority flowing from the BPA.
- Both letters were duly received by the Girdlers and Mr Neill gave evidence as to what happened to them. Both were put before a meeting of the Girdlers' Property Committee on 28th October, having been brought to the committee's attention by Mr Harding, the Girdlers' surveyor. The minutes of the committee in relation to that matter read:
- Meanwhile, nothing apparently having been heard from the Girdlers, on 27th October (prior to the meeting on the 28th) Mr Park of CRS emailed Mr Berry (Mr Harding must have identified Mr Berry as the likely responder to the matter). The email was headed "Hop Poles public house - request for consent to assign lease", and said:
- On 13th November 2015 the Girdlers, via their solicitors Hogan Lovells (Mr Berry) finally responded to the application letter. His letter of that date refers to his being instructed in the matter on behalf of the Girdlers and goes on:
- After some debate it has now become apparent that, so far as the letter is to be taken as being the landlord's response to a valid application for permission to assign, all the conditions are accepted as being reasonable except that relating to the rent deposit. On that point it is said that the landlord is being unreasonable and unreasonably withholding its consent. As will appear, this point is tied up with whether or not the landlord is entitled to insist on a surety under the Lease.
- A question of waiver or election also arises in relation to this letter. The administrators submit that if, contrary to their case, the trigger letter is not sufficient to comply with the obligation to give an option to the landlord to buy the lease, then this letter waives any defect and elects not to buy back the lease.
- On 17th November CRS confirmed in an email to Mr Berry that:
- An undertaking to pay fees was proffered and the right to have a rent deposit challenged.
- Mr Berry asked for a copy of the letter of authorisation, and on 18th November Mr Clarke of BLP confirmed, on behalf of the administrators, that CRS (on behalf of Stonegate) were authorised to make the application to the landlord directly for consent to assign.
- By an email of 27th November Hogan Lovells raised the question of the option. It recited that their client had passed to them the option letter of 7th October and took the point that £1.7m could not possibly be the market value of the demised premises and that their clients had not been offered the ability to buy in the lease at the current open market rental value, and "as such, the offer is non-compliant with the requirements of the lease".
- Thus was battle joined on the effect of the option clause and letter, and out of those facts the principal issues arise.
- The issues which arise out of that background are as follows:
- TCG's case is that the requirement of the grant of an option can be fulfilled by a letter making an appropriate offer. No other degree of formality is required. The Girdlers' case is that that degree of formality is not sufficient. What is required is the actual grant of an option - a separate document, containing an option which the Girdlers can then exercise.
- This is a question of construction. It has to be determined against the legislative background at the time of the lease, which included section 40 of the Law of Property Act 1925, not section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, which was not even on the horizon at the time. As will appear, that latter provision creates mechanical difficulties for the Girdlers' construction, but that is not relevant to the initial construction process.
- The Girdlers' case is that the words in the clause mean what they say. They are carefully chosen and are the words requiring a formal "grant" of something which is appropriately described as the subject of a grant - "grant an option". "Grant" has an accepted and formal meaning, and it means a discrete and formal act by which the property right is conferred. A letter of the nature of that sent in the present case (assuming for these purposes that it would otherwise be sufficient, in its terms, to be effective) does not amount to a grant. It does not grant anything. If the parties had intended this degree of informality they would not have worded the clause as they did. What the parties intended was the grant of a formal option, which had the benefit of irrevocability and assignability. This could have been done at the time as a unilateral act because the tenant could grant an option with just its signature which would be sufficient under section 40.
- TCG's case is that the words are capable of meaning that what is required is a unilateral notice in accordance with the clause (short of a formal option document), and the words do not necessarily bear the narrow meaning attributed to them by the Girdlers. That being the case, their meaning should be preferred because it is commercially more sensible. The grant of a formal option makes no commercial sense. In support of this analysis TCG relies on the fact that the Lease is not in all respects well drafted, which is said to lend support to the proposition that the stricter meaning of the relevant words should not be taken to be the only and proper meaning. A formal separate document is unnecessary and should not be taken to be intended. No draft of any such option was annexed to the lease. The benefits of irrevocability and assignability were conferred by TCG's mechanism - a non-revocation term should be implied into the clause (and, I suppose, the option letter), and the benefit of the fruits of a unilateral notice would be assignable once the offer was accepted. An offer which cannot be withdrawn is properly described as an option - see Bircham & Co Nominees (2) Ltd v Worrell Holdings Ltd (2001) 82 P & CR 427 at para 35. Furthermore, since under section 2 of the 1989 Act the landlord would have to sign the option envisaged by the Girdlers, the operation could now not be done without the consent of the landlord. Had the parties been asked about that possibility at the inception of the lease they would have agreed that an informal notice was all that was required. In all those circumstances, a straightforward notice, not a formal option document, is what the lease requires.
- I have come to the conclusion that the Girdlers are right on this point. The wording used is far more consistent with the grant of an option than with the process of giving notice. The very words "grant an option" have a more obvious reference to a formal transaction. They have an obvious primary meaning. The wording of the clause follows through on that - "such option to be exercised" is again the wording of options. See also "… within two months of the Girdlers Company exercising such option". In the right context they might mean "shall give the landlord the opportunity of purchasing" (which is the effect of what TCG contends) but the far more obvious meaning is that contended for by the Girdlers. Mr Greenhill contended that the same effect could be achieved by serving a notice, but it is clear from the same clause that when the parties intended a notice they used the word "notice" - "within sixty days of the date of receipt of notice by the Girdlers Company of application [etc]." Thus an application to assign has to be done by notice; the prior offer of the premises has to be done by the grant of an option. (There is also a reference to a notice in clause 16, which is a break clause, but that reference is of rather less significance.)
- Mr Greenhill's interpretation is a rather more strained one in the circumstances, but it is, I suppose, arguable. He uses it to get into an inquiry as to which is the more likely interpretation when one considers the commerciality of the two rival contentions, and submits that the more informal interpretation (his) is more likely to satisfy that requirement. The landlord's analysis is said to produce an unnecessarily cumbersome mechanism, and it is more likely that the parties intended the easier route which is produced by his construction. He supports this with his submission that the lease is poorly drafted in some respects, so one cannot necessarily treat the parties as meaning exactly what they say.
- I agree that the lease is oddly, if not poorly, drafted in a few respects. The very positioning of the option provision demonstrates that - it is one of two provisos to a covenant about the occupation of living accommodation, and ends up with a fairly traditionally drafted sentence about assignment. The assignment provisions are then taken up again in clause 3(16), which is a little way away from the option provisions, and it contains the misplaced cross-reference identified above. However, those observations go to structural matters, not to matters going to the meaning of words. There is no other indication in the lease that the parties might not mean what at first sight they seem to say. I do not think that this point lends any real weight to Mr Greenhill's argument.
- The commerciality point merits more consideration. It is a legitimate question to ask why the parties would have intended the more elaborate mechanism. As indicated above, Mr Pymont's answer is that a formal option gives irrevocability and assignability, and he says that may well be what the parties had in mind. I accept that. Mr Greenhill sought to say that both those objectives are or can be achieved under a notice regime where what has to happen is that a notice is to be served giving notice which gives the opportunity to purchase. He said irrevocability would be achieved by an implied term that the offer could not be revoked, and that assignability would exist anyway. I agree with the latter point - if his regime operated, it would probably give the landlord something that he could assign, though arguably it would be assigning part of the benefit of a contract rather than a whole contract (which would be the case with a discrete option). However, the implied term is not so easy. One of the reasons for saying that one should imply a term is to make the position the same as would exist under a real option, but the argument then becomes unsatisfactory. It amounts to saying that the parties intended something like an option, so one must make the transaction look like an option without actually creating one. In my view if the parties intended something like an option, they probably intended an option. That would be a reason for requiring a formal option agreement, not for requiring a term which made a non-option look like an option.
- However, there still remains the point that the landlord's construction requires something which is unnecessarily elaborate. That point is correct so far as it goes, but it is not a real answer to the landlord's case. If it be thought by some that the grant of a formal option is over-elaborate, then that is a sustainable view, but the fact is that that is what the parties seem to have chosen by their choice of words. They should not be taken to have intended a simpler mechanism just because there is a simpler mechanism. In fact the argument goes the other way - if they had intended a simpler mechanism it would not have been difficult to provide that, and the fact that they did not do so provides a pointer towards the option mechanism.
- Accordingly the clause, at the time it was drafted, required the grant of a formal option. Its terms would be straightforward - they would mirror the terms of the clause. It would probably have to be by deed, but that is not an obstacle. Execution by the landlord was not required.
- There remains however the problem as to how the change of legislation in 1989 affects the operation of the clause. That is more appropriately dealt with in a separate section of this judgment.
- At the date of execution of the lease the tenant could fulfil the prerequisites for offering an assignment by the unilateral act of presenting the landlord with an executed option document. Because the terms of section 2 of the 1989 Act require both parties to sign a contract for the disposition of an interest in land (including an option), the grant of an option under the option clause can no longer be achieved by the unilateral act that the original drafting requires or assumes.
- It is common ground in this case that that would apply to any option document within the scope of the option clause (assuming a strict grant is required, which I have found to be the case). It is therefore necessary to consider how the option clause should operate in those circumstances.
- It is impossible to approach this on the footing that the parties could, in fact, have contemplated the change in the law, because there was nothing pointing that way as at the date of the lease. However, that does not mean that the clause can now have no operation, and neither party contended that that was the case. The court now has to embark on the exercise of determining what the parties would have intended had the current state of affairs been known to them even though that cannot have been the case - an artificial exercise, but one which the courts have acknowledged should take place. In Shebelle Enterprises Ltd v Hampstead Garden Suburb Trust Ltd [2014] 2 P & CR 114 the Court of Appeal had to consider the effect of a number of post-agreement factors, including subsequent legislation in the form of the Leasehold Reform Act 1967, on a prior covenant for quiet enjoyment. At paragraph 36 of his judgment Kitchin LJ said:
- Based on that, Mr Greenhill submits that since the parties had agreed a unilateral act (on this footing a deed poll granting a formal option) they would surely have said that when that became impossible a unilateral notice would now suffice. He said there was no need for the formality of a separate option document in the first place and the parties would not, or would no longer, consider a formal grant was necessary in the changed circumstances where it could not be done without the landlord's co-operation.
- Mr Pymont accepted that this gave rise to a problem, but said that the answer to it lay in the implication of a term that the landlord would co-operate in the grant of an option. He said that where a contractual act required the participation of both parties such a term was an appropriate, and well-known, implication.
- I do not consider that either set of submissions is the correct way of approaching this matter. I do not think that the 1989 Act suddenly exonerates the tenant from having to proffer a formal option; nor do I think that the landlord comes under some sort of duty to co-operate. Applying Shebelle, the answer seems to me to be that the tenant proffers the same option as before, with an invitation to the landlord to execute it. If the landlord does so, the option has been granted, and its mechanism is worked through. That gives the landlord the benefit of the option that the clause anticipates. If the landlord declines to execute it then the tenant has done all it can and that, for these purposes, would be taken to have fulfilled its obligations under the clause. The tenant can then move on to seek permission to assign and the landlord could not resist that on the ground that an option has not been granted. This does not impose an obligation on the landlord as Mr Pymont's analysis would require. Such a step is unnecessary. The landlord has a choice - it can take the benefit of the option if it wishes to have it, or reject it by not executing. If it rejects it the option has not been strictly "granted", but the landlord has had its opportunity to have one, which would be enough. This is in my view likely to be the mechanism that the parties would have chosen had the unforeseen change in the law been put to them at the date of the grant of the lease. In some ways that would have the same effect as the notice that Mr Greenhill says would be the appropriate substituted performance, but that does not make a simple notice the appropriate solution in all circumstances. It would not be an appropriate solution where the landlord wishes to have the benefit of an option and is prepared to execute it. In those circumstances it gets the additional benefits of an option identified above.
- This question is easy to answer in the light of my previous determinations about the effect of the option clause. This letter does not proffer a formal option, so it cannot comply with the pre-requisites to the tenant's applying for licence to assign. However, in case I am wrong in those conclusions, and on the assumption that the option clause allows a notice to be given rather than requiring an option to be tendered, I shall express my brief conclusions on the point and on that assumption.
- On this hypothesis what the tenant has to do is to give the landlord written notice of its willingness to sell the residue of the term at the then current market value, to be agreed within 2 months or determined by the independent valuer. The problem with the option letter is that it does not in terms offer to sell at the market price; it introduces references to £1.7m which cloud the matter because it might be taken to be an offer to sell at £1.7m, not market price. Mr Pymont submitted that when it was properly viewed the letter was a "take it or leave it" offer to sell at £1.7m. The letter was silent as to what the position of the tenant would be if the sale were to be at current market value. Any response which invoked the valuation mechanism would be viewed as a counter-offer. Mr Greenhill's counter to that is that the letter has to be seen in the context of the lease itself, to which it expressly refers (and indeed purports to enclose). The reasonable reader would have the option clause in mind when he or she read the letter, and would take it to be an invocation of the mechanism in the clause with £1.7m being the market price proposed by the tenant.
- The manner in which this notice should be construed is set out in Mannai v Eagle Star Ltd [1997] AC 749. That case involved a break clause, but the principles of construction expounded in that case are of wider relevance. Lord Steyn said (at page 768):
- Applying those principles, I consider that, were it relevant, this notice would be treated by a reasonable landlord recipient as a notice under the option clause notwithstanding the references to the £1.7m price and value. The third paragraph refers to the relevant provision in the lease (albeit describing the paragraph numbering wrongly - that error would have been obvious). That is important context for the rest of the notice. The opening words of the next paragraph are important - "In accordance with this clause …". It is obvious from those words that the tenant is seeking to invoke that clause. The same point emerges from the penultimate paragraph (the cross-reference to the 60 days provision). There is also the reference to the "open market value" of the lease, which has no relevance outside the context and purpose of a notice under the clause.
- All those are pointers to the invocation of the clause. What makes it more questionable is the reference to the price. However, that is tempered by the use of the word "proposed". In the context of the rest of the letter, with its reference to the clause, that makes it clear that that is what the tenant is proposing as the price for the purposes of the clause, and it is inviting the landlord to agree that. The second reference to the figure is a justification of the tenant's view of the proper price.
- I therefore do not consider that a reasonable landlord recipient would take this letter as a take it or leave it offer to buy at £1.7m, as Mr Pymont submitted it was. It might be taken as a bullish proposal of a price, but the whole context is the clause to which reference is made. The landlord would know that if it did not like the price it could invoke the valuation mechanism. It is not fatal that the letter does not itself submit, in terms, to a market valuation. My conclusion remains – if a mere notice were sufficient, this letter would be a valid notice.
- This point turns on whether the application letter falls to be treated as an application by the tenant as opposed to the proposed assignee. If it was not an application by the tenant, then there is a question as to whether or not it was confirmed and became, in effect, the tenant's application by virtue of subsequent events.
- If my conclusion as to what the lease requires by way of an option is correct then this issue probably does not arise. However, in case it becomes relevant, I will express my views on the point shortly.
- The principal significance of the question is that it affects when the clock started running for the landlord's response to any request for permission to assign for the purposes of the "reasonable time" allowed to a landlord to respond under section 1(3) of the Landlord and Tenant Act 1988. It is conceivable that different answers to this question might arise if it were being asked for different purposes, but I shall confine my consideration to that point.
- In my view the letter on its face does not purport to be anything other than a letter written on behalf of the proposed assignee. It is written by solicitors, who express their client as being "Stonegate Pub Company Limited (the "Buyer")". The third paragraph emphasises who the client is ("our client, the Buyer"). The first paragraph refers to the Tenant as a separate entity which has gone into administration. The letter twice uses the first person plural ("We") in a way which clearly refers to the solicitors. When it moves on to say "Accordingly please take this letter as our formal application for landlord's consent", that is referring to the same people as it has been referring to before - the Buyer and its solicitors. That is clear on the wording of the letter.
- Mr Greenhill sought to say that the letter should be read as one written on behalf of the tenant. As will appear, the Buyer had the tenant's authority so to apply. He says a common sense reading of the letter would lead the recipient to conclude that the Buyer was applying to save costs, and the use of the word "Accordingly" in the extract set out in the previous paragraph linked the request back to the reference to clause 12 in such a way as to make it apparent that it must be the tenant who was in effect applying. I do not accept that argument. A recipient would wonder whether the letter was written for the tenant, but the letter does not make it clear, and as the subsequent correspondence demonstrates the receiving solicitors wanted the point cleared up. If it is relevant, it was not within Mr Berry's experience that a purchaser from a company in administration would normally or often apply.
- Accordingly as and when received that letter did not amount to a letter which purported to be written on behalf of the tenant, or written with the tenant's authority. In this respect the relevant effect is the effect on the reasonable landlord recipient, and it would not be apparent to such a landlord that it fell to be treated as an application by the tenant.
- However, as it happened the Buyer did have authority to make an application for consent to assign. The Business Purchase Agreement ("BPA") under which the business of the TCG group passed to Stonegate contained detailed provisions relating to leases. Schedule 5 Part 2 paragraph 7.2.3 provided:
- Although that provision does not in terms express that the application is with and on the authority of the tenant, that is clearly implicit. Accordingly, Stonegate would have been entitled to say that it was applying on behalf of the tenant.
- Mr Pymont drew attention to an apparently conflicting provision in the agreement. In paragraph 7.2.1 of the same Part of the same Schedule there is an amendment to the standard commercial property conditions which were made to apply to the BPA. Condition 10.3.2(a) was expressed to be deleted and replaced with words so that it reads:
- Mr Pymont also submitted that unless there was an application for consent by the tenant, there is no way that the landlord could know that the 60 days had started running.
- I accept that there is an apparent conflict between the two paragraphs of the contractual documentation relied on by Mr Pymont but I do not think that that deprives Stonegate of authority to apply for consent. I do not need to work out what the true and full resolution of that conflict would involve, but I consider that the BPA is sufficient to allow Stonegate to make an application if it wished to do so, and if it did so then it would be with the tenant's authority.
- That makes no difference so far as the service of a valid notice is concerned as between Stonegate and the Girdlers because the letter did not purport to be written with the tenant's authority. There is no reason why the landlord should be obliged to treat the notice as valid if it is not informed of the authority and nothing on the face of the letter suggests it. I find that when served, the application notice was not a valid request, served on behalf of the tenant, as far as the landlord was concerned.
- What then happened, on the facts of the present case, is that the landlord sought confirmation that the application for consent was made on behalf of the tenant (see the letter of 13th November) and that was confirmed by Stonegate in their solicitors' email of 17th November and the administrators' solicitors' email of 18th November. That means that thereafter the application should have been treated as having been made on behalf of the tenant. Mr Pymont submitted that if those emails had any effect they had no retrospective effect, at least so far as the running of time is concerned. I consider that it did translate the application, so far as the landlord is concerned, into one which was made on behalf of the tenant, but I agree with Mr Pymont that it had no retrospective effect. Mr Greenhill sought to invoke the rules relating to undisclosed principals, but I do not think they assist him. They do not provide an answer as to whether the application letter should be treated, ab initio, as being an application for consent by the tenant so as to start the clock running from a historical time. They might assist in other situations, but not that one.
- I therefore find that, so far as relevant, the application for consent to assign should be treated as having been made by the tenant from 18th November.
- This developed from what Mr Greenhill called a short point in his opening skeleton argument to a point that assumed major proportions in the case and attracted a 17 page written final submission from Mr Greenhill to make his position clear. That then attracted an application by Mr Pymont to amend his Defence to raise specifically complaints about the accuracy of statements made in the option letter. The matter thus developed very significantly during the hearing.
- Mr Greenhill submitted that the letter of 13th November, by which Hogan Lovells signified a qualified consent to the assignment, amounted to two things -
- The battle-lines in this area of the dispute ranged widely around most of the requirements of waiver, and especially knowledge (so far as that is a requirement).
- The existence of those two types of waiver is made clear in Flacker Shipping Ltd v Glencore Grain Ltd (The Happy Day) [2003] 1 CLC 537:
- As I have indicated above, Mr Greenhill sought to divide the waiver point into two elements – first, waiver of the right to have a separate option deed, or to challenge the option notice as defective, and second, waiver of the right to have the lease under the clause. He then identifies the kinds of waiver applicable to each of those elements (see above) and distinguishes them on the basis that one of them (unilateral waiver) does not require knowledge of the rights being waived.
- I do not think that it is necessary to consider whether this distinction exists between the two kinds of waiver, because I do not think that the point really arises in this case. One has to bear in mind the nature of the waiver relied on. Mr Greenhill's case is, in substance, that the Girdlers waived the right to acquire the lease which the clause gave them. If his case is right the Girdlers decided that they simply did not wish to have the lease. In those circumstances the triggering mechanism is an irrelevance. No separate consideration was given to that mechanism. They jumped straight to the second phase - the exercise of an option - and indicated (if Mr Greenhill is correct) that they did not want to do it. It seems to me to be unduly artificial to break out the mechanism and consider Mr Greenhill's two elements separately, and solemnly come to the conclusion that the Girdlers waived compliance with the mechanism when they were not interested in the option at all. It therefore seems to me to be unnecessary to consider the mechanism point (Mr Greenhill's unilateral waiver) separately. It would be somewhat absurd to find that they had waived their rights under the option but not their right to have a formal option conferred on them. If they have done the former they must, by necessity, have done the latter. I shall therefore consider the former point only (whether they have waived their right to exercise an option and to have an assignment) and not encumber this judgment with an elaborate consideration (debated by counsel) of whether and to what extent a unilateral waiver requires knowledge of what is being waived (and indeed whether it applies at all to the triggering mechanism under this lease).
- There was no dispute between the parties as to what was required of a waiver by election. In summary what is required is:
- All these points are apparent from the speech of Lord Goff in The Kanchenjunga [1990] 1 Lloyds Rep 391. In addition, it appears from Peyman v Lanjani [1985] 1 Ch 457 that the waiving party has to have knowledge that he actually has the right itself. Mr Greenhill accepted that that determination in that case was binding on me. The effect of the case in this respect is summarised in the judgment of Slade LJ at p500G:
- Mr Greenhill submitted that the assessment of knowledge had to be conducted on what he called an objective basis. It was not wholly clear what the effect of that submission really was, but I think it was intended to convey that one could only look at extrinsic evidence and not at subjective evidence that a relevant individual might give as to his or her actual state of mind. If that was the submission then I reject it. Knowledge for these purposes means actual knowledge. It is not the same as contractual intention, which generally has to be assessed by extrinsic objective evidence. Mr Greenhill's version of knowledge would convert it almost to constructive knowledge rather than actual knowledge. In Peyman v Lanjani the court apparently would have allowed an inquiry as to knowledge covering the whole range of available evidence, including evidence from the alleged knowledge possessor himself. Thus Slade LJ said (at p500H-501B):
- Mr Greenhill sought to rely on remarks of Stephenson LJ at p487D-H. In my view those remarks are not setting out the totality of the knowledge analysis. They deal with some ways of proving knowledge, not the scope of the inquiry.
- Accordingly if the claimants are to establish waiver they must establish knowledge on all the evidence, and statements by the relevant witnesses as to what they did and did not know are admissible, along with other relevant evidence. In the end the inquiry is as to what they actually knew, not constrained by some requirement of objectivity.
- I now turn to the application of those principles to the facts of the waiver point in this case. Mr Greenhill's case is in substance that there was a waiver by election arising out of the 13th November letter. The first question is whether it is an unequivocal indication by the Girdlers that they were abandoning a course open to them, namely pursuit of the option in the lease.
- Mr Pymont submitted that the letter was not unequivocal. It made no reference to the option, and dealt with something that might be dealt with in parallel with the option - the landlord might wish to progress the application for a licence to assign whilst considering the option, because it might wish to know who the proposed tenant was before deciding whether to exercise the option. It might also wish to avoid allegations of unreasonable delay in dealing with the application for consent. Furthermore, the tenant might wish to pursue the consent in case the landlord decided not to exercise the option. In addition, the letter was itself not a consent to assignment. It left matters outstanding and was "in principle" only. And the landlord insisted on being approached by the administrators before progressing the matter further.
- Mr Greenhill drew attention to what he said was the real effect of the fifth paragraph of that letter ("Strictly …"). The thrust of it was to say that subject to confirmation that the tenant was applying, the landlord had no objection to the assignment. The application by the tenant was just a "formality". That was fundamentally inconsistent with the Girdlers saying they wanted to prevent an assignment by buying back the lease for themselves. The letter conveyed there were no other matters standing in way of giving consent other than the limited matters referred to, and there was no reservation of the position. There had been no response for over a month to the option letter. This letter would be taken to be the single formal response that is allowed to the landlord faced with an application for consent to an assignment - see Go West Ltd v Spiragolo [2003] QB 1140 - and as such was inconsistent with an intention to exercise the option. The words "in principle" did not detract from the finality of the letter because they meant no more than "subject to formal licence".
- I consider that the letter does not amount to a sufficiently unequivocal statement so as to amount to a waiver of the rights under the option clause. One needs to trace the apparent events through from the sending of the option letter and the application letter to the 13th November letter. I say "apparent" events because what was going on behind the scenes at the Girdlers, unknown to TCG (and Stonegate) is not capable of going to the nature and quality of the overt act of sending the letter. The sequence starts with the option letter, sent by the administrators. Then Stonegate (not TCG) send a separate letter seeking consent to the assignment. The next significant event is one which was not relied on by either party in argument before me, but it seems to me to have importance. It is the email from Mr Park (on behalf of Stonegate) dated 27th October chasing the assignment point. He does not chase the option point; neither does TCG. When Mr Berry then responds to Mr Medlock at CRS the more natural view is that he is responding to the chaser from that firm, which was all about the assignment. The option point is still open and not dealt with, and in its context Mr Berry's letter should be taken as dealing with the point to which he responds – the licence to assign point. The letter in its context is consistent with the option not being pursued, but it does not unequivocally demonstrate that it was not. It is true that it did not reserve the position over the option, but it did not have to, and bearing in mind this letter was written to the Buyer, and not the tenant (who had sought to trigger the mechanism) that makes it slightly more natural that it should not contain such a reservation.
- The next requirement would be that the communication is addressed to the person to be affected by the waiver. This letter was not addressed to the tenant, but it was plainly intended to come to the tenant's attention (as it apparently duly did). To that extent this requirement would have been fulfilled had the letter otherwise passed the equivocation test. In any event, that particular hole would have been filled when the tenant confirmed that the request was made with its authority.
- I do not give a lot of weight to the "in principle" point. That was intended to reserve the position on the assignment pending confirmation from the tenant that the tenant itself was applying and pending the grant of a formal licence. It was not intended to introduce significant qualifications in relation to the serious thrust of what was being said in substance.
- Thus the letter on its face did not fulfil all the requirements for an act of waiver. That conclusion means that it is strictly unnecessary for me to reach any conclusions about knowledge, but it featured heavily in the debate and in case the matter goes further I will make some brief findings about it.
- Mr Greenhill's case on knowledge is that the Girdlers knew the contents of the lease as a matter of fact; they knew the contents of the option letter; they knew of the tenant's desire to assign to Stonegate; they had knowledge of the right to buy back the lease; they knew that the wish of the tenant to assign gave rise to a right under the lease to buy back the lease from the tenant; and they knew that the right to buy back was at the then current open market rental value. That is enough for them to have knowledge of their right to elect to have or not to have the lease and to give rise to waiver by election (if all the other conditions were fulfilled).
- Mr Pymont's case was that the Girdlers did not know of their right to elect, or that Hogan Lovells would be electing when they wrote their letter. At the time the letter was written Hogan Lovells had not seen the option letter (on the evidence) and so could not have given any advice on it. While Mr Harding (the surveyor) had seen the letter there was no indication he had given any advice on it. So they had no advice on any purported compliance with the terms of the lease.
- The key person on the Girdler's side was Mr Neill. He was a member of the property committee, and although that body did not have automatic delegated authority from the principal governing body (the Court) it would be given authority if the Court resolved to take a step. I shall assume, without finding it, that the property committee had authority sufficient to allow it to waive when it instructed Hogan Lovells. Mr Neill was the crucial person involved. The evidence did not portray the serious participation of any other individual (apart from Mr Harding). In the circumstances it is Mr Neill's knowledge that is the most relevant for present purposes. He was cross-examined closely on his understanding of the position at the time.
- He first saw the option letter when it was handed to him on 27th October, shortly before the property committee meeting the next day. Mr Harding had had it before then. Having read it, Mr Neill's principal focus was on the proposed price of £1.7m. Because of other property spending commitments that the Girdlers had they would not have been able to match that figure. At the time of the meeting on 28th October, which led to Hogan Lovells being instructed, Mr Neill (and probably the other members of the committee) had not read the lease, but Mr Neill assumed (probably correctly) that Mr Harding had. They had advice from Mr Harding. Mr Neill's main perception was that unless the Girdlers could match the £1.7m then they were not entitled to the lease. The real question here is whether he thought that because he thought that they had to match any offer that the tenant had had, or whether he thought they had to match it because it was the true market value. If it was the former then he, and the Girdlers, did not (at least at that time) have sufficient knowledge to waive the benefit of the option because they did not know what their rights were. The right to match an already proffered price is one thing; the right to have a property at market value (irrespective of an already proffered price) is another. If Mr Neill (who is the important person for these purposes) did not know the latter then he did not have sufficient knowledge to waive the benefit of the option which was, of course, an option to purchase at the market price.
- This point is not dealt with in his witness statement (perhaps not surprisingly, because at that point some of the more refined aspects of the waiver point had not become apparent) but it was investigated in cross-examination. His evidence was that he did not understand from the option letter that they had a right to buy at market value, but he understood that when he was told by Mr Harding. Although he did not say precisely when that was, I consider that it was likely that he (and probably the other members of the committee) were told that at the meeting. There was a degree of equivocation as to whether it was then or afterwards that he had that understanding, but viewing his evidence in the round I think it likely that it was at the meeting, or if not then then by the time that Hogan Lovells were instructed to write their letter. I think it very likely that Mr Harding understood the position and that it would have been before or at the meeting on 28th October that he indicated what it was. I therefore find that Mr Neill, and the Property committee, understood the nature of the Girdlers' rights and that they would have an opportunity to insist on buying at market value if they wished to have it. They did not have an understanding of the formalities involved, and in particular whether or not they were entitled to the grant of a formal option, but that did not matter to them in their then state of mind which was that they could not afford it.
- Subject to considering one additional point, that would be sufficient knowledge for the purposes of waiver if (contrary to my findings) there were subsequent overt acts of waiver. That additional point arises out of what the option letter said about market value and what Mr Neill believed about it. While Mr Neill, on my findings, knew that the Girdlers were entitled to buy the lease back at market value, he also believed that that value was likely to be £1.7m because he understood, or believed, that the price referred to in the letter was a market value price. He assumed that there had been some sort of market exercise because of the terms of the letter, and that the figure of £1.7m was therefore a market-derived price. He and the committee accepted Mr Harding's advice that at that price it was not worth buying the lease in (in addition to the factor relating to over-stretching to which I have already referred). He said in cross-examination that if the option letter had not referred to a purchaser at the price stated he would consider they would be in a "smoke-filled room", by which I take him to mean that they would have given consideration to what the market value really was and debated it with the tenant. As it was, the Girdlers were told about an offer and PricewaterhouseCoopers (the administrators' firm) were saying they believed the price to be market value, so they were being told that that is what the market was paying. I accept his evidence and find all those facts to be true.
- Mr Pymont said that the Girdlers' belief was a materially erroneous belief, because the terms of the BPA demonstrated that the £1.7m referred to was not a price arising out of a market transaction. It was, on the evidence, an apportioned part of a global consideration to be paid for a large number of properties, that apportionment having been carried out by Stonegate as purchaser for its own purposes and being one which did not in any way (unless by coincidence) coincide with market value. The price was certainly not determined by a separate market testing exercise in relation to the Hop Poles. He submitted that the option letter was inaccurate in suggesting that the £1.7m was a market figure which had been "offered" by a purchaser and in suggesting that the administrators "considered" that it was an open market value of the premises or had reasonable grounds to believe that it was. In a proposed amendment to his Defence (provided during his final submissions) it was alleged that such knowledge as the Girdlers had in relation to waiving its rights was "infected" by those inaccuracies with the consequence that TCG cannot rely on any purported waiver.
- Dealing first with the facts, I consider that Mr Pymont is correct to say that the £1.7m did not represent a market-tested price, and that it had not been offered by a purchaser in the way in which that expression would normally be understood. The properties being disposed of by the administrators were freehold and leasehold, some being run by operating companies, some not. The £1.7m comes from a schedule to the BPA entitled "Apportionment of Property Consideration and the timing of the Deferred Consideration payments". It is part of an overall sum of £18,430,000 paid across a number of leasehold properties. As Mr Chubb made clear in his evidence, the administrators were principally concerned with the overall figure they were receiving, which was some £105m. The apportionment of consideration was not something that concerned him; it would be driven by the purchaser, and possibly with tax considerations in mind. No valuation advice was taken as to that particular value (though there was a pre-administration valuation – see below). I accept all that evidence. It means that the £1.7m was not a sum which was arrived at by a process which involved testing the market value of the lease of the Hop Poles as such. Furthermore, at an interlocutory stage the administrators confirmed (in the context of an application for expert valuation evidence) that they were not asserting that £1.7m was a market value, and they had disclosed a draft valuation by Christies (in September 2015, before the administration) which apparently put a figure of £600,000 on the Hop Poles. It is therefore impossible to find that the market value of the Hop Poles at the time relevant to this action was £1.7m.
- That means that, so far as Mr Neill was relying on the £1.7m as a market tested sum, he was making a mistake. That, however, does not of itself require any qualification to my finding that Mr Neill and the Girdlers had the knowledge necessary for waiver. His belief as to what the market value was is not of itself relevant to waiver. However, Mr Pymont's point does not stop there. He relies on what he says are the option letter's statements about market value and says that the false information somehow "infects" the Girdlers' knowledge so as to make it insufficient for waiver.
- Mr Pymont did not suggest any legal basis for his doctrine of infection, and produced no authority on it, but in my view it falls to be viewed as a misrepresentation point. If a state of mind which is relevant to waiver is induced by a misrepresentation of the other party, intended to operate on the mind of the recipient, then it would seem to me that by analogy with contract the victim of the misrepresentation ought to be able to say that the state of mind ought to be ignored and the apparent waiver ought not to be viewed as such. I reach this conclusion with diffidence because there was no authority cited on the point, and in the light of the conclusions I have reached above it is not strictly necessary to express a view on it, but that is the conclusion I have reached.
- The next question is therefore whether there was such a misrepresentation. I consider that the option letter contains one. The thrust of the sentence:
- In those circumstances the option letter did contain something in the nature of a misrepresentation. It did go to Mr Neill's thinking in that he considered that PricewaterhouseCoopers were describing a market transaction which made it pointless for the Girdlers to think about the option, and therefore led the Girdlers to indicate that they did not wish to have the benefit of the option (if, contrary to my actual finding, that is what happened in the letter of 13th November). There was therefore no waiver.
- Finally, a pleading point arose in relation to this. In order to fix the scope of the debate on waiver in the course of final submissions I invited Mr Pymont to clarify his pleading on the points in issue. He did so by proposing a paragraph which made explicit in pleading form what his case was as to inaccuracies in the option letter, and another which referred to knowledge. Mr Greenhill formally objected to the proposed pleading on the footing, inter alia, that it affected the evidence that might have been adduced on the point. I have considered this point anxiously, but find that Mr Greenhill's objections fail. The points which arose in relation to the statements in the option letter, how they were understood by Mr Neill and the committee and their knowledge were all clearly in play on the evidence and were the subject of appropriate challenges. So far as necessary I would have allowed Mr Pymont's amendments.
- This is another question which has been rendered academic if I am right on the ineffectiveness of the option letter, but I will deal with it in case I am found elsewhere to be wrong on that. The point may also have significance in the future if a valid option is granted and if the Girdlers do not choose to exercise it.
- The debate on this point rather moved on during the course of the hearing. As indicated above, the 13th November letter indicated certain conditions which the landlord would insist on. All of them bar one are accepted as reasonable and complied with (or, in the case of the Opinion, will be complied with). Of the conditions referred to in that letter only the requirement for a deposit remained disputed. In his opening skeleton argument Mr Pymont said that the reasonableness of that requirement was the only outstanding question.
- By the time of final speeches Mr Pymont's position had shifted. He accepted that the status of Stonegate was such that he could not insist on the deposit per se, but he said he was entitled to insist on the guarantee provided for by clause 3(12)I(iii), and was prepared to treat the deposit as an alternative which the incoming tenant could consider. In those circumstances the debate shifted to whether the Girdlers were entitled to insist on the guarantee. Mr Greenhill submitted that the guarantee requirement was unenforceable as being contrary to section 19(1) of the Landlord and Tenant Act 1927. If that is wrong then he says that it is too late to insist on the guarantee because it was not included as a requirement in the landlord's initial statement of requirements for consent and a reasonable time for including it had long since passed by the time it was first relied on by the Girdlers (in their Defence).
- For these purposes I treat the 13th November letter as a valid response to a request for permission to assign, at least from the confirmation that the request came from the tenant.
- The first point is the status of clause 3(12)I(iii) in the context of section 19(1). That section provides as follows:
- Mr Pymont's case was that the clause is a standalone provision which his client could insist on as a matter of contract independently of any right to impose conditions on the granting of consent to assign.
- Mr Pymont's main authority in support of his submission was Vaux Group Ltd v Lilley [1991] EGLR 60 (Knox J). In that case a lease which fell within paragraph (b) of the subsection contained a qualified covenant against assignment followed by some provisos. The second was that "upon any assignment [the tenant should] obtain if the lessor shall so require an acceptable guarantor for any private limited company and a direct covenant by the assignee with the lessor to observe and perform the covenant [sic] and conditions of this underlease …". The tenant, who wished to assign without providing a guarantor, sought a declaration that it need not obtain a guarantor because it was relieved of the obligation to do so by section 19(1)(b) (which applied in that case), and in particular the words which I have emphasised above. Knox J rejected that application. He said:
- There is a distinction between that case and this. In that case the proviso stated that "Upon any assignment to obtain [etc]…". In the present case the proviso states "prior to any such assignment". That means that Knox J's reasoning, so far as it turns on something having to be done after assignment, does not fully apply. The obtaining of a guarantee is capable of being more in the nature of a condition precedent in the present case. That seems to me to be a point of distinction in the case, contrary to Mr Greenhill's position in reply which was that it was difficult to distinguish Vaux from our case. Nonetheless, what one does take from the case is the need to construe the clause properly, and ascertain whether the statute prohibits giving effect to the bargain that the parties reached.
- In my view it does not. The reason for that is the reason set out by Lightman J in Crestfort Ltd v Tesco Stores Ltd [2005] 3 EGLR 25. In that case there was a qualified covenant against assignment or underletting with a proviso that the intended assignee should "first" procure a direct covenant by the assignee to abide by the terms of the lease, and "on the grant of any permitted Underlease the Tenant shall obtain" various terms from the sub-tenant. Lightman J set out two analyses and chose the one which upheld the validity of the provisions:
- All that applies to the clause in the present case. That means that the clause is not void and ineffective. It operates as a valid gateway before one gets to considering conditions for obtaining permission to assign. The landlord is entitled to insist on it. As such its validity is not tested by reasonableness. Nor do I consider that a desire to enforce it has to be indicated at the same time as conditions for consent are expressed. The landlord is entitled to deal with it separately. If he raises the point too late he might be met by a waiver claim, but that point is not taken here.
- It follows, therefore, that the landlord can operate this clause if it wishes to do so. That does not mean, contrary to the submissions of Mr Pymont, that the landlord is justified in insisting on a rent deposit as an alternative in its proposed conditions for granting consent. That is not how the point was offered anyway in the 13th November letter. In making that proposal the landlord was making one which made consent unreasonably withheld (because it is conceded that Stonegate's position did not require it). Via the surety provision in the lease it may have a negotiating route through to the same result, but that is different.
- I therefore conclude as follows:
Mr Justice Mann :
Introduction
Witnesses
The principal facts
"(I) That the living accommodation of the demised premises shall not be used otherwise than for the accommodation on a service occupancy basis only of a 'bona fide' full-time manager and staff who shall be required to reside on the demised premises as a term of his employment or (if an individual) of Watney PROVIDED (i) Watney may assign or sublet the whole of the demised premises only during the said term to a wholly owned subsidiary of Grand Metropolitan PLC of which Watney is a subsidiary without prior written consent of the Girdlers Company PROVIDED NEVERTHELESS that Watney if they wish to assign or sublet (other than sublettings pursuant to sub-clause (iii) hereof) the whole of the demised premises during the said term to any other party must first grant an option to the Girdlers Company (such option to be exercised within sixty days of the date of receipt of notice by the Girdlers Company of application by Watney to assign or sublet (save where pursuant as aforesaid) the whole of the demised premises to such other party) to buy back the residue of the said term at the then current open market value of the demised premises such value to be agreed by the Girdlers Company and Watney within two months of the Girdlers Company exercising such option or failing agreement within such time the same shall be determined by an independent valuer specialising in licensed property valuation acting as an expert appointed by the said parties or in default of agreement within one month thereof by the President of the Royal Institution of Chartered Surveyors upon the application of either party and at the joint expense of both parties (including the Tenants furnishings and loose goods inventory and stock in trade). If such option is not exercised by the Girdlers Company as aforesaid Watney may with the consent of the Girdlers Company such consent not to be unreasonably withheld or delayed assign or sublet the whole of the demised premises."
"(iii) Watney may sublet the whole only of the demised premises without the prior consent of the Girdlers Company to a brewery tenant for a term not exceeding ten years in a form substantially following Watney's usual tenancy agreement from time to time provided the same shall have an absolute prohibition against assignment and further subletting of the whole or any part of the demised premises, PROVIDED that the Girdlers Company may require that prior to any such assignment or underlease Watney procures that any proposed assignee or under-tenant enters into a formal deed to be prepared by the Girdlers Company solicitors in which (i) the proposed assignee or under-tenant shall covenant directly with the Girdlers Company that from and after the execution of such assignment or underlease the assignee or under-tenant will pay the rents hereby reserved and perform and observe the other covenants and conditions on the part of Watney herein contained (including the provisions of this sub-clause (I)) during the residue of the said term (ii) in the case of an assignment or underlease to a company or other corporate body substantial and reputable sureties acceptable to the Girdlers Company shall enter into covenants with the Girdlers Company jointly and severally to guarantee the payment of the said rents and the performance and observance of the said covenants and conditions hereunder during the residue of the said term…"
"(16)(A) not to assign underlet charge part with or share the possession of part only of the demised premises
(B) not to assign underlet part with or share possession or grant any licence in respect of the demised premises except as permitted pursuant to Clause 3(11)."
"We refer to the Lease dated 22nd June 1987 made between [Girdlers] and [Watney] and note you remain the current landlord. TCG Pubs Ltd is the current tenant of the Property.
Clause 12(I) of the Lease provides that, prior to disposing of the Property, the tenant must grant an option to the landlord to buy back the residue of the term at the current open market value of the Property.
In accordance with this Clause, we have been instructed by the Administrators to offer you the ability to purchase the Property at a proposed price of £1,700,000.00. The Administrators have received an offer of £1,700,000.00 for the Property which is considered to be the open market value of the Property. Under the terms of Clause 12(I), we require a response from you within 60 days of receipt of this notice. We enclose a copy of the Lease here for ease of reference.
Please contact Barry Gross of this firm if you wish to discuss the above further."
"Our client: Stonegate Pub Company Ltd (the "Buyer")"
The letter goes on:
"As you may already be aware, the current Tenant under the Lease entered into administration on 29th September 2015. We enclose a copy of the notice of appointment for your information.
We understand that you are the landlord.
The Administrators of the Tenant have entered into an agreement for sale of a number of assets of the Tenant, including the Property, with our client, the Buyer.
In accordance with Clause 12(I) of the Lease dated 22 June 1987 the Tenant has granted an Option to the Landlord to buy the residue of the term at the current market rate. A copy of the letter dated 07/10/2015 from the Administrators' lawyer containing this offer is enclosed. Accordingly, please take this letter as our formal application for Landlord's consent to the assignment of the Lease to the Buyer.
To enable you to consider the application fully we enclose:
• Certificate of Incorporation of Buyer and associated information;
• Annual reports and accounts for the Buyer for the last 3 years;
• An overview of the Buyer and its group;
• Draft Licence to Assign.
We confirm that this firm will be handling this matter on a day to day basis. Please contact Lee Medlock with a request for an appropriate undertaking and with confirmation that consent will be granted subject to completion of a formal Licence to Assign."
"The Surveyor briefed the Committee that a letter had been received from lawyers acting for the administrators of TCG Pubs Ltd (the Tenant), advising the Company that an offer of £1.7M had been received for the property, and querying whether – as the lease stated that, in such an eventuality, the landlord should first be given the opportunity to buy back the residue of the term – the Company wished to match this offer. The Surveyor having advised the Committee that he could see no advantage in doing so, members agreed to decline the offer made and asked the Surveyor to advise the administrators accordingly. The Company was also being asked to grant consent to an assignment of the lease to Stonegate (who had acquired a number of public houses from TCG in September 2015) and it was agreed that Hogan Lovells, having secured an undertaking for costs, would be instructed to deal with the matter and to protect the Company's long term interests, including securing a rental deposit, if feasible."
"I understand from Daniel Watney Chartered Surveyors that our request for a licence to assign the lease of the property has been passed on to Hogan Lovells.
I would be grateful if you could confirm this and let me know if there has been any progress on this matter."
"I am told that your clients go by the name of Stonegate Pub Company Limited, incorporated in the Cayman Islands.
Strictly, the administrators (on behalf of the current tenant) should make an application for licence to assign. Subject to that formality being observed, however, the purpose of this letter is to let you know that my clients have no objection in principle to the proposed assignment of the Lease conditional on:
• Matters being documented by way of formal Licence
• Their costs being underwritten by the usual undertaking for costs
• The prospective assignee appointing a process agent to accept service in England and Wales
• Given that it is incorporated overseas, the prospective assignee lodging a rent deposit equivalent to six months' rent (plus VAT)
• The provision of a legal opinion from a firm of Cayman attorneys verifying that the company has been properly incorporated, remains in good standing and (on completion) has properly executed the counterpart Licence such that the document is binding and enforceable in accordance with its terms.
I await the undertaking for costs, which should be expressed to apply whether or not matters proceed to completion…
I shall look forward to hearing from you accordingly."
"In respect of the application process, the outgoing tenant has authorised us to approach your client. Confirmation of this can be provided by BLP, who act for the outgoing tenant's administrator, should this be required."
The points for decision
(a) Can the option be triggered by a notice, or is a separate formal option document required?
(b) If a letter suffices, was the option letter adequate for that purpose?
(c) Was the application letter a valid application for permission to assign?
(d) Have the Girdlers waived their right to buy back the lease?
(e) If Girdlers have lost their right to buy back the lease, has consent to the assignment to Stonegate been unreasonably withheld. This point turns on whether or not the Girdlers can insist on a rent deposit and/or a surety.
Can the option be triggered or proffered in a letter or is the grant of a formal option required?
What is the effect of the 1989 legislation on the operation of the option clause?
"2(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract."
"Now it is of course entirely true to say that an agreement must be interpreted in the light of the circumstances pertaining at the time it was made. But that does not mean that if the parties did not anticipate a particular factual situation which subsequently arises, the agreement does not apply to it. In such a case the question to be considered is what reasonable parties should be taken to have intended by the words used in the agreement in relation to the event which they did not foresee. As Chadwick LJ explained in Bromarin BV v IMD Investments Ltd [1999] STG 301 (at page 310):
"It is not, to my mind, an appropriate approach to construction to hold that, where the parties contemplated event 'A', and they did not contemplate event 'B', their agreement must be taken as applying only in event 'A' and cannot apply in event 'B'. The task of the court is to decide, in the light of the agreement that the parties made, what they must have been taken to have intended in relation to the event, event 'B', which they did not contemplate. That is, of course, an artificial exercise, because it requires there to be attributed to the parties an intention which they did not have (as a matter of fact) because they did not appreciate the problem which needed to be addressed. But it is an exercise which the courts have been willing to undertake for as long as commercial contracts have come before them for construction. It is an exercise which requires the court to look at the whole agreement which the parties made, the words which they used and the circumstances in which they used them, and to ask what should reasonable parties be taken to have intended by the use of those words in that agreement, made in those circumstances, in relation to this event which they did not in fact foresee.""
Was the option letter sufficient to trigger the landlord's rights under the clause?
" (2) The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene. The approach in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (trading as H. E. Hansen-Tangen) [1976] 1 W.L.R. 989, which deals with the construction of commercial contracts, is by analogy of assistance in respect of unilateral notices such as those under consideration in the present case. Relying on the reasoning in Lord Wilberforce's speech in the Reardon Smith case, at pp. 996D–997D, three propositions can be formulated. First, in respect of contracts and contractual notices the contextual scene is always relevant. Secondly, what is admissible as a matter of the rules of evidence under this heading is what is arguably relevant. But admissibility is not the decisive matter. The real question is what evidence of surrounding circumstances may ultimately be allowed to influence the question of interpretation. That depends on what meanings the language read against the objective contextual scene will let in. Thirdly, the inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of clause 7(13) the question is simply how the reasonable recipient would have understood such a notice ….
(3) It is important not to lose sight of the purpose of a notice under the break clause. It serves one purpose only: to inform the landlord that the tenant has decided to determine the lease in accordance with the right reserved. That purpose must be relevant to the construction and validity of the notice. Prima facie one would expect that if a notice unambiguously conveys a decision to determine a court may nowadays ignore immaterial errors which would not have misled a reasonable recipient."
Was the application letter an effective application for licence to assign?
"7.2.3 SPCL [ie the purchaser] shall procure that SPCL's Solicitors apply to each Landlord for licence to assign within ten Business Days after the date of this Agreement provided that Operating Business Sellers shall provide SPCL with reasonable assistance at the cost of SPCL."
"[the Seller is to] at SPCL's expense apply for and use all reasonable endeavours to assist SPCL in obtaining the Consent".
Mr Pymont relied on that conflict and said that there was a good reason why, at least in this instance, the tenant should make the application itself because under paragraph 7.8.1 it was obliged:
"simultaneously with making application for the Assignment Consent pursuant to paragraph 7.2, [to] serve an Offer Back Notice on the Landlord and provide reasonable evidence to SPCL of service of the Offer Back Notice".
Was there a waiver of the buyback right?
(i) A waiver of any defect in the manner in which the option rights were offered (characterised as a unilateral waiver); and
(ii) An election not to exercise the right itself (characterised as a waiver by election).
"62. Broadly speaking, there are two types of waiver strictly so-called: unilateral waiver and waiver by election. Unilateral waiver arises where X alone has the benefit of a particular clause in a contract and decides unilaterally not to exercise the right or to forego the benefit conferred by that particular clause. It has been described as:
"The abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted" - see Banning –v Wright [1972] 1 WLR 972 per Lord Hailsham LC at 97C-D.
In such a case, X may expressly or by his conduct suggest that Y need not perform an obligation under the contract, no question of an election by X between two remedies or courses of action being involved. Waiver by election on the other hand is concerned with the reaction of X when faced with conduct by Y, or a particular factual situation which has arisen, which entitles X to exercise or refrain from exercising a particular right to the prejudice of Y. Both types of waiver may be distinguished from estoppel. The former looks principally to the position and conduct of the person who is said to have waived his rights. The latter looks chiefly at the position of the person relying on the estoppel. In waiver by election, unlike estoppel, it is not necessary to demonstrate that Y has acted in reliance upon X's representation: see per Lord Goff of Chieveley in The Kanchenjunga [1990] 1 Lloyd's Rep 391 at 399 RHC." (per Potter LJ).
(a) An unequivocal representation by one party to the other by words or conduct in such a manner as to communicate an intention to abandon one of two courses open to him.
(b) This representation must be communicated to the other party.
(c) This has to occur at a time when the party alleged to be waiving his or her rights was aware of the relevant facts giving rise to his right to choose between two courses of conduct.
" Lord Blackburn in Kendall v. Hamilton, 4 App.Cas. 504, 542, said, "there cannot be election until there is knowledge of the right to elect." For the reasons given by Stephenson and May L.JJ., I am of the opinion that this statement, which was cited by Lord Porter in Young v. Bristol Aeroplane Co. Ltd. [1946] A.C. 163, 186, as being the foundation of the principle of election, still correctly represents the law. With Stephenson and May L.JJ., I do not think that a person (such as the plaintiff in the present case) can be held to have made the irrevocable choice between rescission and affirmation which election involves unless he had knowledge of his legal right to choose and actually chose with that knowledge."
To the same effect was May LJ at p494E:
" This being so, I do not think that a party to a contract can realistically or sensibly be held to have made this irrevocable choice between rescission and affirmation unless he has actual knowledge not only of the facts of the serious breach of the contract by the other party which is the pre-condition of his right to choose, but also of the fact that in the circumstances which exist he does have that right to make that choice which the law gives him. To hold otherwise, subject to the considerations to which I shall refer in a moment, would in my opinion not only be unjust, it would be contrary to the principles of law which one can extract from the decided cases."
" I would like to make a few observations as to the practical consequences of this court's decision on this point, as I see them. If A wishes to allege that B, having had a right of rescission, has elected to affirm a contract, he should in his pleadings, so it seems to me, expressly allege B's knowledge of the relevant right to rescind, since such knowledge will be an essential fact upon which he relies. The court may, and no doubt often will, be asked to order A to give further and better particulars of the allegation: see R.S.C., Ord. 18, r. 12(4). In many cases the best particulars that A will be able to give will be to invite the court to infer knowledge from all the circumstances. However strong that prima facie inference may be, it will still be open to the court at the trial, after hearing evidence as to B's true state of mind, to hold on the balance of probabilities that he did not in fact have the requisite knowledge. In the latter event A's plea that B has elected will fail."
"The Administrators have received an offer of £1,700,000 for the Property which is considered to be the open market value of the Property."
is that there was something that could be described as an offer in the normal sense and that the Administrators considered it to be the open market value. The underlying suggestion is that there was some sort of arms length negotiation for and marketing of the property. None of that is accurate for the reasons given above. They had received the Buyers' appropriation of part of an overall global purchase sum for the property, which is different. Nor does it appear that the Administrators thought it was a market price, or had reasonable grounds for thinking that. Mr Chubb thought it was the Buyer's apportionment.
Has consent been unreasonably withheld?
"19 (1) In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against assigning, underletting, charging or parting with the possession of demised premises or any part thereof without licence or consent, such covenant condition or agreement shall, notwithstanding any express provision to the contrary, be deemed to be subject—
(a) to a proviso to the effect that such licence or consent is not to be unreasonably withheld, but this proviso does not preclude the right of the landlord to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with such licence or consent;
(b) (if the lease is for more than forty years, and is made in consideration wholly or partially of the erection, or the substantial improvement, addition or alteration of buildings, and the lessor is not a Government department or local or public authority, or a statutory or public utility company) to a proviso to the effect that in the case of any assignment, under-letting, charging or parting with the possession (whether by the holders of the lease or any under-tenant whether immediate or not) effected more than seven years before the end of the term no consent or licence shall be required, if notice in writing of the transaction is given to the lessor within six months after the transaction is effected.
I have emphasised the words which are relied on by Mr Greenhill as operating against the landlord in this case so as to void any absolute right of the landlord to insist on guarantors.
"But in connection with the construction of the statutory words, in my judgment one has to look at the clause and see whether the words thus introduced by the operation of the statute do prevent effect being given to what the parties have otherwise agreed shall be the bargain between them. It was submitted to me that, although obtaining a direct covenant from an assignee and registering the transaction after it had taken place and obtaining covenants from the sub-tenant when there is a further under-letting all fell outside the ambit of something that was prevented by the introduction of the statutory words, the requirement that a guarantor acceptable to the lessor should be procured was contrary to, and therefore nullified by, the introduction of the statutory words. In my judgment that is not a correct analysis of the situation. It seems to me clear that the assignment is one operation and the obtaining of a guarantor is not a condition precedent to its being effected; it is something that has to be effected once there is an assignment, but that, in my judgment, is not by any means the same thing. I do not, therefore, accept the proposition that the introduction of the statutory words involves a prohibition of giving effect to the bargain that the parties have reached that a guarantor should be provided."
"41. I turn first to the question of construction of clause 4(28)(d) of the Lease. There are two alternative views of the clause. The first alternative is that it sets out conditions which the Landlords can impose for giving consent or sets out circumstances in which the Landlords' refusal of consent to underletting is to be deemed to be reasonable. The second alternative is that it sets out the agreement of the parties as to what alienations are not absolutely prohibited and can be made with consent and accordingly restricts the circumstances in which a tenant can properly apply for consent to an underletting. It is well established law and common ground between the parties, that if the clause is of the character set out in the first alternative it is void, but if the clause is of the character set out in the second alternative it is valid: see e.g. Bocardo v. Hobbs [1980] 1 WLR 17.
42. The issue of construction does not admit of any lengthy useful elaboration and the citation of authorities on the construction of clauses which are not practically identical affords no assistance. In my judgment the proviso to clause 4(28) limits the circumstances in which the absolute prohibition on underletting is qualified and the tenant has a right to request consent. The mandatory conditions stipulated in the proviso must be satisfied. This is the fair and sensible reading of the language of the Lease. Such provisos are in common use in commercial leases and are intended, and recognised to be intended, to control the terms of any underlease. Support for this approach (if support is needed) is to be found in the decision of the Court of Appeal in Allied Dunbar Assurance v. Homebase Limited [2002] EWCA Civ 666 [2002] EGLR 23 ("Allied Dunbar"). The lease under consideration in that case was (for all relevant and practical purposes) the same as that in the present case. The tenant in that case conceded that the purpose and effect of the proviso was to restrict the circumstances in which the tenant could properly apply for consent, but the Court of Appeal made plain its view that the concession was correctly made: see paragraphs 3, 16 and 42. Again if further support for this approach were needed, the court should be slow to give an alternative interpretation that the clause is intended merely to deem the imposition of conditions or grounds of refusal reasonable when it is clear that to do so renders the clause legally ineffective."
Conclusion
i) The option clause has not been validly triggered.
ii) The landlord's right to the option has not been waived.
iii) So far as it may be relevant, the landlord's insistence on a rent deposit makes its refusal to consent to an assignment unreasonable; but the landlord was entitled to insist on a surety.