LEGAL: common sense prevails in lease dispute

Lease disputes are time consuming, costly and most can be avoided when leases are well drafted in the first place. This article addresses a case where the landlord failed to ensure that the lease was properly drafted.

The lease gives a tenant the right to use the property for its approved business or commercial use for a period of time, in exchange for money paid to the landlord.

The contractual nature of leases in England and Wales means that the exact wording of the lease is crucial, that’s because the courts will interpret this wording at face value, binding the parties to its exact terms.

But what if the wording of the lease does not make business sense? Can this term be varied, can a term be implied into the lease at the discretion of the courts?

This was the question which arose in the case of Rail for London v The Mayor and Burgesses of the London Borough of Hackney. The UK High Court had to consider what happens when the express terms of a lease do not make sense in the wider business context.

Was rent still payable when the underlease was surrendered?

In this case the rent payable under the lease was defined by reference to sums payable under a sub-lease. On the face of it, this meant that if the sublease was surrendered, no rent was payable.

The Court decided that this did not make commercial sense in the context of the wider transaction between the parties. But could a term be implied into the lease that rent remained payable?

The facts of the case

Hackney had granted a 99 year lease of the railway arches to London Underground, who then sublet for the same term, minus one day. The rent under London Underground’s lease was defined as percentage of the commercial rental income from the sub-tenant in the arches.

However, in 2003, the sublease was surrendered for a premium of £7 million and London Underground continued to pay the rent in line with the provisions of the now non-existent sublease until 2019.

When Rail for London – London Underground’s successor – became responsible, it challenged the obligation to pay rent, arguing that with no sublease, no rent was payable under its own lease.

Rail for London asserted that as a result of the surrender, no basic rent had been due after the surrender took place, and sought repayment of around £6m paid during the intervening period to Hackney. Hackney disagreed. Ultimately, Rail for London issued proceedings on 9 March 2021 seeking various declarations, including that basic rent was not payable under its lease.

In its Defence, Hackney argued that (1) on the true construction of Rail for London’s lease, the basic rent continued to be payable after the surrender, (2) that further or alternatively a term should be implied to this effect or that Rail for London was “estopped” by convention from asserting that basic rent is not payable under its lease as a result of the Surrender.

Hackney argued that the commercial purpose of the principal agreement was so that Hackney would obtain by the mechanism of a long lease-back in the form of a lease to Rail for London, the net rental income from the arches for a 99 year term. Rail for London argued that this was not part of the commercial purpose.

Hackney’s counterclaim said that Rail For London had breached its obligations under its lease by failing to pay rent since September 2019, and sought declarations (1) in the alternative that (a) its interpretation of the lease with Rail for London was the correct one, (b) that a term was to be implied into this lease to that effect, and (c) that Rail for London was “estopped” by convention from asserting that the basic rent was not payable as a result of the surrender, and (2) that Rail for London should provide Hackney with the information necessary to calculate the unpaid basic rent.

In its reply to Hackney’s defence and counterclaim, Rail for London argued that with regard to estoppel, by convention that Hackney disclosed no reasonable grounds for defending the claim because it was seeking to use estoppel by convention as a sword, not as a shield.

The upshot was, Rail for London was seeking a declaration from the Court that no rent was payable under its lease and Hackney was arguing that rent continued to be payable, even after the sublease was surrendered, and that therefore it was entitled to the back-rent payable after Rail for London stopped paying.

Hackney’s case was that either the express wording of the lease meant that rent was still payable or, failing that, that a term to that effect should be implied.

The court’s interpretation

The Court considered the wording of all the relevant clauses in the lease and concluded that, on the express wording alone, at face value, no rent would be payable under the lease after the surrender of the sublease.

However, the court then considered whether a term could be implied into the lease. This would be to the effect that, even after the sublease was surrendered, rent would continue to be payable.

Looking into the background, the court decided that original purpose of the commercial agreement was to enable London Underground to extend the East London Line.

The sale and lease-back arrangement gave London Underground control and use of the property to enable it to extend the line without the need for a capital payment to Hackney. In exchange, Hackney would receive a percentage of the commercial rental income from the property which was to be paid by the underlease to Hackney.

Taking the whole arrangement in context, the Court concluded that it made no commercial sense for Rail for London to stop paying rent under its own lease when the sublease came to an end. It was therefore reasonable and equitable to imply a term into the lease requiring it to continue to pay rent.

Lessons to be learned

Hackney was fortunate in this case that the court took to view that terms which did not make commercial sense could be varied or implied, rather than taking them at face value.

It would have saved a lot or argument, time and expense had the leases been drafted differently in the first place. When the parties negotiate the terms of leases, especially those involving complications with head and sub-leases, drafting solicitors need to be mindful of the possible scenarios that could ensue.

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