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Summary

When surrendering a lease it is the tenant’s responsibility to check whether consent of the landlord’s lender is required.

Be cautious in accepting an unconditional term; the courts will be reluctant to allow a different interpretation even if it is clear that the party would not have agreed to it on an unconditional basis.

Where a party has obtained advice from solicitors, which proves to be incorrect, the courts may be reluctant to grant a remedy other than in negligence against the solicitor.

Background

In Co-Operative Bank plc v Hayes Freehold Ltd (in liquidation) and others [2017] EWHC 1820 (Ch) Hayes Freehold Ltd (the ‘Landlord’) held the freehold interest in the Digiplex Megaplex Centre in Hayes (the ‘Property’).

The Landlord granted a lease of the Property dated 29 June 2001 (the ‘Headlease’) to Deutsche Bank AG (the ‘Tenant’). The Tenant sub-let the Property to Sentrum (Hayes) Ltd (the ‘Sub-Tenant’) by a lease dated 26 February 2010 (the ‘Underlease’). Sentrum Holdings Ltd (the ‘Guarantor’) guaranteed the Sub-Tenants’ obligations in the Underlease, including payment of rent.

The Landlord, the Sub-Tenant and the Guarantor were part of the same corporate group until June 2012 when the Guarantor ceased to be part of the group following a share sale, the terms of which provided the seller would receive further monies if the Guarantor was released from its guarantee at a time after 36 months following the sale.

Later that year, Co-Operative Bank plc (the ‘Lender’) granted a facility to the Landlord secured by, amongst other things, a debenture from the Landlord under which it charged its interest in the Headlease. The debenture precluded the Landlord from selling, leasing, transferring or otherwise disposing of any ‘Secured Assets’, which included the Headlease, without the prior written consent of the Lender.

The Landlord, the Tenant and the Sub-Tenant entered into a deed dated 6 August 2015 (the ‘Deed’) which purported to effect:

  • a surrender of the Headlease;
  • a surrender of the Underlease; and
  • an unconditional and irrevocable release of the Guarantor from its guarantee.

Pursuant to the debenture, consent of the Lender was required for the Landlord to accept surrender of the Headlease from the Tenant. Such consent was not sought or obtained, meaning the Tenant would remain liable for its obligations under the Headlease, including annual rent of reportedly over £2.6m, but would no longer have the benefit of matching obligations from the Sub-Tenant under the Underlease (the Underlease having been surrendered pursuant to the Deed), nor any recourse against the Guarantor (the Deed having released the Guarantor from its guarantee).

The solicitor acting for the Tenant failed to carry out a title search of the freehold of the Property and advised the Tenant that its surrender of the Headlease would be effective.

The Lender had issued proceedings seeking various declarations as to the effectiveness of the Deed. The Tenant commenced interim proceedings for an order that the Deed was void and be set aside.

The Landlord and the Sub-Tenant are in liquidation and did not participate in the proceedings. The defendant was the Guarantor.

The Tenant's Claim

The Tenant put its claim five ways, as follows:

(i) It was an implied condition precedent to the release of the Guarantor from its guarantee that the surrender of the Headlease would be effective

The Tenant argued the following points:

  • It was obvious the parties did not intend the Deed (and accordingly the release of the guarantee) to be effective if the Landlord was not able to accept surrender of the Headlease.
  • The Deed therefore lacked commercial and practical coherence without the implied condition.
  • The word ‘unconditionally’ contained in the guarantee release clause never came into effect as the failure of the implied condition meant the release was not effective.

The judge did not accept that the condition had been implied, citing the following key reasons:

  • It is only possible to decide whether a term should be implied into a contract once it has been determined what terms the parties have expressly agreed to.
  • The clause was clear; the parties agreed that the Guarantor should be unconditionally released from its guarantee. To imply the condition would contradict this express term, requiring the clause to be ‘rewritten’.
  • The final sentence of the Deed, ‘This document... takes effect on the date stated at the beginning of it’, operated to effect the release upon execution of the Deed and to imply the condition would therefore be incompatible with that structure.
  • It was not necessary to imply the condition to give the Deed business efficacy or commercial coherence, nor was it obvious that the parties did not intend the Deed to be effective if the Landlord was not able to accept surrender of the Headlease. The Tenant was a sophisticated organisation and represented by commercial solicitors. A reasonable person would conclude that it was the Tenant’s responsibility to ensure that the Landlord had the power to accept its surrender.
(ii) The Deed should be rescinded on the grounds of an implicit fraudulent misrepresentation that the Landlord was able to accept the surrender of the Headlease

The Tenant alleged that the Landlord and the Sub-Tenant knew that the required consent of the Lender had not been obtained and that, by entering into the Deed, they fraudulently represented by indication that the Landlord had the power to accept the surrender.

The judge did not find any representation that the Landlord had the power to accept the surrender and stated that these were matters for the Tenant to check. The draft Deed was given to the Tenant on the basis that it would be reviewed by the Tenant’s solicitors, thus a reasonable person would conclude that the Tenant would satisfy itself that the surrender would be effective. Furthermore, the Tenant relied on its own legal advice, rather the representations of others.

(iii) The Deed should be rescinded for unilateral mistake under the rule in Pitt v Holt

The Tenant argued it was entitled to rescind the Deed for unilateral mistake under the principles in Pitt v Holt as:

  • The Deed was a voluntary disposition (the Guarantor providing no consideration for its release).
  • The Tenant mistakenly gave the release as it believed the Landlord could accept surrender of the Headlease.
  • The mistake (releasing the Guarantor) was of sufficient gravity that it was unconscionable not to reverse it.

Firstly, the judge held that the Deed was not a voluntary disposition because the surrender of the Underlease by the Sub-Tenant had been effective, the Tenant was released from its obligations as landlord and thus consideration had been provided for the release of the guarantee.

Secondly, the judge held that it would not have been just to rescind the Deed for unilateral mistake because the Tenant’s mistake was not that it believed the Landlord was able to accept surrender of the Headlease. The Tenant’s actual mistake was relying on the advice of its solicitor. Accordingly, the Tenant had an alternative remedy for its mistake; a negligence claim against its solicitor.

(iv) The Deed is void for common mistake

The legal requirements for common mistake had not been met, as the Guarantor did not have a ‘positive belief’ that the Landlord had the power to accept surrender of the Headlease and contractual performance of the Deed was not made impossible by the mistake, as the surrender of the Underlease and release of the guarantee were not dependant on it.

(v) It is entitled to rescind the Deed on the grounds that the Sub-Tenant has been unjustly enriched

The judge concluded that there was no unjust enrichment, for the same reasons that he determined it was not unconscionable to leave the Tenant’s unilateral mistake uncorrected.

Lessons to be learned

The message for commercial tenants is clear; when surrendering a lease it is the tenant’s responsibility to check whether consent of the landlord’s lender is required. Failure to do so may bear grave financial consequences and in the Tenant’s case the judge would not relieve it of ‘the consequences of the bad bargain that it made’, a comment indicative of the ‘buyer beware’ principle.

The courts will not be quick to tamper with the effect of a clear and express unconditional term in a contract. The Tenant’s intention was clearly to only effect surrender of the Underlease and release of the guarantee if it was able to surrender the

Headlease. Nevertheless, the judge placed great importance on the unconditional wording of the release and that the release of the guarantee was not expressed to be in consideration of the surrender of the Headlease.

Where a party has relied on solicitors’ advice, the courts may be reluctant to grant a remedy to that party other than in a negligence claim against the solicitor. The judge stated on numerous occasions that the Tenant had instructed solicitors and that a reasonable person would thus assume the Tenant proceeded in the knowledge that the surrender of the Headlease would be effective.

The parties’ state of knowledge and their witness evidence was important and ultimately served to weaken the arguments of the Tenant. The charge over the Headlease was drawn to the attention of the Tenant repeatedly and documents showing the charge were accessible from its own files. Conflicting and inaccurate witness evidence was also given on its behalf. This resulted in the Judge rejecting the Tenant’s submissions regarding misleading or fraudulent behaviour on the part of the other parties.

Accordingly, when advising on these types of arrangements:

  • Carry out thorough due diligence and do not make assumptions as to the representations or conduct of the other parties.
  • Thorough due diligence includes all relevant title searches against landlords and tenants and making appropriate enquiries.
  • Be cautious in accepting an unconditional term. Ensure that appropriate conditionality is present or that the consideration for what is being offered is clearly stated and that the structure of the document, including the effective date provisions, achieves the desired effect.
  • Consider each lease and underlease separately. The invalidity of a surrender of a superior lease may not affect the corresponding surrender of an underlease.

The Tenant is seeking leave to appeal


This article was first published in the Corporate Rescue and Insolvency journal.

This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.