Allied Dunbar Assurance Plc v Homebase Ltd

CourtCourt of Appeal
Docket NumberCase No: A3/2001/1021
JudgeLord Justice Chadwick
Judgment Date17 May 2002
JurisdictionEngland & Wales
Neutral Citation[2002] EWCA Civ 666

[2002] EWCA Civ 666

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE CHANCERY DIVISION

MR BERNARD LIVESEY QC

(sitting as a Deputy High Court Judge)

Royal Courts of Justice

Strand,

London, WC2A 2LL

Before

Lord Justice Simon Brown

Lord Justice Chadwick and

Lady Justice Hale

Case No: A3/2001/1021

Between
Homebase Limited & ANR
Defendant/Appellants
and
Allied Dunbar Assurance PLC
Claimant/Respondents

Mr J McDonnell QC & Mr G van Tonder (instructed by Messrs Russell Jones & Walker) for the Appellants

Mr M Barnes QC & Miss T Scott (instructed by Messrs Nabarro Nathanson) for the Claimant/Respondent

Lord Justice Chadwick
1

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

2

The covenant not to underlet is contained in clause 3(32)(C) of the lease. So far as material the clause is in these terms:

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

(a) …

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

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

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

…"

3

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

The underlying facts

4

The lease was granted to Homebase, then known as Texas Homecare Limited, on 6 January 1986. The premises demised by the lease, Unit 1, Bilston Road, Wolverhampton, were part of what the judge described as "a first generation retail warehouse scheme". They were used by Homebase as a DIY retail store until the middle of 1998. The lease, together with leases of a number of similar retail stores from which Homebase was then trading, was placed on the market. There was little demand for warehouse units of that type; but, by the end of 1999, the agents had attracted a potential purchaser, Lairdale Limited. Lairdale sold furniture under the trade name "Furniture to Go".

5

On 17 February 2000 Homebase entered into an agreement for the grant of an underlease of the premises to Lairdale. At that date the yearly rent payable under the headlease was £322,500. The next rent review date was 24 June 2000. Under the rent review provisions in the headlease the rent was to be reviewed (upwards only) to an open market rent—see clause 6.

6

The rent which Lairdale was willing to pay to Homebase for a sub-tenancy of the premises was substantially less than the rent which was then payable under the headlease. That gave rise to an obvious problem. An application to Allied Dunbar for consent to sublet at a rent which was substantially below the passing rent under the headlease would invite a refusal on the ground that the proposed underlease would not comply with the requirement in paragraph (b) of the proviso to clause 3(32)(C). It was not to be expected that, with a rent review imminent, Allied Dunbar would accept that the market rent was less than the current passing rent. Further, it appears that the premises were—or were perceived to be—out of repair and that Lairdale was not prepared to undertake repairing obligations which were as onerous as those in the headlease. An underlease which imposed on the tenant repairing obligations which were less extensive or less onerous than those in the headlease would not comply with the requirement contained in paragraph (c) to the proviso to clause 3(32)(C).

7

It was in those circumstances that Homebase was advised that, if the proposed underletting was to proceed, it was necessary that the arrangements with Lairdale, its proposed sub-tenant, should be set out in two separate documents. It was proposed that there should be an underlease, in the form of a draft annexed to the agreement of 17 February 2000, which (in that form) would satisfy the requirements set out in the proviso to clause 3(32)(C) of the headlease. And there was to be a collateral deed, expressed to be personal to Homebase and Lairdale, which would limit the extent to which the obligations in the underlease would be enforced by Homebase against Lairdale.

8

The mutual obligations to grant and take the underlease were, as might be expected, conditional on Homebase obtaining consent from Allied Dunbar to the proposed underletting. An application for such consent was first made on 20 January 2000. A draft of the proposed collateral deed was sent to Allied Dunbar's solicitors in March 2000. A revised draft was sent on 4 April 2000. That draft provided that Homebase would indemnify Lairdale for the difference between an initial rent of £100,000 per annum (rising to £200,000 per annum and, thereafter, to £322,500 per annum) and the rent expressed to be payable under the underlease; and that Homebase would indemnify Lairdale against the cost of complying with repairing obligations under the underlease in so far as those obligations would require Lairdale to put the premises in any better condition than that evidenced by a schedule of condition.

9

These proceedings were commenced shortly thereafter. The relief sought was an order restraining Homebase and Lairdale from completing the proposed underlease and the collateral deed. On 9 June 2000 solicitors for Homebase—recognising, perhaps, that there would be difficulties in seeking to support the arrangements if the collateral deed were in the form which had been sent on 4 April 2000—sent what was described as "an amended version of the Revised Deed". They wrote: "We await hearing from you regarding your client's consent to the proposed underletting once you have had an opportunity to consider the same and obtain your client's instructions".

10

The draft collateral deed sent on 9 June 2000 contains the following provisions, so far as material:

"2. Homebase hereby undertakes to pay to Lairdale:—

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

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

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

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

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

2.2.2 any obligation to repair or redecorate the Premises (including any such obligation contained in any licence to underlet which Lairdale enters into) insofar as it would require Lairdale to put the Premises into any better state of repair or condition or decorative repair and decorative condition than that evidenced by the attached...

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