P. & O. Property Holdings Ltd and Others v Norwich Union Life Insurance Society
| Jurisdiction | England & Wales |
| Judge | Lord Templeman,Lord Ackner,Lord Goff of Chieveley,Lord Browne-Wilkinson,Lord Mustill |
| Judgment Date | 17 February 1994 |
| Judgment citation (vLex) | [1994] UKHL J0217-1 |
| Date | 17 February 1994 |
| Court | House of Lords |
[1994] UKHL J0217-1
House of Lords
Lord Templeman
Lord Ackner
Lord Goff of Chieveley
Lord Browne-Wilkinson
Lord Mustill
My Lords,
For the reasons to be given by my noble and learned friend Lord Browne-Wilkinson I would dismiss this appeal.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Browne-Wilkinson. For the reasons he gives I too would dismiss the appeal with costs.
My Lords,
For the reasons to be given by my noble and learned friend Lord Browne-Wilkinson I would dismiss this appeal.
My Lords,
This appeal concerns a tripartite development of a new shopping centre at Sutton, Surrey, known as "The St. Nicholas Centre". The freeholders are the London Borough of Sutton ("the Council"). The development was carried out by the appellants, a consortium of companies ("the Developers") and financed by the respondents, the Norwich Union Life Insurance Society ("the Society"). The physical construction of the shopping centre has been completed but, due to the recession, many units in the development remain unlet and the development has not proved profitable. Shortly stated, the question raised on the appeal is whether the Society, without any further agreement by the Developers, can insist that reverse premiums be paid to attract possible tenants to take underleases of units remaining unlet, the cost of which reverse premiums will be borne wholly by the Developers. Ultimately the answer to that question depends on the construction of one clause of the documents regulating the very complicated arrangements made between the parties.
In outline, the relationship between the parties was as follows. The Council owned or had acquired the site of the development. The Council entered into an agreement dated 26 January 1989 with the Developers ("the Development Agreement") under which the Council agreed, in the events which have happened, to grant to the Developers or their financiers a headlease of the site for 200 years in consideration of (a) the Developers carrying out an agreed development of the site as a shopping centre and (b) the head lessee paying to the Council a rent calculated by reference to a percentage of the net rents received from underlessees.
The Developers procured the finance for the development from the Society on the terms of a Funding Agreement dated 27 July 1989. Under the Funding Agreement the Society was bound to meet the development cost up to the" Maximum Commitment" of £108,700,000. The Society has already paid up to the Maximum Commitment. Development costs in excess of that Figure have to be borne by the Developers. The funding agreement provided that the headlease was to be granted by the Council to the Society and the Developers bound themselves to carry out the development. The Developers' profit, if any, on the transaction took the form of the right to receive the "Developers' Profit Payment", the amount of which was dependent upon the net income receivable from underlessees of the development at a particular date to be fixed by a formula contained in the agreement but which will occur not later than three years after practical completion of the development. Under clause 9 of the Funding Agreement (which is the critical clause) the Developers and the Society both entered into certain obligations as to the letting of the development when completed.
The position therefore is that the profit expected to be reaped by all three participants in the development when they entered into it was dependent upon the rents to be obtained from underlessees: the Developers, because the greater the amount of such rents the greater the "profit payment" they were to receive; the Society because the return for its funding consisted of the right to the rents from the underleases during the 200 year term of the headlease; the Council because the amount of the head lease rent was geared to rents received by the Society from underlessees. However, the parties' interests in the rents payable by the underlessees were not identical. The Council and the Society would be likely to take a long term view, being primarily concerned to obtain underlessees at good rents for long terms. The Developers, in contrast, would be much more concerned to obtain underlessees for all units as soon as possible since their profit payment fell to be calculated by reference to the rents receivable, at the latest, on the third anniversary of the practical completion of the development.
A reverse premium is a capital sum paid by a landlord to induce a potential tenant to take a lease of premises or agree to pay a higher rent than he would otherwise agree. Therefore the payment of a reverse premium to induce tenants to take underleases of units which would otherwise remain unlet or at annual rents higher than would be acceptable is in one sense an advantage to all three participants since it will increase the amount of the rent roll. But of course the advantage to any one of the parties is largely dependent upon who has to bear the cost of paying the reverse premium. Under the Funding Agreement, reverse premiums are expressly made part of the Development Costs. It is common ground that, since the Society has paid the Maximum Commitment, the Developers will be bound to pay any further development costs incurred and accordingly will have to bear the whole cost of any reverse premiums (amounting, it is said, to some millions of pounds). It is therefore not surprising that the Developers are unwilling to agree to such payments, despite the increase in rental income they might produce. The Society, on the other hand, is anxious to increase the rent roll at no additional cost to itself and contends that under clause 9 of the Funding Agreement the Developers are already bound to pay reverse premiums if a reasonable landlord would regard such premiums as part of good estate management in current conditions.
The trial judge, Mr. Gavin Lightman Q.C., held in favour of the Society and made a declaration in the following terms:
"Any reverse premium or other capital sum paid to any tenant or prospective tenant of any part of the said development in connection with the grant of a lease thereof is to be taken into account as part of the 'Development Costs' or (as the case may be) the 'Society's Expenditure' … if such a reverse premium or other capital sum would reasonably be agreed by a landlord of the development in order to achieve a letting of the relevant premises having regard only to his own interests as such landlord and to principles of good estate management in accordance with the obligations of the parties under the said agreement but otherwise unconstrained and uninfluenced by the terms and effect of the said agreement."
The Court of Appeal reversed the judge's decision by a majority (Dillon and Steyn L.JJ., Rose L.J. dissenting) and declared:
"Any premium or other capital sum paid by [the Developers] or by [the Society] to any tenant or prospective tenant of any part of the said development in connection with the grant of a lease is only to be taken into account as part of 'the Development Costs' or 'the Society's Expenditure' as these expressions are defined in the said agreement if payment has been agreed between [the Developers], [the Society], the tenant or prospective tenant and the London Borough of Sutton."
The documentation regulating the development is very complex and I will seek to refer only to those parts which are directly relevant. Before coming to the critical provisions of the Funding Agreement, it is necessary to refer to certain provisions of the...
To continue reading
Request your trial
-
Teekay Tankers Ltd (a company incorporated in the Marshall Islands) v Stx Offshore & Shipbuilding Company Ltd (a company incorporated in the Republic of Korea)
...156 At p. 339 Kennedy LJ referred to a then recent decision of the House of Lords: In P & O Property Holdings Ltd v Norwich Union (1994) 68 P & CR 261 a developer and head lessor had each contracted to use 'reasonable endeavours to obtain' lettings of units in a shopping centre. The head le......
-
R & D Construction Group Limited V. Hallam Land Management Limited
...judge the issue (Phillips Petroleum Company UK Ltd v Enron Europe Ltd, per Potter LJ at pages 343-344; P & O Property v Norwich Union (1994) 68 P&CR 261, per Lord Browne-Wilkinson at page 268; Scottish Coal Company Ltd v Danish Forestry Company Ltd, per Lord Glennie at para [61] at first in......
-
Phillips Petroleum Company UK Ltd v Enron Europe Ltd
...239. Mallozzi v CarapelliUNK [1976] 1 Ll Rep 407. May & Butcher Ltd v RELR [1934] 2 KB 17. P & O Property Holdings Ltd v Norwich Union (1994) 68 P & CR 261. Queensland Electricity Generating Board v New Hope Collieries Pty LtdUNK [1989] 1 Ll Rep 205. R v Paddington and St Marylebone Rent Tr......
-
Yewbelle Ltd v London Green Developments Ltd
...endeavours". The first was the decision of the House of Lords in P & O Property Holdings Ltd v Norwich Union Life Insurance Society (1994) 68 P & CR 261. P & O were the developers of a shopping centre in Sutton, funded by the Norwich Union. Under the terms of the development agreement P & O......