PW & Company v Milton Gate Investments Ltd

JurisdictionEngland & Wales
JudgeMR JUSTICE NEUBERGER
Judgment Date08 August 2003
Neutral Citation[2003] EWHC 1994 (Ch)
Date08 August 2003
CourtChancery Division

[2003] EWHC 1994 (Ch)

Before:Mr Justice Neuberger

Between:
pw & Co
and
Milton Gate Investments Ltd

JUDGMENT AS APPROVED

I direct that pursuant to CPR PD 39a para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

MR JUSTICE NEUBERGER

MR JUSTICE NEUBERGER:

Introduction

1

This case involves two connected disputes, which raise a number of points of difficulty. The first dispute is between PW & Co. ("PW), in its capacity as former tenant of a substantial office building, and Milton Gate Investments Limited ("Milton Gate") its former landlord. The second dispute is between Milton Gate and PW's former subtenants of parts of the building, who are two companies in the BT plc group, under seven underleases ("the Underleases").

2

The disputes have their origin in the fact that, when the lease of the building ("the Headlease") was granted to PW, and when PW granted the Underleases, the parties involved, and their respective advisers, were all under an arguable misconception as to the effect on a subtenancy of the exercise by the head-tenant of a right to determine the head-tenancy. Because it is so fundamental to an understanding of the issues in this case, it is appropriate to explain the point, albeit in fairly summary terms, before turning to the facts, and the issues between the parties.

3

In Pennell -v- Payne [1995] QB 192, the Court of Appeal had to determine what Simon Brown LJ (who gave the only reasoned judgment) described at 195C as "a pure question of law", which he then summarised in these terms:

"[W]here a head-tenant serves an upwards notice to quite, i.e. a notice upon his landlord, is the landlord thereupon entitled to possession against a subtenant irrespective of whether that subtenancy was granted within the terms of the Headlease?"

4

Two points should be made about that formulation. First, it is implicit that, in the absence of the notice, the subtenancy in question would, as between head-tenant and subtenant, have otherwise continued. Secondly, even if the effect of the notice described by Simon Brown LJ would be to determine the subtenancy in common law, it may be that the subtenant would be entitled to remain in possession as against the landlord, because statute entitled him to do so.

5

The only case where the question as formulated by Simon Brown LJ had previously been decided was in Brown -v- Wilson (1949) 208 LTJo. 144. In light of observations in earlier cases, Hilbery J concluded that, in the case envisaged by Simon Brown LJ, the subtenant was entitled to remain in possession: in other words, that the notice by the head-tenant determining the head-tenancy did not put an end to the subtenancy.

6

In Pennell, the Court of Appeal unanimously took the opposite view, and overruled the decision in Brown -v- Wilson. The decision in Pennell was considered by the House of Lords in Barrett -v- Morgan [2000] 2 AC 264, where Lord Millett (who gave the only reasoned speech) said that he had "no doubt that this case was correctly decided" (see at 274A).

7

The decision in Brown -v- Wilson had stood for some 45 years, and (as was pointed out by Simon Brown LJ at [1995] QB 201A-B) it had been assumed to represent the law, in various textbooks (some of which expressed doubts as to its correctness). Accordingly, it is perhaps not very surprising that those involved with the drafting of the Headlease and Underleases in the present case were under an arguable misapprehension as to the law.

8

There is one other point of law which should be mentioned at this stage. The Headlease and Underleases were, at least potentially, within the ambit of Part III of the Landlord and Tenant Act 1954 ("the 1954 Act"), which affords protection to tenants in occupation of business premises (unless their tenancies have been lawfully excluded from such protection by a court order). Accordingly, even if the effect of a notice served by a head-tenant to determine the head-tenancy puts an end to a subtenancy as a matter of extra-statutory law, a subtenant who has the benefit of the 1954 Act would nonetheless be entitled to remain in occupation of the premises sublet to him because his tenancy would continue pursuant to the provisions of that Act.

9

The apparent misconception on the part of those involved in the conveyancing documentation in the present case has led to a wide ranging series of well presented arguments, involving fundamental questions of property law, including the impact of the Human Rights Act 1998 ("the 1998 Act"), questions relating to the permissible ambit of estoppel by deed and estoppel by convention, and the circumstances in which such an estoppel can be avoided, generally and in a tripartite situation.

10

With those introductory observations, I turn to the relevant facts.

The facts

11

I shall begin by setting out the relevant provision of the Headlease, of the Underleases, and of the licences pursuant to which they were granted. I shall then summarise the evidence relating to the negotiation of the grant of the Headlease and the Underleases (which can be dealt with pretty shortly). Finally, I shall describe the relevant events which took place from the time that Milton Gate was proposing to acquire the freehold reversion to the Headlease (which must be explained in a little more detail).

The Headlease

12

Until late 1994, the freehold of Milton Gate, 1 Moor Lane, London EC2 ("the premises"), was owned by City of London Real Property Company Limited ("CLRP"), a member of the Land Securities plc Group. By the Headlease, dated 29th November 1990, CLRP let the premises to PW the chartered accountants, then known as Price Waterhouse. The Headlease was for a term of 25 years from 24th June 1990 at an annual rent (payable in advance on the usual quarter days) of £6,616,000 (subject to upwards review every five years).

13

The centrally relevant provision of the Headlease was clause 5(6), which was in the following terms:

"The Lessee [that is, PW] may determine this Lease on the 24th day of June 2002 by giving to the Lessors [that is CLRP] not less than twelve months prior written notice and on the expiration of such notice this present Lease shall determine subject to any Permitted Underleases but without prejudice to any claim by either party against the other in respect of any antecedent breach of any covenant… and in the event of the Lessee serving such notice the Lessee shall upon the 24th day of June 2002 pay to the Lessors a sum equivalent to nine months yearly rent payable at that date Provided That such sum will not be payable if on the expiration of such notice 75% of the lettable office area of the … premises is underlet in accordance with the terms of this Lease and such Permitted Underlease or Underleases have an unexpired term of at least 5 years (emphasis added).

I shall refer to the sum equivalent to "nine months yearly rent payable" as "the Penalty".

14

Clause 3(25) of the Headlease contained detailed provisions which limited and controlled the circumstances in which, and the basis upon which, PW could underlet. By virtue of clause 3(25)(2)(e)(i), a "Permitted Underlease" was a subtenancy which was required to:

"Contain on the part of the Underlessees (inter alia) the Stipulated Covenants and provisions for rent reviews on the same dates and in the manner (mutatis mutandis) specified [herein] and [to] reserve no less than the open market rent then reasonably obtainable for the subject premises…"

Clause 3(25)(2)(e)(ii) defined a "Permitted Underlessee" as a person "who shall have previously to the execution of the Permitted Underlease entered into the Stipulated Covenants directly with the Lessors".

15

The "Stipulated Covenants" referred to in clauses 3(25)(2)(e)(i) and (ii) were defined in clause 3(25)(1)(iii) as including obligations to:

"Observe and form the covenants and conditions on the Lessee's part herein contained so far as they relate to or affect the subject premises (save… the covenant to pay the rents hereby reserved …) …"

16

Clause 3(25) also required PW not to underlet the whole or any part of the premises save by a Permitted Underlease to a Permitted Underlessee, and not to effect any such underletting without first obtaining the consent of the Lessors, which consent was not to be unreasonably withheld.

17

The Headlease was at all times vested in PW. Towards the end of 1994, CLRP transferred the freehold reversion to the Headlease to three Swedish companies, to which I will refer as "Allmanna". On 19th June 2000, the freehold reversion was transferred by Allmanna to Milton Gate, who retain the freehold of the premises to this day.

The Underleases

18

PW granted a total of seven Underleases, each of which was in respect of a single floor of the premises. Between them, they involved subletting effectively the whole of the premises. Four of those Underleases were entered into on 3rd March 1994, and they extended to the ground, first, second, and third floors of the premises. Each of these four Underleases was granted to BT, for a term expiring on 28th September 2007. A fifth Underlease was granted by PW to BT on 28th April 1995; it related to the fourth floor, and was for a term expiring on 20th June 2015. I shall refer to these five Underleases as "the BT Underleases" and the parts of the premises thereby demised as "the lower five floors".

19

Each of the Underleases granted to BT on 3rd March 1994 had a clause, which conferred on BT the right to determine, by giving at least 12 months notice, on 29th September 1998 or 17th June 2002, but, in the event of it exercising such right, BT had to pay a penalty to PW. In the Underlease which I have seen (that of the third floor), the...

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