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Lunar Office v Warborough Investments Ltd [2017]:

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Whether interpretation of the parties’ intentions resulted in a breach of alienation provisions.

The background

Warborough Investments Ltd was the Landlord of a property consisting of four self-contained shops with office space above. Lunar Office SARL, the tenant, had a long leasehold interest at the property with a 67-year reversionary interest.

A previous tenant had granted an underlease of part in 2011 and so, in 2016, Warborough served a Section 146 (Law of Property Act) Notice on Lunar specifying that the underlease had been granted without its consent or knowledge and so was in breach of the alienation covenants contained in the lease.

The alienation covenants comprised of four sub- clauses. Sub-clause (a) related to assignment, and sub-clauses (b) – (d) dealt with underletting. Here, the decision as to whether the grant of the underlease was a breach of covenant depended on the court’s interpretation as to whether sub-clauses (b) and (c) should be read in conjunction with one another, as was contended by Warborough as Landlord, or whether these provisions should be construed separately:

“(b) Not at any time during the term hereby granted to underlet or part with possession of the whole or any part of the demised premises other than by written underlease which shall not be in respect of less than complete floors or shop units for terms of not less than 10 years and at such rent or rents and upon such terms generally (including provision for the periodic review of rent at five yearly intervals) as shall accord with the principles of good estate management and with the duty (which is hereby imposed specifically upon the Lessee) of managing the demised premises to the best commercial advantage of the parties hereto

(c) Not at any time during the said term without the consent in writing of the Lessor first obtained such consent not to be unreasonably withheld to grant an Underlease or Undertenancy of part of the demised premises except at a rent which shall represent the best rent reasonably obtainable for the premises concerned as between a willing lessor and a willing lessee”

Lunar argued that sub-clauses (b) and (c) were drafted separately and therefore should be read as ‘stand-alone’ provisions. As such, the granting of the underlease, although prohibited by sub-clause (b), could still be permitted by sub-clause (c) as no consent was required to the underletting in accordance with Section 19 (1) (b) of the Landlord and Tenant Act 1927.

Warborough argued that sub-clauses (b) and (c) were to be interpreted alongside each other and as such, when granting the underlease both requirements should have been satisfied and landlord’s consent sought.

The law

The Court considered Section 19 (1) (b) of the Landlord and Tenant Act 1927, whereby if a lease is made in consideration wholly or partly of improvements/alterations or additions to buildings, is for a term of 40 years or more and the landlord is not a government department or public, local or statutory authority, then a covenant requiring consent to underlet is subject to a proviso that no consent can be required for an underletting granted more than 7 years prior to the end of the term, and if notice of the underletting is given to the Landlord within 6 months of the underletting itself.

The Court in its judgment also considered what the likely intention of the parties at the time of drafting the lease would have been.

The decision

The High Court upheld the Tenant’s interpretation of the covenant and ruled that the sub-clauses were separate provisions which should be considered individually. Although the drafting was unclear, this was also a long lease and so in applying commercial common sense, it was likely that the original parties had intended the provisions to be distinct from one another.

The grant of the underlease was therefore not in breach of covenant.

JB Leitch comments on the decision:

“Not only does this case provide a valuable lesson on alienation provisions, but it highlights the importance in ensuring that the drafting in any lease clearly reflects the intentions of all those which are party to it. Specifically, when considering alienation provisions, all parties must ensure that the drafting clearly sets out all required and agreed restrictions for any potential future dealings and precisely what the tenant’s application procedure is (if any). Due consideration must also be given to circumstances, as here the High Court considered what would be “commercial common sense” for a long lease.”

The High Court upheld the Tenant’s interpretation of the covenant and ruled that the sub-clauses were separate provisions. The grant of the underlease was therefore not in breach of covenant.

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