Common Sense Prevails in Leasing Dispute – LandlordZONE

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

Lease disputes are time consuming, expensive, and most can be avoided when leases are well drafted in the first place. This article addresses a case where the landlord failed to ensure that the lease was properly drafted.

The lease gives the tenant the right to use the property for their approved business or commercial use for a period of time, in exchange for money paid to the landlord.

The contractual nature of tenancies in England and Wales means that the exact wording of the tenancy agreement is crucial, as the courts will interpret this wording literally, binding the parties to its exact terms.

But what if the wording of the lease doesn’t make business sense? Can this term be varied, can a term be implied in the lease at the discretion of the courts?

This was the question that arose in the case of Rail for London v The Mayor and Burgesses of the London Borough of Hackney. The UK High Court had to consider what happens when the express terms of a lease do not make sense in the broader commercial context.

Were you still paying rent when the lease was signed?

In this case, the rent payable under the lease was defined by reference to the amounts payable under a sublease. At first glance, this meant that if the sublease was surrendered, no rent was paid.

The Court decided that this did not make commercial sense in the context of the larger transaction between the parties. But could it be implicit in the lease that the rent is still due?

The facts of the case

Hackney had given a 99-year lease on the railway arches to the London Underground, which it then sub-leased for the same term, minus one day. Rent under the London Underground lease was defined as a percentage of the sublessee’s commercial lease income in the arches.

However, in 2003, the sublet was given for a premium of £7 million and the London Underground continued to pay rent in accordance with the provisions of the now defunct sublet until 2019.

When Rail for London, the successor to the London Underground, was held liable, it challenged the obligation to pay rent, arguing that without subletting, you were not paying rent under your own lease.

Rail for London claimed that no basic rent was due as a result of the handover after the handover had taken place, and sought reimbursement of around £6 million paid during the interim period to Hackney. Hackney disagreed. Ultimately, Rail for London commenced proceedings on 9 March 2021 seeking various statements, including that the basic rent was not payable under their lease.

In his Defence, Hackney argued that (1) in the actual construction of the Rail for London lease, the basic rent continued to be payable after delivery, (2) that additionally or alternatively a term to this effect should be implied or that Rail for London London was “prevented” by convention from asserting that the basic rent is not payable under its lease as a result of the Surrender.

Hackney argued that the commercial purpose of the main agreement was for Hackney to obtain, through the mechanism of a long lease in the form of a lease to Rail for London, the net rental income from the arches for a period of 99 years. Rail for London argued that this was not part of the commercial purpose.

Hackney’s counterclaim said that Rail For London had breached its obligations under its lease by not paying rent since September 2019, and sought statements (1) in the alternative that (a) its interpretation of the lease with Rail for London was correct, (b) that a term would be implied in this lease to that effect, and (c) that Rail for London was “prevented” by convention from asserting that the basic rent was not payable as a result of delivery, and (2) that Rail for London must provide Hackney with the information necessary to calculate the unpaid basic rent.

In its response to Hackney’s defense and counterclaim, Rail for London argued that with regard to the statutory bar, by convention Hackney failed to disclose reasonable grounds to defend the claim because it sought to use the statutory bar by convention as a sword, not a shield.

The result was that Rail for London sought a finding from the Court that no rent was payable under its lease and Hackney argued that the rent remained payable even after the sublet was relinquished, and that therefore , was entitled to a refund. rent payable after Rail for London stopped paying.

The Hackney case was that either the express wording of the lease meant that the rent was still payable or, failing that, that a term to that effect had to be implied.

The interpretation of the court

The Court considered the wording of all relevant clauses of the lease and concluded that, based solely on the express wording, at face value, no rent would be paid under the lease after delivery of the sublease.

However, the court then considered whether a term might be implied in the lease. This would be in the sense that, even after the sublet is waived, the rent would continue to be payable.

Looking at the background, the court decided that the original purpose of the business agreement was to allow the London Underground to extend the East London Line.

The sale and lease agreement gave the London Underground control and use of the property to allow it to extend the line without the need for a capital payment to Hackney. In exchange, Hackney would receive a percentage of the commercial rental income from the property that the lease was to pay to Hackney.

Taking the entire agreement in context, the Court concluded that it did not make commercial sense for Rail for London to stop paying rent under its own lease when the sublet ended. Therefore, it was reasonable and equitable to include a term in the lease that required you to continue paying rent.

lessons to learn

Hackney was fortunate in this case that the court found that terms that did not make commercial sense could be varied or implied, rather than taken at face value.

It would have saved a lot of argument, time and expense if the leases had been worded differently in the first place. When parties are negotiating the terms of leases, especially those that involve complications with master leases and subleases, drafting attorneys must take into account the possible scenarios that could arise.