A recent court case before the High Court of England and Wales has considered the consequences of when a lease’s express terms do not reflect the broader relationship between the landlord and tenant.
Facts of the case
In Rail for London Ltd v London Borough of Hackney [2022] EWHC 2929 (Ch), LB Hackney granted a headlease of railway arches at Kingsland Viaduct to London Underground Limited (LUL).
The lease, signed in 1996, was one of several transactions relating to the railway arches, and was for a 99-year term. LUL’s rent was calculated by reference to the rent payable to it under an underlease of the property it had granted to London Industrial Plc (a firm specialising in the letting out of commercial real estate) on the same day, and for the same term minus one day. That rent was based on the monies paid/payable to London Industrial under the various subleases of the individual arches at Kingsland Viaduct that it granted to different sub-tenants.
However, in late 2003, owing to a commercial arrangement between LUL and London Industrial, the underlease was surrendered and the successor body to LUL Rail for London (RfL) became the direct landlord to London Industrial’s sub-tenants.
Between 2004-2019 LUL/RfL paid basic rent to Hackney using the lease rental calculation. In 2019, RfL issued proceedings against Hackney, arguing that given the surrender of the underlease, the basic rent under the Hackney/LUL lease was effectively nil and moreover that the rent it paid between 2004-2019 was recoverable. Hackney counter-claimed that RfL remained liable. Neither party could resolve the issue between themselves, so both sought a declaration from the court in their favour.
Questions for the Court to consider
Amongst other issues, the High Court had to decide upon two key points of law:
- Did RfL have an ongoing liability to pay the basic rent under the lease to Hackney, or did this liability cease on the surrender of the underlease, given that rent for the former was linked to the latter?
- Could a term be implied into the Hackney/LUL lease allowing the rent to continue to be calculated pursuant to the terms of underlease after (and notwithstanding) its determination?
Decision
On point 1 (the express wording in the lease), the Court ruled in favour of RfL, who had argued that the Court did not need to look past the clear and unambiguous wording in the lease, and that when the underlease was surrendered, their ability to pay rent was determined (as there was then no underlease in respect of which any rent could be assessed).
On point 2 (the implied term), the Court considered whether such a term met the necessary five-part test for implying terms into a contract in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2015] UKSC 72; namely that the term must:
- Be reasonable and equitable
- Be necessary to give business efficacy to the contract
- Be so obvious it goes without saying
- Be capable of clear expression
- Not contradict any express term of the contract
The Court found that the proposed term suggested by Hackney (i.e. that rent should still be payable to it) satisfied this test on all counts. In particular, HHJ Jackson stressed that the Hackney/LUL lease as written did not make sense when considered in light of the series of transactions as a whole, and that allowing RfL’s proposition (that the term should not be implied – and hence no rent levied) would neither be reasonable nor equitable.
Conclusion
The key takeaway from this case is that landlords and tenants should never look at a lease in isolation – they should carefully consider each lease’s life cycle, any commercial arrangements underpinning them, and the possible issues that may arise by linking the terms of one lease to another. They should give particular consideration to what would/should happen when one of those leases ends sooner than expected. In practice (and as good practice), this may mean drafting express terms into leases to deal with such eventualities.