UK: The Court Stands Firm On Implied Terms.

Last Updated: 10 January 2018
Article by Keith Conway

In the recent case of Co-operative Bank Plc v Hayes Freehold Ltd (In Liquidation) [2017] EWHC 1820 (Ch), the High Court refused to imply into a deed of surrender a condition precedent that the landlord had obtained its lender's consent. Accordingly, it held that a purported surrender of a lease without the lender's consent was, on the facts, deemed ineffective.

The Facts

In June 2001, Deutsche Bank AG (Deutsche) was granted a 20 year lease (the lease) over a data centre (the Property) in Hayes, Middlesex. In February 2010, Deutsche granted an underlease of the property to Sentrum Hayes Ltd (Sentrum Hayes). Sentrum Holdings Ltd (Sentrum Holdings) acted as a guarantor of the underlease.

In December 2012, the freehold interest in the property was transferred to Hayes Freehold Ltd (Hayes Freehold). Hayes Freehold thereafter charged the freehold interest in the property and the lease to Co-operative Bank Plc (Co-op) and Sentrum Hayes charged its interest as tenant under the underlease to Co-op (the two companies being part of the same group at that stage). The terms of the charges provided that Co-op's prior written consent was required to any surrender of the lease and for any dealings with the underlease.

In August 2015, Hayes Freehold, Deutsche, Sentrum Hayes and Sentrum Holdings entered into a deed of surrender which purported to effect a surrender of both the lease and the underlease and an unconditional release of Sentrum Holdings as guarantor. Co-op's consent was not obtained before the purported surrenders took place with the result that Deutsche's liabilities under the lease continued.

Deutsche issued a claim, contending that if the surrender of the lease was ineffective, then so too was the surrender of the underlease and the release of the guarantor. Deutsche argued (amongst other things) that there was to be implied into the deed of surrender a condition precedent to the release of the guarantee that the surrender of the lease would be effective.

Claim dismissed

Mr Justice Henry Carr concluded that it was not an implied condition precedent to the release of Sentrum Holdings' guarantee that the surrender of the lease should be effective.

The surrender of the lease and the surrender of the underlease were not dependent on each other. The latter could take effect in circumstances where the former could not. Hayes Freehold did not have the power to accept a surrender of the lease without the Co-op's consent because it had given up the right to do so when it had charged its interest in the lease to the Co-op. The failure to obtain the Co-op's consent meant that the surrender of the lease did not take effect. However, Deutsche's interest as landlord of the underlease was not charged so it could accept a surrender of the underlease from Sentrum Hayes and could release Sentrum Holdings from its guarantee.

In deciding whether or not a term should be implied, the Court firstly considered what had been expressly agreed by the parties. The Court found that the deed of surrender was plain and unambiguous and must be applied – the parties had agreed that Sentrum Holdings should be unconditionally released from the guarantee. The implication of the condition precedent would have contradicted the express terms of the deed of surrender.

Furthermore, the implication of the condition precedent was not considered necessary to give the deed of surrender business efficacy or commercial coherence, nor was its implication so obvious that it would have gone without saying that the parties did not intend the deed to take effect if Hayes Freehold did not have the power to accept the surrender of the lease from Deutsche. It is evident that the threshold for implying terms remains high.

Comment

As well as highlighting the fundamental importance of checking whether the consent of the landlord's mortgagee is required when acting on a lease surrender, the case confirmed the Court's stance on implied terms. In a previous ruling (Irish Bank Resolution Corporation Limited (in Special Liquidation) v Camden Market Holdings Corp and Others), the Court of Appeal again indicated that a term would not be implied if it contradicted an express term in the contract, even if it would make commercial sense to do so (see  Real Estate Bulletin Spring 2017 ('Borrowers Beware')). See also the decision of the Supreme Court refusing to imply a term for the return of sums of rent and alike after a break midquarter (Marks and Spencer Plc v BNP Paribas [2016] A.C. 742 –  Real Estate Bulletin Autumn 2016).

However, it should be noted that the recent case of Sparks v Biden [2017] EWHC 1994 (Ch) has provided a contrast to the Court's usual stance on the implication of missing terms. In that case, a term was implied into an option agreement, obliging the buyer to market and sell its property within a reasonable time of the option having been exercised and the planning permission having been obtained. Although the Sparks case does indicate that the Court can unusually be persuaded to imply missing terms, as the Co-op and case law elsewhere have demonstrated, it is rare for the Court to intervene.

This article first appeared in our Real Estate Bulletin - January 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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