Underleases - determination of headlease - whether underleases determining on determination of headlease by notice - whether parties effectively contracting for different result - whether outcome affected by Human Rights Act 1998 - claim dismissed

PW & Co v Milton Gate Investments Ltd (BT Property Ltd and another, Part 20 defendants): ChD (Mr Justice Neuberger): 8 August 2003

The claimant held the headlease of an office building owned by the defendant.

The two part 20 defendants were subtenants holding underleases of parts of the building.

At the date on which the headlease and underleases were granted, the parties were all under a misconception, based on the then accepted case law as stated in Brown v Wilson (1949) 156 EG 45, that if the headtenant exercised its right to determine the headlease, the subtenants would be entitled to remain in possession.

Clause 5(6) of the headlease entitled the claimant to give notice determining the headlease on a certain date 'subject to any permitted underleases'.

Upon the exercise of that right, the tenant would be required to pay a penalty to the landlord unless 75% of the lettable office area of the building was underlet in accordance with the terms of the lease, 'and such permitted underlease or underleases have an unexpired term of at least five years'.

In October 2000, the claimant exercised its right to determine the headlease.

By that time, Brown had been overruled by Pennell v Payne [1995] 1 EGLR 6, which stated that, in such circumstances, any subtenancy would also determine.

The claimant sought a declaration that the penalty was not payable upon determination of its headlease because the parties had contracted out of the usual consequences of determination of the headlease and therefore, the underleases continued.

The defendant argued that the underleases had determined at the same time.

Thus, 75% of the building was not sublet and the penalty was payable.

Kirk Reynolds QC and Nicholas Taggart (instructed by Slaughter & May) for the claimant; David Hodge QC and Nicole Sandells (instructed by Denton Wilde Sapte, Milton Keynes) for the defendant; Nicholas Dowding QC and Jonathan Evans (instructed by Ashurst Morris Crisp) for the part 20 defendants.

Held: The claim was dismissed.

On a fair reading of the expression 'subject to any permitted underleases' in clause 5(6), the parties had agreed that, upon service of a notice, the headlease would determine but that any permitted underlease would be unaffected by such determination.

Accordingly, the parties had purported to contract out of the consequences of Pennell, as upheld by the House of Lords in Barrett v Morgan [2000] 1 EGLR 8.

However, to permit them to do so would be contrary to the principle that the determination of a headlease in accordance with its terms would lead to the destruction of any subtenancy, except where the determination of the headlease arose from some consensual arrangement between the landlord and the headtenant not provided for in the headlease: Barrett, per Lord Millett applied; Webb v Russell (1789) 3 TR 393, considered.

It was not possible to contend that the headlease had been determined by surrender, rather than by notice to break, so that the underleases continued.

Clause 5(6) could not be treated as a surrender provision.

Although the law was concerned with substance rather than form, it would not be consistent with the orderly development of the common law if the court could, as a matter of construction, produce the result that it believed the parties to the contract wanted by rewriting the contract: Re Stirrup's Contract [1961] 1 WLR 449 and Barrett and Street v Mountford [1985] 1 EGLR 128, considered.

Accordingly, the underleases had not survived the determination of the headlease.

This conclusion was unaffected by the Human Rights Act 1998: Stretch v United Kingdom (44277/98) [2003] 29 EG 118 (CS), considered.

No estoppel had arisen to affect that outcome as between any of the parties.

Therefore, the claimant was liable to pay the penalty to the defendant.