Surrender by agreement (conditional)

Agreement to surrender

Conditional on payment of monies due and giving up of possession

Principles of interpretation of lease terms

Dreams Ltd v  Pavilion Property Trustees Ltd

[2020] EWHC 1169 (Ch)

Summary

A conditional agreement to surrender was conditional on the tenant giving up vacant possession, but not conditional on the tenant paying an unliquidated sum for dilapidations.

An obligation to pay “any money due on completion” did not include an unliquidated damages sum for dilapidations.  So that an agreement to surrender on payment of “any money due on completion” did not require the tenant to pay such a sum.

Facts

Pavilion (“the landlord” and defendant) owns a retail building on a retail estate in Margate.  The building was let to Dreams plc under a 2006 lease for a term ending in 2031.

The lease required the tenant to pay rent quarterly in advance. Additional rents in respect of insurance, service charge, interest and VAT were also reserved. The lease also contained other standard tenant covenants to keep the property in repair, not to make alterations without consent and to remove belongings at the end of the term. In addition, the tenant covenanted to reimburse the landlord for costs incurred in the preparation of any schedule of dilapidations or in pursuing any payment.

In 2013, Dreams plc went into administration, and the lease was assigned to the claimant tenant, Dreams Ltd. An Agreement for Surrender (the Agreement) was then entered into between the new tenant and the landlord. The Agreement gave each party the right to require the surrender on 6 months’ notice. It also contained the following clauses:

  • Clause 6: “[it] is a condition of completion that the Tenant is to pay any money due on completion by direct credit"
  • Clause 8: “The surrender is with vacant possession.”

On 16 October 2018, the tenant served a notice to surrender the lease on 25 April 2019.

By the completion date, the parties had not determined an agreed sum owed to the landlord in respect of dilapidations. The landlord’s solicitors stated that payment of the full amount set out in the Schedule of Dilapidations was required if the surrender was to take effect. In response to a request for an exact figure, the landlord's solicitors said:

  "… the figure can easily be calculated by your client, being the sum of the apportioned rent, service charge and insurance, together with the final figure set out in the dilapidations schedule. To the extent that your client has carried out any of the works listed in the schedule, it is better placed than ours to make an appropriate deduction in respect of the works, and the associated loss of rent claim. No doubt your client's surveyor can assist."

The landlord’s solicitors also wrote saying that on termination of the Lease the tenant should hand back the property in accordance with the schedule of dilapidations. It also required the removal of all tenant's belongings, trade fixtures and fittings, in accordance with the lease.

Issues

  • Was completion of the surrender conditional on a payment in respect of dilapidations?
  • Was the tenant obliged to give vacant possession before the landlord was obliged to accept the surrender?

Decision

The High Court considered the case with reference to leading authorities on the interpretation of contract terms, in particular the principles of interpretation as distilled by Lord Neuberger Arnold v Britton [2015] UKSC 36 in the following way:

 

"15. When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann. And it does so by focussing on the meaning of the relevant words … in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.

19. The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.

20. Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. … Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party."

Applying those principles, the High Court held that:

  • Completion of the surrender was not conditional on a payment in respect of dilapidations; but
  • The tenant was obliged to give vacant possession before the landlord was obliged to accept the surrender

Dilapidations

Noting that “language always takes its colour from the situation in which it is used and in the end the question is one of interpretation of the particular words used by the parties in their contractual setting and context” the court recognised that:

  “It may be possible in some contexts for the concept of ‘monies due’ to be broad enough to include damages, but to my mind, as used here, the obligation to pay the ‘money due’ naturally connotes that there is a crystallised liability to pay a given sum on the relevant date (here the date of completion)”.

However, the court added “I do not think [money due] naturally includes the undertaking to do something other than pay money, such as keeping the Premises in repair. And a potential, but unresolved, liability under the general law to pay damages for breach of such an obligation would not naturally or ordinarily be called ‘monies due’."

There was no mechanism for determining the dilapidations dispute prior to completion, and the landlord could not at completion specify an exact sum for the dilapidations. In assessing the language of the Agreement, the phrase “any money due on completion” did not include an unliquidated damages sum for dilapidations.

Vacant possession

The argument here by the tenant was that, although contractually bound to give vacant possession, it was not a condition precedent and not set out in the conditions to completion within the Agreement, and that the landlord could be compensated in damages. 

The court disagreed. The Agreement was a contract for the conveyance of an interest in land (which incorporated the Standard Commercial Property Conditions) and, under the general law, where a seller has undertaken to deliver vacant possession, the purchaser is not required to complete if the seller is unwilling or unable to give vacant possession.  In addition, this finding was supported by commercial common sense given that the premises comprised a retail unit which the parties would expect the landlord to want to re-let as soon as possible after completion. Failure by the tenant to give vacant possession could hinder this.

Miles J:

  “… I consider that the performance of the Claimant's obligation to give vacant possession is a direct quid pro quo of its entitlement to complete the surrender. The bargain involved (among other things) the transfer of the Premises with vacant possession in return for the acceptance of the surrender and the release of all liabilities under the Lease. The two things are to my mind properly to be regarded as conditional obligations, with one being needed to earn performance of the other.”

 

 

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