Summary

Under the terms of a lease, a landlord's buy-back option had to be triggered by a formal grant, and a letter containing an offer to sell the residue of the lease to the landlord did not suffice.

Facts

The court was required to determine whether a buy-back option in a lease had been validly triggered.

The tenant leased a pub from the landlord under a lease executed in 1987. The lease provided that before the tenant could assign the pub, it had to "grant" the landlord an option to buy back the residue of the lease at the current open market value ("the option clause"). If the landlord chose not to do so, the tenant could assign the lease with its consent, which was not to be withheld unreasonably. When the tenant went into administration, the administrators sold the business at above market value. Pursuant to a business purchase agreement, the purchaser apportioned £1.7 million of the purchase price to the pub. That sum did not represent a negotiated market figure. Thereafter, the administrators purported to trigger the buy-back option by offering to sell the lease to the landlord "at a proposed price of £1.7 million" ("the option letter"). That was followed by a letter from the purchaser seeking permission to have the lease assigned to itself ("the application letter"). Concluding that it could not afford £1.7 million, the landlord did not exercise the buy-back option and indicated that it would, in principle, consent to the assignment on condition that it received a rent deposit or guarantee.

Held

Could the buy-back option be triggered by a letter? - No. The option clause required the grant of a formal option; its wording was more consistent with the grant of an option than with the giving of a notice. The phrase "grant an option" connoted a formal transaction, and the word "grant" meant a discrete and formal act. The option letter was not a formal grant and therefore did not trigger the buy-back clause (see paras 33, 35-41 of judgment).

What was the effect of the Law of Property (Miscellaneous Provisions) Act 1989? - When the lease was executed in 1987 it was possible for the tenant to satisfy the requirements of the option clause by presenting the landlord with an executed option document. However, that was no longer possible following the enactment of s.2 of the Act, which required both parties to sign a contract for the disposition of an interest in land. While the parties could not have contemplated that change in the law, the court had to determine what they would have intended had they contemplated it. They would have chosen a mechanism which required the tenant to proffer an option and invite the landlord to execute it. If the landlord chose not to execute it, the tenant could seek permission to assign, it being enough that the landlord had been given the opportunity to execute the option, Shebelle Enterprises Ltd v Hampstead Garden Suburb Trust Ltd [2014] EWCA Civ 305 applied (paras 42-47).

If the buy-back option could be triggered by a letter, did the option letter suffice? - If the foregoing was wrong and the option could be triggered by a letter, a reasonable landlord would have treated the option letter as validly triggering it, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749 followed. It was clear that the tenant was proposing a price and inviting the landlord to agree to it (paras 48-53).

Was the application letter a valid application for permission to assign? - Yes, but only from the date on which the landlord was told that the purchaser had authority to apply on the tenant's behalf. The business purchase agreement gave the purchaser that authority, but the landlord did not know that when it received the letter. Since the letter did not purport to be anything other than a letter written on behalf of the purchaser, no reasonable recipient would have known that it should be treated as an application by the tenant. However, once the landlord knew that the purchaser had authority to apply for permission, it should have treated the letter as an application made on behalf of the tenant (paras 57-67).

Had the landlord waived its right to buy back the residue by conditionally consenting to the assignment? - No. Waiver required the communication of an unequivocal representation in the actual knowledge of the rights being waived, Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd's Rep. 391 and Peyman v Lanjani [1985] Ch. 457 followed (paras 74-78). The landlord had not unequivocally abandoned pursuit of the buy-back option. While its conditional consent to assignment was consistent with the option not being pursued, when viewed in context it was not an unequivocal demonstration of that (paras 82, 85). Although the landlord had known that it was entitled to buy back the lease at market value, it had mistakenly believed, on the basis of the option letter, that £1.7 million was the market value. That was a misrepresentation which had led it to believe that it was pointless to think about the option. There was therefore no waiver (paras 90-98).

Had the landlord unreasonably withheld its consent? - If the option letter had been effective to trigger the buy-back option, the landlord would have been unreasonably withholding its consent by insisting on a rent deposit. However, under the lease, it was entitled to insist on a guarantee, Vaux Group Plc v Lilley (1991) 61 P. & C.R. 446 considered and Crestfort Ltd v Tesco Stores Ltd [2005] EWHC 805 (Ch) applied (paras 99-101, 105-109).

Judgment accordingly