Summary

Lessees who contracted to assign the remainder of their lease to the claimants were in breach of a pre-emption clause in the lease in favour of the lessors who accordingly acquired an equitable interest in the lease, ahead of the claimants, that was not avoided by s.17 Landlord and Tenant Act 1954.

Facts

Action raising questions as to the meaning and effect of clause 5 of a lease commonly used by the Alexander Estate which held the freehold of a number of properties in South Kensington let for residential purposes on long leases. The third and fourth defendants ('the Bailies') were assignees of a long lease of No.1 Thurloe Close. Clause 5 of the lease provided that if the lessee wished to dispose of the lease he should first offer it to the lessors. In 1986 the Bailies entered into an agreement to sell the lease to Tiffany (the first claimant) for £250,000 after the Bailies had served on the landlord a notice of their wish to acquire the freehold under the Leasehold Reform Act 1967. No such notice was served because the Bailies were advised that they were not entitled to enfranchise. The Bailies moved out of No.1 and N, who was associated with Tiffany, moved in together with C, the second claimant. Proceedings between the Bailies, N, C and Tiffany were settled in 1999 on terms that the Bailies held the lease of No.1 for the benefit of Tiffany and Tiffany had agreed to sell it to C for £475,000. In proceedings by the lessors the Bailies agreed to transfer the lease to the lessors for £250,000 purportedly in accordance with clause 5. Tiffany and C claimed an interest in the lease. The issues for the court were: (i) whether an equitable interest in the lease in favour of the lessors arose in 1986 when the Bailies contracted to sell it to Tiffany without having offered it to the lessors as required by clause 5; and (ii) whether in so far as the transactions effected by the Bailies in 1986 required them to assign to the lessors they fell foul of s.17 Landlord and Tenant Act 1954 as in effect a contract of surrender since the Bailies were then still resident in No.1.

Held

(1) The words of clause 5, whether construed strictly or not, created a plain positive obligation on the Bailies to make the required offer to the lessors not later than immediately before entering into an enforceable contract for sale of the lease to Tiffany ((1) Bircham & Co Nominees Ltd (2) Sarah Stowell v Worrell Holdings Ltd (2001) 82 P & CR 34 applied). Since the Bailies were obliged but failed to offer the remainder of the term to the lessors in 1986 at £250,000 an equitable interest in the lease was thereby created in the lessors' favour (Pritchard v Briggs (1980) Ch 338). The Bailies' contracting to assign to Tiffany created an equitable interest in the lessors' favour before any interest could have arisen in favour of Tiffany and ahead of any interest in the claimants arising by virtue of the dealings in 1999. (2) Assuming that if the clause 5 mechanism had been operated in 1986 it would have led, if the lessors had accepted the Bailies' offer at the then price of £250,000, to a contract which was unenforceable as a surrender contrary to s.17 of the 1954 Act (applying Re Hennessey's Agreement (1975) Ch 252), the obligation to offer was not struck down by s.17. As no offer was made to the lessors no contract which fell foul of s.17 was made with them. Accordingly, even if Hennessey (supra) had the effect contended for, there remained an obligation on the Bailies to offer the lease to the lessors at £250,000, an obligation in respect of which the Bailies were in breach from 1986 and which created an equitable interest in the lessors' favour.

Judgment for the lessors.