Received wisdom

Matt Hutchings KC, Ranjit Bhose KC and Shomik Datta report on a dispute between two public bodies about the interpretation of a commercial lease, implied terms and estoppel by convention worth over £200m.

In Rail for London v London Borough of Hackney [2022] EWHC 2929 (Ch) under a principal agreement dated 3 May 1996, the London Borough of Hackney (LBH) transferred the freehold title to Kingsland Viaduct to London Underground Limited (LUL), Rail for London’s (RFL’s) statutory predecessor, for nominal consideration for the purpose of the proposed construction of the East London Line Extension (ELLX).

The agreement provided for a sequence of 99 year leases (extendable to 125 years) whereby the viaduct arches occupied by commercial tenants were let back to LBH, then sublet to LUL (Lease C) and then in turn sub-underlet to LIKV (Lease D/the Underlease). LIKV was a third party SPV known as “Workspace”.

The parties’ dispute centred on the rent provision in Lease C. This reserved to LBH the “Basic Rent”, defined as follows:

“‘Basic Rent’ means for each Relevant Year the Basic Rent (as defined in the Underlease) that is received by the Tenant pursuant to the provisions of the Underlease”.

The Basic Rent calculated and paid by Workspace to LUL under the provisions of Lease D was a revenue rent, calculated under the terms of Lease D as a percentage of the net rental income received by Workspace.

In 2003, LUL served a notice to treat on Workspace in exercise of its compulsory purchase powers relating to ELLX. In November 2003, Lease D was surrendered to LUL for a premium of just under £8m.

For some 16 years thereafter, LUL (and then RFL, as its statutory successor) continued to pay LBH Basic Rent under Lease C, calculated in accordance with the provisions of Lease D, despite Lease D no longer being in existence.

In December 2019, RFL asserted that such payments were in error, and that as a result of the surrender of Lease D, the Basic Rent payable under Lease C was zero. This was on the basis that, since the surrender, no Basic Rent had been “received by the Tenant [of Lease C] pursuant to the provisions of” Lease D.

If correct, RFL’s contention would have meant that zero rent was payable under Lease C for the remaining 75+ years of the term. By the date of trial, the Basic Rent was or would have been approaching £2m per annum.

This gave rise to three issues:

• The proper interpretation of Lease C. LBH contended that the Basic Rent remained payable notwithstanding the surrender of Lease D and any other interpretation was an affront to business common sense. RFL argued that Lease C “meant what it said”.
• Whether a term should be implied into Lease C on the ground of obviousness and/or business efficacy. LBH argued that that it was commercially absurd for LBH to lose its share of the rental income from the arches as a result of a commercial decision reached between LUL and Workspace. RFL denied this and in any event argued that the proposed implied term would contradict the express terms of the lease.
• Whether RFL was estopped by convention from denying that the Basic Rent remained payable under Lease C as a result of a common assumption relied on by LBH in particular by not suing its former solicitors, who advised it in relation to the principal agreement, within the limitation period that had expired during the currency of the common assumption. RFL denied that an estoppel was made out on the facts, but also contended that it was impermissible for LBH to use estoppel by convention to effectively found a cause of action for the Basic Rent in a manner that circumvented the doctrine of consideration (in short, the “shield v sword issue”).

The case was tried by HHJ Claire Jackson, sitting as a High Court Judge, on 18 – 20 October 2022. She handed down her judgment on 12 December 2022.

RFL succeeded on issue (1). The Judge held that the terms of Lease C were clear and unambiguous and therefore there was no need for the Court when interpreting the lease to consider business sense (paras 77 – 87).

LBH succeeded on issue (2) and thus succeeded overall. The Judge held that there was to be implied into the definition of “Basic Rent” in Lease C a further part of the definition as follows:

“where the Underlease is determined the sum that is received by the Tenant ascertained in accordance with the provisions of the Underlease (including its definition of Basic Rent) with all necessary modifications”.

Whilst the Judge did not find that Lease C as written was commercially absurd, given the benefits to LBH of ELLX proceeding, without the implied term Lease C lacked commercial coherence and therefore the implication was justified on the ground of business efficacy and also obviousness. Further, whilst the express wording referred to the need for Lease D to exist for the Basic Rent to be paid, this was not inconsistent with an implied term providing for rent to be paid if Lease D ceased to exist (paras 88 – 114).

It was therefore not necessary for the Judge to go on to consider issue (3), and in particular she did not address the vexed shield v sword issue. She did, however, make findings of fact in LBH’s favour and in particular found that the loss of an arguable claim against LBH’s former solicitors constituted a sufficient detriment and that, if estoppel by convention could succeed as a matter of law, it would be unjust and unconscionable for RFL to resile from it (paras 115 – 118).

The decision will be of interest to all property and commercial practitioners.

Matt Hutchings KC is a barrister at Cornerstone Barristers. He represented RFL, instructed by Morgan Francis at TFL Legal.

Ranjit Bhose KC and Shomik Datta, also of Cornerstone, represented LBH, instructed by James Gibson at LB Hackney Legal.

Both Ranjit and Shomik will be speaking at a Service Charge Symposium on Thursday, 25 May. Register here.