- Chancery Division
- 9 December 2020
- Judge Halliwell (sitting as a High Court judge)
- [2020] EWHC 3367 (Ch)
- [2020] PLSCS 223
Landlord and tenant – Covenant – Construction – First claimant reversionary leasehold owner of hotel granting lease to defendants – First defendant original tenant covenanting to pay for supplies of electricity and gas at no more than prevailing commercial rates – Preliminary issue arising as to meaning of “prevailing commercial rates” – Whether prevailing commercial rates being of supplies from private utility supplier or public network – Preliminary issue determined
The first claimant was the reversionary leasehold owner of land at Manchester Airport. On 30 October 1996, it entered into a lease with the first defendant under which the first claimant agreed to carry out enabling works and the first defendant agreed to build a hotel; once the building works were complete, the hotel would be let on the terms of an appended draft lease. The hotel was constructed and, pursuant to the 1996 agreement, a lease was agreed for a term of 55 years from September 1998.
In October 2001, the first defendant entered into a sale and leaseback transaction with Q Ltd. The first claimant gave the first defendant licence to assign and Q Ltd covenanted to comply with the lease. A deed of variation made modifications to some of the covenants.
Q Ltd subsequently assigned the lease to the second defendant and the first claimant granted the second claimant an intermediate lease of land including the hotel. The first claimant continued to supply electricity and gas to the hotel and invoice the first defendant directly. Moreover, the first defendant covenanted to pay for those supplies.
A preliminary issue arose as to the meaning of the covenant, in clause 5.3.2 of the lease, for the first defendant, as original tenant, to pay for electricity and gas “at no more than… the… prevailing commercial rates…” The claimants contended that the covenant required the first defendant to pay for those supplies at no more than the prevailing commercial rates for such supplies from a private utility supplier. The first defendant contended that it should be based on the prevailing commercial rates for supplies from a public network.
Held: The preliminary issue was determined accordingly.
(1) A document was to be interpreted in one unitary exercise in which the words used were construed in the light of the admissible background. It also involved an iterative process by which each suggested interpretation was checked against the provisions of the contract and its commercial consequences investigated. If the contract was susceptible of more than one interpretation, the court might prefer the construction which was consistent with business common sense and reject the other: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Arnold v Britton [2015] EGLR 53, Rainy Sky v Kookmin Bank [2011] 1 WLR 2900 and Wood v Capita Insurance Services Ltd [2017] AC 1173 considered.
(2) In the present case, there was an issue as to the date for ascertainment of the admissible background. The claimant argued that it should be ascertained on 29 October 2001 on the basis that the deed of variation operated as a surrender and re-grant. The first defendant argued that it should be ascertained on 30 October 1996, when the parties entered into the 1996 agreement.
In BlueCo Ltd v BWAT Retail Nominee (1) Ltd [2014] EWCA Civ 154, Briggs LJ said that it was strongly arguable that the admissible background was to be ascertained on the date of the antecedent contract since that was the date of the relevant bargain and there had been no material alteration to the parties’ contractual rights. That was no more than a view, which contradicted the approach of the Chancellor in the same case. However, it was open to the court in the present case to adopt Briggs LJ’s approach since it was not possible to discern a collective ratio to the contrary.
A provision incorporated by amendment was to be construed in the light of the background knowledge reasonably available when the amendment was agreed. In a case such as the present, where the contractual commitment was entirely a function of the antecedent agreement, the admissible background was to be ascertained as at 30 October 1996 when the parties entered into the 1996 agreement: Portsmouth City Football Club Ltd v Stellar Properties (Portsmouth) Ltd [2004] EWCA Civ 760 considered.
(3) The covenant in clause 5.3.2 of the lease was in simple terms. It did not identify a hypothetical market to which the prevailing commercial rate was applicable, nor did it provide that it was to be assessed with reference to assumptions. The court had to avoid, so far as possible, an excursion into the world of make believe; rather the lease should be construed so as to reflect the factual position of the parties and the state of affairs existing at the time they entered into the 1996 agreement. That was consistent with the natural and ordinary meaning of the words used and consistent with business common sense. If parties were to avoid departing further from reality than was necessary to give effect to a hypothetical assumption, there was every reason to avoid departing from reality when there was no contractual requirement to do so: Charrington & Co Ltd v Wooder [1914] AC 71, Co-operative Wholesale Society v National Westminster Bank plc [1995] 1 EGLR 97; Harbinger Capital Partners v Caldwell [2013] EWCA Civ 492 and Cornwall Coast County Club v Cardgrange Ltd [1987] 1 EGLR 146 considered.
(4) In order to ascertain the prevailing commercial rate, it was necessary to identify a market or comparator which should accommodate or approximate, as closely as possible, the contractual arrangements between the claimants and the first defendant in respect of the hotel.
The private utility networks of major UK airports could collectively be regarded as an identifiable market or comparator. When viewed in that way, they accommodated or more closely approximated the parties’ contractual arrangements than any other appropriate comparator. The major airports included all UK airports which received international passenger flights in addition to internal passenger flights and operated private utilities networks. Manchester Airport had a private utility network and it had charged customers and tenants for the supply of electricity for many years. It might thus be possible to regard its tenants and customers as a market in which the first claimant fixed the prevailing rates.
Martin Hutchings QC (instructed by Eversheds Sutherland LLP) appeared for the claimants; Adam Rosenthal QC (instructed by Marriott Harrison LLP) appeared for the first defendant; Simon Atkinson (instructed by Travers Smith LLP) appeared for the second defendant.
Eileen O’Grady, barrister
