Court implies term into lease where rent was calculated by reference to a surrendered underlease

In Rail for London Ltd v Hackney LBC [2022] EWHC 2929 (Ch) (12 December 2022) (Jackson J), a lease provided for the rent payable by the Tenant to be calculated by reference to the rent payable under an underlease of the property. The lease was part of a complex arrangement of transactions between the Landlord and Tenant.

The underlease was surrendered in 2003 and the Tenant became the direct landlord of the occupational tenants. Until 2019, the Tenant paid rent to the Landlord based on the rent received from the Occupational Tenants. In 2019, the Tenant argued that, because the underlease had been surrendered, there was no rent payable under the underlease and therefore the rent due under the lease was nil. The Tenant sought a declaration to that effect. The landlord counterclaimed for a declaration that the rent remained payable.

The High Court (Judge Claire Jackson) found that the construction of the obligation to pay rent In the lease was clear and unambiguous. However, construing a document and considering whether terms should be implied were two different things. The landlord argued for an implied term that the rent payable by the Tenant be calculated by reference to the underlease, or, if that underlease were determined, by reference to the sum received by the Tenant from the Occupational Tenants (implied term).

Applying the test for implying terms into a contract from Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, the court held that, without the implied term, the lease lacked commercial and practical coherence within the wider suite of agreements. It made no business sense for the Landlord to have agreed a scheme that left it without an income stream. It was obvious that a term should be implied to allow the Landlord to continue to receive rent. This term could be expressed clearly, was not inconsistent with the lease, and was reasonable. The judge also suggested (obiter) that if estoppel by convention could be established in law, it would on the facts be unjust for the Tenant to claim that the Landlord had no right to rent.

This case was decided against the context of the various agreements between the parties. It may be of limited application to other leases, but is a good example of the complications that can arise when a lease reserves rent by reference to an underlease that is later surrendered.

What this case highlights once again, is the importance of seeking legal advice, always. The impact of, in this case, a Surrender and it’s knock on effects, the importance of clear drafting, interpretation, etc., having legal advice at every step of the way is vital.

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