Landlord Succeeds in Establishing Breach of Subletting Covenant

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Leases say what they mean. That was the conclusion of the Court of Appeal on a case about the interpretation of a covenant which set out the conditions on which a tenant could assign or underlet the property.

Our client landlord owned a freehold which comprised of a number of shops and office blocks and which was let under a 99 year commercial lease. The lease contained two particular sub clauses about underletting part of the property.

The first sub clause was an absolute prohibition preventing the tenant from underletting any part of the property for less than 10 years and for anything less than complete floors or shop units as shall accord with the principles of good estate management.

The second sub clause was a qualified prohibition which said that the tenant could only underlet at the best rent reasonably obtainable with the permission of the landlord and that consent was not to be unreasonably withheld.

The tenant granted an underlease which was not of a complete floor area and was for less than 10 years. The question for the court was whether the underlease amounted to a breach of covenant under the two sub clauses.

The tenant argued that the two sub clauses were alternatives and that it did not have to comply with both of them. If it could comply with the second sub clause, that was sufficient and there was no breach of covenant.

The landlord argued that the sub clauses were part of a series of covenants which set out what the tenant had to do to grant an underlease. There was nothing in the lease which suggested that it was an “either/or” scenario.

In the High Court, the tenant’s argument prevailed but the landlord successfully appealed to the Court of Appeal and the High Court’s decision was overturned.  

The Court held that the correct starting point was the words used in the lease. The court’s role was to interpret the meaning of the words used – not to try and guess what the parties had intended some 40 years previously. In this case, the landlord’s argument was the correct approach and the tenant was in breach of covenant. 

Warborough Investments Limited v Lunar Office SARL