A recent case stresses the significance of documenting every agreed term into the lease document.
In June 2007 the Court of Appeal decided on the relevance of pre-contractual correspondence and in particular whether it could amount to a collateral contract to a lease (Business Environment Bow Lane Limited v Deanwater Estates Limited [2007]).
The decision highlighted once again the importance of including all relevant heads of terms in the lease document. A number of tenants (and landlords!) are being pressed for a swift completion of the documentation on the basis that there are other offers and that the tenant has to be flexible in order to “secure the deal”. Solicitors are often not made aware by their clients of the terms which have been agreed prior to the Solicitors’ instruction since the parties do not consider it necessary to document them in the lease. The above case illustrates perfectly the potential disadvantages of such an approach.
Facts of the Case
The parties had agreed that the tenant should surrender an existing lease of a whole office building to the landlord, and take a shorter lease of part of the building. The tenant relied on the landlord’s assurance that he would not serve a terminal schedule of dilapidations for the property, (this had been subject of negotiations between the parties when agreeing the surrender and the terms of the new lease).
During the negotiations and leading up to the grant of the lease, the tenant was reassured by the landlord, in writing, that no terminal schedule of dilapidations would be served. However, the new lease, granted in 2002, contained a full repairing covenant by the tenant. No agreement for lease was entered into.
The landlord later sold the reversion to a third party and the tenant exercised its early break option in the lease. After the tenant had terminated the lease, the new landlord served a terminal schedule of dilapidations. The tenant claimed that this was a breach of the assurance given by the original landlord on the grant of the lease.
The new landlord subsequently issued proceedings against the tenant for breach of the repairing covenant in the lease. The tenant claimed that the assurance given by the original landlord not to serve a terminal schedule amounted to a collateral contract to the lease.
The Court of Appeal held that the correspondence between the parties leading up to the grant of the lease could not be viewed as a collateral contract. In order for it to amount to a separate contract it needed to comply with s2 of the Law of Property (Miscellaneous Provisions) Act 1989, which states that all agreements in relation to land need to be in writing incorporating all terms agreed between the parties. Either all terms must be incorporated within the same document or the document must contain a written reference to another document, such as a letter. The Court held that the assurance given by the original landlord in the letter did not constitute an agreement. The Court held that the assurances should instead be seen as merely part of the negotiations which led to the execution of a written document, i.e. the lease.
Practical Significance
The agreed heads of terms should always find their way into the lease document (or a formal agreement for lease). The tenant in this case asked initially for a side letter to include an explicit warranty to the effect that no terminal schedule of dilapidations would be served. The original landlord’s solicitor responded with the words: “…the nature of this transaction is to be one of flexibility and co-operation” and that their client “has already indicated that a terminal schedule of dilapidations will not be served and this should be satisfactory comfort to your clients”. All pre-contract correspondence was marked “subject to contract” (as is usual practice between solicitors).
The Landlord and Tenant relationship has always been one which should be governed exclusively by the terms of the lease (or, where appropriate, an agreement for lease). The lease should be capable of “standing alone” as a written, legally binding, contract. It follows therefore that a lease cannot be governed by any oral or written statements made prior to the grant of the lease. This rationale was established largely on the principle of the transferability of leases and the fact that the parties ending up as parties to the lease have not necessarily been involved in the negotiation of its terms.
In the judgment, it was recommended that “in a normal conveyancing transaction in a commercial context with both parties represented by experienced solicitors the usual course of dealing is to ensure that all agreed terms are put into the contract and conveyance, transfer or lease.” This has to be the preferred route. Tenants as well as landlords should insist that the agreed terms are expressly incorporated into the lease wherever possible.
If it is too late, i.e. the lease has been completed without the inclusion of every previously agreed term, it remains to be seen whether the terms can be interpreted as being agreed collaterally to the lease.
An earlier decision (Inntrepreneur Pub Co (GL) v East Crown Ltd [2000]) set out five indicators which are intended to assist in establishing the existence (or not) of a collateral contract when dealing with pre-contractual assurances:
(a) any pre-contractual statement will be treated as having contractual effect if this was intended by the parties. This is to be decided by looking at the totality of the evidence
(b) if an objective observer’s view is that it was meant to be part of the contract then it will be
(c) the pre-contractual statement should not be followed by further negotiations nor should it be followed by a written contract which does not contain a term corresponding to the statement.
(d) the longer the time interval between the statement and the contract the less likely it is that it will be part of the contract
(e) a representation must be more a statement of future than of a “future forecast”
Therefore, it is not safe to say that a landlord can try to market his property to tenants by giving random incentives and then subsequently failing to include them in the lease. Any incentive given by a landlord to enter into a lease has to be considered carefully and, providing one or more of the Inntrepreneur indicators are satisfied, may constitute a collateral contract.
However, given the vagueness and uncertainty of the Inntrepreneur indicators, tenants should, where possible, refuse to accept verbal assurances or pre-contractual incentives. Instead, tenants should make their solicitors aware of all the agreed terms prior to the grant of a lease in order that each term can be incorporated into the documentation.
