PW & Co v Milton Gate Investments Ltd

A head-tenant and landlord cannot contract out of the common-law rule that a subtenancy ends when the head-tenancy is determined in accordance with its terms. The rule follows from the tenurial nature of a lease and the derivative nature of a subtenancy. A unilateral break clause cannot be recharacterised as a surrender to preserve the subtenancy. Business tenants in occupation may obtain statutory protection under Part III of the Landlord and Tenant Act 1954. Estoppel by convention may arise from subsequent dealings based on a communicated common assumption, but it requires unconscionability and relevant detriment. Here, no estoppel operated. The underleases therefore ended on the break date and PW became liable for the contractual penalty.

PW held a headlease of office premises and granted seven underleases to companies in the BT group. The headlease entitled PW to determine it by notice on 24 June 2002. Its proviso relieved PW from a substantial penalty if sufficient permitted underleases remained in force. PW served notice, and Milton Gate, the freehold owner, claimed the penalty on the basis that the underleases had also ended. BT was joined as a Part 20 defendant. The principal issues were whether the parties had contracted out of the rule in Pennell v Payne [1995] QB 192, whether the notice operated as a surrender, and whether statutory protection or estoppel altered the result.

1. Contracting out. The wording of clause 5(6), including its reference to permitted underleases, showed that CLRP and PW intended the underleases to survive. However, that agreement was ineffective. A lease creates an estate in land, and a subtenancy is a derivative estate. When the head-tenancy ends naturally in accordance with its terms, the derivative estate ends with it. The established surrender exception did not justify creating a further contractual exception.
2. Break notice and surrender. A clause permitting unilateral determination by notice produces determination by notice, not surrender. The court could not rewrite or recharacterise the clause merely to achieve the parties’ intended result. Even if it were treated as a surrender provision, it would remain a unilateral right contained in the original headlease and would fall within the rule applied to natural termination.
3. Consequences and statutory construction. If the underleases had survived, the common law would have created difficulties concerning the reversion and enforcement of rent and covenants. In light of Article 1 of the First Protocol and section 3 of the Human Rights Act 1998, sections 141 and 142 of the Law of Property Act 1925 could be construed so that the covenants were enforceable. That alternative construction did not alter the primary conclusion that the underleases ended. BT’s occupation could nevertheless attract continuation under Part III of the Landlord and Tenant Act 1954.
4. Estoppel. No estoppel by deed arose because clause 5(6) concerned a future legal consequence and was not a clear recital of existing fact. A convention did arise from the later underleases and licences, and it bound the relevant successors and subtenants. But Milton Gate and BT had mutually resiled from it, and PW could not show relevant detriment or unconscionability. The court assessed unconscionability by reference to the facts known at the hearing.
5. Disposition. Milton Gate was entitled to rely on the strict legal position. The underleases expired on 24 June 2002, subject to any statutory continuation, and PW became liable for the penalty. Milton Gate’s inconsistent positions against PW and BT did not, without a judgment or election, bar its claim.