Business Environment Bow Lane Ltd v Deanwater Estates Ltd

An alleged collateral contract arising from pre-contractual negotiations must be assessed objectively when the principal lease or conveyance is executed. The whole course of negotiations and the executed document must be considered. In a commercial land transaction, parties asserting an extraneous promise must show a distinct intention to give it contractual force.

A statement made during negotiations marked subject to contract cannot crystallise into a collateral contract while negotiations continue. Where the parties subsequently negotiate and agree an amendment in the lease to address the same concern, the earlier assurance is superseded. Continuing negotiations may also show that the promisee did not rely on the assurance for promissory-estoppel purposes.

The respondent lessee surrendered an earlier lease and entered into a five-year replacement lease of part of a London building. The new lease contained repairing and yielding-up covenants. Before execution, the lessor's solicitors stated that a terminal schedule of dilapidations would not be served. The parties then continued to negotiate the repairing provisions and agreed an amendment to clause 2(6), which was included in the executed lease.

After the lease ended, the appellant lessor, as assignee of the reversion, claimed dilapidations. Briggs J dismissed the action on a preliminary issue, holding that the earlier assurance gave rise to a collateral contract or promissory estoppel. The lessor appealed. The central issue was whether the correspondence, viewed as a whole at execution of the replacement lease, created a collateral contractual promise precluding enforcement of the repairing covenants.

1. Appeal allowed. The lessee had no defence based on collateral contract or promissory estoppel. The issue had to be decided by reference to the entire course of negotiations and their outcome at the execution of the replacement lease, rather than by first treating the solicitor's letter of 4 December 2001 as creating a prima facie collateral agreement.

2. A subject to contract condition did not prevent a collateral contract from taking effect when the principal contract was executed. It did, however, mean that no collateral contract could have arisen while negotiations remained open to withdrawal or modification. The court therefore asked whether the parties objectively intended, at execution, to make a separate contract in addition to the lease.

3. Applying the relevant considerations identified in Inntrepreneur Pub Company Ltd v East Crown Ltd [2000] 2 Ll.L.R 611, the subsequent negotiations, the agreement of an amendment to the lease, the delay before execution, and the future and commercially extensive nature of the alleged assurance all pointed against that intention. The amendment to clause 2(6) was the parties' considered agreed resolution of the relevant concerns. In the absence of a rectification claim, it superseded the earlier assurance.

4. The continued negotiations also showed that the lessee did not accept and act upon the assurance as sufficient protection. That was fatal to the analogous claim of promissory estoppel. The court applied the necessary caution concerning collateral promises in land transactions, reflected in Heilbut Symons v Buckleton [1913] AC 30.

5. The Chancellor additionally observed that a purported collateral promise which was in truth an integral term of a disposition of land would require compliance with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. The matter was remitted to the Master for directions concerning the future conduct of the dilapidations claim.

• Court of Appeal (Civil Division): Allowed the lessor's appeal and remitted the claim to the Master for further directions: [2007] EWCA Civ 622.
• High Court, Chancery Division: Briggs J determined a preliminary issue in the lessee's favour and dismissed the dilapidations action, holding that a collateral contract or promissory estoppel provided a defence. He granted permission to appeal.