Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd

A settlement agreement may alter obligations concerning a property’s condition without necessarily waiving an independent condition in a lease break clause. However, where the agreement settles claims for reinstatement and notional rent that arise only on termination, and records a full and final settlement of the lease breaks, it may be construed, or supplemented by a necessary implied term, so that the lease ends on the break date regardless of vacant possession. Failure to give vacant possession then constitutes a breach sounding in damages rather than defeating the break. The appeal was dismissed by a majority.

The tenant held two materially identical commercial leases containing break clauses conditional on payment of rent, substantial performance of material covenants and delivery of vacant possession on the break date. The tenant served break notices and the parties later entered into a Settlement Agreement for £172,000. That sum included amounts for ordinary dilapidations, reinstatement works arising only on termination and notional rent. The agreement incorporated a photographic schedule described as part of the full and final settlement of the dilapidations claims and lease breaks.

The tenant had not completed vacating the premises by 30 December 2004. Lewison J held that the Settlement Agreement waived the remaining conditions of the break clauses: [2006] EWHC 1008 (Ch). The landlord appealed, contending that vacant possession remained a condition. The central issue was whether the Settlement Agreement, by construction or implication, made the leases terminate despite the tenant’s failure to give vacant possession.

By a majority, Sedley LJ and Sir Anthony Clarke MR dismissed the appeal. Lloyd LJ dissented and would have allowed it.

1. The court accepted the general rule that conditions attached to a lease break option require strict compliance, subject to any relaxation expressed by the clause itself. The break clause’s requirement for vacant possession would ordinarily have remained decisive.
2. The question was determined by the Settlement Agreement construed in its factual context, or by implication of a term. An implied term must be necessary to give business efficacy to the agreement or to make it work, and not merely reasonable. The officious-bystander test asks whether both parties would have answered that the proposed term was obvious when the agreement was made. The presumption against adding terms to a written agreement remains stronger where it appears complete: see Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, Liverpool City Council v Irwin [1977] AC 239 and The Moorcock (1889) 14 PD 64.
3. The majority considered the agreement’s payment and incorporated schedule material. The settlement sum included reinstatement costs and notional rent which would only arise if the leases ended. The schedule described the arrangement as a full and final settlement of the dilapidations claims and lease breaks. It therefore made commercial and legal sense only if the leases were to end on 30 December 2004.
4. Sedley LJ treated the result principally as the meaning and effect of the express agreement. Sir Anthony Clarke MR treated it as an implied term necessary to make the agreement work. In either analysis, the agreement displaced the operation of the vacant-possession condition. Failure to yield up possession remained a breach of the lease covenant, giving rise to compensation and, while possession was retained, the consequences of trespass. A deterioration in condition was similarly remediable as a breach of the substituted covenant, rather than defeating the break.
5. Lloyd LJ considered that the short, professionally drafted agreement was focused on condition and said nothing about the break clause. In his view, the landlord had no obvious reason to surrender the valuable protection of conditionality, and the termination-related liabilities could simply have been accelerated if the lease continued. He would have held that vacant possession remained a condition.

• Court of Appeal (Civil Division) — The majority dismissed the appeal. Lloyd LJ dissented and would have allowed it.
• High Court, Chancery Division — Lewison J held that the Settlement Agreement waived the remaining conditions of the break clause and declared that the leases had ended: [2006] EWHC 1008 (Ch).