Vivienne Westwood Ltd v Conduit Street Development Ltd

A payment of rent at an increased rate does not, without more, establish agreement of a rent review. The court must identify objectively an offer to settle the reviewed rent and acceptance of that offer. A side letter and lease made as part of one transaction must be construed together. Where the substantive bargain gives the tenant a right to pay reduced rent, a provision reverting to higher rent upon breach imposes a secondary obligation capable of being a penalty. The provision is penal where the detriment is out of all proportion to the landlord’s legitimate interest, particularly where it applies to any non-trivial breach regardless of seriousness or consequences. Unlawful retrospective wording may be severed if the remaining contract remains supported by consideration and retains its essential character.

The claimant occupied retail premises under a 15-year lease containing upwards-only rent reviews. A contemporaneous side letter allowed it, subject to conditions, to pay reduced rent capped at £125,000 per annum after the first review. The claimant later paid a quarterly invoice calculated at that rate and argued that the payment settled the 2014 rent review.

The defendant subsequently terminated the side letter after alleging breach of covenant. The issues were whether the rent review had been agreed at £125,000 and whether termination of the reduced-rent arrangement was an unenforceable contractual penalty. The review was ultimately agreed at £232,500 per annum.

1. Rent review. The claimant failed to establish a binding compromise at £125,000 per annum. An objectively identifiable offer to settle the rent review and acceptance of that offer were required. The invoice was a draft, the rent review had not been activated or discussed, and the side letter supplied a sensible explanation for payment at the capped rate pending review. The review was subsequently agreed at £232,500 per annum.
2. Subsequent conduct. Where the alleged contract arises from conduct, subsequent conduct may assist in identifying what agreement was reached. That principle concerns factual agreement and does not permit subsequent conduct to construe the meaning of an otherwise complete written contract.
3. Construction of the side letter. The lease and side letter formed one transaction and had to be read together. Their substance was that the claimant’s primary rental obligation, while the conditions were satisfied, was to pay the reduced rent. Reversion to the higher rent after breach was therefore a secondary obligation capable of being penal.
4. Penalty. Applying the principles restated in Cavendish Square Holding BV v Makdessi [2016] UKSC 67, the court considered the legitimate interest in performance and whether the secondary obligation was exorbitant or unconscionable. The increased rent applied to any non-trivial breach, regardless of its nature, seriousness, timing or consequences, and was additional to interest, costs and damages. It was therefore penal. The termination provision was unenforceable.
5. The court declined to imply a requirement of material breach, but implied that a trivial or de minimis breach could not trigger termination. The wording otherwise gave the termination retrospective effect. Even if only that retrospective element were penal, it could be severed by removing the words producing that effect, leaving the remaining arrangement enforceable prospectively.
6. The purported termination was consequently ineffective. The claimant remained entitled to pay rent at the capped rate of £125,000 per annum while satisfying the side letter’s conditions.