Warborough Investments Ltd v Lunar Office S.A.R.L.

In construing a commercial lease, the court must identify meaning through the language used, read in context and alongside the subject matter and other terms. Commercial common sense cannot justify rewriting clear drafting merely because the bargain appears imprudent or inconvenient. Where a lease contains separate negative covenants against underletting, each must be observed unless the wording creates an alternative route or qualification. A later covenant requiring consent and the best rent does not, without an express link, permit the tenant to disregard an earlier covenant restricting the size and minimum term of an underlease. Potential conflicts, redevelopment, voids or rent mismatches do not justify departing from that construction where the language is clear and the evidence does not establish a different commercial context.

Warborough owned the freehold premises subject to a 99-year head lease. Lunar was the registered assignee of the lease. The tenant’s predecessor granted an underlease of part of Resource House which did not comprise a complete floor or shop unit and did not satisfy the minimum-term requirement in clause 4(21)(b).

After Warborough served a notice under section 146 of the Law of Property Act 1925, Lunar sought declaratory relief. The parties agreed that the preliminary issue was whether clauses 4(21)(b) and (c) imposed cumulative obligations or provided alternative routes to a lawful underletting. The Deputy High Court Judge accepted Lunar’s alternative-route construction: [2017] EWHC 19 (Ch). Warborough appealed.

The Court of Appeal unanimously allowed the appeal.

1. Applicable construction principles. The starting point was the language used. A lease must be construed by asking what a reasonable and informed person, with the relevant background, would understand the parties to mean, having regard to the language in context, the subject matter and the other lease terms. The natural meaning of the words remains important. Commercial common sense cannot displace clear language or justify rewriting an imprudent bargain. The judge had quoted the principles stated in Arnold v Britton [2015] AC 1619 but had not applied them.
2. Separate covenants. Clause 4(21) contained four separate covenants. Sub-clause (b), read in isolation, clearly prohibited underletting any part of the premises except on the specified terms, including an underlease of at least a complete floor or shop unit and for at least 10 years.
3. No alternative route. Sub-clause (c) did not qualify or replace sub-clause (b). There was no express link, proviso or other wording indicating that the tenant could choose which covenant to satisfy. Lunar’s construction would make sub-clause (b) ineffective and would allow the tenant to avoid its restrictions simply by relying on sub-clause (c).
4. Commercial consequences. Possible conflicts between good estate management and best rent, future redevelopment, inability to re-let during the final 10 years, and a possible rent mismatch did not justify departing from the plain language. The evidence did not establish that the agreed construction was commercially abnormal, and identical words in successive sub-clauses should not be given different meanings without justification.

The underlease therefore breached clause 4(21)(b). The order on the preliminary issue was reversed.

• Court of Appeal (Civil Division). In [2018] EWCA Civ 427, the appeal was unanimously allowed.
• High Court of Justice, Chancery Division. The Deputy High Court Judge decided the preliminary construction issue in Lunar’s favour in [2017] EWHC 19 (Ch).