H Company 2 Limited v Spitalfields Small Business Association Limited

A lease provision referring to premises not underlet at a peppercorn or ground rent applied to any underletting in the chain, not merely an underletting granted by the tenant under the head lease. The natural meaning of the words governed the construction. The court would not imply words limiting the provision to underlettings by that tenant.

A construction that enabled a tenant to defeat a rent-review mechanism by interposing a peppercorn underlease of the whole premises was uncommercial and unlikely to reflect the parties’ agreement. The relevant enquiry was the position at the review date. If any downstream underletting of part of the premises was at more than a peppercorn or ground rent, that part remained subject to review.

The appellant landlord appealed from an order of His Honour Judge Parfitt in the County Court at Central London, dated 20 October 2017. The judge had dismissed the landlord’s claim and declared the proper construction of clause 8(1) in two materially identical 99-year leases.

Clause 8(1) permitted review of rent for parts of the demised premises which, on the review date, had not been underlet at a peppercorn or ground rent. Shortly before the 2015 review date, the tenant granted peppercorn underleases of the whole premises. Beneath them were residential and commercial sub-underleases, some of which required substantial rent.

The issue was whether “underlet” meant only an underletting granted by the tenant under the head leases, or included every underletting further down the chain.

1. Appeal allowed. The judge’s construction was wrong. On the true construction of clause 8(1), “underlet” referred to any underletting of the demised premises, whether or not the tenant under the head lease was a party to it.

2. The provision required the court to examine the position at the review date. Its negative condition concerned the rent payable under any relevant underletting in the chain. The court would not read in words limiting the condition to premises underlet by the tenant, since the parties could readily have imposed that limitation had they intended it.

3. The defined expression “Commercial Parts” did not introduce a distinction between commercial and residential use. It described, in binary terms, those parts which were not underlet at a peppercorn or ground rent. The history of the lettings, perceived fairness between the parties, and subjective intentions did not assist construction.

4. The broader construction also avoided a reading under which a tenant could render the rent-review clause ineffective simply by inserting a peppercorn underlease of the entire premises. A downstream rent exceeding peppercorn or ground rent meant that the relevant part fell within the rent-review provision, even if the tenant itself received only a nominal rent.

5. The appellant was entitled to a declaration accordingly. The parties were to frame the precise order and declaration.

• High Court, Chancery Division: allowed the landlord’s appeal and reversed the County Court’s construction of clause 8(1).

• County Court at Central London: His Honour Judge Parfitt dismissed the landlord’s claim on 20 October 2017 and made a declaration as to clause 8(1). Permission to appeal was later granted by Mann J.