Variation of lease did not create new tenancy; LAW REPORT v 14 September 1995

Friends Provident Life Office v British Railways Board; Court of Appeal (Lord Justice Beldam, Lord Justice Waite and Sir Christopher Slade) 28 July 1995

Where a landlord and tenant entered into an agreement which varied the terms of the subsisting tenancy but showed a clear intention not to create a new tenancy, the court would give effect to such intention unless the only way by which the law could give effect to the arrangements made between the parties was to imply the surrender of the old tenancy and the creation of a new one.

The Court of Appeal unanimously allowed an appeal by the landlord, Friends Provident Life Office, against the decision of Mr Recorder Russell on 16 February 1994, who rejected its claim against the respondent, British Railways Board, for arrears of rent of pounds 38,462 due in respect of an office block at 6-34 Oxford Road, Reading, Berkshire.

These premises were originally let in 1957 by the appellant's predecessor in title, who granted the respondent's predecessor a 21-year underlease and a reversionary underlease for a similar term from 1978. In 1984 the respondent, with the then lessor's agreement, by deed assigned the remainder of the term of the reversionary underlease to Commercial Equity Holdings Ltd (CEH).

In February 1985, CEH executed a deed of variation with the lessor which substantially increased the rent payable for the premises and altered the covenants against alienation and the user covenant to permit CEH to grant sub-tenancies and licences far more freely. In 1988 CEH assigned the remainder of the term of the underlease as varied to Showhasty Ltd, a company now in liquidation, which owed rent arrears of pounds 32,626. The remainder of the appellant's claim was for an insurance rent payable under the terms of the reversionary underlease.

The appellant claimed that the respondent was still liable under the terms of a personal covenant to pay the increased rent or, failing that, to pay the original rent. The respondent's case, which the recorder accepted, was that the changes made by the deed of variation were so fundamental that, despite the contrary intention of the parties, it effected a surrender and re-grant by operation of law, thereby determin- ing the respondent's liability.

David Neuberger QC and Michael Roberts (Rowe & Maw, for Sweetlands, Dorking) for the appellant; Jonathan Gaunt QC and Martin Dray (BRB Solicitor) for the respondent.

Lord Justice Beldam said that in the absence of an increase in the extent of the premises demised or of the terms for which they were to be held, both of which would change the legal estate, there was no reason why the lessor and assignee could not achieve the changes they desired in the terms of the lease without the law implying its surrender and re-grant for the remainder of the term of the lease.

The recorder was therefore wrong to hold that the respondent's obligations under the covenant in the lease had been brought to an end by the deed of variation.

However, there was a distinction in English law between the contractual liability of the lessee under his personal covenants and the liability of the assignee for the obligations of the covenants "imprinted" on the legal estate: see City of London Corpn v Fell [1993] QB 589 at 603, per Nourse LJ, and [1994] 1 AC 458 at 465, per Lord Templeman.

In principle it was difficult to see how obligations accepted by the lessee in his contract with the lessor could be varied or increased by a subsequent agreement between the lessor and the assignee.

In his Lordship's judgment, the deed of variation did not vary the lessee's obligation under the covenant in the lease so as to make him liable for the increased rent, payable quarterly in advance, and for the excess rent. The respondent remained liable under the covenant only for the original rent, payable quarterly in arrears, and for the insurance rent.

Finally, the fact that the deed of variation imposed on the assignee an obligation to pay the increased rent did not, on its proper construction, have the effect of releasing the respondent from its personal obligation to pay the original rents during the term.

On that basis, judgment should be given for the appellant.

Lord Justice Waite and Sir Christopher Slade concurred.

Paul Magrath, Barrister