Summary

An obligation owed by a lessee to a potential buyer of the freehold property to surrender its leasehold interest prior to the property being sold was rendered void by the Landlord and Tenant Act 1954 s.38(1).

Facts

The first appellant company (U) and the second appellant company (B) appealed against a decision dismissing their application for summary judgment and holding that the completion of U's sale of freehold land to the respondents (T) was not conditional on the surrender by B of its leasehold interest in that land. B was the wholly-owned subsidiary of U. It owned the leasehold of part of premises of which U was the freeholder. Under an option agreement, T were given an option to purchase the freehold interest and to grant a new leasehold interest. They exercised that option within the option period but U contended that, notwithstanding the option agreement and the notice served, it was not obliged to complete the sale and that it was able to terminate the agreement in accordance with clause 4.1 of the agreement. That clause provided that immediately prior to completion and conditional upon the same, the lessee would surrender its interest in the leasehold property to the seller, such surrender to be in accordance with the terms of an agreed form of deed of surrender and that the seller and buyer would execute and deliver to each other a new lease and counterpart and the transfer. Clause 10 of the option agreement provided that the seller would sell the property free from encumbrances. The judge found that the effect of the Landlord and Tenant Act 1954 s.38(1) was to render clause 4.1 void and that clause 10 was not conditional upon any other condition. The appellants submitted that the judge should have found that completion of the agreement for sale was conditional upon the surrender of the leasehold interest by B and, because that condition could not be enforced, completion of the sale could not be effected.

Held

The effect of the option agreement was that U's obligation was to sell the title free from the lease. That obligation arose because the obligations on completion included, by virtue of the Standard Commercial Property Conditions, 2nd edition, the obligation to hand over on completion the documents of title in which the deed of surrender was included. The issue was what was meant by the phrase "and conditional upon the same". In that context it was saying that it referred to completion. The effect was to make the obligations in clause 4.1 conditional upon completion. The words were not apt to make completion conditional on the events in clause 4.1 taking place. Section 38(1) had no effect on the obligations of the seller and buyer to execute and deliver the new lease and counterpart or transfer because there was nothing in that transfer that purported to exclude the lessee from entering a new lease or that required termination of the existing lease. It seemed plain that there was nothing in s.38(1) that precluded B as lessee from exercising the deed of surrender if it chose to do so: s.38(1) did not make that unlawful but made void an agreement to do so. An obligation on a lessee to surrender its interest in the leasehold property to the seller was within s.38(1) because an obligation to surrender purported to preclude the lessee from making an application or request for a renewed tenancy under the Act, Joseph v Joseph (1967) 1 Ch 78 considered. The effect of s.38(1) was to render void any obligation owed by the lessee to the buyer to execute a surrender of its leasehold interest. If the seller was unable to comply with the obligation set out in clause 8.5.1 of the standard conditions, it was prima facie in breach of its obligation under the contract of sale arising under the option. The judge was right to dismiss the application for summary judgment.

Appeal dismissed