238: Court implies term into headlease where rent calculated by reference to surrendered underlease
The London Borough of Hackney has won a dispute with former and current tenants over the headlease rent charged for use of railway arches at Kingsland Viaduct in Hackney.
A headlease granted to a Rail for London company by Hackney LBC provided for basic rent to be calculated by reference to the rent payable pursuant to an underlease of the same property. The underlease was surrendered in 2003 and, as a result, Rail for London became the direct landlord of the shorter term tenants in occupation of the individual arches.
Rent continued to be paid to Hackney LBC under the headlease, on the basis of the mechanism provided for in the underlease, applying this to some occupational tenancies of the arches. In 2019, Rail for London stated that due to the surrender of the underlease, basic rent was no longer payable under the headlease. This was disputed by the head landlord, Hackney LBC.
The High Court was asked to look at the following points::
- Interpretation: which of the following was the correct interpretation of the lease;
a) whether Rail for London had an ongoing liability to pay the basic rent as defined in the headlease; or
b) did liability to pay the basic rent under the headlease end upon the surrender of the underlease?
- Implied Term: whether a term can be implied into the headlease which allows for the rent to continue to be calculated pursuant to the provisions of the underlease, notwithstanding it had ended.
High Court Decision
The High Court was willing to imply a term into the headlease to allow for basic rent to be calculated by reference to the rents paid under the existing occupational tenancies of the arches.
- Interpretation: Applying the established principles of contractual interpretation set out in Arnold v Britton  AC 1619, the High Court found that the definition of basic rent was clearly linked to the sums received under the underlease and should be interpreted as such.
- Implied Term: The High Court then considered whether it was appropriate to imply into the headlease an ongoing obligation to pay rent, on the determination of the underlease, in accordance with rent paid by the existing occupational tenants.
The court used the test for implying terms into a contract set out in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings  UKPC 13, 26:
(i) it must be reasonable and equitable:
It was held to be reasonable and equitable to imply a term into the headlease allowing for basic rent to continue to be calculated pursuant to the wording of the surrendered underlease.
(ii) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it:
The complex nature of the leases was intended to ensure that the landlord was to receive rental income from the commercial premises. Implying a term gave business efficacy to the commercial arrangement.
(iii) it must be so obvious that it goes without saying:
The background to the legal arrangements made it clear a commercial solution would be preferred to deal with the position should the underlease no longer exist.
(iv) it must be capable of clear expression:
The proposed implied term for calculating the headlease rent was capable of clear expression.
(v) it must not contradict any express term of the contract:
The implied term was not inconsistent with the express terms of the headlease.
This case highlights that there are always complexities involved in interpretation of leases. It’s a warning to consider the complications that can arise where the rent is linked to a separate arrangement and future changes in circumstances should always be taken into account.
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