Crestfort Ltd. & Ors v Tesco Stores Ltd & Anor [2005] EWHC 805 (Ch) (25 May 2005)

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Cite as: [2005] EWHC 805 (Ch)

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		Neutral Citation Number: [2005] EWHC 805 (Ch)
		Case No: HC04CO2107

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

25/05/2005

B e f o r e :

THE HONOURABLE MR JUSTICE LIGHTMAN
____________________

Between:

	CRESTFORT LIMITED HALEPOINT LIMITED YORKSTREAM PROPERTIES LIMITED	Claimants/Part 20 Defendants
	- and -
	TESCO STORES LIMITED MAGSPEED LIMITED	Defendant/Part 20 Claimant Defendant

____________________

Mr Alan Johns (instructed by Pinsent Masons, 30 Aylesbury Street, London EC1R 0ER) for the Claimants/Part 20 Defendants
Mr Stephen Jourdan (instructed by Dewar Hogan, 4 Creed Court, 5 Ludgate Hill, London EC4M 7AA) for the First Defendant /Part 20 Claimant
Miss Elizabeth Fitzgerald (instructed by Pickworths, 6 Victoria Street, St Albans, Hertfordshire AL1 3JB) for the Second Defendant
Hearing dates: 6th – 8th April, 18th – 19th April & 22nd April 2005
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Lightman:

This action arises from the grant by the first defendant Tesco Stores Limited ("Tesco") of an underlease ("the Underlease") to the second defendant Magspeed Limited ("Magspeed") of premises the subject of a lease ("the Lease") held by Tesco of which the freehold reversion was vested in the first and second claimant ("the Landlords"). By the Lease Tesco was subject to a covenant restricting its right to grant any such underlease. In this action the Landlords claim that Tesco granted the Underlease in breach of that covenant and that Magspeed when accepting the Underlease knew of the breach and in accepting the Underlease unlawfully interfered with the contractual relations between the Landlords and Tesco; and the Landlords seek by way of relief an order that Magspeed surrender, and Tesco accept the surrender of, the Underlease and damages from both Tesco and Magspeed (whom I shall refer to together as "the Defendants").

At the trial the Landlords were represented by Mr Alan Johns, Tesco by Mr Stephen Jourdan and Magspeed by Ms Elizabeth Fitzgerald. I gratefully acknowledge the quality of the assistance which each of them provided.

FACTUAL BACKGROUND

The relevant factual background can be ascertained from the contemporary documentation and the evidence of the witnesses. The Claimants' witnesses were Mr Erik Robson ("Mr Robson") a partner in the Robson Associates (the Landlords' agents) and Mr Amir Zarbafi ("Mr Zarbafi") the Landlords' adviser with full power to act on their behalf. Tesco's witnesses were Mr Mark Edwards ("Mr Edwards") a property executive employed in Tesco's Asset and Estate Management Department and Mr Frederick Tarrant ("Mr Tarrant") a client director employed by AON Limited, Tesco's insurance brokers. Magspeed's witness was Mr Martin Olley ("Mr Olley") the managing director of Magspeed. There was also in evidence a joint report of the parties' experts Mr B D O'Connor FRICS and Mr J V Hulme FRICS.

The Landlords hold as trustees for the third claimant the freehold in a large single storey warehouse and office building of about 105,918 square feet on a site of about 4.5 acres known as Gloystarne Unit, Denbeigh Road, Bletchley, Milton Keynes ("the Premises"). The Landlords granted a charge ("the Charge") over the Premises to Anglo Irish Bank Corporation Plc ("the Bank"). The Charge imposed insurance obligations on the Landlords, breach of which could trigger enforcement. By the Lease, which is dated the 5^th February 1981 made between the Landlords' predecessors in title Midland Bank Trust Company Limited ("Midland") and Tesco Holdings Limited ("Holdings") (then named Tesco Stores Limited) Midland demised the Premises to Holdings for the term of 25 years from the 8^th February 1981. In 1989 Holdings assigned the Lease to Gloystarne & Co Ltd ("Gloystarne"). Gloystarne later went into administration. To mitigate the liability of Holdings under the covenants in the Lease Holdings and Gloystarne agreed that another company within the Tesco group of companies, namely Tesco, should take an assignment of the Lease and take whatever action was available to mitigate the impact on Tesco of the continuing liabilities under the covenants in the Lease. The Landlords agreed to this assignment. On the 1^st October 2003, the Landlords by a licence to assign ("the Licence") consented to the assignment of the Lease to Tesco and Gloystarne by its administrators assigned the Lease to Tesco.

The Lease contained the following covenants and provisions:

i) (by clause 2) it was provided that the rent should be reviewed every five years. The current reviewed rent is £400,000 per annum;

ii) (by clause 4(5)-(8)) the tenant covenanted that the tenant should repair and decorate the Premises and keep the open areas in good order and by clause 4(14) the tenant covenanted to repair defects of which the landlord gave notice;

iii) (by clause 4(15)) it was provided that, if the tenant failed to repair after the landlord gave notice, the landlord could enter the Premises and repair at the tenant's expense;

iv) (by clause 4(27) the tenant covenanted not to assign, underlet or part with possession of part only of the Premises;

v) (by clause 4(28)) the tenant entered into a covenant regarding assignment in the following terms:

"Not to assign underlet or part with or share the possession of the whole of the demised premises without the previous consent in writing of the Landlord (which consent shall not be unreasonably withheld) PROVIDED ALWAYS that:-

(a) In the case of an assignment any intended assignee has first by deed covenanted directly with the Landlord that during the residue of the term then subsisting the assignee will pay the rent reserved by and will observe and perform the covenants and conditions contained herein including a covenant not to further assign the demised premises without such consent as aforesaid

(b) On the grant of any permitted Underlease the Tenant shall obtain:-

(i) an unqualified covenant on the part of the Underlessee not to assign or underlet or part with the possession of part only of the premises thereby demised and

(ii) a covenant on the part of the Underlessee that the Underlessee will not assign underlet or part with or share the possession of the whole of the premises thereby demised without obtaining the previous written consent of the Landlord such consent not to be unreasonably withheld or delayed and to provide in such Underlease that any underleases granted out of such Underlease whether immediate or mediate shall contain a similar provision

(c) The Tenant will not accept or pay or agree to accept or pay any fine or premium in consideration for the grant of any Underlease or tenancy that may at any time relate to the demised premises

(d) Any permitted Underlease shall be granted subject to like covenants and conditions as are herein contained except as to the rent thereby reserved and the length of the term thereby granted."

vi) (by clause 5(ii)) the landlord covenanted to insure the Premises against "the insured risks" and (if so required) to produce evidence of payment of the current premium for such insurance to the tenant once yearly and a certified copy of the insurance policy on reasonable demand. Clause 1(2) defined "insured risks" as including property owners' liabilities and three years' loss of rent;

vii) (by clause 2) the tenant covenanted to pay by way of additional rent the insurance premium expended by the landlord.

The Licence contained (in clause 3.14) a covenant by Tesco with the Landlords that as from the date of the assignment until the expiration of the term of the Lease Tesco would pay the rents reserved by the Lease and observe and perform the tenant's covenants and conditions contained in the Lease. By clause 7 of the Licence the Landlords and Tesco agreed that, as a personal concession to Tesco during the period that Tesco should remain the tenant under the Lease and whilst neither Tesco nor any other lawful occupier was in occupation, the Landlords should be under no obligation to insure and have no right to any refund of insurance premium and that in place thereof Tesco should insure the Premises in the joint names of the Landlords and Tesco against loss or damage by the "insured risks" (as defined in the Lease) with reputable insurers or underwriters on the usual terms of that insurer or underwriter in the full reinstatement value of the Premises. No other requirement was laid down as to the terms or character of the insurance policy.

At the date of the assignment to Tesco, whilst the structure of the Premises was sound, the Premises were in a dilapidated condition with the warehouse heating system beyond repair and the sprinkler system had been removed. The Landlords in March 2004 obtained a tender for carrying out all the necessary repairs in the sum of £498,255. Tesco was determined (and throughout has remained determined) not to meet its repairing obligations or incur any cost in this regard unless forced to do so. Beyond this liability in respect of repairs Tesco had a liability for an annual rent of £400,000 and annual security costs of about £60,000. In an endeavour to reduce the burden of meeting these costs Tesco instructed agents, Alexander Reece Thompson ("ART") a firm of chartered surveyors, to market the Premises and find an occupier as soon as it could. ART in December 2004 found Magspeed and heads of terms ("the Head of Terms") were agreed "subject to contract" on the 12^th January 2004.

I must go back to October 2003 to pick up the correspondence between the parties about insurance and repairs. By letter dated the 10^th October 2003 addressed "to whom it may concern" Mr Bayliss of AON, Tesco's insurance broker, confirmed that Tesco had effected a policy of insurance with AIG Europe (UK) Limited ("AIG") to cover all risks of physical damage to the Premises from the 1^st October 2003 to the 30^th September 2004 and went on to say that he trusted that the Landlords would accept this letter as sufficient evidence of cover on the 16^th October 2003. The letter was not sent to the Landlords until January 2004. By letter dated the 16^th October 2003, in order to satisfy themselves of compliance with the insurance covenant in the Licence, the Landlords' solicitors wrote to Tesco's solicitors requesting provision of Tesco's insurance policy in the joint names of their respective clients. Tesco's solicitors replied on the 20^th October 2003 stating that they would let the Landlords have the insurance details in due course. By letter dated the 21^st October 2003 the Landlords' solicitors requested confirmation that the policy was in joint names and that the interest of the Bank as the Landlords' mortagee was noted on the policy and thereafter in a series of letters chased for an answer. Tesco was not obliged to note the interest of the Bank on the policy and could leave it to AIG or the Landlords to give notice of the Bank's interest to AIG, but it was obliged to do nothing less than to take out a policy in the joint names of itself and the Landlords. Tesco knew that it was in breach of its obligation to insure in joint names but was determined to do nothing about it and to delay disclosing this default for as long as possible. Indeed Tesco has still to comply with its obligation to insure in joint names. Tesco refused to make disclosure of its policy or its terms so long as possible on the pretext that its terms were confidential. Tesco first disclosed the policy and admitted that its excuse was baseless when on the 24^th March 2005 Mr Tarrant made his witness statement on behalf of Tesco. It was this arrogant disregard of its insurance and repairing covenant that has brought about this dispute and this litigation.

On the 11^th November 2003 the Landlords' solicitors wrote to Tesco's solicitors expressing concern that they had not heard further with regard to confirmation as to insurance and stated that they had decided to keep their own insurance policy on risk until they had ascertained conclusively that Tesco had insurance on risk for the Premises at which point they would cancel the insurance policy. The Landlords sent further chasing letters on the 17^th and 25^th November and the 1^st December 2003.

On the 16^th December 2003, Mulberry Insurance Services (the Landlords' insurance broker) wrote to Tesco stating that the insurers had revised the insurance premium payable in respect of the year from the 10^th March 2003 from £103,030.20 to £194,922 because Gloystarne had not addressed or completed the risk "requirement" (i.e. completed the works required to make the Premises secure) on which the previous quotation had been made before it went into administration and sought payment of the balance of £91,891.80. The risk requirement was the result of an earlier occupation and damage and loss occasioned by squatters. Tesco itself had done nothing to rectify the position and complete the works required.

On the 4^th December 2003 the Landlords served on Tesco a Notice to Repair. The required schedule of dilapidation was not attached. On the 5^th January 2004 the Landlords served on Tesco a Notice to Repair with the schedule attached.

By email dated the 8^th January 2004 Mulberry wrote to Tesco complaining of the lack of confirmation from Tesco of details of the insurance cover which Tesco had put in place and making plain that the Landlords would keep their existing insurance cover in place until the details were provided; and by email dated the 9^th January 2004 stated that AON's letter dated the 10^th October 2003 (which had now been received) did not provide sufficient detailed information. It is sufficient to summarise subsequent correspondence as repeated requests for detailed information about the insurance which Tesco said it had obtained and sight of a copy of the policy, a request which was not acceded to until the 24^th March 2005.

On the 13^th January 2004, Tesco's solicitors wrote to the Landlords' solicitors making a formal request for consent to an underletting for the residue of the term of the Lease less seven days to Magspeed for use for storage of magazines. The letter concluded: "I have asked my clients to let me have details (accounts etc) for the prospective underlessee if such had been provided".

There was enclosed with this letter a copy of a letter dated the 12^th January 2004 from Tesco's agents to Magspeed's agents headed "subject to contract" confirming the terms of the proposed underlease agreed between Tesco and Magspeed. The terms so set out included the following:

"4. Repairing Obligation:

The sub-tenants repairing liability will be limited to maintaining the premises in no worse state of repair, then [sic] their present condition, to be evidenced by a photographic schedule of condition. This will need to include the roof.

5. Tenant's Covenants:

We know that the proposed sub-lessee is a young company who were incorporated at the beginning of 2003. We will therefore require a rental deposit equivalent to £50,000. This will be held in a high interest bearing account, to which my Clients are entitled to draw upon in the event of a default by the Tenant. The deposit will be returned to the Tenant on expiry of the term assuming that it has not been necessary for the Landlords to draw down on it.

6. Timing:

I understand Magspeed Limited are keen to take occupation as quickly as possible. My Clients Lawyers have therefore been instructed to urgently prepare draft documentation. However Superior Landlords consent will be required to the underlease and it may therefore be necessary for your Clients to initially take occupation by way of a Licence. However I suggest this matter be resolved by the Lawyers."

On the 9^th February 2004 the Landlords' solicitors wrote to Tesco's solicitors enclosing a draft licence and stating that they looked forward to receiving from them: (1) their firm's undertaking to meet their costs and disbursements; (2) confirmation that Tesco would meet any additional premium levied on the Landlords because of the state of repair of the Premises; (3) a proposal for undertaking the works of repairs; and (4) accounts etc for Magspeed as indicated in the letter of the 13^th January 2004. No point was taken that, because the repairing covenant in the Underlease was limited, the repairing covenant was not "like" the repair covenant in the Lease.

By letter dated the 10^th February 2004 (received by the Landlords' solicitors on the 12^th February 2004) Tesco's solicitors replied: (1) providing the undertaking to meet the costs and disbursements; (2) stating that the Premises were covered under Tesco Group Insurance arrangements and had been since October 2003, that there was a "general interest" provision on Tesco's insurance so that the interests of the Landlords and their mortgagees were noted and there was no occasion for the Landlords insisting on Tesco paying any additional premium: the Landlords' policy should be cancelled; (3) stating that the question of repairs remained under discussion and that, since the building was reaching the end of its useful life, it would not be sensible to spend vast sums of money putting the Premises into good repair; and (4) stating that Magspeed was only formed early in 2003 and accordingly had no accounts and that Tesco were seeking a rent deposit of £50,000. Tesco's solicitor's ended saying that they would write further as soon as he had some comments from Magspeed on the form of the Underlease and the rent deposit deed.

By an email dated the 11^th February 2004 (prior to receipt of the letter dated the 10^th February 2004) the Landlords' solicitors informed Tesco's solicitors that the Landlords would not grant the licence to underlet until the insurance position had been settled. The email enclosed an email dated the 22^nd January 2004 setting out the Landlords' insurer's requirements for the Tesco insurance position and a copy of the latest insurance premium account showing the balance due. The enclosed email (so far as material) reads as follows:

"1. The policy will have to be issued on a stand-alone basis away from the Tesco block policy in the sole name of my client and my client's mortgagees. Their interests will need to be noted as first loss payee under the policy.

2. A specified sum insured will have to be shown under the policy in accordance with the mortgagee's requirements

3. The policy will have to confirm that Property Owners Liability cover is provided subject to a limit of indemnity of no less than £5 million.

4. A mortgagee non-invalidation/no lapse agreement will have to be provided under the policy in favour of my client's mortgagees

5. The scope of cover provided under the terms and conditions of the policy will need to be broadly in line with the cover which is currently being provided by my client under our policy."

The email dated the 11^th February 2004 ended: "I look forward to hearing from you further on the terms of the draft Licence and with your undertaking for costs". It is clear that the Landlords were not entitled to impose these conditions.

By letter dated the 23^rd February 2004 Tesco's solicitors replied that they did not accept that the Landlords could refuse to issue the licence to underlet because of the disagreement over insurance: the disagreement was of no concern to Magspeed and any argument could continue after the Underlease was granted. In any event the Landlords' responsibility for insurance would resume as soon as the Underlease was granted.

By letter dated the 26^th February 2004, Magspeed's solicitors wrote to Tesco's solicitors that Magspeed was extremely anxious to have the licence to occupy at short notice and needed the accommodation by the 7^th March 2004.

By letter dated the 26^th February 2004 the Landlords repeated their complaint that Tesco had not provided evidence that they had taken out the required policy in joint names and that in default the Landlords had been obliged to continue to insure to protect their interest. They insisted on payment of the additional premium of £91,891.80 which arose from Tesco's failure to meet the insurer's requirement of sprinkler systems within the Premises. The letter concluded that before the application for the licence to underlet could proceed, Tesco must: (1) pay the outstanding premium of £91,891.80; and (2) resolve the issue of the Notice of Repair.

"Your clients have been aware of the disrepair for some time. In light of the arrangements your clients are seeking with the Under tenant [imposing a more limited repairing obligation on the Under tenant] it is clear that there appears to be no present intention on the part of your clients to carry out the repairs. Our clients propose to carry out the repairs pursuant to the terms of the lease and are currently arranging for the works to be costed and arrangements will be made to carry out the works and recover all costs and expenses from your client pursuant to the terms of the lease."

By letter dated the 3^rd March 2004 the Landlords' solicitors wrote to Tesco's solicitors expressing concern that no steps had been taken to carry out any of the works the subject of the Notice dated the 1^st December 2003, and that, bearing in mind that the proposed Underlease appeared to have a Schedule of Condition annexed, consent to underlet would not be given until this was clarified. A response was also sought on the issue of the insurance premium.

By letter dated the 4^th March 2004 the Landlords again complained that Tesco had not provided evidence that they had properly insured the Premises.

On the 15^th March 2004 Mulberry wrote to Mr Robson that it had negotiated with the Landlords' insurer Great Lakes for the cancellation of its insurance cover from the 1^st October 2003 and needed the consent of the Bank to this course. Mulberry stated that this course involved discontinuing efforts to recover the premium previously outstanding from Tesco.

On the 22^nd March 2004 the Bank wrote to the Landlords indicating that the insurance issue was problematic for the Bank. But within days thereafter the Bank agreed to rely on Tesco's covenant to reinsure and reinstate, and required only adequate confirmation of cover and that their interest was noted.

There followed further correspondence about the repairs needed to the Premises. Tesco's building surveyor, Mr Rushton, produced details of works covering everything except the sprinklers and heating system, and the scope of the works (but not the omission of the sprinklers and heating system) were approved by the Landlords' building surveyor on the 13th May 2004 and the works were put out to tender on the 2nd June 2004.

On the 2nd April 2004, Magspeed took up occupation of the Premises and has ever since remained in occupation. The Landlords' position has been and remains that Magspeed is not in lawful occupation and consequently that the obligation imposed by the Licence on Tesco to insure continued in force. The Landlords took no action to require Magspeed to vacate. No doubt they anticipated the successful conclusion of negotiations for the grant of the required consent to underlet. When the Underlease was granted without consent, an application for possession was implicit in the application for an order for surrender of the Underlease.

On the 7th May 2004, Masons took over from Bowling as the solicitors for the Landlords. By letter dated the 18^th May 2004 to Tesco's solicitors the Landlords' solicitors said that they were happy with the form of the draft underlease (which Tesco's solicitors had sent to Bowling on the 23^rd February 2004 with the draft licence to underlet) apart from one point, namely the draft underlease did not include a reservation of a right of entry on the part of the Landlords to carry out repairs and that they were disinclined to give consent to the grant of the Underlease without the additional reservation. (The Landlords did not take the point that the absence of the right of entry meant that the covenants and conditions in the Underlease were not like those in the Lease.) Tesco and Magspeed agreed to include such a reservation and Tesco's and Magspeed's solicitors sent copies of it to Masons on the 28th May 2004. Masons suggested some drafting improvements. On the 9th June 2004, Tesco's solicitors sent a revised form of reservation to Masons.

Magspeed and Tesco were not willing further to delay the grant of the Underlease. It is clear from the contemporary correspondence and the evidence of Mr Edwards that Tesco knew that in completing before any licence was granted Tesco was acting in breach of the covenant against underletting in the Lease, but it did not think that the Landlords would or could take any effective action to counter what was done. As Tesco's solicitors wrote to Tesco on the 22^nd March 2004: "Once the underlease is in place, there is little that the superior landlords can do about it short of forfeiting the lease which is highly unlikely." By letter dictated on the 14^th June 2004 (but dated the 15^th June 2004) Tesco's solicitors told Magspeed's solicitors that they had notified the Landlords' solicitors of the grant of the Underlease and added the warning: "This may provoke a reaction because the underlease has been completed without formal consent from the landlords". I shall consider later the frame of mind of Magspeed.

By the Underlease on the 14th June 2004, Tesco demised the Premises to Magspeed for the term beginning on the 2^nd April 2004 and ending on the 28^th January 2006 at the commencing rent of £79,438 for the first six months of the term and thereafter for the residue of the term at the yearly rent of £317,754. By clause 3.6 of the Underlease Magspeed covenanted to repair and keep the Premises in good and substantial repair and maintained and clean and in good decorative condition and at the expiry or earlier determination of the term to yield up the Premises in that condition subject however to the limitation that Magspeed should not be required to put the Premises into any better state of repair and condition than as at the date of the Underlease as evidenced by the schedule of condition attached thereto. Clause 3.9 conferred on Tesco (on default by Magspeed to comply with its covenant to repair) the right to enter the Premises and execute all necessary works and provided that all expenses so incurred should be paid on demand by Magspeed to Tesco and be recoverable as rent in arrear. The Underlease was in the terms described in the heads of terms sent to the Landlords' solicitors on the 13^th January 2004 and set out in the draft underlease sent to them on the 23^rd February 2004. The Underlease is contracted out of the Landlord and Tenant Act 1954 by a court order dated the 12^th March 2004.

By letter dated the 15^th June 2004 the Landlords' solicitors wrote to Tesco's solicitors informing them that they were instructed to commence proceedings for the removal of Magspeed from the Premises. Since the date of the Underlease Tesco have continued to pay and the Landlords have continued to accept payment of the rent reserved by the Lease. The Landlords have no wish or need to avoid waiving their right of forfeiture of the Lease. They merely wish to require Magspeed to vacate. On the 28^th June 2004 the Landlords commenced these proceedings.

The Underlease did not include any reservation of a right of entry on the part of the Landlords to carry out repairs on default by Tesco. This was a mistake, as Tesco's solicitors had told Magspeed's solicitors they were going to include in the engrossments held by Tesco's solicitors (as well as a right of entry by Tesco) a right of entry by the Landlords to carry out repairs in exercise of their rights under the Lease, but subject to the proviso that in exercise of such right of entry Tesco and the Landlords should "cause as little damage as possible to the Premises or inconvenience to [Magspeed], such person making good the Premises to the reasonable satisfaction of [Magspeed]". By letters dated the 9^th July 2004 Tesco and Magspeed notified the Landlords that they were content and intended to be bound by that provision. The provision as typed omitted provision for access by Tesco to comply with its obligations under the Lease and by letters dated the 23^rd July 2004 Tesco and Magspeed agreed to make good this omission and the Landlords were informed that an additional reservation of rights of access incorporating these rights should be inserted in the Underlease. Tesco's solicitors and Magspeed's solicitors both confirmed this by letters to Masons dated the 9th July 2004.

PROCEEDINGS

This claim was issued on the 28th June 2004, seeking an injunction ordering the surrender of the Underlease by Magspeed to Tesco. The grounds for the claim were that:

i) the Underlease was granted in breach of covenant because the Landlords did not consent to it, and the Underlease is on different terms to the Lease, because of the limitation on Magspeed's repairing obligations, and the absence of a right of entry permitting the Landlords to enter and repair and decorate;

ii) Magspeed was party to such breach because the covenant against underletting was a restrictive covenant, and/or Magspeed knowingly and intentionally procured and induced the breach to the damage of the Landlords.

Tesco counterclaimed for declarations that the Landlords unreasonably withheld consent to the Underlease and that Tesco was free lawfully to underlet to Magspeed.

By its Defence to Counterclaim the Landlords contended that, by reason of the fact that in the two respects the Underlease did not contain like covenants and conditions to those in the Lease, the Landlords had no obligation to consider Tesco's application for consent to the Underlease and accordingly there was no scope for any claim for a declaration that consent had been unreasonably withheld.

By its Reply to the Landlords' Defence to the Counterclaim of Tesco, Tesco challenged the Landlords' contentions therein contained. Tesco went on to plead as follows:

"10 Further or alternatively the [Landlords] waived the provisions of clause 4(28)(d) of the Underlease."

No particulars of this allegation were given or sought. The plea of waiver found no place in Tesco's or Magspeed's skeletons or submissions. In the course of the trial, when this was pointed out, Tesco disavowed any reliance on it.

In none of the many letters and emails until the issue of this claim on the 28th June 2004 did the Landlords make any complaint that the covenants and conditions in the Underlease were not like those in the Lease in the two respects specified or that this precluded any claim by Tesco that the Landlords were under any obligation to consider Tesco's application for consent to the grant of the Underlease and that consent should not be unreasonably withheld. Nor did the Landlords complain of the fact that the Underlease contained a covenant imposing more limited repairing obligations on Magspeed than those imposed on Tesco by the Lease. The grounds given by them for refusing to consent to the Underlease were limited to the insurance position and Tesco's failure to repair the Premises.

By letter dated the 31^st January 2005 Tesco wrote to the Landlords that, whilst it did not accept that the grant of the Underlease constituted a breach of covenant, in order to resolve the matter without an expensive trial, Tesco had agreed that Tesco and Magspeed would execute a deed of variation and that Tesco Property Holdings Limited ("Holdings") and Magspeed should execute a deed of indemnity, and Tesco enclosed drafts of the two deeds for any comment by the Landlords. By letter dated the 9^th February 2005 the Landlords replied that the deeds were not sufficient to secure compliance by Tesco with the covenant in the Lease and that any underletting must be on the same terms as the Lease. Tesco and Magspeed executed the Deed of Variation on the 15th March 2005. The Deed of Variation imposed an obligation on Magspeed to observe and perform the tenant covenants and conditions in the Lease in relation to repair and decoration. It also added a covenant to permit the Landlords to enter the Premises in accordance with the rights of entry reserved by the Lease. On the same day Holdings and Magspeed entered into the Deed of Indemnity. By the Deed of Variation Holdings covenanted with Magspeed to indemnify Magspeed against any costs and liabilities which Magspeed incurred as a result of the Deed of Variation imposing obligations on Magspeed to repair and decorate the Premises going beyond what were imposed under the Underlease. Tesco contends that any prior breach or non-compliance with the terms of the Lease was remedied by the Deed of Variation. There can however have been no remedy of the breach constituted by granting the Underlease without the Landlords' consent.

After the Underlease was granted, prompted by the threat by the Landlords to enter and carry out the repairs at the expense of Tesco, Tesco carried out the necessary work of repair to the Premises, but did not carry out work to the sprinkler or heating systems. Tesco hoped that these would be left over until after the Lease expired when any claim by the Landlords for damages for breach of the repairing covenants would be limited to the reduction in value of the reversion on the Lease. The Landlords said on the 1st March 2005 that they proposed to enter and do those works starting on the 14th March 2005, but they have not yet done so. The obligation to carry them out however continues to be an obligation of Tesco.

On the 15^th March 2005 Tesco made an open offer to settle the action on terms that: (1) Tesco paid the Landlords' costs of the action up to the date of acceptance of the offer to be assessed if not agreed; (2) Tesco paid the Landlords' damages of £10,000; (3) the remainder of the Landlords' claims (including claims against Magspeed) be dismissed; and (4) Tesco indemnify the Landlords in respect of any liability for the costs of Magspeed. By their reply dated the 18^th March 2005 the Landlords stated that the offer might be an appropriate starting point for discussions between the parties in a time-limited mediation. The mediation did not however result in a settlement.

ENTITLEMENT TO SEEK CONSENT

The first and fundamental issue is whether Tesco was entitled to require the Landlords to consider its application for consent to the grant of the Underlease to Magspeed and not unreasonably to withhold consent. This turns on the answer to two questions. The first is whether clause 4(28)(d) of the Lease only requires a landlord to consider an application to consent to underlet if the proposed underlease is subject to like covenants and conditions as the Lease. The second is whether (if the answer to the first question is in the affirmative) the Underlease was granted subject to such like covenants and conditions.

I turn first to the question of construction of clause 4(28)(d) of the Lease. There are two alternative views of the clause. The first alternative is that it sets out conditions which the Landlords can impose for giving consent or sets out circumstances in which the Landlords' refusal of consent to underletting is to be deemed to be reasonable. The second alternative is that it sets out the agreement of the parties as to what alienations are not absolutely prohibited and can be made with consent and accordingly restricts the circumstances in which a tenant can properly apply for consent to an underletting. It is well established law and common ground between the parties, that if the clause is of the character set out in the first alternative it is void, but if the clause is of the character set out in the second alternative it is valid: see e.g. Bocardo v. Hobbs [1980] 1 WLR 17.

The issue of construction does not admit of any lengthy useful elaboration and the citation of authorities on the construction of clauses which are not practically identical affords no assistance. In my judgment the proviso to clause 4(28) limits the circumstances in which the absolute prohibition on underletting is qualified and the tenant has a right to request consent. The mandatory conditions stipulated in the proviso must be satisfied. This is the fair and sensible reading of the language of the Lease. Such provisos are in common use in commercial leases and are intended, and recognised to be intended, to control the terms of any underlease. Support for this approach (if support is needed) is to be found in the decision of the Court of Appeal in Allied Dunbar Assurance v. Homebase Limited [2002] EWCA Civ 666 [2002] EGLR 23 ("Allied Dunbar"). The lease under consideration in that case was (for all relevant and practical purposes) the same as that in the present case. The tenant in that case conceded that the purpose and effect of the proviso was to restrict the circumstances in which the tenant could properly apply for consent, but the Court of Appeal made plain its view that the concession was correctly made: see paragraphs 3, 16 and 42. Again if further support for this approach were needed, the court should be slow to give an alternative interpretation that the clause is intended merely to deem the imposition of conditions or grounds of refusal reasonable when it is clear that to do so renders the clause legally ineffective.

I turn now to the second question whether the Underlease was granted subject to like covenants and conditions. The Landlords contend that Tesco has not underlet the Premises subject to "like" covenants and conditions in two material respects: (1) whilst the Lease in clause 4(5)-(8) imposed an unqualified covenant to repair, the Underlease by clause 3.6 imposed a covenant to repair limited by reference to the Schedule of Condition; and (2) whilst the Lease in clause 4(5) provided that, if Tesco failed to repair, after the Landlords gave notice they could enter and repair at Tesco's expense, the Underlease in clause 3.9 merely conferred on Tesco (on default by Magspeed) the right to enter to carry out repairs at the expense of Magspeed but conferred no right for the Landlords to enter in case of default by Tesco or Magspeed.

The clause in the Lease requires that the Underlease imposes, not the same, but like covenants. The term "like" does import "identical" covenants, as is imported by the term "same": it imports similarity in substance without the need of similarity in form, detail or wording. Tesco plainly failed to include the "like" covenant in respect of repairs in the Underlease. The limitation by reference to the schedule of condition was substantial and meaningful: it was necessitated by the continuing default by Tesco to comply with its repairing covenant in the Lease. The limitation on the repairing covenant in the Underlease reflected the fact that Magspeed (and indeed any prospective subtenant) could not reasonably be required under its repairing covenant in the Underlease to remedy the state of disrepair of the Premises arising from Tesco's far reaching breaches of its repairing covenant under the Lease. If Tesco had fulfilled its repairing obligation under the Lease, the occasion for the limitation by reference to the schedule of condition would not have arisen. In my judgment the dissimilarity in respect of the repairing covenants in the Lease and Underlease was a dissimilarity in substance, and not merely form, detail or wording. The obligation on Magspeed was a truncated version of the obligation imposed on Tesco.

The question whether there was a dissimilarity in respect of the right of entry in the Lease and Underlease depends on whether clause 4(28)(d) of the Lease required that there should be reserved in the Underlease a similar right of entry in favour of the Landlords as in the Lease or whether it was sufficient that there was reserved a similar right of entry in favour of Tesco as was reserved by the Lease in favour of the Landlords.

I am satisfied that the latter is the correct construction. The clause is designed to ensure that Tesco (as the Landlords' tenant) has the like rights and protection under the Underlease against the underlessee as the Landlords have against Tesco under the Lease. This construction is underlined by clause 4(28)(b)(ii) of the Lease, for it spells out the single additional right and protection against the underlessee which the Lease requires the Underlease to confer on the Landlords.

Accordingly by reason of the absence of a like repairing covenant in the Underlease the condition precedent to the existence of any obligation on the part of the Landlords to consider the application for consent to the grant of the Underlease to Magspeed was never satisfied. Tesco at all times therefore remained subject to an absolute obligation not to underlet and the Landlords at no time were under any obligation to consider Tesco's application for consent to underlet, section 1 of the Landlord and Tenant Act 1988 had no application and the grant of the Underlease to Magspeed constituted a breach of covenant by Tesco. I accordingly dismiss Tesco's counterclaim. The only issue in respect of this breach is the relief to be granted.

ESTOPPEL

I was concerned, and expressed my concern during the hearing, that the Landlords and Tesco at all times until commencement of this action proceeded on the basis that Tesco was entitled to apply for consent to underlet to Magspeed and that the Landlords were obliged to consider that application and could only refuse it on reasonable grounds. It was on this basis that (for example) the Landlords demanded, and Tesco conceded the demand, that Tesco give an undertaking to pay the Landlords' costs of the application for consent. The Landlords for the first time in their pleadings in this action took the point that the conditions specified in clause 4(28)(d) had not been satisfied and that accordingly the Landlords had not been obliged to consider the application for consent. During the trial I indicated that it might be open to Tesco to establish a case that it was unconscionable for the Landlords to raise this issue so belatedly. But Tesco did not seek to do so, no doubt for good reasons. A belated application for permission to raise the issue was however made after final speeches and I was asked to decide the issue on the evidence before the court. If Tesco had taken the point earlier, the issue could have been fully and properly explored and all parties would have been able to call relevant available evidence and would have been entitled to cross-examine witnesses on this issue. It was however far too late to make an application to raise a new case on this issue at this stage, and I cannot (as invited) decide the issue on the existing partial evidence. I only mention this possibility of a plea of estoppel because, in cases like the present, tenants should be alerted to its possible availability. They should also be alerted to the possible availability of a plea that a request by a landlord for an undertaking to pay the costs of considering an application for permission and the provision by a tenant of such an undertaking in compliance with that request may constitute or evidence a contract that in consideration of the undertaking the landlord will duly consider the application.

REASONABLENESS OF REFUSAL OF CONSENT

As I have already said, upon the true construction of the Lease the Landlords had no obligation to consider the application for consent to assign and section 1 of the Landlord and Tenant Act 1988 has no application. I should briefly set out what my decision would have been if the Landlords had been under an obligation to consider the application and the section had applied. That section would have imposed on the Landlords the duty to Tesco within a reasonable time: (a) to give consent except when it is reasonable not to give consent; and (b) to serve on Tesco written notice of its decision whether or not to give consent, specifying in addition, if the consent is withheld, the reasons for withholding it. The onus would have been on the Landlords to show that their refusal was reasonable.

I should say a word about the relevant law. The judgment of Lord Bingham in Ashworth Frazer Ltd v. Gloucester City Council [2001] 1 WLR 2180 makes plain that the onus on the Landlords was to show, not that the refusal was right or justified, but merely that it was reasonable; that a reasonable landlord may seek to avoid not only an undesirable outcome which must occur but also one which he reasonably fears may well occur; and that the question of reasonableness is a question of fact. The same general principles apply in cases of applications for consent to assign and to underlet, but the two forms of transaction have different legal and practical implications which may affect the application of the general principles in any particular case: NCR v. Riverland [2004] EWCA Civ I312 at para 37. The principle is established that, if there are breaches of the covenant to repair which are more than minimal, and more especially if they are (as they were in this case) extensive and of longstanding, it is not in general unreasonable of a landlord to refuse his consent to an assignment unless he can reasonably be satisfied that the proposed assignee will remedy them: Orlando Investments Ltd v. Grosvenor Estate Belgravia [1989] 2 EGLR 74 at 77. The landlord has an interest in ensuring compliance with repairing covenants in the headlease by the tenant and any underlessee.

Two issues are raised to which I have to direct attention. The first is whether and (if so) when the Landlords determined Tesco's application for consent and the second is whether this determination was made within a reasonable time and the grounds for any refusal.

I now turn to look at the relevant facts. Tesco's letter dated the 13^th January 2004 applying for consent to underlet effectively promised "details" regarding the underlessee and the Landlords could legitimately defer a decision until this was received. The absence of these details was explained by Tesco's solicitor's letter dated the 10^th February 2004, but this letter promised comments by Magspeed on the form of the Underlease and the rent deposit deed. The Landlords' email dated the 11^th February 2004 said that the Landlords would not grant the consent to underlet until the insurance position had been settled, but this was not intended by the Landlords or understood by Tesco to be a decision on the application for consent: it was merely part of ongoing discussions as was made plain by the rest of the email and in particular the expressed anticipation of receipt of the draft licence and Tesco's undertaking to pay costs. The Landlords' decision was communicated by the letter dated the 26^th February 2004 refusing consent unless the outstanding insurance premium of £91,891.80 was paid and the position in respect of repairs was resolved effectively either by Tesco carrying them about or by Tesco reimbursing the Landlords for the costs of carrying them out. As it seems to me in determining the application for consent in this letter the Landlords gave their decision within a reasonable time, and it is plain that this was the view of Tesco at the time: the complaint made in this regard in the action was an afterthought.

Whilst the conduct of Tesco in continuing in flagrant breach of its insurance covenant was deplorable, I would have found it difficult to hold that this breach justified a refusal of consent to grant the Underlease, for the obligation to insure and accordingly the breach would be brought to an end on the grant of the Underlease. I would have found it even more difficult to find justified the demand for payment of £91,891.80 (in effect) as "damages" for breach of covenant before consent would be forthcoming.

But I think that the Landlords could (as they did) reasonably object to the grant of the Underlease unless and until the matter of outstanding repairs was resolved. The continuing lack of repair had adverse consequences for the Landlords both in respect of the value of their reversion and the cost of insurance and could (as they feared) precipitate a default under the Charge. The terms of the Underlease (and in particular the limited obligation to repair to be imposed on Magspeed) made clear that, if the Underlease was granted, Magspeed would not effect the required repairs and Tesco would have even less incentive (directly or indirectly) to fulfil its repairing obligations. Tesco had adopted a deliberate policy of prevarication over repairs and the grant of the Underlease was its logical culmination. The Landlords could reasonably take the view that their interest as landlords required the reassurance they sought in respect of repairs before they granted consent.

I would therefore have decided, if the issue had arisen, that the Landlords had reasonably refused consent to underlet and that therefore the grant of the Underlease in the face of that refusal was a breach of covenant.

SURRENDER

The Landlords have at all times made plain their view that it is advantageous for them to keep the Lease in full force and effect and not to forfeit it for breach of covenant and in particular for breach of the covenant not to underlet without consent. The relief which they have always sought is an order for the surrender of the Lease and damages. To obtain an order for surrender however the Landlords require to establish a cause of action entitling them to this relief, not merely against Tesco, but also against Magspeed because no order could be made against Tesco which prejudiced Magspeed unless Magspeed could on its own account properly be subjected to the grant of such relief. The cause of action against Tesco for breach of covenant is clear. The Landlords contend that (as well as the cause of action for breach of covenant against Tesco) they have two causes of action against Magspeed which entitle them to an order for surrender of the Lease by Magspeed. Magspeed dispute this contention.

The first cause of action maintained by the Landlords is breach by Magspeed (as well as Tesco) of clause 4(28) of the Lease on the basis that the prohibition of underletting in clause 4(28) of underletting is a restrictive covenant which binds Magspeed as underlessee under the Underlease. There is some degree of uncertainty whether a covenant against alienation of land (and accordingly underletting) can constitute a restrictive covenant. There is a view that a restrictive covenant is a covenant restrictive of user (which includes prohibiting the erection of structures and buildings on, or development of, land). The distinguished conveyancer Ernest Scammell in Land Covenants (1996) page 13 says:

"The only negative covenants which are restrictive covenants are covenants which are restrictive of user of land. Thus, whilst a covenant against using land for any purpose other than a private dwelling house is a restrictive, a covenant not to sell land for less (or more) than a stated price or a covenant not to sue an adjoining owner for nuisance would not satisfy this requirement. Such covenants, though restrictive, do not restrict the user of land."

Such understanding of the meaning and ambit of restrictive covenants is reflected in the property legislation e.g. section 2(5)(ii) of the Land Charges Act 1972 and section 10(4) of the Leasehold Reform Act 1967. I expressed a view to this effect in University of East London v. London Borough of Barking and Dagenham [2004] EWHC 2710 (Ch) at paragraph 28. I did not however have the advantage in that case which I have now of the citation of expressions of view to the contrary by Jacobs J in Hemingway Securities Ltd v. Dunraven Ltd [1995] 1 EGLR 61 or by the Supreme Court of Canada in Canadian Long Island Petroleums v. Irving Industries (1974) 50 DLR (3^rd) 265. I am unconvinced of the error of my thinking, but it is unnecessary for me to say anything more on this vexed subject, because (as it seems to me) the Landlords' contention that Magspeed acted in breach of such a restrictive covenant is unmaintainable for the simple reason that the covenant (even if it bound Magspeed) only bound Magspeed not to underlet. It did not bind Magspeed before it took the Underlease not to accept an underlease.

The alternative ground relied on by the Landlords is far more substantial. The alternative ground is that Magspeed in accepting the Underlease unlawfully interfered with the contractual relations between the Landlords and Tesco. Whether it did so turns on whether in accepting the Underlease Magspeed knowingly and intentionally induced the breach of covenant by Tesco. It is not sufficient merely to show that Magspeed was muddle headed or illogical in what it thought and did or that it had the means of knowledge that a breach of covenant was being committed (leaving aside questions of recklessness). Actual knowledge of the breach and the intention that the breach be committed must be established.

On the issue of the frame of mind of Magspeed I have before me, besides contemporary correspondence, the evidence of Mr Olley. At the time that the terms of the Underlease were agreed and the consent of the Landlords was being sought, no-one yet had in mind that the Landlords had an absolute right to refuse consent to the Underlease because of the disparity between the limited repairing obligation reserved in the Underlease and the unlimited obligation in the Lease: all had in mind that the Landlords could only refuse his consent on reasonable grounds.

The correspondence makes plain a number of critical facts. Magspeed wanted to get possession of the Premises to house its business as soon as practicable: as its solicitors informed Tesco's solicitors by letter dated the 20^th February 2004, Magspeed needed to obtain occupation by the 7^th March 2004 and knew that the Landlords' consent to the underletting was required. By letter to Tesco's solicitors dated the 26^th February 2004 Magspeed's solicitors wrote that Magspeed needed assurance of the terms upon which the Landlords were prepared to grant the consent. On the 2^nd April 2004 Magspeed took occupation on the basis agreed with Tesco (as recorded in its solicitor's letter dated the 5^th April 2004) that the Underlease would be executed and Magspeed would receive the Licence to sublet for signature in due course. Correspondence then proceeded between the Landlords and Tesco regarding the reservation of a right of entry in favour of the Landlords in the Underlease. By letter dated the 18^th May 2004 Tesco's solicitors wrote to Magspeed's solicitors that the Landlords had no problems with the form of the underlease proposed other than requiring inclusion of a provision making it clear that Tesco and the Landlords were entitled to enter the Premises to carry out repairs and that they were disinclined to give consent to the grant of the Underlease without the additional reservation of a right of entry to which Magspeed was requested to (and did) agree. By letter dated the 10^th June 2004 Tesco's solicitors wrote to Magspeed's solicitors to the effect that they would insert the required right of entry in the Underlease and would then be in a position to complete "although my clients are obviously concerned to ensure that the superior landlords will now agree to issue a formal licence to underlet". By letter dated the 14^th June 2004 Magspeed's solicitors wrote requesting Tesco's solicitors to call when they were ready to complete and the Underlease was completed the same day. By the letter (already referred to) dictated on the 14^th June 2004 Tesco's solicitors informed Magspeed's solicitors that he would now inform the Landlords' solicitors that the Underlease had been granted and that this might provoke an adverse reaction because it was completed without the formal consent of the Landlord.

Mr Olley in his witness statement said that, as he understood at the time discussions were under way between the Landlords and Tesco regarding repairs, with agreement of the terms of the new reservation of rights of entry the Landlords were happy with the Underlease and the grant of the licence to underlet; that, whilst the formal licence to underlet still had not been forthcoming, he had no reason to believe that there was any basis on which the licence could reasonably be withheld; and that it was on this basis that Magspeed agreed to complete.

In his oral evidence Mr Olley said that he knew when Magspeed took occupation that there was a risk that the Landlords might refuse a licence to underlet; at the time when the Underlease was granted he understood that the form of licence to underlet had been agreed and that under the Lease the Landlords could not unreasonably refuse consent to the Underlease; that (though he conceded that he received no assurance from anyone to this effect) he regarded the absence of the required written consent to be a formality; that it would be forthcoming in due course; that there was no possibility that it would not be granted, since (so far as he was aware) no ground of objection to the grant to Magspeed was given and there was no reasonable ground; that in his mind the only questions for the Landlords was whether Magspeed was a suitable tenant and was able to meet its obligations under the Underlease and the Landlords were satisfied with the answers to these questions; and that, if Tesco did not want to wait for the grant of a formal licence, he was agreeable to going along with that decision.

He insisted that he did not think that in granting the Underlease without the Landlords' consent Tesco was acting in breach of its obligations under the Lease, and that so far as he was concerned the grant of the licence was never going to be a contentious issue. Nonetheless he acknowledged that, when he read Tesco's solicitors letter to Magspeed's solicitors dated the 15^th June 2004, he appreciated that the Landlords might seriously object and adversely react to the grant of the Underlease proceeding without their licence, and it was plain from his evidence and the way he gave it that this letter and its contents came as no surprise.

After long and anxious consideration I have reached the conclusion that Mr Olley did know that by granting the Underlease Tesco was committing a breach of contract and that he did intend by accepting the Underlease to induce or procure such breach. He knew that the Landlords might view the breach of covenant seriously and take legal action. I do not think that he considered the breach merely a technical breach, but even if he did that would be no answer. Nor would it be an answer that he considered that such breach would later be waived and result in no effective response by the Landlords. I found Mr Olley a defensive and unconvincing witness whose evidence cannot be uncritically accepted. There was within it much that was wishful reconstruction. He knew that under the Lease the Landlords consent was required and knew and intended that the Underlease was granted to him without such consent. I do not accept that at the time any question arose in the mind of Mr Olley (or indeed anyone else) that the Landlords were acting unreasonably in not, or not yet, granting the required consent. Mr Olley was anxious to acquire the Underlease and, if Tesco was prepared to take the risk of proceeding with the grant of the Underlease without the Landlords' consent, he was likewise prepared to go ahead in flagrant disregard of the rights of the Landlords and face the consequences: he proceeded in the expectation that, if the Landlords reacted adversely to the fait accompli, Tesco would ensure that the loose ends, and in particular the grant of the consent to sublet, were satisfactory cleared up.

The Defendants submitted that, even if Magspeed had the necessary knowledge and intent to commit the tort of wrongful interference with contract, the tort was not shown to have been committed because the Landlords could not satisfy the requirement of the tort that the breach of contract induced by Magspeed caused damage to the Landlords. In my judgment the necessary damage is established. First the Landlords had a commercial interest in the conditions and covenants (and in particular the covenant to repair) in any underlease granted by Tesco and their compliance with the conditions specified in clause 4(28)(d): see Allied Dunbar. The conditions and covenants did not so comply. Second the wrongful grant of the Underlease deprived the Landlords of the opportunity to require payment of a premium as the price for giving consent to such grant.

I accordingly hold that Magspeed committed the tort against the Landlords of wrongful interference with contract by agreeing to accept and accepting the grant of the Underlease. As a consequence not merely is Magspeed liable in damages, but (perhaps more importantly) in principle the relief is available to the Landlords against Tesco and Magspeed of an order for the surrender of the Lease.

GRANT OF MANDATORY ORDER

The Landlords have accordingly in my judgment established that Tesco knowingly in breach of contract granted, and Magspeed tortiously accepted, the Underlease. In the circumstances in the absence of any equitable defence and any plea that its grant would be oppressive (and there is none pleaded, established or maintained) the Landlords are prima facie entitled to mandatory orders for surrender of the Underlease and should not be required to accept damages in its place. In his concluding submissions Tesco's counsel for the first time suggested that it was oppressive to grant an injunction because the Landlords did not contend that they had no obligation to consider the application for consent to underlet until the issue of proceedings. This case was both unpleaded and too late and in any event lacks merit: as I have already held the Defendants proceeded with the grant of the Underlease in deliberate breach of covenant.

In my judgment the Landlords in justice should be granted the mandatory order which they seek and the grant of any lesser relief would be inadequate, for interference with their rights was knowing and deliberate to serve the Defendants' financial interests. For this purpose I do not accept Tesco's contention that there is any relevant distinction between characterising its own conduct as directed to making a profit and to mitigating the liabilities arising from its accepting the assignment of the Lease. The Defendants took a calculated gamble that the Landlords would be unable to obtain any effective remedy for the breach of covenant: the gamble rightly has not paid off. Neither Tesco nor Magspeed should obtain any advantage from their wrongdoing and the Landlords should not be disadvantaged by it.

It is no reason why such relief should not be granted that by reason of the Deed of Variation the conditions and covenants in the Underlease are now like those in the Lease. The breach of covenant constituted by the grant of the Underlease must be remedied. It is far from a foregone conclusion that a fresh application for consent (if made) would succeed. It is scarcely a passport to favour that Tesco arrogantly persists in its deliberate breaches of covenant to this day: the required policy of insurance has not been taken in joint names and repairs have yet to be carried out to boiler and sprinkler systems; and the attitude displayed to the covenants in the Lease and the tortious conduct of Magspeed may reasonably raise serious questions whether it is a fit and proper underlessee.

DAMAGES IN ADDITION

The Landlords maintain before me a claim (in addition to the injunction) to damages against Tesco for breach of contract and against Magspeed in tort in respect of the period that the Underlease is in force i.e. from the date of grant until the date of surrender. Modern authorities establish that in cases like the present where claimants in the position of the Landlords are awarded damages in addition or in lieu of an injunction, the court may award as compensatory damages such sum as the Landlords might reasonably have demanded at the date of the breach of contract or tort for relaxing the covenant against underletting for the period that no injunction is in force: see e.g. Jaggard v. Sawyer [1995] 1 WLR 269 and Experience Hendrix LLC v. PPX Enterprises Inc [2003] FSR 46. For this purpose the court may take into account in the hypothetical negotiations between the parties the possibility of any new arrangement available to the Defendants which might affect the sum agreed to be payable: see Amec Developments Ltd v. Jury's Hotel Management (UK) Ltd [2001] 1 EGLR 81 at 83-4. Magspeed argues that the award of damages on this basis should be made against Tesco alone because Tesco alone was subject to the covenant requiring relaxation. But both Defendants required the covenant to be relaxed if the Underlease was lawfully to be granted and I see no reason why the award of damages should not be made against both of the Defendants.

Both parties have instructed experts. Those experts have prepared a joint report setting out their views as to what the Landlords could have demanded for relaxing the covenant against underletting so as to permit the grant of the Underlease. In their report the experts have agreed that, given the state of disrepair of the Premises, Tesco had at the date of grant of the Underlease two options available to it enabling it to proceed with an underletting in compliance with the terms of the Lease:

i) the first was to grant an underlease on full repairing terms, with the subtenant indemnified against costs in excess of those needed to maintain the Premises in their current condition by a company in the same group of companies as Tesco (the course in fact later followed by Tesco); or

ii) the second was to negotiate terms with the Landlords to vary the Lease so as to permit the subletting subject to the schedule of condition.

The experts went on to agree that, if Tesco followed the first of these courses, Tesco would have been prepared to pay a premium of £10,000 to avoid the time, inconvenience and expense of arranging for a deed of indemnity from another company in the Tesco group; and that if the first course was not available, the parties would have agreed that Tesco pay 25% of the value of the benefit to Tesco of subletting to Magspeed (estimated over the full term of the Underlease at £480,000) namely £120,000. The figure of £120,000 was agreed on the premise that the Underlease was continued in force until its expiration: even as the benefit to Tesco of the underletting would of course be proportionality reduced if the Underlease was surrendered prematurely, so would 25% of that sum that would be agreed to be payable by Tesco to the Landlords.

Before I turn to the substantive issue raised on damages I must deal with two preliminary points raised by the Defendants. Tesco first took the technical point that no claim for damages is maintainable because no claim is made in the Claim Form for damages in addition to the injunction. But this is a technical point without legal or other merit. It is unnecessary to plead the claim. Tesco then took the point that the experts in their joint report contemplate the award of damages in lieu of and not in addition to an injunction. This is correct, but the failure to contemplate the eventuality of an award of damages in addition should not preclude such an award unless to make such an award would occasion injustice to the Defendants. It has not been suggested that the award would occasion any injustice. No injustice can be occasioned so long as the Defendants are afforded the protection which they are afforded by this judgment.

The substantive issue before me on damages as addressed in the experts' report is whether as a matter of law it was open to Tesco to adopt the first of the two options and consistently with the provisions of clause 4(28)(d) to grant an underlease on full repairing terms but with the subtenant indemnified by an associate company against costs in excess of those needed to maintain the Premises in their current condition. If it was open to Tesco to do so, this is the course they must be assumed to have taken in the hypothetical negotiations and the award of damages must (in accordance with the experts' report) be limited to £10,000.

The Landlords submit that, if Tesco entered into such underlease and indemnity: (1) the underlease and indemnity would be inter dependent (since both would have been signed or neither); (2) if the tenancy agreement and indemnity were inter dependent, they would need to be read together; and (3) if they were read together, the repairing covenant in the tenancy would not be a like covenant to the repairing covenant in the Lease, for it would limit the repairing obligation of Tesco under the underlease to carrying out works necessary to maintain the Premises in their existing condition. For this last proposition reliance is placed on the decision in Allied Dunbar.

For the purposes of this judgment I am prepared to accept the first and second of the Landlords' submissions, but I reject the third. In a case such as Allied Dunbar where the underlease and indemnity are inter dependent and need to be read together and are made between the same parties, the obligation of the tenant to repair under the underlease must be modified and limited by the terms of the indemnity: the indemnity must afford a full and complete answer to any claim by the landlord that the tenant is liable in respect of repairs covered by the indemnity. In the circumstances it is totally unreal to suggest that by the underlease the tenant has assumed any obligation beyond maintenance of the Premises in their existing condition: any obligation in terms imposed by the underlease going beyond that is discharged by the landlords obligations under the indemnity. But the position is totally different if the indemnity is given by a third party, whether or not associated with the landlord. In that case the obligation assumed by the tenant under the underlease is absolute and unlimited; and the indemnity, far from limiting that obligation, is premised on its existence in its absolute and unlimited form and provides for the discharge of that absolute and unlimited obligation by the third party.

I therefore held in the draft of the judgment circulated to counsel for comment that it was open to Tesco to adopt the course which would have required Tesco to pay only the sum of £10,000 and (subject to one qualification) I thought that the Landlords are entitled to an award of this sum in addition to the injunction. Unlike the figure of £120,000, I did not think that the figure of £10,000 is affected by any subsequent actual or potential surrender of the Underlease and in particular the surrender pursuant to the order which I make in this case, for it merely reflects the premium which Tesco would have agreed to pay to avoid the time, inconvenience and expense of arranging for a deed of indemnity whatever the duration of the period of the release. But I had not heard argument on this question and, before I made a final order for payment of damages of £10,000, I gave the Defendants liberty to address me on this issue. The Landlords' counsel thereupon made written submissions to me to the effect that the award should not be £10,000 and that on the basis of the findings in this judgment I should either award £120,000 (discounted for the early surrender) or direct an inquiry as to damages. The reason was that the Landlords had always contended that the Underlease was unlawful both because it was not granted on like terms and because it was granted without consent; that the Landlords succeeded on both grounds; that the experts did not have in mind or consider the alternative ground that consent was unreasonably refused; and that, whilst £10,000 was the proper price for avoiding the costs of a deed of indemnity required to secure the grant of the Underlease on like terms, it was not (and clearly was not) the proper price for purchasing consent to the Underlease which was likely to be, or approximate to the price of £120,000 for negotiating a variation of the Lease to permit sub-letting subject to the schedule of condition. Mr Johns at the same time satisfied me (notwithstanding the objections of the Defendants) that I have the necessary jurisdiction to amend my draft judgment to award the damages to which he said he was entitled or to direct an inquiry as to damages: see Robinson v. Fernsby [2003] EWCA Civ 1820 at paras 91, 113 and 120. The appropriate exercise of that jurisdiction is to direct an inquiry as to damages.

CONCLUSION

I accordingly give judgment for the Landlords and grant the injunction sought and direct an inquiry as to damages. I dismiss Tesco's counterclaim. For the avoidance of doubt I should make it clear that nothing in this judgment precludes Tesco after resuming possession of the Premises from entering into any arrangement with Magspeed which is lawfully open to it under the Lease.

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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Crestfort Ltd. & Ors v Tesco Stores Ltd & Anor [2005] EWHC 805 (Ch) (25 May 2005) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2005/805.html Cite as: [2005] EWHC 805 (Ch)