Terminating a lease on condition of an event occurring

A recent case considered by the Court of Appeal in Avondale Park Ltd v Miss Delaney’s Nursery Schools Ltd (see ‘The Case Summary’ below) confirms the position that if a commercial lease in England & Wales states that ‘’the lease will be terminated’’ upon the occurrence of a certain event, such as the landlord’s failure to provide the required deeds or consent, it gives the tenant an automatic right to terminate the lease. The implication of this case is wide-ranging, as it concerns the legal issues of the creation of periodic tenancies, the operation of estoppel by convention, the construction of a lease, and the rule that a party in default may not profit from its wrong.

Defining legal terms and concepts

• Periodic tenancies – The term of the tenancy runs on a rolling contract basis, such as weekly, monthly, or yearly, with no fixed end date until a notice to quit is served by either the landlord or the tenant. The tenancy becomes periodic automatically if a tenant stays past the end of the fixed term without a renewal agreement.
• Estoppel by convention (‘’Estoppel’’) – A common assumption has to be established, either through express agreement or conduct, on which the reliance must have occurred within the dealings between the parties to the agreement, and the person who is alleging the estoppel has suffered a detriment so as it would be deemed as unfair and unjust for the other party to go back on the agreement (Blindley Heath Investments Ltd v Bass).
• The American Cyanamid Co (No 1) v Ethicon Ltd (‘’American Cyanamid’’) test – This case set out guidelines which consider whether there is an adequate case for granting an interim injunction by considering factors such as whether (i) there is a serious issue to be tried and if so, (ii) what is the balance of convenience.

The Case Summary

This case concerns the appellant landlord, Avondale Park Ltd (‘’Avondale’’), who threatened to evict the subtenant, Miss Delaney’s Nursey School Ltd (‘’Miss Delaney’s’’).

Headlease

Avondale was a tenant at the property, for a term expiring on 13^th September 2022, in which the property was permitted to be used as residential accommodation. The head lease was protected under Part II of the Landlord and Tenant Act 1954 (‘’LTA 1954’’).

Sublease

On 9^th September 2014, Miss Delaney’s was granted a sublease by Avondale’s predecessor, to use the property as a nursery school, for a term expiring on 29^th August 2022, before the expiry of the head lease. The sublease contained an express term that it would be ‘’terminated immediately by 14^th December 2014 if the Landlord does not produce to the Tenant a certified copy of a completed Deed of Variation’’. However, no certificate was produced by Avondale on the required date and Miss Delaney’s went into occupation on 18^th December 2014 and started to pay rent. Miss Delaney’s also spent a substantial sum on refurbishing the property as a nursery. Avondale accepted the rent and Miss Delaney’s continue its occupation until Avondale sought possession in August 2022.

Disputes arose between parties

On 26^th August 2022, Avondale purported to forfeit the sublease by re-entry, based on non-payment of rent. Miss Delaney’s sought an urgent injunction which was granted in September 2022, initially by Mr. Justice Meade and then by Mr. Justice Leech. Avondale argued that an injunction should not be granted as the sublease had expired by the time the injunction hearings were held, which were on the 5^th and 8^th of September 2022.

Grounds of Appeal

Avondale appealed the grant of injunction on the following three grounds: –

1. that automatic termination provision requires an election by the tenant to terminate the lease rather than an automatic termination right, and
2. that an Estoppel had arisen by which there was no triable issue, and
3. that as the injunction would effectively dispose of the proceedings, the Court should apply closer scrutiny to the merits of the dispute rather than relying on the American Cyanamid

Miss Delaney’s argument

Miss Delaney’s relied on the automatic termination provision set out in the sublease, which states that the lease will be terminated immediately upon the non-production of the completed deed of variation, which Avondale had failed to provide. Miss Delaney’s also argued that its subsequent occupation and payment of rent created a periodic tenancy, which is protected under Part II of the LTA 1954.

The Court of Appeal’s decision

Following the hearing on 25^th May 2023, the Court of Appeal dismissed the Appeal.

It held that: –

1. the plain meaning of the words of the termination provision meant that it was automatic in effect.
2. the Court referred to the requirements of Estoppel as set out by the Supreme Court in Tinkler v HMRC and Keen v Holland and held that Estoppel could not operate to override the statutory security of tenure under an implied periodic tenancy.
3. While American Cyanamid was not a case in which the injunction would finally discard the case, and the court must give full weight to ‘all the practical realities’ when dealing with an injunction application, the practical realities in this case simply did not amount to the meritorious case which Avondale argued to be in its favour as it had never occupied the property or ran a nursery.

Points to Note                                                           

This case sets a reminder to all landlords that a tenant will qualify for protection under LTA 1954 should they remain in occupation after the expiry of a lease. Therefore, landlords should be mindful of provisions that purport to terminate a lease automatically upon a tenant’s breach as it is subject to forfeiture restrictions as well.

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