Akzo Nobel UK Ltd v Arista Tubes Ltd [2009] EWHC 497 (Ch)

[2009] EWHC 497 (Ch)Case No HC08C00726
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 19/03/2009
Before
THE HON MR JUSTICE FLOYD
Between
AKZO NOBEL UK LIMITEDClaimantARISTA TUBES LIMITEDDefendant
Christopher Pymont QC (instructed by Reed Smith Richards Butler LLP) for ClaimantJonathan Gaunt QC (instructed by Geldards LLP) for DefendantHearing Hearing dates: 11 March 2009
JudgmentMr Justice Floyd :Introduction
[1]The claimant is the leaseholder of a set of industrial units known as Units 3-7 Gunnel’s Wood Park, Gunnel’s Wood Road, Road in Stevenage (“the premsises”) pursuant to leases dated 15th June 1987 granted by Universities Superannaution Scheme Limited (“USSL”). The leases expire in 2012. By this action the claimant seeks specific performance of an agreement it entered into with the defendant for the grant to the defendant of an underlease of the premises.[2]The claimant acquired the leases of the premises in the following circumstances. In late 1998 the claimant (then known as Akzo Nobel UK PLC) purchased the business carried on at the premises by Courtaulds Packaging Limited (“CPL”) as its Plastics Tubes Europe division. The purchase was subject to an agreement that the leases (then in the name of CPL) would be assigned to the claimant. The transaction giving effect to all this was called the Business Transfer Agreement (“the BTA”).[3]Pending the assignment of the leases to the claimant, the claimant and all persons authorised by it were granted a licence to occupy the premises. Under the terms of the agreement between CPL and the claimant, the claimant would pay CPL a licence fee equivalent to the rent, service charges and other outgoings properly paid by CPL in respect of the premises.[4]The leases were not in fact assigned to CPL until 13th December 2007, more than nine years after the agreement. The assignments required the consent of USSL. The delay is alleged by the claimant to have been due to concerns by USSL as to the covenant strength of the claimant and the need to obtain a foreign lawyer’s opinion (the claimant’s parent company being Dutch). The reasons for the delay are not material to the outcome of the action.[5]In the meantime, in December 1998, the claimant entered into an agreement with the defendant to sell on its Plastics Tubes Europe division to the defendant. This was in the form of a management buy-out, the defendant being a newly formed company registered for that purpose. By a Business Purchase Agreement (“the BPA”) dated 31st December 1998 the defendant agreed to take underleases of the premises for the terms granted by the leases (less a nominal reversion) at the rents payable from time to time under the leases. Recognising that the completion of the assignment of the leases from CPL to the claimant had not yet taken place, paragraph 6.2 of schedule 7 of the BPA granted licences to the defendant to occupy the premises on the same terms as the licences granted to the claimant. These licences were to continue pending the obtaining of USSL’s consent to(a) the assignment of the leases from CPL (now called Betts UK Ltd) to the claimant and(b) the grant of the underleases to the defendant.[6]By clause 5.2 of Schedule 7 of the BPA:
“The Seller and the Purchaser shall use all reasonable endeavours to procure the obtaining of the Property Consents as soon as reasonably practicable after the Completion Date…”
[7]Paragraph 11 of schedule 7 of the BPA provided that:
“If by the date of 12 months after the date hereof all Property Consents shall not have been obtained in respect of the Business Property then either the Seller or the Purchaser may, by 3 months’ notice in writing to the other terminate on the date of expiry of that notice, the obligations of the parties thereto in respect of the Business Property, under this Schedule 7 (Properties) (but without prejudice to any antecedent breach) in which event the Purchaser shall vacate the Business Property by the end of such notice period.”
[8]It is the meaning and effect of paragraph 11 of Scehdule 7 of the BPA which is at the heart of the present dispute. As the Property Consents had not been obtained by 31st December 1999, the option to terminate under that paragraph arose on 1st January 2000.[9]On 30th October 2007, still before the Property Consents had been obtained, the defendant wrote to the claimant, having referred to the BTA and BPA, as follows:
“Those Agreements require us to give three months’ notice to terminate and we accordingly therefore give notice to terminate our Licence Agreement on 31st January 2008, when all five units will be vacated.”
[10]Although a large number of points concerning this notice were pleaded and pursued with differing degrees of enthusiasm thereafter, there is now a considerable measure of common ground. There is now no dispute that this letter constituted a notice to terminate under clause 11 of Schedule 7 of the BPA. There is also now no dispute that the defendant was entitled to serve such a notice when it did: an argument that the notice could only be served on or around the expiry of the 12 months from the date of the BPA was not pursued. It is also common ground that the notice was not invalidated by the fact that it was not received until 1st November, thereby cutting down by one day the three months notice to which the claimant was entitled, or indeed on any other ground.[11]No doubt spurred on by the service of the defendant’s notice, the transfer of the leases to the claimant from Betts UK Ltd occurred on 13th December 2007. At or about the same time the claimant procured USSL’s consent to grant the underleases to the defendant.[12]By paragraph 6.1 of Schedule 7 of the BPA, the date of “delayed legal completion” of the underleases to the defendant of the premises was, so far as relevant here:
“4 business days after … reasonable evidence is provided to the Purchaser’s Solicitors that the Property Consent has been obtained”
[13]On the date for legal completion the defendant was obliged by paragraph 7.1 of Schedule 7 of the BPA to deliver to the claimant a duly executed counterpart of the underleases.[14]On 14th December 2007, in a letter addressed to the defendant’s company secretary (subsequently re-sent on 18th December to correct an error), the claimant (by its solicitors) informed the defendant that the leases had been transferred to the clamant by the transfer dated 13th December 2007. It also informed the defendant that it had procured the necessary agreement to grant the underleases to the defendant. It therefore enclosed forms of underlease for execution by the defendant, and forms of licence to underlet.[15]The letters of 14th and 18th December 2007 both stated as follows:
“Our client has passed to us a copy of the letter … dated 30 October 2007, but not received by our client until 1 November 2007. We do not accept the validity of that letter as good notice to terminate your company’s obligations in relation to these properties under the [BPA].”
[16]The letters of 14th and 18th December 2007 were in fact passed by the defendant to its then solicitors, Messrs. Geldards, as confirmed by a letter from them to the claimant’s solicitors dated 18th January 2008. The letter from Geldards having referred to the earlier correspondence, continued as follows:
“Having considered the [BPA] and, in particular, paragraph 11 of Part B Schedule [8], we can see no reason for which our client’s Notice of 30th October should not be regarded as valid and accordingly therefore our client will not be proceeding to completion of the Underleases.”
[17]Inherent in the latter of the 18th January 2008 is the assertion that once a valid notice under paragraph 11 has been served, the obligation to take the underleases cannot subsequently arise. It is common ground that the claimant had done enough to bring about the date for legal completion before the expiry of the 30th October notice provided that it was entitled to do so.

The rival arguments

[18]The dispute resolves itself into a question of construction of paragraph 11 of Schedule 7 of the BPA. Does it, as the claimant contends, permit the claimant to bring about completion of the underleases in the period of the notice, and to obtain by means of an order for specific performance, completion of the underleases? Alternatively, does it mean that following service of a valid notice under clause 11, the obligation to take the underlease can no longer arise?[19]Mr Pymont QC, who appears on behalf of the claimant, submitted that, before the notice expired, the defendant was in breach of its obligation to complete. He says that the effect of the notice is expressly that the parties’ obligations remain in force until the expiry of the notice, and no obligation is excluded from that. Thus, for example, the obligation under paragraph 5.2 of Schedule 7 to use all reasonable endeavours to obtain the Property Consents as soon as reasonably practicable continued down to the date of expiry of the notice. So too did the obligation to pay in respect of the continued occupation of the premises. Most importantly, the obligation under paragraph 6.1 of the Schedule to deliver the duly executed counterpart lease on the date for legal completion similarly continued. Moreover, if Arista committed a breach of that obligation before expiry of the notice, the breach, and thus the remedies for that breach were also expressly preserved. There was thus no question of the termination of the parties’ obligation having any retrospective effect.[20]Mr Pymont supported his submissions by drawing attention to the fact that Schedule 7 excluded certain provisions of the National Conditions of Sale (3rd Edition) which were otherwise to apply except so far as inconsistent with the express terms (see paragraph 8). Amongst the excluded provisions were those relating to notices to complete. Thus, he said, paragraph 11 was the regime which the parties had agreed to substitute for the usual notice to complete arrangements, as the means for bringing matters to a head when timely completion does not occur.[21]Mr Jonathan Gaunt QC, who argued the case on behalf of the defendant, drew attention to the closing words of the paragraph:
“in which event the Purchaser shall vacate the Business Property by the end of such notice period”
. The “event” to which this part of the paragraph refers was, he submitted, the giving of the notice. Hence the giving of the notice triggers an obligation on the part of the defendant to vacate the premises. He submits that it would be a strange and uncommercial construction which required the defendant both to vacate the premises and allowed for the possibility that the defendant could be required to complete the underlease as well, or be sued for breach if he did not do so.[22]Mr Gaunt submits that on the correct construction of paragraph 11, it is not possible for the obligation to complete the underleases to arise once the notice has been given. He submitted that the way in which the clause was intended to work was that, if the Property Consents had not been obtained by the expiry of 12 months from the date of the BPA, and a paragraph 11 notice was given, the defendant would have three months to vacate the premises and the claimant would have three months to find a new tenant. It was not intended, after 12 months had expired and a valid notice served, that the claimant would be able to require completion. The whole point of the notice,as made clear by the closing words, was that the defendant was going to vacate and could no longer be required to complete. If it were not so, it would be possible for the claimant to place the defendant in breach within a few days of the expiry of the notice, when its arrangements for leaving the premises were likely to be complete.[23]In reply Mr Pymont submitted that the “event” to which the concluding words of the paragraph referred, and which triggered the obligation to vacate, was not the service of the notice but the termination of the obligations of the parties (without prejudice to antecedent breach) at the date of expiry of the notice. Only where no such obligation is remaining would the obligation to vacate arise. Thus, where, as the claimant contends here, there has been a breach, and therefore an obligation is expressly preserved by the paragraph, the obligation to vacate does not arise.

Discussion

[24]It is convenient to start with the dispute over which “event” the concluding words of the paragraph intend to refer. It is clear to me that the “event” is the service of a valid notice. The termination of the parties’ obligations under Schedule 7 at the end of the notice period is the consequence of the service of the notice. This termination could, I suppose, be described as an “event”. However, what is, to my mind, decisive is that the defendant is required to leave the premises “by the end of such notice period”. This language is strongly suggestive that the “event” is earlier in time than the end of the notice period. I do not think Mr Pymont’s alternative construction can be what is meant. If, for example, the defendant withheld the rent during the notice period, there would, as I understood Mr Pymont’s argument, be an outstanding obligation at the end of the notice period which prevented the “event” from occurring, with the result that the defendant was not obliged to vacate the premises. I do not think this can have been the intended result.[25]Thus it follows that I should approach the paragraph on the basis that service of a valid notice carried with it the necessary consequence that the defendant would have to leave the premises by the expiry of the notice.[26]Secondly, I think it is important to seek to determine objectively what the purpose of the paragraph is. Plainly the objective is to provide an encouragement towards obtaining the necessary consents by the expiry of 12 months from the date of the BPA. The consequence of allowing that date to pass is that both sides acquire the right to give a notice terminating, on the date of expiry of the notice, their respective obligations under the agreement. On the claimant’s approach to the paragraph, its effect is to give a last chance to complete, within the confines of the 3 month period. On the defendant’s construction, it gives both sides the ability to bring their contractual relationship to a complete end, precisely because completion has not occurred.[27]Whilst it is correct that the Notice to Complete provisions from the Standard Conditions of Sale have been deleted, I think it is wrong to suppose that the parties had in mind that the notice provisions in paragraph 11 of Schedule 7 would operate so as to have a similar effect. The main encouragement which the contract provided for completion was during the 12 month period, when the approach of the deadline should have acted as an incentive to secure completion. After the deadline had expired, the claimant was at risk that if the defendant wished to leave it could do so. Moreover the claimant could require the defendant to leave under the provisions of the same clause. This regime is superimposed on the 12 month deadline. There is no reason to suppose that the parties contemplated that the notice provision should act in the same way as a Notice to Complete, so as to allow yet further opportunities to complete, outside the 12 month period and after a notice has been served.[28]I cannot accept the “last chance” approach to the underlying purpose of the paragraph. The effect of a valid notice is final: the defendant has to leave at the end of the notice period. I agree with Mr Gaunt that it would be surprising in those circumstances if an opportunity to trigger the obligation to complete, could still arise.[29]I turn then to the rest of paragraph 11. It is correct, as Mr Pymont submits, that the clause treats all obligations under the Schedule in the same way, and provides that they terminate on the expiry of the notice. But I do not think it is realistic to regard the notice as terminating an obligation to complete which had not arisen at the date of the notice. The obligation is contingent on a future uncertain event. Of course, if the obligation to return the counterpart underleases duly executed had arisen at the date of the notice, the obligation would obviously continue until expiry, notwithstanding service of the notice, and specific performance would be available to enforce it. But in the present case that obligation had not arisen at the date of the notice. So the real question is not whether the obligation to execute the underleases is continued notwithstanding service of the notice, but whether the clause permits such an obligation to be created in those circumstances.[30]In my judgment, once a valid notice under paragraph 11 is served, it is no longer open to either party to require completion.[31]Firstly, I think this construction gives effect to the purpose of the paragraph, which is to enable the parties to bring an end to the relationship if one of them chooses to do so and if the Property Consents have not been obtained at the expiry of 12 months from the date of the BPA. It is inconsistent with this purpose to allow an obligation to complete to arise after the notice has been served. The whole point of the notice is that time for completion has passed.[32]Secondly, service of a notice leads automatically to the defendant vacating the premises precisely because there has been no completion It is not consistent to give the notice these automatic and final consequences and at the same time allow an obligation to complete to be created after service of the notice.[33]Thirdly, the claimant’s construction produces business uncertainty. If the claimant were able to trigger completion at any time during the notice period, the defendant could be placed in a position where it would not know where it stood until shortly before the expiry of the period. I think Mr Gaunt is right that the clause contemplates a period of certainty when the claimant can seek another tenant and the defendant can make preparations to vacate. Given the factual background of the use of the premises for industrial purposes, where giving vacant possession involves moving out of a manufacturing facility, it is not surprising that such a period is provided for. The ability to require completion within the notice is destructive of reasonable commercial certainty.[34]Fourthly, if the purpose of the paragraph were, as the claimant contends, to allow the failure to complete to be remedied within the notice period, I would expect this to have been effected by clear words. One would also have expected that the obligation to vacate at the end of the notice period to have been qualified expressly to allow for this possibility. None of this was done.[35]For all these reasons I consider that the defendant was justified in not completing the underleases. An obligation to complete cannot arise once a valid notice under paragraph 11 has been served. The action for specific performance of the agreement to take the underleases fails.