Can a term be implied into a UK lease so that it makes business sense?

The facts

Hackney granted a 99 year lease of some railway arches to London Underground, who then sublet for the same term, minus a day.

The rent under London Underground’s lease was defined by reference to the rent payable under the sublease – which was a percentage of the commercial rental income from the arches.

In 2003, the sublease was surrendered for a premium of £7 million. Despite the surrender, London Underground continued to pay the rent in line with the provisions of the sublease until 2019.

London Underground’s successor – Rail for London – then challenged the obligation to pay rent, on the basis that, with no sublease, no rent was payable under its own lease.

The dispute

Rail for London sought a declaration from the Court that no rent was payable under its lease.

Hackney argued that rent continued to be payable, even after the sublease was surrendered.

Hackney argued either that the express wording of the lease itself meant that rent was still payable or, if not, that a term should be implied to that effect.

Correct interpretation

The Court looked at the wording of the relevant clause and the lease as a whole and concluded that, on the express wording alone, no rent would be payable under the lease after the surrender of the sublease.

Implied term

The Court then considered whether a term could be implied into the lease to the effect that, even after the end of the sublease, the rent would continue to be payable.

Here, the purpose of the transaction was to enable London Underground to extend the East London Line. The sale and lease-back scheme gave London Underground the use of the property to enable it to do so, without making an up-front capital payment to Hackney. In exchange, Hackney would receive a percentage of the commercial rental income from the property which was to be paid up the chain of leases to Hackney.

In this context, the Court concluded that it made no commercial sense for Rail for London to stop paying rent under its own lease when the sublease came to an end and it was reasonable and equitable to imply a term into the lease requiring it to continue to do so.

What is the lesson?

In this case, Hackney was rescued by an implied term. However, it would clearly have been far better had the lease expressly addressed the consequences of the sublease ceasing to exist. It is not uncommon for obligations in leases to be drafted by reference to headleases or sub-leases. Parties negotiating such leases would be well advised to turn their minds to the consequences of the relevant headlease or sub-lease coming to an end and to draft expressly for this scenario.

Authored by Sarah Tillmann and Paul Tonkin.