Terms implied into a break right limited the capability to exercise the right

Wigan Borough Council v Scullindale Global Ltd and others [2021] EWHC 779 (Ch)

The question

Can terms be implied to limit the timeframe in which a contractual right can be exercised?

The key takeaway

The courts are willing to imply terms, even if they are not necessary to meet the ‘business efficacy’ test, where those terms are so obvious that it “goes without saying” that the parties would have proceeded on the basis that they existed. 

The background

The case concerned a home owned by Wigan Borough Council (WBC) called Haigh Hall. In 2015 WBC granted planning consent to redevelop the property into a hotel and wedding venue. WBC then granted a lease over the property to Scullindale Global Ltd (SGL) for a term of 199 years for a premium of £400,000. 

The lease contained some milestones that required SGL to redevelop the property within a specific timeframe, along with acquiring the proper planning permissions. The lease also contained a break right for WBC, which was exercisable “…at any time” with two months’ notice if SGL failed to meet those specific milestones (deemed to be an Event of Default). The lease also stipulated that WBC should pay compensation to SGL if the break right was exercised.

In September 2019 WBC purported to exercise the break right and gave notice to SGL to terminate the lease two months later. SGL remained at the property after the termination date and WBC subsequently claimed that they were trespassing and therefore liable for damages for trespass or mesne profits. SGL argued that the lease was still in place as WBC had not served the notice exercising their break right within a reasonable time, and that their redevelopment of the property had been completed by the time the break right notice was served.

The decision

The High Court found that WBC’s break right notice was effective. 

The court rejected SGL’s suggestion that the words “at any time” should be construed as requiring notice to be served “at any reasonable time”, “at any time whilst an Event of Default persists” or “at any time between 23 May 2018 and subsequent completion of the Development in accordance with the Planning Permissions”. SGL had argued that an implied limitation to the right was necessary to meet the business efficacy test or to reflect the reasonable expectations of the parties. 

The court did not agree – SGL could serve a notice on WBC at any time after an Event of Default, making time of the essence for the exercise of the break right. The failure to serve a notice at that point by WBC would make the right lapse. Because of this the implied term was not necessary to satisfy the business efficacy test.

However, the court decided that it was necessary to imply a limitation on the break right because it was so obvious as to “go without saying” that both parties had proceeded on the basis that a break notice could only validly be served at any time whilst an Event of Default still persisted.

Even with this implied limitation on the break right, the court deemed the notice to be valid because the development was not completed in accordance with the planning permissions by the required completion date and/or the break right notice date. The court also required that WBC pay compensation based on the value of the Property at the break date. 

Finally, the court considered the matter of damages for trespass or mesne profits. WBC had not suffered any financial loss, nor had SGL received any financial benefit from the continued possession of the property after the break right date, so the court did not order any damages or mesne profits to WBC. 

Why is this important?

The decisions confirms that the courts may be willing to imply terms where those implied terms satisfy only the requirement of “obviousness”, not “business efficacy”; although the judge acknowledged that in practice it is likely to be a rare case when only one of those requirements is satisfied.

Any practical tips?

When considering the exercise of a contractual right, consider whether there should be any limitations, eg if the trigger event has passed, duration, new circumstances, etc. This particularly relevant if a “trigger” event can happen at any point during a long-term agreement. Those limitations should be expressly included in the contract to avoid the uncertainty of implied terms.