Contract Forfeit Rental

In January 2003 Whimsey Enterprises LTD (WEL), manufacturers of space toys, took a £10 year lease on a building on the Porchester Industrial Estate, owned by Capital Investments plc (CIP). The rental is £36,000 a year, payable by installments of £3000 per month. In April 2004 WEL's accountants advise that the company is not coping with cash flow problems, mainly because of overheads, and it is likely the bank will 'call in' its overdraft, putting the business into liquidation. WEL are also advised that the recession now deeply affecting the toy sector could last for several years. WEL are aware that several sites on the industrial estate are unoccupied and that several businesses have already gone into liquidation. WEL approach CIP with a view to a reduction in rent.

At a meeting in May it is clear that CIP are keen that WEL continue to rent their premises and it is agreed that the rental be reduced to £2000 per month and the maintenance covenant in the lease will not be strictly enforced until business improves. In November 2004 the new space movie 'Space Wars III' is released and, contrary to all expectation, the new Captain Starlet spaceship and robot become the 'must have' toys for Christmas. WEL cannot make them fast enough and their financial situation improves dramatically. In April 2005 CIP are offered a lucrative deal on WEL's particular site. This leads them to review their position. CIP write to WEL informing them of the following: i) they wish to introduce full rental charges from next month onwards, in accordance with the lease ii) they are demanding the arrears in rental payments from May 2004 iii) If this is not agreed, they will seek forfeiture of the lease on the grounds of breaches of the maintenance covenant. WEL are insisting that promises made at the May meeting are legally binding. Advise WEL whether CIP can enforce these claims against them.

The present facts call attention to the law surrounding the concept of equitable estoppel and waiver. Although both concepts are derived from equity, they work beside and can be seen to complement common law contract law. This essay therefore proposes to examine the present scenario from a common law perspective before analysing whether or not these equitable tools can in any way aid the defendants.

From a purely common law perspective, I would have to advise WEL that on the facts as they stand they would be liable to pay CIP the arrears in rental payment from May 2004. Moreover, CIP will be allowed to introduce full rental charges from next month onwards and, if this is not agreed, CIP will be able to forfeit the lease on the grounds of breaches of the maintenance covenant.

As regards the payment of arrears, I have advised that WEL will be liable to pay them under the common law of contract due to the fact that WEL has provided no fresh consideration for the alterations to the contract. This rule was laid down in Pinnel’s Case. Here, it was held that “payment of a lesser sum in satisfaction of a greater cannot be any satisfaction for the whole”. This was upheld in the case of Foakes v Beer, and more recently in Re Selectmove. Basing myself on the common law then, I would have to advise WEL that they are liable to pay CIP the arrears on the rent from May 2004.

As regards introducing full rental charges from next month onwards I would advise WEL that CIP have every right to do this under the contract, as this is what the terms of the contract state.

Finally, as regards CIP’s rights to forfeit the lease on the grounds that WEL breached their covenants to maintain the premises, I would have to advise that it seems from the facts that CIP may be allowed to forfeit the contract as, again, WEL did not provide any consideration for CIP’s promise not to strictly enforce the maintenance covenants in the lease.

On the other hand, equity might, in the present circumstances, be able to lend a hand to WEL. This is because on the facts WEL may be able to argue that even though under common law contract law CIP may be able to enforce the relevant terms of the contract, equity may prohibit CIP from enforcing them.

The doctrine of waiver traditionally applied when one party to the contract agreed not to enforce their strict legal under the contract. Equity then, subject to all the equitable principles, stops them from enforcing the contract even though they would otherwise have a right to do so under the common law. Promissory estoppel can be seen to be a development of this principle, as opposed to a separate concept in and of itself. Its emergence can be traced back to the case of Hughes v Metropolitan Railway. This case involved a lease under which the tenants of a building were obliged to keep the premise in a good state of repairs. In October 1974, the landlord gave the tenants six months notice to do some repairs failing which the lease would be forfeited. In November, however, the tenants entered into negotiations with the landlord for the purposes of buying the premises. In the mean time, they stated, they would not carry out those repairs. The negotiations broke down soon after, and six months after the original six months notice had been given, the landlord claimed the lease was forfeited as the tenants had failed to carry out those repairs. The House of Lords, however, held that the landlord’s conduct amounted to an implied promise not to enforce the six month deadline and the tenants had relied on this promise. The notice period would then have started to run again from the moment the negotiations broke down.

From this it would seem that, at least as regards CIP’s right to forfeit the lease due to breach of the maintenance covenants, equity would prevent them from doing so. As a result then, CIP cannot forfeit the lease for this reason.

The case of Central London Property Trust Ltd v High Trees House Ltd provides a far more recent example of the doctrine and, more importantly, on facts very similar to the present scenario. Here the claimants had leased a block of flats to the defendants, whom planned to rent out the flats so as to cover the lease and make a profit on top. Unfortunately the Second World War broke out and people were leaving London, making it hard to find tenants. Moreover, many of the flats were left empty. As a result the claimants agreed to accept half rent. By the end of the war, in 1945, the flats were full again and the claimants sought the full rent for the last two quarters of 1945, claiming that the agreement was only meant to last until the war was over or the flats were filled up again, whichever occurred sooner. The court agreed with this. More importantly, however, Denning J went on to state that the claimant would not have been entitled to claim back for the period from 1940 to 1945 even though there was no consideration for the promise to accept the reduced rent due to the equitable principle of promissory estoppel laid down in Hughes. However, the precise extent of this principle is unclear. Nevertheless it is clear that the following conditions must be fulfilled.

Firstly, it seems from case law that there must be a pre-existing contractual relationship between the parties before the principle of promissory estoppel can be raised. In the present situation WEL had, quite clearly, an existing relationship with CIP before any promises were made by CIP.

Secondly, there must be a clear and unambiguous promise not to enforce a person’s full legal rights. The promise may be implied from conduct, as was the case in Hughes, but silence or failure to act will not in ordinary circumstances be sufficient. In China Pacific SA v Food Corp of India a claim for promissory estoppel was rejected on the grounds that no unambiguous promise had been made. In this scenario we are told that at a meeting in May it was made clear that CIP were keen to allow WEL to continue to rent their premises and it was agreed that the rental would be reduced to £2000 per month and the maintenance covenant in the lease would not be strictly enforced until business improved. It is submitted that this amounts to a clear and unambiguous promise.

Thirdly, the promisor must have acted in reliance on that promise. In High Trees, for example, the defendants relied on the promise ion the sense that they could have tried to sell the lease but did not do so. In the present situation quite clearly WEL would have tried to so something similar, and decided to pursue the contract simply because they were relying on CIP’s promise to lower the rent.

Fourthly, it must be inequitable for the promisor to enforce his strict legal rights. As promissory estoppel is an equitable doctrine, the usual equitable principles apply. Therefore, if the promisee cannot be restored to the position he would have been in before, or if there is something in his conduct which makes it inequitable to allow him/her to take advantage of the promise, then the doctrine would not apply. This was the case in D&C Builder v Rees where the claimants did work on the defendants premises amounting to ₤732. The defendants then, knowing that the claimants were suffering cash flow problems, offered to pay them ₤500 or nothing at all, knowing that the claimants were obliged to accept. When the builders brought forward a claim, the courts held that the defendants were prevented from relying on the promise as they had effectively held the builders to ransom and had therefore not come to equity with clean hands. In the present circumstances, it would seem that there is nothing inequitable in WEL’s behaviour and as a result it does not seem that there is anything which would prevent them from relying on CIP’s promise to suspend their full contractual rights. Moreover, on the facts it is submitted that it would be inequitable to allow CIP to enforce their strict legal rights in claming back the arrears from May 2004, or to seek to enforce the maintenance convents after WEL had relied on their promise not to enforce them. As a result it is submitted that WEL could rely on the doctrine of estoppel.

Fourthly, promissory estoppel can be used only to prevent rights from being exercised for a period of time; they cannot be destroyed for ever. Therefore in High Trees, the landlord was only promising not to enforce the full contract price for the duration of the war or until the flats were full up, he did not waive his right to enforce these terms forever. As a result, even if the doctrine of estoppel applies, CIP have a right to introduce full rental charges from next month onwards.

Finally, the doctrine has been described as being ‘a shield and not a sword’. In other words, estoppel cannot be used to create entirely new rights or extend the scope of existing ones; it can only be used to prevent the enforcement of rights already held. This does not create a problem for WEL in the present situation, as they seek no more than to prevent CIP from enforcing their strict legal rights.

In conclusion I would advise WEL that under the common law of contract they would have no defence against CIP’s claim and would be liable to pay arrears from May 2004, to pay full rent from next month onwards, and, failing this, to have the lease forfeited on the grounds of breach of the maintenance covenants. On the other hand, I would advise them that this is a situation where the doctrines of waiver and promissory estoppel can quite clearly apply and as a result WEL will not be liable to pay CIP the arrears from May 2004 onwards nor will they be liable to have their lease forfeited for breaching the maintenance covenants as equity prevents CIP from enforcing their strict rights. Either way, however, WEL will be liable to commence paying full rent from next month onwards as CIP’s promise was only for a period of time until business improved which, quite clearly, it has done.

BIBLIOGRAPHY

Cases

• Pinnel’s Case (1602) 5 Co Rep 117a

• Foakes v Beer (1884) 9 App Cas 605

• Re Selectmove Ltd [1995] 2 All ER 531

• Hughes v Metropolitan Railway Co (1877) 2 App Cas 439

• Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130

• China Pacific SA v Food Corp of India [1980] QB 403

• D&C Builders v Rees [1966] 2 QB 617

Books

• Elliot, C and Quinn, F. Contract Law (3^rd Edn), Essex, Longman: 2001

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