Akzo Nobel UK Ltd v Arista Tubes Ltd

In 1998 the claimant bought the business of another company. The seller under the business transfer agreement agreed to transfer its leasehold premises to the claimant. However, landlords' consent was required to the assignments. Pending this being obtained, the claimant was granted a licence to occupy the premises by the seller.

The leases were not in fact assigned until December 2007. In the meantime, later in 1998, the claimant agreed to sell its recently acquired business to the defendant. The defendant agreed to take underleases of the premises for the terms granted by the leases (less a nominal reversion). Recognising that the completion of the assignment of the leases to the claimant had not yet taken place, the claimant granted licences to the defendant to occupy the premises on the same terms as the licences granted to it. These licences were to continue pending obtaining the landlords' consent to (a) the assignment of the leases to the claimant and (b) the grant of the underleases to the defendant.

The sale agreement between the claimant and the defendant provided that if both sets of consents had not been obtained within 12 months of the date of the agreement, then either party could give three months' written notice to terminate, on the date of expiry of that notice, all obligations of the parties in relation to the properties. This was expressed to be without prejudice to any antecedent breach of the agreement.

On 30 October 2007, since landlords' consents had still not been given, the defendant gave notice to the claimant to determine the licences on 31 January 2008. Between these two dates, landlords' consents were obtained and the leases were assigned to the claimant. The claimant, notwithstanding the termination notice, then sought to enforce the defendant's obligation to take the underleases.

The High Court ruled that an obligation to complete the underleases could not arise once a valid termination notice had been served.

It held that the objective of the termination provision was to encourage the obtaining of the necessary consents before the expiry of 12 months from the date of the agreement. After that deadline expired, the claimant was at risk because 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.

Although the agreement between the claimant and the defendant incorporated a set of standard conditions of sale, the provisions relating to the service of a notice to complete were expressly excluded. The claimant argued that the termination clause was intended to replace the notice to complete provisions, with the result that the claimant had a last chance to complete, within the confines of the three month period. The court rejected this argument. It thought that, where a termination notice had been served, it would be surprising if an opportunity to trigger the obligation to complete could still arise. If the purpose of the termination provision was to allow the failure to complete to be remedied within the notice period, the court would have expected this to have been effected by clear words.

The court pointed out that the claimant's interpretation produced business uncertainty. If the claimant was 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 that period. At that point it would already have made preparations to vacate.

Things to consider

This case forms an interesting contrast to Alchemy Estates v Astor. Alchemy concerned a right to rescind a contract for the purchase of a lease. The contract incorporated the Standard Conditions of Sale, fourth edition. Standard condition 8.3.3 provides that if landlord's consent is not obtained three working days before completion, either party may rescind the contract.

Landlord's consent had not been obtained by the completion date specified in the contract. About two months later, the buyer gave notice to the seller under condition 8.3.3 to rescind the contract. The court ruled in favour of the seller. It reasoned that the right to rescind in standard condition 8.3.3 had to be exercised promptly. This meant by the completion date, or (at the most) one or two days after it. Instead, the buyer had allowed the sale agreement to remain "on foot" and had encouraged the seller to continue working towards completion. The court thought that it could not have been intended that the right to rescind under condition 8.3.3 should continue indefinitely, so that either party could bring the contract to an end without any warning. If the buyer had wanted to rescind, it should have served a notice to complete on the seller requiring completion within ten working days.

It appears that the claimant in Akzo had initially argued that the notice could only be served on or around the expiry of 12 months from the date of the agreement, but this argument was dropped before the trial. It is not clear from the transcript whether the argument was based on Alchemy. At first glance the reasoning in Alchemy would appear to apply equally to the special condition in Akzo. Perhaps a distinction can be drawn on the basis that the buyer in Alchemy had taken steps which indicated its intention to complete. Additionally, there was, as we have seen, no notice to complete procedure available in Akzo.