3PLR – BANDAR PROPERTY HOLDINGS LTD. V. J. S. DARWEN (SUCCESSORS) LTD.
POLICY, PRACTICE & PUBLISHING LAW REPORTS, 3PLR
BANDAR PROPERTY HOLDINGS LTD.
V.
J. S. DARWEN (SUCCESSORS) LTD.
QUEEN’S BENCH DIVISION
[1968] 2 ALL E.R. 305
FEBRUARY 6, 1968
3PLR/1968/28 (QB)
BEFORE:
ROSKILL J.
REPRESENTATION
Edwin J. Prince – for the lessors
Robert J. Southan – for the lessees
Solicitors–Fremont & Co.; Forsyte, Kerman & Phillips.
MAIN ISSUES
REAL ESTATE AND PROPERTY LAW:- Landlord and tenant – Lease – Covenant –Insurance clause – Construction – Implied term – Covenant by lessors to insure demised premises – Covenant by lessees to reimburse lessors in respect of premium – Cover effected by lessors at premium higher than could have been obtained elsewhere – Whether lessees liable to pay excess
INSURANCE AND REINSURANCE LAW:- Insurance clause in a real estate agreement – Construction of – Implied term – Covenant by lessors to insure demised premises and for lessees to reimburse lessors in respect of premium – Whether term to be construed as implying a duty on lessors to act reasonably in placing insurance so as not to impose unnecessarily heavy burden on lessees
HISTORY AND SUMMARY OF CASE
By an underlease, the lessors covenanted that they would insure the demised premises “in some insurance office or offices of repute or at Lloyd’s,” and the lessees covenanted that they would “repay to the lessor[s] such sum as the
lessor[s] shall from time to time pay or be called on to pay by way of premium or premiums for insuring the demised premises” in accordance with their covenant. In pursuance of their covenant, the lessors effected insurance of the demised premises at an annual premium of ₤1,134 14s. 2d.
Subsequently, the lessees obtained a quotation for similar cover at an annual premium of ₤946 6s. 6d., and, in an action by the lessors for recovery of the premium paid of ₤ 1,134 14s. 2d., contended that, on the true construction of the underlease, there was to be implied a duty on the part of the lessors to act reasonably in placing such insurance so as not to impose an unnecessarily heavy burden on the lessees, and that, accordingly, they were not liable to the lessors in the full amount claimed.
Held, giving judgment for the lessors, that, on general principles, a term was not to be implied into a contract unless it was necessary for the business efficacy of the contract that it should be implied; that what was or was not reasonable was not the test; and that there was no justification for implying into the underlease the term sought to be implied by the lessees.
Leather Cloth Co. v. Bressey (1862) 3 Gift. 474 distinguished.
ACTION.
The facts are stated by Roskill J.
MAIN JUDGEMENT
Roskill J.
By an underlease dated February 9, 1965, the lessors there mentioned, a company called Industrial and Commercial Properties Ltd., leased to the lessees, a company called S. Guiterman & Co. Ltd., certain property known as Red Star Wharf in Red Star Wharf Road, Bethnal Green, for a period of twenty years beginning on June 24, 1964, at an annual rental of ₤ 10,500. The lessors’ reversion on the underlease has devolved on the present plaintiffs, Bandar Property Holdings Ltd., and the lessees’ title to the underlease has devolved on the present defendants, J. S. Darwen (Successors) Ltd. The matter comes before the court for the determination of a very short question–namely, the extent of the lessees’ liability to indemnify the lessors in respect of certain insurance premiums paid by the lessors in accordance with certain provisions in that underlease.
I can, I think, go straight to the relevant clauses in the underlease. The first is clause 2 (1) (b), which provides that the lessee will repay to the lessor such sum as the lessor shall from time to time pay or be called on to pay by way of premium or premiums for insuring the demised premises in accordance with the provisions of clause 3 (1) hereof and against such other risks in respect of the demised premises as the lessor may from time to time require and payment of such sums shall be made on the quarter day for payment of rent next following the date on which each such premium becomes payable by the lessor and the proportion of the current premium to the next renewal date shall be paid on the quarter day next following the date hereof.
The next relevant provision is in clause 2 (6), which, so far as is relevant, contains the following provision: The lessee will at the lessee’s own cost put and from time to time and at all times during the said term keep in good and substantial repair and condition and cleanse maintain and amend the whole of the demised premises including but without prejudice to the generality of the foregoing the fixtures and fittings therein.
Then follows reference to certain other things that have got to be kept in good repair. The covenant ends thus: (excepting such damage by fire or in peacetime by aircraft or articles dropped therefrom the reinstatement whereof is covered by the insurance referred to in clause 3 (1) hereof.
I turn next to clause 3 (1), which reads thus: The lessor hereby covenants with the lessee as follows: (1) that the lessor will at all times during the said term (unless such insurance shall be vitiated by any act neglect default or omission of the lessee) insure and keep insured the demised premises against loss or damage by fire and in peacetime by aircraft and articles dropped therefrom in some insurance office or offices of repute or at Lloyd’s in the full reinstatement cost thereof including insurance to cover architects’ surveyors’ and legal fees and two years’ loss of rent the provisions of the policy to be such as the insurers shall require and will whenever reasonably required produce to the lessee a certificate from the insurers stating for what sums the demised premises are insured and to what date the premium has been paid and in case of destruction or damage by fire or in peacetime by aircraft or articles dropped therefrom the lessor will as soon as practicable cause all money received in respect of such insurance (other than in respect of rent and fees) to be forthwith laid out in reinstating the demised premises.
What happened was this: On March 25, 1966, a well-known firm of Lloyd’s brokers, Messrs. Halford, Henry and Montefiore, placed the cover as to 50 per cent. with the Yorkshire Insurance Co. Ltd., and as to 50 per cent. with the Sun Insurance Office Ltd., for ₤200,000 on building, ₤20,000 on architects’ and surveyors’ fees, that being 10 per cent. of the sum insured on the building, and ₤21,000 for two years’ rent, the total sum insured being ₤241,000. The cover there arranged by those brokers was expressed in the cover note to be for twelve months from 4 p.m. on December 31, 1965. The premium appears on the second page of that cover note. The total premium was ₤1,134 14s. 2d. That, I would mention in passing, was the sum claimed by the lessors in this action against the lessees. It seems that the lessors shortly afterwards changed their insurance brokers, but nothing turns on that. On May 26, 1966, that is, some two months after the cover effected through Messrs. Halford, Henry & Montefiore, the lessees consulted other Lloyd’s brokers and obtained a quotation for what would appear to have been an identical, or virtually identical, cover at Lloyd’s at a premium of ₤946 6s. 6d., instead of the premium to which I have just referred of ₤1,134 14s. 2d. The difference between the two is ₤188 7s. 8d.
The lessees for some time declined to pay any part of the premium for the cover arranged through Messrs. Halford, Henry & Montefiore, but ultimately liability was accepted except for the sum now nominally in dispute in this action, which is that difference, for the lessees now contend that it is unjust and wrong, on the true construction of the underlease, that they should be called on to pay to the lessors the whole amount which the former as lessors have disbursed over the relevant period for insurance premiums when an identical cover could have been obtained at Lloyd’s for nearly ₤200 less.
The question which I have to decide is whether, on the true construction of the covenants which I have read, the lessors are right in their contention that the whole amount is recoverable or the lessees are right in their contention that an implication of a restrictive nature has to be made into the relevant covenants which, in effect, obliges the lessees to pay no more to the lessors in respect of insurance premiums than the sum for which the lessors could have obtained the requisite cover at Lloyd’s. I said a moment ago that the sum of ₤ 188 7s. 8d. was the sum nominally involved. The underlease, as I have already stated, was for a period of twenty years, and, therefore, the sum in fact involved under the underlease is twenty times the figure which I have just mentioned. There is, however, a more substantial sum of money at stake, inasmuch as I was told by counsel that the total period
involved is about forty years and not twenty years, a further and consecutive underlease having been executed. In reality, there is a substantial sum involved in this dispute between the parties, which I have been told is a friendly dispute, both parties wanting the true position determined by the court in view of the fact that the current lease and the later lease have nearly forty years to run.
As I have already indicated, the defence is that the lessors are not entitled to the larger sum which they claim, and the ground on which the lessees rely is pleaded, with admirable succinctness, if I may say so, in paragraph 6 of the defence, in these, terms:The [lessees] admit that the [lessors] have arranged insurance for the said premises at a premium of ₤1,134 14s. 2d. but will contend that on the true construction of the said underlease there is to be implied a duty on the part of the lessor to act reasonably in placing such insurance so as not to impose an unnecessary heavy burden on the [lessees].
The question for determination is whether, on the true construction of clause 3 (1), any restrictive implication of that nature is to be made. If it is, then the lessees are right; if it is not, then the lessors are right.
The principles on which the courts have proceeded for at least the last seventy-five years in determining whether or not terms which have not been expressed in contracts are to be implied therein have been stated again and again in cases of the highest authority. I do not propose to refer to those cases, all of which are well known. It is axiomatic that a court will not imply a term which has not been expressed merely because, had the parties thought of the possibility of expressing that term, it would have been reasonable for them to have done so. Before a term which has not been expressed can be implied it has got to be shown not only that it would be reasonable to make that implication, but that it is necessary in order to make the contract work– sometimes expressed as “necessary for the business efficacy of the contract”– that such a term should be implied. It is against that well-known and established principle that I approach the determination of the crucial question in this case.
As a matter of language, at least, there is no restriction on the lessors’ freedom of choice; indeed, the covenant in clause 3 (1) provides in terms that they shall insure and keep insured the premises “in some insurance office or offices of repute or at Lloyd’s in the full reinstatement cost.” At first sight, at least, those words “in some insurance office or offices of repute or at Lloyd’s” would seem to give to the lessors a wholly unfettered option as to which means of effecting the insurance they shall adopt. Shall they go to one insurance office? Shall they go to more than one insurance office? Or shall they go to Lloyd’s? Moreover, the parties have not seen fit expressly to fetter that option which the covenant gives to the lessors. It has been stressed–and it is, of course, right–that the lessees have to pay, and it is urged on me that, because the lessees have to pay, it is quite unreasonable to read this covenant as free from all restrictions in favour of the lessees. It is said that this covenant, by necessary implication, obliges the lessors to avoid imposing what the pleader has expressed as an “unnecessarily heavy burden on the lessee.” It is not suggested that the whole test here is financial. It is not suggested that the lessor is bound of necessity to obtain the cheapest rate. It suggested, however, that he has to look at all the circumstances and determine which course he is going to pursue in the light of that which will avoid an “unnecessarily heavy burden upon the lessee,” and, therefore, could be argued to be the most reasonable for him to adopt.
I said a moment ago that the question: “what is reasonable?” is not the test. It has to be necessary to make the contract work as well as reasonable before the court will make any implication of the kind contended for on behalf of the lessees. Reliance was placed by counsel for the lessees on a decision of Sir John Stuart V.-C. in Leather Cloth Co. v. Bressey. [FN1] The facts of that case were unusual and intensely complicated, and the report is of some length.
What appears to have happened, taking the matter as briefly as I can, was this: The plaintiffs, the Leather Cloth Co., were seeking to restrain a man named Bressey from pursuing an action brought by Bressey on a covenant to which the plaintiffs, the Leather Cloth Co., were a party, under which Bressey claimed that the Leather Cloth Co. were liable to repay to Bressey certain sums disbursed by Bressey in respect of fire insurance premiums. Bressey had acquired his title by way of an underlease made in 1855, the headlease having been granted some five years earlier, in 1850. The Leather Cloth Co. came into the picture in 1857, when they, by an assignment from Bressey and others, acquired the benefit of the underlease which had been entered into in 1855.
Both the headlease and the underlease contained certain covenants requiring the head lessee in the one case, and the lessor in the other, to effect certain insurances and to keep those insurances in being. A man named Pratt failed for some time to effect the insurances which were necessary to comply with the provisions of the leases, but it seems that he subsequently disbursed a sum of money of no less than ₤528 in respect of an insurance which did not comply with his or the lessee’s contractual obligation and then sought through Bressey to recover that amount from the Leather Cloth Co. Sir John Stuart V.-C., restraining Bressey from pursuing his action at common law, said in a passage relied on by counsel for the lessees in the present case [FN2]: But it is said that, according to the terms of the contract in that part of the lease in which the plaintiffs bind themselves to pay the expense of insurance, the words are large and general, and are words which import an obligation upon the plaintiffs to repay any sums which may be paid by the defendant, Pratt, in respect of insurance, whether unnecessarily paid or not; and it is sought to read these words as an absolute covenant, and without reference to other parts of the deed in which insurance is referred to. That is a mode of construction which it is impossible for the court to adopt. The instrument must be looked at as a whole, and it seems to me entirely contrary to the true construction of the words to say that this part of it imposes upon the plaintiffs the obligation to pay any sum that Pratt might choose to pay for insurance, although that insurance might be useless with regard to another covenant in the original deed, which prescribes another mode in which insurance must be effected.
FN1 (1862) 3 Giff. 474. FN2 Ibid. 493, 494.
It must be remembered that the words which Sir John Stuart V.-C. used had reference to the particular facts of a particular case, and to a particular covenant, though it is true that he did say that the obligation on the Leather Cloth Co. was not an unfettered and unrestricted obligation. Counsel for the lessees has sought to apply those words to the covenant in the present case, but, with respect, I do not get any help from that decision. The question which I have to decide turns on the construction of this covenant in this particular underlease, and, for the reasons which I have endeavoured to give, and applying very well-established legal principles, I can see no justification for making the implication sought since no implication is necessary and the bargain between the parties works perfectly sensibly without making any implication.
In the result, therefore, the defence fails, and there must be judgment for the lessors.
Order
[Reported by Michael Gardner, Barrister-at-Law]
Judgment accordingly.
