A lesson in leasing

A recent case decides that an 'entire agreement' clause in the lease of a café did not prevent the implication of a missing term.

Facts

In Hipwell v Szurek, Ms Szurek ran a café in premises let to her by Mr Hipwell. The parties entered into a three-year lease in 2012. A year into the leas,e Ms Szurek experienced problems which she alleged were due to unsafe wiring. These included a small fire and a sparking plug socket which caused her to close her business.

Ms Szurek sought to recover her losses from Mr Hipwell and he counter-claimed against her for unpaid rent.

The High Court found in favour of Ms Szurek. Mr Hipwell appealed to the Court of Appeal.

Issues

It was a critical part of Ms Szurek's case that a term should be implied into the lease to the effect that Mr Hipwell was to be responsible for maintenance and repair of electrical installations. Before she had signed the lease, the court found that Mr Hipwell had represented to her that the rewiring of the property had been checked and certified.

In response to this, Mr Hipwell depended on the perfectly standard entire agreement clause in the lease. This stated that the lease constituted the entire agreement and understanding of the parties and that Ms Szurek had not entered into the lease in reliance on any representation that he had made.

The Court of Appeal had to decide: 

• Whether there was a legitimate basis for the implication of a term placing responsibility for the installation and maintenance of electrical wiring onto Mr Hipwell; and
• Whether the entire agreement provisions stood in the way of any such implied term.

The Court of Appeal's decision

Case law has established that a term may be implied where it is necessary to give business efficacy to a contract. The principles to be applied by the court in deciding whether it should do so were considered by the Supreme Court in the case of Marks & Spencer PLC v BNP Paribas

Securities Services Trust Co (Jersey) Ltd [2016] AC 742, an important case about break clauses. In summary these are: 

• A term can be implied only where there is no provision in the agreement that expressly covers the point; 
• The court must take into account the possibility that the parties deliberately decided not to include the term sought to be implied; 
• The question whether a term should be implied is to be judged at the date when the contract is made; 
• The test is one of necessity, not reasonableness; 
• The two processes of construction of a contract and implying terms into a contract both involve determining issues of scope and meaning, but the process of implication requires strict restraint.

Applying these principles in context, the court found there to be a plain and obvious gap in the drafting of the lease. It made no express provision in relation to the plumbing or electrical installation and supply, but did contain a provision entitling the landlord to access the premises to maintain service media.

The court concluded that it was "in no doubt that, to ensure that the lease does not lack commercial or practical coherence, or in other words, as a matter of business necessity, the obvious gap should be plugged" by implying a covenant on the part of the landlord to the effect that the electrical installation and other service media was safely installed and continued to be covered by any requisite safety certificate.

On the second point at issue, the court held that an entire agreement provision does not prevent the implication of a term on the basis of business efficacy. This is because a contract lacking in business efficacy must, if possible, be supplemented to cure a defect. It cannot be supposed that the parties would have intended an entire agreement clause to cause the agreement to fail and to prevent the court from saving it if there is a proper means of doing so. It followed that the entire agreement clause did not preclude the imposition of a clause by necessary implication.

Accordingly, the court found that Mr Hipwell was in breach of the landlord's implied covenant and it awarded damages to Ms Szurek.

Comment

Most leases provide that the formal document comprises the entire agreement reached between the parties and restrict a tenant's right to depend on representations made before the lease is completed (with the common exception of replies to standard form enquiries). This is an important decision, that such terms do not preclude the court from implying a term where that is necessary to achieve coherence

In this case, the decision of the court was to make sense of the agreement that it had in front of it. It was not perfect and there was ambiguity in the drafting, which ultimately led to uncertainty and dispute.