3 October 2019 | Comment | Article by Jennifer Butcher

What’s in a name? Costly consequences

Failing to clarify party names or even carry out a simple Companies House check could cause serious issues upon attempted forfeiture of a lease. This was demonstrated by a recent decision of the Cardiff County Court in Seafood Shack Limited v Alan Darlow [2019] EWHC 1567 (Ch).

The Facts

Mr Darlow (the Defendant) granted a 25 year lease of a restaurant in Cardiff city centre to Seafood Shack UK Ltd (SSUKL) in February 2017. During the negotiations, the heads of terms had referred to the tenant as Seafood Shack UK Ltd and eventually, the lease granted to SSUKL based on these heads of terms. It later transpired that SSUKL was not a registered company (or indeed any form of company at all).

The claimant company (SSL)’s sole director had instructed its solicitors to enter into the lease in 2017. SSL’s wholly owned subsidiary Seafood Shack (Cardiff) Limited (SSCL) occupied the property.

Neither Mr Darlow’s agent, nor his solicitor carried out a company check to establish that SSUKL was a registered company when SSUKL was inserted as the tenant on the heads of terms draft lease. Neither SSL nor its agent/solicitor had noticed the error prior to the lease being granted. Brief reference had been made in correspondence during negotiations by Mr Darlow’s agent to a company called Seafood Shack Limited (SSL), but it was not flagged by either party that this was the party intended to be the tenant, and no further reference was made.

Following the mistake being noticed in August 2017, the parties attempted to complete a new lease with SSL as the tenant, but due to various administrative errors this was delayed. Before the new lease could be completed, SSCL was wound up and liquidators appointed.

Mr Darlow gave evidence to the court that after receiving a notice of disclaimer by the liquidators of SSCL, he inspected the property and upon finding it abandoned (and being informed by the liquidators that staff had been dismissed without pay, and having not received rent/insurance payments), he instructed bailiffs to change the locks.

The court

The court was asked to decide;

  1. whether, on the true construction of the lease, SSL was tenant under the lease;
  2. if so, was rectification required (and should it be granted) to show SSL as a party;
  3. whether Mr Darlow had lawfully taken back possession of the premises when he re-entered, and/or;
  4. should SSL be entitled to possession of the property.

The Judge applied the test, “what would a reasonable person having all the background knowledge, which would have been available to the parties, understand the language in the contract to mean?’ from the case of Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38.

Considering the facts of the case, the Judge concluded that it wasn’t possible to say that a reasonable person would have taken the parties to mean SSL (or indeed SSCL). Even going as far as to say that if a Companies House search had been undertaken and it was discovered that SSUKL was not a registered company (but that SSL and SSCL were), this would not assist a reasonable person to understand which of the companies were meant to be the tenant.

The reference by Mr Darlow’s agent during negotiations to SSL was considered to have been a ‘co-incidental use of shorthand or a slip in leaving out the letters “UK”’. It was also accepted that SSUKL was the only company which Mr Darlow was aware of at that time as a potential tenant.

The findings

The mistake could not be dealt with as a matter of construction of the document and therefore rectification could also not be allowed. This was based on the test applied in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 7, i.e.there had been no ‘common continuing intention’ that SSL should be tenant and no ‘outward expression of accord’ in that regard.

The mistake could not be put right by construction, or rectification. SSL was never party to the lease and could not become party to the lease. The Judge considered that a tenancy at will in SSCL’s favour had probably arisen when they took occupation. When Mr Darlow took possession of the property upon disclaimer by SSCL’s liquidators, he had done so lawfully and SSL were not entitled to possession of the property.

What can we learn from this case?

Whilst ultimately it was the claimant, SSL who paid the price, all parties would have avoided the need to engage in costly litigation, had a simple Companies House search been undertaken to ensure the tenant company was registered. This case highlights the necessity, even in seemingly straightforward contracts, to carry out simple checks and thoroughly check draft documents.

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