Basic “freedom to contract” principle | Commercial property

The freedom to contract principle means benefits can automatically transfer to third parties

A recent court ruling relating to an agreement for lease issue has grabbed our attention.

The Bella Italia Restaurants Ltd v Stane Park Ltd and others case saw Bella trying to terminate an agreement for lease on a property in Colchester originally made with the first defendant among others (“the Trustees”), because it believed it was entitled to refuse to accept a lease from the new landlord, Ropemaker.

Bella argued that the agreement was personal to the Trustees, and therefore only the Trustees could grant it a lease of the property, despite the Trustees no longer being the legal owners.

The case turned on two issues: the contractual and statutory interpretation of the operative clause of the agreement, which stated that the “Landlord” would grant to the “Tenant” a lease on the terms set out in the agreement.

It was found that although the “Landlord” was defined in the agreement as the Trustees, the benefit of granting the lease was not personal to the Trustees. The operative clause was silent on whether the benefit of granting the lease could be transferred to another party.

Another clause of the agreement was considered because it stated that the benefit of the agreement could not be assigned by the Tenant. The court decided that the purpose of the agreement was not to set similar restrictions on the Landlord, meaning the benefit of granting a lease could pass to Ropemaker. Bella was therefore still tied into the agreement.

Ropemaker was able to rely on the agreement to uphold its right to grant a lease to Bella and so the statutory interpretation did not need to be explored. However, Ropemaker could have used the Landlord and Tenant (Covenants) Act 1995 to argue that the Trustees’ benefits passed to them.

The finding meant Bella failed to validly terminate the agreement and therefore had to complete the lease offered by Ropemaker.

The learning point is to know your agreement, and what your client is entitled to do.  In this case, the “freedom to contract” principle means parties can assign their rights – even if a right appears to only benefit a specific named person – unless the parties are expressly barred by the contract from doing so.

For further advice contact Pam Virdee on 0121 312 5174  or pvirdee@thursfields.co.uk