Supreme Court
Action No. 170 of 1978
18th February, 1982.
Alcantara, J.

Mr. Glenn Godfrey for the Plaintiff
Mr. Denys Barrow for First Defendant
Mr. Michael Young for Second Defendant
(Informs Court he will not be taking part in the case.)

Lease Agreement - Whether Lease Agreement had an option to
renew clause or an option to purchase clause - Effect of such
clauses on Lease Agreements - Proof of "economic incapacity"
where it is a condition of a Lease Agreement - Privity of Contract
- Limitation period for a specialty - Limitation Ordinance -
Amendment of Writ and Statement of Claim during proceedings -
031R12 RSC - 028R1 White Book 1961.

J U D G M E N T

Mr. Harry Lawrence's alter ego at the material time was City Enterprises Ltd., the first defendant (hereinafter referred to as "the defendant"). On behalf of the company he obtained a plot of land, 95A Cemetery Road, from the Belize City Council, the second defendant, to erect and run a gasoline service station. The Council granted him a lease (hereinafter referred to as "the Original Lease") for a term of twenty years with an option to renew: There was an unusual clause in the said lease - it read: "The lessee for itself and its assigns and to the intent that the obligations may continue throughout the term, hereby creates covenants with the lessor as follows …. (f) to transfer the said lease to Esso Standard Oil in the case of bankruptcy liquidation or economic incapacity." The reason for this clause was that the plaintiff, Esso Standard Oil S.A Ltd., was backing, sponsoring or helping with the enterprise.

In 1967, there was another Indenture (hereinafter referred to as "the Principal Lease") executed between the defendant and the City Council. It was a Surrender and Lease. It purported to incorporate the conditions of the Original Lease, but a new term of twenty years with an option to renew was granted commencing on the first September, 1967.

A few months after a document was executed, between the defendant and the plaintiff, bearing date 26th day of June, 1967, I say document (hereinafter referred to as "the Document") because although it purports to be a lease, and the plaintiff alleges that it was in fact an assignment of lease, whereas the defendant say that it was an underlease.

In 1971 two things happened and one is alleged to have happened by the defendant. Firstly, but not necessarily in that order, the defendant executed a Bond acknowledging a trading debt of $22,554.65 and undertaking to pay the same by yearly payments of $6,000 commencing on the 31st day of December, 1971. Secondly, the defendant handed over the station and the running thereof to the plaintiff. Thirdly, the defendant alleges that he gave up the station readily because there was an agreement with the plaintiff that some compensation would be paid, and that until the question of compensation was settled, the liability under the Bond would be suspended.

There are many issues in this case but the main issues as I see them that arise out of the case as pleaded are:

1. On how much was the defendant indebted?

2. Was the document an assignment or an under lease?

3. If an assignment, did it also assign the option to renew?

4. Was there economic incapacity on the defendant at the relevant time, and if so was the defendant bound to assign?

5. Was there an agreement for compensation, and if so what the effect of it?

6. The Limitation Ordinance.

No dispute now arises under the first issue. The plaintiff has conceded during the course of the trial that the debt owing is only $22,554.65 and not $27,000 as claimed. The defendant, however, claims that the payment of this debt was conditional on the question of compensation and further in any event that it is statute-barred under the Limitation Ordinance. The question of compensation is Issue No. 5 and I shall deal later with it together with the question of whether the debt is statute-barred.

On Issue No.2, assignment or underlease, counsel for the defendant has put forward a very attractive argument because of its simplicity and ingenuity. What he says is that the document can never be an assignment. True it conveyed a term of twenty years but the plaintiff had more. The plaintiff had a term of 20 years plus an option to renew. This option was not just a convenant but was part of the actual term in the Document or as counsel likes to call it part of the Habendum.

In support of his contention counsel has not been able to cite to me an authority dealing directly with this point but has referred me to the following authorities which in his submission support his contention:

Hill & Redman's Law of Landlord and Tenant,
16th Edition at pages 54, 160 and 183.

Cheshire's Modern Law of Property,
4th Edition at page 752,

Milmo v Carreras (1946) 1 AER 288.
Baker v Merkle (1960) 1 AER 668

Encyclopedia of Forms and Precedents,
3rd Edition Vol. 8 at pages 775 and 776.

William Skelton & Son v Harrison Pinder (1975)
1 AER 182.

Counsel for the plaintiff disagrees with the defendant's submission. The plaintiff's contention is that the defendant by executing the Document divested himself of everything he had under the head lease including the option to renew. He distinguishes the case of Baker v Merkle (1960) 1 AER 668 on the ground that that case was decided on its own particular facts and that it is no authority for the proposition that an option for renewal does not run with the land. He also brought to my attention the following authorities. I am particularly grateful for Woodall v Clifton.

Hill & Redman's Law of Landlord and Tenant, 14th Edition at pages 177, 152 and 46.

Hand v Hall 36 L.T. 765.

English & Empire Digest Vol. 31 part I (Replacement) p. 124.

Baker v Merkle (1960) 1 AER 668.

Milmo v Carreras (1946) 1 AER 288.

Woodall v Clifton (1904-1907) AER 268.

William Skelton & Son v Harrison Pinder (1975) 1 AER 182.

One thing is obvious: this is a point of some nicety. I can do no better than start with a quotation from Curtis v Ruoff's Registered Conveyancing at page 813. It says: "Options in leases give rise to some nice questions for whereas normally an option to renew runs with both the land and reversion, but will be exercisable by the original lessee only if the lease does not specify by whom it is to be exercised. Normally an option to purchase is collateral to the relation of lessor and lessee, although it may create property capable of being assigned, and can be so worded as to devolve upon the lessee's successors in title."

The law as I see it is that a lease may confer an option to purchase the reversion or an option to renew. An option to purchase is collateral to, independent of, and not incident to the relation of landlord and tenant. However an option to purchase may be so phrased that the benefit of it passes on assignment. An option to renew runs with the land and with the reversion, and so both the landlord's and tenant's successors in title are bound. Of course an option to renew might be so worded as not to run with the land.

The point I have to decide is whether the option to renew in the case before me is collateral because it is to be found next to the term demised and not alongside the other covenants. I am not surprised that there is no direct authority on this point, because none is required. An option to renew is an option to renew, and it matters not where it is to be found. What is important is whether there is anything which would lead the Court to conclude that the intention of the original parties was such that it was meant to be collateral. The normal inference is that an option to renew runs with the land. He who alleges that it is collateral must bear the burden of proof.

On my reading of the Principal Lease there is nothing to indicate that this was not an option to renew simpliciter. I therefore find that it runs with the land. Consequently it was assigned to the plaintiff when the defendant executed the Document, which can henceforth be called an Assignment.

Because of my views on Issue No. 3 it is really unnecessary for me to deal with Issue No.4. However, counsel have addressed themselves to me and it is only right that I should deal with it. Further, in the event of an appeal, it would be useful if my findings on the issue were known.

Issue No. 4 is economic incapacity. Has the plaintiff proved that there was economic incapacity on the defendant and thus in a position to compel the defendant to assign the whole of the term, including the option to renew? In his Defence the defendant agrees that under the Original Lease he might have been bound to assign, but he says that this term was extinguished or modified by the Principal Lease, and that he was only bound to assign if he (the defendant) went into voluntary liquidation or otherwise and was at the same time indebted to the plaintiff. He further says that as there is no privity of contract or estate between the plaintiff and defendant under the Original or Principal Lease the plaintiff cannot force an assignment. Issue No. 4 therefore raises three distinct points. One is a question of fact, as to whether there was in fact economic incapacity. Two is a question of interpretation, whether the assignment clause has been extinguished or modified. Three is a question of law, privity or no privity.

First as to economic incapacity. The question I have to ask is whether the plaintiff had discharged his burden of proof. The answer is yes. The plaintiff owed nearly $23,000. I accept the evidence of Mr. Mendez on this point. This is what he said in evidence:

"Towards the end, before he gave up the station he was in financial difficulties. He was getting involved in purchasing fuel to such an extent that he found it impossible to make payments. Gave up service station because he could not continue making payments and said he was losing money and could continue no further."

Later on he said: "Some of the cheques were returned by the Bank." This denied by the defendant, but I accept the evidence of the plaintiff in preference to that of the defendant on this point. So I find that there was economic incapacity. A legal interpretation of the phrase is not necessary or called for. Under the Original Lease, disregarding for one moment the question of privity of contract, he would have been bound to assign the whole of his interest in land to the plaintiff.

Secondly, extinguishment or modification of the terms of the Original Lease. Of course the Original Lease has been extinguished in the sense that it has ceased to exist or have effect. What has not been extinguished have been the terms and conditions which were in the Original Lease. It is explicit in the Principal Lease that the lease shall be supplemental to the Original Lease. All the terms and conditions of the Original Lease have been incorporated into the Principal Lease. I agree that there has been a modification insofar as the following clause in the Principal Lease, which was not in the Original Lease, is concerned:

"The lessor hereby consents to the assignment by the lessee of the said term in the premises less one day or more as agreed between the parties to Esso Standard Oil S. A Limited ………upon conditions to be agreed hereafter between the parties but with effect from the 1st day of January, 1967 and the lessor further hereby consents in the event that the lessee shall go into liquidation, whether voluntary or otherwise and is at the time indebted to the said Esso Standard Oil S.A. Limited to the assignment or further assignment as may be necessary of the remainder of the term hereby granted to the said Esso Standard Oil S.A. Limited."

But this clause is not in anyway antagonistic of the duty imposed on the defendant to assign in the event of economic incapacity. The defendant's submission on this issue fails.

Thirdly, privity of contract. I agree entirely with counsel for the defendant in his exposition of the law on this matter. In the best tradition of the Bar he drew my attention to Section 46 of the Law of Property Ordinance, Cap. 193. I agree with him that there was no privity of contract between the plaintiff and defendant enabling the plaintiff to force the defendant to assign the lease, notwithstanding the wording of the covenant in the Original Lease.

Finally, Issues No. 5 and 6. Compensation and the Limitation Ordinance. The defendant says that he is not bound to pay any money for two reasons. First because he was promised compensation contemporaneously with the handling over of the service station and further says that it was agreed that the liability under the Bond would be suspended until such time as there was an agreement about compensation. There is no Counterclaim for compensation as the figure was never agreed. Compensation is pleaded as a defence - a collateral agreement suspending the payment of the amount due by the defendant.

The evidence of Mr. Harry Lawrence on this matter is as follows:

"We passed service station under verbal agreement between myself and Mendez, Manager of Esso Standard, that Esso would pay compensation for handing over the business."

"The agreement was that we would trade off against compensation the trading debt of $23,000."

"I thought compensation had been settled, left service station full conviction it had been settled. There would have been a trade off between what we owed Esso and what they owed us. In discussion with Eduardo Mendez of Esso he assured me that there would be no difficulty in arriving at compensation."

And in cross-examination the witness had this to say:

"I signed Bond sometime in 1971, 21st June, 1971. Acknowledged I owed Esso certain amount of money. Time given."

I agree that the evidence is not very strong on its own, but I am satisfied that the evidence of the plaintiff tends to corroborate his story. Although Mr. Mendez did say that he never agreed to a postponement of debt saying that he had no authority, he did say in cross-examination this:

"Right now all I can remember is that I received station and City Enterprises gave it up and nothing more."

"I have very little recollection of what transpired on the surrender to Esso."

"Apart from appraisal by Esso in matter of course, I remember valuation done for and paid for at request of City Enterprises. Also Mr. William Craig. I cannot recall the object of this. Not for compensation by Esso."

"Recall nothing surrounding handing over of station but I remember there was no compensation agreement. City Enterprises was asking for compensation. There may have been discussion but I cannot remember. I know he was claiming. I presume there may have been compensation talk."

If to this type of evidence you add the fact that there was an independent valuation by Mr. William Craig at the relevant time, and the fact that from 31st December, 1971, to 1978 there is no evidence of the plaintiff having pressed for payment on the Bond, the balance of probabilities tips over the defendant's favour.

I am prepared to hold that the payment of the Bond was suspended. This being so the money owed is not as yet recoverable by action.

The question of the Limitation Ordinance does not therefore arise, but I shall deal with it. On a simple debt the time limit is 6 years. On a specialty, a Bond, the time is 12 years. What the defendant is saying that both in the indorsement of the Writ and on the relief claimed on the Amended Statement of Claim, the plaintiff is not claiming under the Bond and therefore the six years limit becomes operable. The plaintiff in turn says that the Bond was pleaded in paragraph 3 of the Statement of Claim. Strictly speaking the defendant is right and I am very much in favour of parties being bound by their pleadings. In this case however the existence of the Bond has been in the forefront of the case.

Counsel for the Plaintiff during his address has asked me for leave to amend the Writ and Statement of Claim so that the amount of $22,554.65 should appear instead of $27,000. He has referred me to Order 23 rule 3 of the Supreme Court and Order 20 R 5 of the White Book (1967).

Counsel for the Defendant has objected to any amendment on the ground that a claim under a specialty is something different from a simple contract debt. I agree with him on this point. The amendment really required is to amend the endorsement to Writ to read that the plaintiff is claiming the amount under a Bond executed on the 21st June, 1971.

Counsel for Defence says that such amendment would operate unfairly and would be manifestly prejudicial to the Defendant. I do not agree. The claim under the Bond has been in the forefront of the action from the very beginning - it is even pleaded in paragraph 5 of the Amended Statement of Claim. I feel I would be justified in granting leave to amend or ordering an amendment to the Writ in the circumstances of this particular case subject to costs.

My power to do so is contained in Order 31 Rule 12 of the Supreme Court which reads:

"The Court may at any time, and on such terms as to costs or otherwise as the Court may think just, amend nay defect or error in any proceedings and all necessary amendments shall be made for the purpose of determining the real question in issue raised by or depending on this proceedings."

The equivalent of this rule is Order 28 Rule 1 of the White Book (1961). There is a note there which reads:

"The Court will not refuse an amendment simply because it introduces a new case. But it will do so where the amendment would change the action into a substantially different character which would more conveniently be the subject of a fresh action."

In this case before me the action is different, but not substantially so and it would be more convenient for this Court to deal with the matter.

There is one aspect of this matter which has not been argued but which is full of interest. If the payment of the debt was conditional, as has been found by the Court, then the time under the Limitation Ordinance has not as yet started to run as the payments are not due until the condition has been fulfilled. This finding is only of academic interest insofar as the result of this case is concerned.

I have said nothing about the 2nd Defendant, who is still a party to this action. They entered a Defence on the 19th of January, 1979. Sometime between the date and the date fixed for trial they thought fit to sell the reversion of the land in dispute, the fee simple, to the first Defendant. On the first day of hearing they informed the Court that they would not defend the action but would be quite happy to be bound by whatever decision the Court came to.

I therefore give judgment for the plaintiff and make the first two declarations sought in the terms set out in the amended Statement of Claim.

I dismiss the claim for $22,554.65

No order as to costs.

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