Alec Lobb (Garages) Ltd & Ors v Total Oil (GB) Ltd

Factual and Procedural Background

In 1968, Company A was the freehold owner of a garage and petrol filling station in The City. The company was undercapitalised and facing financial difficulties, including dishonoured cheques and pressure from creditors. To address these issues, Company A proposed a lease and lease back arrangement with Company B in July 1969. Company A granted a 51-year lease to Company B for a premium, and Company B granted a 21-year sub-lease back to the original proprietors of Company A, who were also individual plaintiffs. The sub-lease included tie provisions obliging exclusive petrol supply from Company B and restrictions on assignment.

The plaintiffs commenced an action in 1979 seeking to set aside the lease and lease back on grounds including unreasonable restraint of trade due to the tie provisions. The deputy High Court Judge held the tie provisions void as an unreasonable restraint of trade but severable from the remainder of the agreements, which were upheld as valid. The company had entered voluntary liquidation, and the original individual plaintiffs had died, with their personal representatives continuing the appeal. The appeal and cross-appeal raise questions on the validity, severance, and equitable relief related to the lease arrangements and tie provisions.

Legal Issues Presented

1. Did the underlease contain covenants constituting an unreasonable restraint of trade?
2. If so, are both the lease and the underlease unenforceable, or can the offending covenants be severed?
3. Can both the lease and underlease be set aside in equity?
4. If so, are the plaintiffs barred from relief by laches?

Arguments of the Parties

Appellants' Arguments

• The tie provisions in the lease back, held void as an unreasonable restraint of trade, are not severable, rendering the entire lease and lease back void.
• Alternatively, the entire transaction should be set aside in equity due to inequality of bargaining power at the time of agreement, with Company B failing to prove the terms were fair, just, and reasonable.

Respondents' (Company B's) Arguments

• The tie provisions are severable from the rest of the agreements, and the remainder of the lease and lease back are valid.
• Any equitable claim to set aside the agreements is barred by laches due to delay in asserting rights.
• On the cross-appeal, the tie provisions are not an unreasonable restraint of trade as (a) the lease back was to individuals rather than the company, but the court should pierce the corporate veil; (b) the restrictions derive from a disposal of substantially all interest in the property; and (c) the tie provisions are reasonable given the commercial context.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed the lease and lease back as a single composite transaction designed to recapitalise Company A and preserve its business. The tie provisions, requiring exclusive petrol supply for 21 years, were found to constitute a restraint of trade. However, the court held that the lease back to the individual plaintiffs was a device to avoid the restraint of trade doctrine, allowing the court to pierce the corporate veil and treat the transaction as one involving the company.

Applying established principles from Esso v. Harper's Garage and related cases, the court found that a tie of 21 years without justification was generally unreasonable. Nevertheless, the court considered the commercial context: the premium paid represented market value for the 51-year lease, the company was insolvent and required recapitalisation, and the tie was a necessary part of the rescue operation. The presence of break clauses at 7 and 14 years provided some mitigation.

The court rejected the appellants' equitable claim based on inequality of bargaining power, noting that the plaintiffs had independent legal and accounting advice, that no unconscionable conduct or coercion was found, and that mere impecuniosity does not justify equitable relief. Furthermore, the claim was barred by laches due to significant delay in asserting it after the transaction.

Regarding severance, the court applied tests from Bennett v. Bennett and Goodinson v. Goodinson and distinguished Amoco, concluding that the invalid tie provisions were severable from the remainder of the lease and lease back, which were supported by substantial consideration and remained valid contracts.

In sum, the court upheld the validity of the lease and lease back arrangements minus the invalid tie provisions, rejected equitable relief, and barred the claim by laches.

Holding and Implications

The court's final decision was to DISMISS THE APPEAL and ALLOW THE CROSS-APPEAL. The tie provisions in the lease back were held to be reasonable and valid, overturning the lower court's finding of unreasonable restraint of trade. Severance was not necessary given this conclusion.

The direct effect is that the lease and lease back arrangement, including the tie provisions, stand as valid and enforceable. The appellants' claim to set aside the agreements on grounds of restraint of trade or equity failed, and the claim was barred by laches. No new precedent was established beyond the application and reaffirmation of existing legal principles regarding restraint of trade, severance, and equitable relief in the context of lease/lease back transactions.