Landlord and tenant — Assignment — Guarantee — Contracts (Rights of Third Parties) Act 1999 — Former tenant guaranteeing liabilities of assignee — Supplemental deed between assignee and landlord limiting recovery against tenant or any previous tenant to assets of assignee — Whether deed intended to limit liability of former tenant as guarantor — Whether former tenant entitled to rely upon provisions of deed as third party upon whom benefit conferred under section 1(1)(b) of 1999 Act
The defendants were the tenants of the claimant under a 1997 underlease of office premises for a term ending in December 2006. In 2001, the claimant granted a licence to the defendants to assign the underlease to an American partnership (A&G). The defendants and A&G were parties to that licence. The defendants agreed to act as guarantors for A&G’s obligation to pay the rent reserved by the underlease. By a supplemental deed, to which only the claimant and A&G were parties, it was agreed that “the liability of the Tenant under the lease… shall be limited to the Partnership” and that “consequently any recovery by the Landlord against the Tenant or any previous tenant under the Lease for any such default shall be limited to assets of the Partnership”.
A&G subsequently became bankrupt both in the US and the UK. The claimant sought to recover £1.5m in rent arrears and interest from the defendants in their capacity as A&G’s guarantors. The defendants denied liability and relied upon the terms of the supplemental deed. Issues arose as to whether: (i) the deed limited recoverability against a previous tenant to the assets of the partnership; and (ii) the defendants could rely upon the provisions of the deed, even though they were not parties to it, as third parties upon whom it purported to confer a benefit within the meaning of section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999. The claimant contended that such a construction of the deed was uncommercial.
Held: Judgment was given for the defendants. (1) The supplemental deed did not change the rent reserved by the underlease, but it limited the liability of the tenant. The full rent was payable unless A&G raised the inadequacy of the partnership assets. However, once that inadequacy was raised, although the extent of the obligation remained the same the claimant had no available remedy beyond the extent of the described partnership assets. The limitation on recovery against “any previous tenant” was intended to prevent a situation where, even though the claimant’s recovery from A&G had been confined to partnership assets, the claimant could still recover the full rent reserved from the previous tenant as guarantor, leaving the guarantor to make a claim against A&G for an indemnity that could go beyond the partnership assets. On the correct construction of the deed, the claimant was entitled to nothing more than was derived from the partnership assets, either from A&G or from any previous tenant. Such a construction was not so plainly improbable that it could not have been intended. (2) The supplemental deed conferred a benefit on previous tenants that were guarantors in the form of a cap on recoverability. The defendants, as previous tenants, were entitled in their own right to enforce those provisions against the claimant. Section 1(1)(b) of the 1999 Act is satisfied if, on the true construction of the relevant term, its sense has the effect of conferring a benefit on the third |page:32| party in question. There is no requirement that the benefit on the third party should be the predominant purpose or intent behind the term; nor does section 1(1)(b) apply if a benefit is conferred upon someone other than the third party.
The following cases are referred to in this report.
Bank of Credit & Commerce International SA (in liquidation) v Ali (No 1) [2001] UKHL 8; [2002] 1 AC 251; [2001] 2 WLR 735; [2001] 1 All ER 961
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130; [1956] 1 All ER 256
Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1); Investors Compensation Scheme Ltd v Hopkin & Sons; Alford v West Bromwich Building Society; Armitage v West Bromwich Building Society [1998] 1 WLR 896; [1998] 1 All ER 98, HL
Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No 2): sub nom Laemthong International Lines Co Ltd v Abdullah Mohammed Fahem & Co [2005] EWCA Civ 519; [2005] 2 All ER (Comm) 167; [2005] 1 Lloyd’s Rep 688
Rennie v Westbury Homes (Holdings) Ltd [2007] EWHC 164 (Ch); [2007] 2 P&CR 12; [2007] 2 EGLR 95; [2007] 20 EG 296
This was the hearing of a claim by the claimant, The Prudential Assurance Co Ltd, to recover rent arrears from the defendants, David Ayres and Christopher Grew, as guarantors of a tenant’s obligations under an underlease.
Anthony Trace QC and Philomena Harrison (instructed by Lovells LLP) appeared for the claimant; Alan Steinfeld QC and Richard Ritchie (instructed by Kingsley Napley) represented the defendants.
Giving judgment, Lindsay J said:
Introduction
[1] The claimant, The Prudential Assurance Co Ltd (Prudential), represented by Mr Anthony Trace QC leading Ms Philomena Harrison, is the lessee of substantial office premises in the City of London. It holds them of the Wardens and Society of the Mistery or Art of the Leathersellers of the City of London, whom I shall call the leathersellers. The underlessee of the premises, replacing the defendants, Messrs David Monroe Ayres and Christopher Grew (who had been the immediately preceding underlessee) came to be a firm of US attorneys, the Illinois partnership Altheimer & Gray (A&G). A&G moved into bankruptcy both in the US and here, leaving, by now, some £1.5m owing by way of unpaid obligations under the underlease. Prudential accordingly looked to recover from the defendants, previous tenants of the premises, in their capacity as guarantors of A&G. However, there exists a supplemental deed between Prudential and A&G, supplemental to the underlease, which contains a provision clause 2 that has been called a non-recourse provision, an unusual provision that arguably limits recovery by Prudential to what might be called the partnership assets of A&G to the exclusion of the personal assets of its individual partners. This judgment is concerned with the effect of clause 2 upon recoverability from the defendants as guarantors of A&G. The defendants, represented by Mr Alan Steinfeld QC leading Mr Richard Ritchie, argue that the effect of clause 2 in the events that have happened, which I shall describe, is wholly to exonerate the defendants from liability to Prudential.
Background facts
[2] On 12 March 1997, Prudential granted an underlease of substantial office premises on two floors of Hasilwood House, Bishopsgate, London EC2. The underlessee, there described as “the Tenant”, then consisted of two individuals, Mr DJ Guiney and Mr DM Ayres. The term of the underlease was to end on 24 December 2006. The reviewable rent, even unreviewed, was prescribed to be, from 25 December 2001, a little short of £400,000 pa payable by equal quarterly payments in advance on the usual quarter days in every year. In addition, there were service charges and other conventional provisions. The underlease was described as a new tenancy within the meaning of section 1 of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act). The underlessees covenanted to pay the rents reserved without deduction. The only permitted use was as high-class offices. There was a prohibition against assignment of the underlease without the landlord’s, Prudential’s, consent. Among the preconditions that Prudential could insist upon were the underlessee to wish to assign, was the execution by the underlessee and delivery to Prudential prior to the assignment of an authorised guarantee agreement, an instrument the nature of which is prescribed in the 1995 Act. Were rent to be paid late, interest was to fall due thereon under the provisions of the underlease. The provisions of sections 24 to 28 inclusive of the Landlord and Tenant Act 1954 were duly excluded.
[3] I have not seen the terms of the headlease from the leathersellers to Prudential, but it is plain, to judge from the licence to assign to Messrs Guiney and Ayres that Prudential obtained from the Leathersellers on 3 March 1997, that the headlease required that Prudential should obtain prior licence before assigning and that Prudential bound itself not without the leathersellers’ consent at any time expressly or by implication to waive any of the covenants contained in the underlease that it granted to Messrs Guiney and Ayres.
[4] Messrs Guiney and Ayres had been joined as underlessees as partners in the law firm of Brobeck Hale & Dorr International and, upon Mr Guiney retiring from that partnership in April 1997, he was shortly thereafter replaced by Mr Grew. On 24 September 1998, Prudential joined in a deed of assignment, covenant, release and licence of that date with Mr Guiney, Mr Ayres and Mr Grew. The underlease was assigned to Messrs Ayres and Grew and Mr Grew covenanted with Prudential, with effect from 24 September 1998 and for the residue of the term, to pay the rents reserved by the underlease.
[5] On 8 May 2001, Messrs Ayres and Grew, the defendants, agreed with A&G that A&G should take over the underlease. A term of the agreement between them was that, in the prospective assignment, A&G would separately covenant with the defendants that A&G and its successors in title to the underlease would, during the continuance of the term of the underlease, pay all rents becoming due under the underlease from the date of actual completion of the assignment.
[6] On 8 June 2001, a licence to assign the underlease was granted by the leathersellers to Prudential. Both the defendants and A&G were also parties to the licence. Both the leathersellers and Prudential agreed to the assignment by the defendants to A&G. A&G covenanted with the leathersellers and also with Prudential. The covenant with Prudential was that A&G would pay the rents “in the manner and at the respective times appointed for payment thereof and will perform and observe all the covenants on the part of the lessee and the covenants and provisions contained in the Underlease”. By clause 6, the defendants covenanted with and guaranteed to Prudential, inter alia, that if A&G, before any lawful assignment of the underlease by it, made default in payment of the rents payable under the underlease, the defendants would pay the rents notwithstanding (clause 6.4.1) any time or indulgence granted by Prudential to A&G, or any neglect or forbearance of Prudential or (clause 6.4.2) any variation in the terms of the underlease, or:
Any other act or thing [by] which but for this provision [A&G] would have been released.
[7] That is the background against which has to be construed the most important instrument for present purposes, namely the supplemental deed of 21 June 2001 made between only Prudential and A&G. It was expressed to be supplemental to the underlease. The supplemental deed has a definition of “Partnership”, which was defined as meaning A&G “as constituted by the present and future partners thereof carrying on in partnership (with others) in the United States of America and elsewhere the professional practice of attorneys under the name or style of Altheimer & Gray and includes any successor body or firm carrying on the whole or a substantial part of the business of that Partnership from time to time in the United States of America and elsewhere and any successor firm, partnership or body following any merger, incorporation or otherwise”. It will be seen from that definition that it defines what is, so to speak, a legal personality; it does not in terms describe any particular body of assets or liabilities.
[8] I shall come on later to the more crucial terms of clause 2 of the supplemental deed but, to continue a recital of the background |page:33| facts, in October 2003, A&G’s creditors filed a petition against A&G under chapter 7 of the US bankruptcy code. In November 2003, the case was converted to one under chapter 11 of the US bankruptcy code and, on 21 November 2003, by order of the US Bankruptcy Court, A&G was authorised to reject the underlease with effect from 30 December 2003.
[9] In May 2004, Prudential began proceedings against the defendants, asking for a declaration that they, the defendants, were obliged to accept a new lease of the fourth and fifth floors of Hasilwood House, the premises described in the underlease, and there then began to be served on the defendants a series of notices under section 17 of the 1995 Act, none of which is contested as to its service or effect. In May 2005, Prudential’s claim form was amended and there were later further amendments to it so as alternatively to claim from the defendants as guarantors sums (then) of more than £1.3m and interest. It is that alternative claim that gives rise to the questions of construction with which I shall be concerned.
[10] In May 2006, A&G, as a partnership, was wound up in England. In June 2006, its liquidator disclaimed the underlease.
[11] So far, I have described, when speaking of proceedings, proceedings the number of which ends 1599. Prudential has since issued separate proceedings, the ending of which is 4440, but I have not been concerned with such later proceedings.
[12] No evidence other than documentary was led save for the witness statement of Mr Martin, the solicitor who, at the time of the supplemental deed, was at Berwin Leighton Paisner and had the conduct of conveyancing matters there on behalf of Prudential. He wrote as to some surrounding circumstances, but neither added to or subtracted from the matters required to be entertained in arriving at a true construction of the supplemental deed.
[13] Liability only is in dispute before me. Subject to certain qualifications with which I need not, at this stage, deal, quantum is agreed at £1,534,416.88, of which more than £1.289m is for arrears of the reserved rent that, from March 2004, was at £143,250 per quarter.
[14] Before going in detail to the important provisions of clause 2 of the supplemental deed, I must describe a point that is quite deliberately not taken here. It might be thought that a guarantor that guarantees a tenant’s liability to pay rent to the landlord could expect that the tenant, unless the guarantor had otherwise expressly agreed to some restriction as to this, would be liable to the landlord to its uttermost farthing. A restriction limiting the landlord’s recovery only to some part of the tenant’s assets might be thought to represent an additional risk or burden upon the guarantor and, hence, if not agreed by the guarantor, that it might serve to avoid the guarantee. That argument was expressly not taken here by Mr Steinfeld and Mr Ritchie.
[15] That suffices as the background against which the questions as to the true construction of the supplemental deed are set.
Construction of clause 2 of the supplemental deed
[16] The applicable principles of construction have not been in issue between the parties, and I have been referred to Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896, at p912f-913, Bank of Credit & Commerce International SA (in liquidation) v Ali (No 1) [2001] UKHL 8; [2002] 1 AC 251, at pp259f and 269 and Rennie v Westbury Homes (Holdings) Ltd [2007] EWHC 164 (Ch)*, in [37] and [38].
—————————————————————————
* Editor’s note: Reported at [2007] 2 EGLR 95
—————————————————————————
[17] It is necessary to set out the whole of clause 2 of the supplemental deed, which is as follows:
2. PARTNERSHIP LIABILITY
Whilst the Lease is vested in Altheimer & Gray or any Group Company of Altheimer & Gray or while Altheimer & Gray or any Group Company of Altheimer & Gray remains liable
under an authorised guarantee agreement pursuant to Section 16 of the Landlord and Tenant (Covenants) Act 1995 (but notwithstanding any assignment or other transfer, or any disclaimer, of the same or any other event or circumstance whatsoever):
2.1 The liability of the Tenant under the Lease and all documents ancillary to or supplemental to the Lease and the liability of the Tenant under any authorised guarantee agreement given in connection with any assignment of the Lease shall be limited to the Partnership (including, but not limited to all its assets, income and accounts) and such liability shall not extend to the personal assets of individual partners (present, past or future) therein. Consequently any recovery by the Landlord against the Tenant or any previous tenant under the Lease for any such default shall be limited to assets of the Partnership and shall not extend to the personal assets of any individual partners therein other than the capital and current accounts of such partners in the Partnership. Further, no partner (present, past or future) of the Tenant shall be required by the Landlord at any time to loan or contribute personal money or property to the Tenant to enable it to discharge any obligation owed to the Landlord.
2.2 In the event of the liquidation of Altheimer & Gray or such Group Company (whether in England and Wales or any other jurisdiction) in circumstances where the liquidator would have a right to bring a claim against the separate estate of any of the individual partners or to prove for the same by reason of any insufficiency in the joint estate for the payment of the joint expenses and joint debts with or without interest thereon, then the Landlord shall not be entitled to any payment, dividend or other distribution from any such liquidator, in either case to the extent that the liquidator may be or become entitled to make or have made any claim or submit or have submitted any proof against the individual partners themselves or their separate estates. The Landlord undertakes that when submitting any proof of debt in any such liquidation it will notify the liquidator of the terms of this Deed and will complete such proof of debt so as to give effect to the intent of this Clause 2.2.
[18] Mr Trace noted, as I accept, that the provisions of clause 2 are temporary, in the sense that they do not necessarily apply for the whole of the remnant of the term of the underlease. They apply only “whilst the lease is vested in” A&G or in a related underlessee. Mr Trace relied upon that as one of a number of features that point, contrary to Mr Steinfeld’s argument, to the rent under the underlease remaining unchanged. If, for example, quarter by quarter, the rent reserved depended, Mr Trace said, upon an examination of the “assets, income and accounts” of A&G, the rent would lose the certainty that is required as a characteristic of a rent and, even if those three ingredients were so well defined as to lead to an ascertainable sum, there would, even so, be a state of flux and of unknowing so uncommercial as to be improbable to have been intended. Depending upon the law of partnership in Illinois (as to which no evidence was given), it could be that the partnership assets could be reduced at will by the partners and its net income could effectively be reduced, in either case to thwart recovery of the reserved rent. Surely, said Mr Trace, that would be so uncommercial to be improbable to have been intended. Further, in the licence to assign A&G had covenanted to pay Prudential the rents, not as described in the supplemental deed but as contained in the underlease. Moreover, Prudential had licence from the leathersellers to permit assignment to A&G of an underlease only, under which A&G was required to pay the rents described in the underlease. Even after the execution of the supplemental deed, A&G, on giving notice to the leathersellers, wrote:
The rent reserved by the above… Underlease will in future continue to be paid by Altheimer & Gray… .
[19] I accept that, in these circumstances, the rent reserved by the underlease remained unchanged. However, I do not see that as conflicting with the first part of clause 2.1 of the supplemental deed: “The liability of the Tenant under the Lease… shall be limited… .” It is open to a landlord to indicate to its tenant a willingness to accept less than the reserved rent. An example is to be found in the celebrated case Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. I thus read clause 2.1’s reference to the “liability” of the underlessee not as affecting the rent reserved, but as indicating a binding willingness on the part of Prudential in some circumstances to accept less than the reserved rent and thus to deny itself also any remedy at law or in equity for the full reserved rent, although those particular circumstances should apply. I can quite see the objections that it may have been unwise of Prudential to have exposed its recovery to concepts as vague (if not further defined and regulated) as the Illinois partnership’s “assets income and accounts” and not to have obtained the leathersellers’ consent to a partial waiver of the covenant as to |page:34| rent in the underlease, but I cannot pretend that the first sentence of clause 2.1 is not there. In the result, as I see it, unless A&G should raise the inadequacy of the partnership assets, the full reserved rent would be payable and accepted, but, once that inadequacy is raised, whereas the obligation remains the same, there would be no remedy available to Prudential beyond the extent of the described partnership assets. The “liability” of the underlessee is limited, in other words, much as is the “liability” of a limited liability company; the extent of its obligations is unaffected but there are circumstances in which recovery from it will be restricted. Viewing liability in that way, the provisions of clause 2.1 beginning “Consequently” are indeed, in part at least, a consequence of liability being treated as I have construed it to be; they are so consequential, at any rate so far as concerns recovery against A&G by Prudential.
[20] In reliance upon the word “consequently”, Mr Trace argued that its effect is to limit the sense of the words following so as to require that sense to be no other than such as is strictly consequential upon that which has preceded it. An alleviation of the burden on A&G, said Mr Trace, does not have, as an inescapable consequence, an alleviation of the burden on a previous tenant. I see the force of that but, if (as is the case) part of what immediately follows is truly so consequential, but part (as to recovery against “any previous tenant”) is not directly consequential, I do not see the word “consequently” as, of itself, to have sufficient force in such a context to deny effect to the part that is not. I cannot simply ignore the words “or any previous tenant” because their apparently intended effect would not be directly consequential upon the earlier restriction of recoverability against A&G. Nor is there any plea of rectification to delete them. Moreover, although an alleviation of the burden on a tenant does not have the inescapable consequence that the burden on the tenant’s guarantor is also alleviated, the implied process whereunder the guarantor is to be indemnified by the tenant leads to that consequence, although not inescapable, being at least usual.
[21] Does such a reading thus far conflict with the phrase in clause 2.1 “recovery by [Prudential]… for any such default”? The reference to “any such default” is at least inelegant, since there is no prior reference to any kind of default, but Mr Trace argued that any true construction has to give meaning to that phrase and thus has to be such as to contemplate some sort of default being possible. He continued that, were there to be no complaint possible for non-payment of the unchanged reserved rent, there never would be any “default”. I do not accept that. Even if Prudential bindingly indicates that it will, in the described circumstances of an inadequacy of partnership assets, accept a lesser sum as the payable rent, there could still be default on A&G’s part in its not paying even that reduced sum, either on time or at all. The need for a default to be possible is thus satisfied.
[22] The words in clause 2.1 “or any previous tenant” plainly provide, as I have already touched upon, a real difficulty in Prudential’s way when it seeks, as it does, to recover the unchanged full rent from the defendants, a previous tenant. A natural and grammatical reading of the expression “any recovery by the landlord against the tenant or any previous tenant” is that what is there being described are two kinds of recovery by the landlord: one against the tenant and one against any previous tenant. Mr Trace, though, sought first to say that it describes two kinds of recovery: one by the landlord and another by any previous tenant. I cannot accept that ungrammatical construction. The phrase is dealing with a claim against the “previous tenant” rather than by it. Its intent, as it seems to me, is to ensure, as it was put in argument, that, having shut the front door to keep out recovery from A&G going beyond the partnership assets (by restricting the “liability” of A&G to Prudential), the draftsman then wishes to shut the back door, whereby Prudential might otherwise recover the full reserved rent from the previous tenant as guarantor, leaving the guarantor then to make a claim against A&G for indemnity, which, but for clause 2, could go beyond partnership assets. The draftsman shuts the back door by providing that the landlord’s claim, not only against the tenant but also against “any previous tenant”, is limited as clause 2.1 prescribes.
[23] But what commercial motive could there be, asked Mr Trace, for so limiting the recoverability against A&G or its guarantors? Mr Steinfeld, rightly in my view, said that it is not for the court to explore motives and that, in any event, it has inadequate evidence to enable it to do so. It is plain that A&G insisted on a provision for limited recourse and plain, too, that, ultimately, Prudential accepted and agreed that. It could be that the insolvency of a substantial American legal practice was thought to be so unlikely that it was regarded as a risk that could safely be borne; it could be that the full rent payable was high enough, in comparison with what was available from other prospective tenants, to justify the taking of whatever risk there was. It could be that a large American legal firm represented a prestigious tenant that it was worth the acceptance of some risk to attract it to the building. It is not for me to speculate on motives (and whatever I might do, it could be speculation only), but I cannot say that plainly was there no possible commercial motive for the acceptance by Prudential of clause 2.1 on the construction that I have given it. It is not, in my view, a construction so plainly improbable as not possibly to have been intended, nor to use Mr Trace’s word, so absurd as to require a departure from the ordinary meaning of the language used.
[24] Mr Trace was entitled to take and did take the point that the last sentence of clause 2.1 “Further, no partner… shall be required by the Landlord at any time to loan or contribute personal money or property to the Tenant to enable it to discharge any obligation owed to the Landlord” could be expected, by way of repetition of the words “or any previous tenant” earlier found, to add such words, after reference to “the Landlord”, at either or both of the two opportunities that that last sentence affords for their addition. That might have been expected, so there is some force in that but not, in my view, force sufficient to override the plain intent of the earlier words “or any previous tenant”, which limit recovery as there provided.
[25] It is true to say that the expression “any recovery by the Landlord against the Tenant or any previous tenant under the Lease… shall be limited to assets of the Partnership” is inept in the sense that recovery by the landlord against a previous tenant would not be “under the Lease” but it would be “by reference to” or “in relation to” the lease and I do not regard the words “under the Lease” as so inept as to require some construction other than that which I have given.
[26] The words “or any previous tenant” lead to such difficulties for Prudential that Mr Trace even argued that they should be ignored. I have been unable to find any good reason for so extreme a construction. Looking at clause 2 as a whole and, indeed, the supplemental deed as a whole, one can see that it was very much concerned with limiting recourse to partnership assets. The draftsman sees a number of ways in which attempts might be made to go beyond the recovery of partnership assets. There could be attempts to recover, in excess over partnership assets, against the tenant, A&G, or individual partners. There could be recovery attempted by way of claim against the guarantor as previous tenant that, in turn, (as is common ground) could, but for clause 2, then recover by way of indemnity in such excess against A&G; and there could be recovery by Prudential in the liquidation of A&G by way of a proof for the full unchanged reserved rent of the underlease. The draftsman seeks to head off all forms of recovery beyond the loosely defined partnership “assets, income and accounts” in all three circumstances. It is the commanding purpose of the supplemental deed to do so, but the question then becomes this: can the defendants, not party to the supplemental deed, take advantage of the limitation of recovery against them that, if my construction is right, it confers?
[27] To answer that question, Mr Steinfeld relied upon the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act), which came into force on 11 November 1999. Under the heading “Right of Third Party to Enforce Contractual Term”, clause 1 provides, so far as material, as follows:
1(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if
(a) The contract expressly provides that he may, or
(b) Subject to subsection (2), the term purports to confer a benefit on him.
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. |page:35|
(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.
Mr Steinfeld accepted that section 1(1)(a) does not apply, but he asserted that section 1(1)(b) does apply. He said, as I accept, that section 1(3) is satisfied in the sense that a particular description of a third party is given in clause 2.1 of the supplemental deed and that “any previous tenant” suffices as a particular description to identify the defendants. I do not see any proper construction of clause 2 of the supplemental deed as being such as to make it “appear” that the parties to it did not intend “the term” namely the limitation of recovery against any previous tenant as there prescribed to have been not intended to be enforceable by the previous tenant. It would have been easy enough (but somewhat destructive of the overall purpose of clause 2) so to provide had that been intended, but nothing to that effect appears. It is not argued that the supplemental deed is not a contract for the purposes of the 1999 Act. The key question thus becomes whether the provision in clause 2.1, seeming to restrict recoverability against any previous tenant, is a term that “purports to confer a benefit on” the previous tenants.
[28] “Express” provision of a right to enforce is dealt with in section 1(1)(a) of the 1999 Act, and what “appears” from a proper construction is dealt with in section 1(2), so it might be thought that the verb “purport” in section 1(1)(b) is intended to deal with something that differs in some way from “express” provision and from the “appearance” of an intent. However, the first meaning given to the noun in the Oxford English Dictionary is;
That which is conveyed or expressed, esp by a formal document; bearing, tenor, import, effect; meaning, substance, sense.
The verb is defined as, inter alia, “to bear as its meaning; to express, set forth, state; to mean, imply”. It thus seems to me that section 1(1)(b) is satisfied if, on a true construction of the term in question, its sense has the effect of conferring a benefit on the third party in question. There is within section 1(1)(b) no requirement that the benefit on the third party shall be the predominant purpose or intent behind the term or that it denies the applicability of section 1(1)(b) if a benefit is conferred on someone other than the third party. The 1999 Act has no such additional requirement and Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No 2) [2005] EWCA Civ 519*, a decision of the Court of Appeal of 5 May 2005, illustrates that there is no such additional requirement.
—————————————————————————
* Editor’s note: Reported at [2005] 2 All ER (Comm) 167
—————————————————————————
[29] The term or provision in question is clause 2.1, namely that recovery by Prudential against “any previous tenant… shall be limited to assets of the Partnership”. It is, again, inelegant in the sense that one would not ordinarily expect recovery against A to be against assets other than those of A, but I regard the sense as sufficiently clear, namely that although Prudential is fully entitled to recover in respect of the full reserved rent from partnership assets, it was entitled to nothing more than that which was derived from those assets, either from A&G or from “any previous tenant”. To that extent, where, as here, the previous tenant is a guarantor, the sense of clause 2.1, in my view, manifestly confers a benefit, a cap as to recoverability, on the previous tenant. Accordingly, I hold that the defendants, as previous tenants, are entitled in their own right to enforce the provisions of clause 2.1 against Prudential.
[30] Ms Harrison, briefly following Mr Trace, argued that if clause 2.1 is given the construction that I have held to be the case and for which Mr Steinfeld argued, there are no circumstances in which the previous tenant’s guarantee would ever avail Prudential; it would be a quite useless provision. I accept Mr Steinfeld’s answer that that is not so. There are circumstances, on such a construction, in which Prudential might reasonably find it at least more convenient to go against the defendants rather than against an American partnership. There could, for example, be a case in which A&G failed to pay or punctually to pay the full reserved rent even though the partnership assets did suffice to pay them. In such a case, Prudential might prefer to sue the defendants under their guarantee rather than to chase an overseas defaulting debtor. I thus cannot describe the guarantees given by the defendants as pointless, even on the construction of clause 2.1 coupled with the effect of the 1999 Act, as I have taken it to be.
[31] Mr Steinfeld argued that, in any event, the defendants are not liable under their apparent guarantees to Prudential contained within the licence to assign of June 2001 because, he said, those guarantees fall foul of the 1995 Act. The argument runs as follows. In that licence to assign, the defendants (there described as the undertenant) covenanted with Prudential (there, the tenant) to pay all rents and perform and observe all the covenants in respect of which A&G should be in default. Under section 5 of the 1995 Act, the defendants were released from the tenant’s covenants set out in the underlease. That, though see section 16 did not preclude the defendants from entering into an “Authorised Guarantee Agreement” with respect to the performance of the covenants in the tenancy: section 16(1). However, section 16 prescribes limits to what may be an authorised guarantee agreement. Thus, in section 16(5), one finds that, although an authorised guarantee agreement may impose upon the erstwhile tenant liabilities as guarantor in respect of the assignee’s performance of a particular covenant in the lease, the burdens of its covenants are not to be “more onerous than those to which he would be subject in the event of his being liable as a sole or principal debtor in respect of any obligation owed by the assignee under that covenant”. Mr Steinfeld’s argument here relied upon the rent payable by A&G because he argued, having been reduced by way of clause 2.1 of the supplemental deed and, he continued, on that footing, unless the obligation on the previous tenant is correspondingly reduced, the obligation on the previous tenant would be more onerous than that applicable to the assignee. If, however, I am right in construing the reserved rent as continuing unchanged (but being subject to a binding indication from Prudential that it will, in certain circumstances, accept less), then, so long as the recoverability against “any previous tenant” is correspondingly reduced by way of clause 2.1, in a comparison between the liabilities of the current tenant and the liabilities of the previous tenant as guarantor, neither is more onerous than that of the other and, accordingly, I do not see the 1995 Act as assisting the defendants.
[32] I have not been told what attempts at recovery of partnership assets has been made by Prudential nor what those attempts have led to by way of recovery, but if my construction of clause 2 of the supplemental deed is correct, and if I am right about the ability of the defendants to rely upon the 1999 Act, in practical terms the defendants are proof against any recovery against them under the guarantees given in clause 6 of the licence to assign of 8 June 2001 going beyond A&G Partnership assets. Mr Trace argued that clause 2.1 represents no more than an indulgence granted by Prudential to A&G and, hence, within clause 6.4.1 of the licence to assign, that it does not restrict Prudential’s ability to go against the defendants. However, in my view, if it is right to describe clause 2.1 as an indulgence at all, it is not merely an indulgence granted by Prudential to A&G but an indulgence granted by Prudential to “any previous tenant” and, in that sense, is outside the protection of clause 6.4.1 and can be relied upon by the defendants against the claimant.
Conclusion
[33] I have not understood it to be argued that Prudential can now recover from the defendants at least to the extent of an equivalent of what Prudential might claim to recover from A&G partnership assets, leaving the defendants then to be subrogated to Prudential in the A&G insolvency. That would plainly present difficulties and, as I say, has not been argued and may be rather pointless. For the reasons that I have given, I hold that clause 2.1 of the supplemental deed protects the defendants as I have indicated and I shall thus invite counsel to discuss the particular form of relief to that the construction that I have adopted should properly lead.
Judgment to the defendants.
