Leases – Surety – Lessee in receivership – Surety claiming no outstanding breaches of covenant – Surety seeking release from obligations – VAT and interests outstanding – Whether landlord estopped from claiming VAT and interest a breach of covenant – Judge finding for landlord – Appeal dismissed
The plaintiff, Knighton Estates Ltd (Knighton), a subsiduary of Great Portland Estates plc, was the freehold owner of 33 Gresse Street, London W1. The first floor, ground floor and basement of the premises were let to TSBW Ltd. The first floor was let on a 25-year lease dated October 10 1983, and the ground floor and basement on another 25-year lease of the same date. The defendant, Gallic Management Co Ltd (Gallic), was surety of both leases. The first floor was sublet on December 30 1991 to RROS. Both leases of October 1983 contained a proviso whereby the surety would be released from his obligations at the end of the 10th year of the term “if . . . there is no subsisting breach of any of the covenants in this lease contained”. By the end of the 10th year, which was October 5 1993, the lessee was in receivership. Contending that there were no subsisting breaches of any covenants in the leases, Gallic sought to be released from its obligations with effect from October 5 1993. However, Knighton issued proceedings claiming arrears of rent, service charges, insurance and interest from Gallic. At the hearing Knighton conceded that there were no arrears of rent and Gallic in turn conceded that the lessee had failed to pay VATand interest
The issues at trial were: (a) given that the lessee had not paid VAT, was Knighton nevertheless estopped from relying upon that failure as against the surety; (b) was the lessee’s failure to pay interest a breach of covenant by the lessee; and (c) was there a breach by the lessee as to subletting. The judge found in favour of Knighton on the estoppel issue and in favour of Gallic on the other two issues. Gallic appealed against the decision on the estoppel issue and Knighton sought in the alternative to affirm the result on other grounds. The judge had found that there was interest due on late payments at the material date but Knighton contended, inter alia, that he had been wrong to conclude that the obligation to pay interest under the leases was not a covenant to pay interest.
Held The appeal was dismissed.
Gallic had accepted that VAT was due and owing on rents and service charges under the lease as at October 5 1993 but later contended that correspondence between the parties’ respective solicitors which itemised amounts without including VAT and interest, amounted to clear and unequivocal representations that no other sums were due. In order to found an estoppel, a representation had to be clear and unambiguous and the letters relied upon did not state that no VAT was due and payable. Gallic knew from correspondence, including a letter dated September 27 1993, that Knighton would be demanding VAT plus interest, and the further correspondence had to be read in that light. The judge could not be faulted for finding that Knighton was reserving its rights and that there had been no clear nor unambiguous representation. VAT and interest were due as at October 5 1993. Therefore the tenant had been in breach of covenant for which Gallic as surety was liable.
Guy Fetherstonhaugh (instructed by Watson Farley & Williams) appeared for the appellant; Jonathan Brock QC (instructed by Clifford Harris & Co) appeared for the respondent.
