Co-sureties under lease — Tenant failing to pay rent — One surety making two quarterly payments when demanded by landlord — Surrender of lease negotiated — Agreement of co-surety not obtained — Demand for payment of part of cost of surrender from co-surety — High Court holding that co-surety had no defence to claim and granting summary judgment — Court of Appeal granting co-surety leave to defend
The plaintiff was one of three sureties who were parties to a lease dated July 6 1981. By that lease the council granted a tenancy of certain premises in Reading to a company for a 20-year term expiring in 2001. The plaintiff, the defendant and a third party were the guarantors of the company’s obligations under the lease. Their obligation to pay only arose on demand by the landlord.
Administrative receivers of the company were appointed in January 1993. The company had failed to pay the quarterly rent due, in December 1992 and March 1993 and the landlord demanded and received payment from the plaintiff as surety of the rent due, together with interest. In December 1993 the plaintiff and the landlord negotiated a surrender of the lease in consideration of the sum of £207,100 plus VAT. On surrender, the plaintiff also covenanted to pay insurance premiums and the landlord’s legal fees. The plaintiff then brought an action against the defendant claiming that it was entitled to a contribution of one-half of the payments of £303,544.36 made by it. No claim was made against the third party, who had little or no financial resources. The High Court, on an appeal from the district judge gave judgment under Ord 14 of the Rules of the Supreme Court in the sum of £100,548, being one-third of the plaintiff’s payments.
Held The defendant’s appeal was allowed.
1. A surety who discharged the liability of the principal debtor was entitled by subrogation to any remedies against the principal debtor and to any securities held by the creditor: see Harberton (Lord) v Bennett (1829) Beatty 386; Mercantile Law Amendment Act 1856.
2. However, where the creditor was a landlord and the principal debtor his tenant, there could be no scope for the application of the Harberton decision or section 5 of the 1856 Act.
3. The remedy of a landlord, when a tenant failed to pay the rent, was to distrain or to forfeit the lease by re-entry. But the right of distress was not a security within section 5 nor a remedy which a surety paying the principal debtor’s debt was entitled to use: see Re Russell, Russell v Shoolbred (1885) 29 Ch D 254.
4. However, the surrender established a completely new contract to which the defendant was not a party. The surrender amounted to a release by accord and satisfaction and so discharged the defendant as surety from any further obligations under the lease.
5. In failing to secure the defendant’s agreement to the actual terms negotiated and by accepting liability under the surrender, the plaintiff could not claim a right of contribution in respect of its new liability which it discharged.
6. It followed that the defendant had at least an arguable defence to the claimed contribution in respect of the sums payable under the surrender, save for one-third of the payments made before surrender.
Leolin Price QC and Nicholas Yell (instructed by Jenkin Evans, of Henley-on-Thames) appeared for the plaintiff; Katherine Dunn (instructed by Eversheds, of Leeds) appeared for the defendant.
