Landlord and tenant — Covenant by surety — Assignment of reversion — Default by tenant in payment of rent — New landlord claims against surety under guarantee clause in lease — No express assignment of benefit of surety covenant to assignee of reversion — Whether surety liable under covenant — Whether surety covenant runs with the reversion — Whether covenant ‘touched and concerned’ the land — ‘Leap frog’ appeal by surety to House of Lords from decision of judge of High Court in favour of landlord — Kumar v Dunning followed — In the present case the surety covenant was actually in an underlease and the claim under the covenant was made by the assignee of the leasehold reversion
pointed out on appeal that, as section 141 of the Law of Property Act 1925
applied only to covenants between landlord and tenant, the assignee of the
reversion had to rely on the common law rule under which the benefit of the
covenant would run with the land if the covenant was one which touched and
concerned the land — It was argued on behalf of the surety that a reversion was
not ‘land’ for this purpose, but the House had no difficulty in rejecting an
argument which would exclude let land — The question whether a surety’s
covenant touches and concerns land is to be determined by the same test as that
applicable to the tenant’s covenant; and a covenant by a surety to the effect
that a tenant’s covenant which touches and concerns the land shall be performed
must itself be a covenant which touches and concerns the land — As to the test,
there is old and more recent authority, from Congleton Corporation v Pattison (1808)
and Vyvyan v Arthur (1823) to Kumar v Dunning — And Lord Oliver in the present
appeal formulated the following ‘working test’ — A covenant touches and
concerns the land if:
for time being, and if separated from the reversion ceases to be of benefit to
the covenantee;
mode of user or value of the land of the reversioner;
(that is to say neither being given only to a specific reversioner nor in
respect of the obligations only of a specific tenant);
money will not prevent it from touching and concerning the land so long as the
three foregoing conditions are satisfied and the covenant is connected with
something to be done on, to or in relation to the land —
expressly approved as correct and was held to be indistinguishable from the
present case in any material respect — Appeal dismissed
The following
cases are referred to in this report.
Congleton
(Mayor of) v Pattison (1808) 10 East 130
Dyson v Forster [1908] 1 KB 629, CA; [1909] AC 98, HL
Gaw v Coras Iompair Eireann [1953] IR 232; (1952) 89 ILT 124
Grant v Edmondson [1931] 1 Ch 1
Kumar v Dunning [1987] 3 WLR 1167; [1987] 2 All ER 801; [1987] 2
EGLR 39; (1987) 283 EG 59, CA
Rogers v Hosegood [1900] 2 Ch 388
Vyvyan v Arthur (1823) 1 B&C 410; 2 D&R 670; 1 LJ (os) KB
138
This was an
appeal by Combined English Stores Group plc, the surety, from the decision of
Judge Oddie (sitting as a judge of the High Court) whereby the appellants were
held liable under their surety covenant to pay £4,250 with interest and costs
in respect of arrears of rent due but not paid by the underlessee to the
assignees of the reversion on the underlease, P & A Swift Investments,
respondents to the appeal. The appeal to the House of Lords was made directly
by means of the ‘leap frog’ provisions of certification under section 12 of the
Administration of Justice Act 1969.
Michael Barnes
QC and David Neuberger QC (instructed by Simmons & Simmons) appeared on
behalf of the appellants; John Colyer QC and Martyn Zeidman (instructed by Rose
& Birn) represented the respondent.
In his speech,
LORD TEMPLEMAN said: The appellant, the surety, joined in a lease to guarantee
the performance and observance of the covenants by the tenant contained in the
lease. A covenant by a tenant which touches and concerns the land runs with the
reversion; the benefit of such a covenant vests in the successors in title of
the landlord; the successors in title of the landlord may sue upon the
covenants although the benefit of the covenants may not have been expressly
assigned. For this purpose a successor in title of the landlord is the person
who, at the date of the breach of covenant, is entitled to the reversion
expectant on the expiration or sooner determination of the term demised by the
lease. In the present case the original landlord assigned the reversion to the
respondent landlord; there was no express assignment of the benefit of the
tenant’s covenants or of the benefit of the surety’s covenant. The tenant
defaulted in payment of the rent reserved by the lease and thereby committed a
breach of a covenant which touched and concerned the land. The respondent
landlord, failing to recover the rent from the tenant, brings these present
proceedings against the surety to recover the amount of the unpaid rent. The
surety denies liability, pleading that the surety’s covenant does not touch and
concern the land and does not run with the reversion so as to be enforceable by
the respondent landlord. The respondent landlord replies that a covenant by a
surety, in whatever form or expression the surety covenant may take, is a
covenant that the tenant’s covenant shall be performed and observed. A covenant
by a surety that a tenant’s covenant which touches and concerns the land shall
be performed and observed must itself be a covenant which touches and concerns
the land; the benefit of that surety’s covenant will run with the reversion and
the covenant is therefore enforceable without express assignment. I agree. A
surety for a tenant is a quasi tenant who volunteers to be a substitute or
twelfth man for the tenant’s team and
covenant which runs with the reversion against the tenant runs with the
reversion against the surety. For these reasons and for the reasons to be given
by my noble and learned friend, Lord Oliver of Aylmerton, I would dismiss the
appeal.
In his speech
agreeing, LORD OLIVER OF AYLMERTON said: This is an appeal from an order made
on January 29 1988 in an action in the Queen’s Bench Division of the High Court
whereby the plaintiff, the respondent firm, recovered judgment against the
appellant in a sum of £4,250 together with interest and costs, that sum being
the amount of the arrears of rent due to the respondent as the landlord of
certain premises under a lease to which the appellant was a party not as tenant
but solely as guarantor. The judge, His Honour Judge Oddie (sitting as a judge
of the High Court), granted a certificate pursuant to section 12 of the
Administration of Justice Act 1969 and on March 24 1988 leave was granted by
your lordships to appeal direct to your lordships’ House. The appeal raises the
much debated question whether the benefit of a covenant by a surety for the
performance of the tenant’s obligations under a lease is one which is capable
of running with the reversion so as to be available without express assignment
to the successor in title of the original landlord. The point had been decided
in favour of the landlord by the Court of Appeal in Kumar v Dunning
[1987] 3 WLR 1167 at the time of the hearing before Judge Oddie and his order
was accordingly made without hearing full argument, since he was, in any event,
bound by that decision.
The relevant
facts can be shortly stated. Two individuals, Paul and Annie Swift, were the
lessees of premises at 58-60 Lime Street, Liverpool, for a term of 99 years from
December 1 1950. In 1959 they assigned their leasehold interest to a company, P
& A Swift (Investments) Ltd. At that time they were carrying on business at
the premises, but in July 1967 they ceased to trade there and sold their
business to a subsidiary company of the appellant. By an underlease dated July
26 1967 P & A Swift (Investments) Ltd demised the premises to a subsidiary
of the appellant, P & A Swift Ltd, which company subsequently changed its
name to Dubarry (Liverpool) Ltd (‘Dubarry’). The underlease was for a term of
35 years at a substantial rent and the undertenant’s obligations were
guaranteed by the appellant, which joined in the underlease as surety only. In
July 1968 P & A Swift (Investments) Ltd was wound-up voluntarily and by a
conveyance dated August 18 1969 the leasehold reversion expectant upon the
underlease was assigned by the company and its liquidator to the respondent
firm. That conveyance did not contain any specific assignment of the benefit of
the surety’s covenant entered into by the appellant in the underlease. P &
A Swift (Investments) Ltd has since been dissolved. Dubarry failed to pay the
rent due under the underlease for the quarter commencing on September 29 1984
and subsequent quarters and on November 18 1986 went into creditors’ voluntary
winding-up. On July 31 1987 the liquidator of Dubarry disclaimed all interest
in the underlease. The appellant has not paid the outstanding rent although
called upon to do so.
The underlease
was a full repairing and insuring underlease containing standard covenants on
the part of the tenant. The only clause which matters for present purposes is
clause 5 which, so far as material, is in the following terms:
5. THE SURETY
in consideration of the demise hereinbefore contained having been made at its
request HEREBY COVENANTS with the lessor that the tenant shall pay the rent
hereby reserved on the days and in manner aforesaid and shall duly perform and
observe all the covenants hereinbefore on the tenant’s part contained and that
in case of default in such payment of rent or performance or observance of any
of the covenants as aforesaid during the currency of the said term and also
thereafter during such period as the tenant remains in occupation of the
demised premises the surety will pay and make good to the lessor on demand all
loss damages costs and expenses thereby arising or incurred by the lessor . . .
there follows
an immaterial proviso
PROVIDED
FURTHER and it is hereby further agreed that in the event of this lease being
disclaimed by the tenant or on behalf of the tenant under any statutory or
other power the surety will take from the lessor but only if so required by the
lessor by written notice to the surety within three months after such
disclaimer a grant of another lease of the demised premises for the residue of
the said term unexpired at the date of such disclaimer at the same several
rents as those hereinbefore reserved and subject to the like covenants and
provisos as are herein contained and the surety on the execution of such
further lease shall pay the costs thereof and shall execute and deliver to the
lessor a counterpart thereof.
The only other
observation which requires to be made about the terms of the lease is that in
the usual way the expression ‘the lessor’ is expressed to include the
reversioner for the time being immediately expectant on the term thereby
created.
The
relationship between the landlord and a surety in a case such as the present
is, of course, contractual only. The surety has no interest in the land the
subject-matter of the demise and there is thus no privity of estate. In
seeking, therefore, to enforce the surety’s covenant, an assignee of the
reversion cannot rely upon the Grantees of Reversions Act 1540, the provisions
of which were substantially re-enacted in section 141 of the Law of Property
Act 1925 and which apply only to covenants between landlord and tenant. His
claim to enforce rests upon the common law rule, under which the benefit of the
covenant would run with the land if, but only if, the assignee had the legal
estate in the land and the covenant was one which ‘touched and concerned’ the
land. There is no question but that the first of these conditions is complied
with in the instant case, but it is said, first, that a reversion on a lease is
not ‘land’ for the purposes of the application of the common law rule and,
second, and in any event, that the covenant of a surety is no more than a
covenant to pay a sum of money which is entirely collateral and does not
therefore touch and concern the land.
As to the
first point, Mr Barnes has argued with his usual persuasiveness that although
there is no specific authority on the point the reversion of a lease clearly
could not have been treated as ‘land’ under the old common law rule since, if
it had, the Grantees of Reversions Act 1540 would have been unnecessary.
Certainly that seems to have been so as regards covenants between the tenant
and his landlord, but, of course, the tenant’s covenants ordinarily endure only
during the term of the lease and this may, therefore, have been peculiar to
that particular relationship. There seems to be no logical reason in the case
of a third party covenant why the mere fact that the land is let, either at the
time of the covenant or of its transfer to a successor, should prevent the
benefit from running with the land. Certainly it appears that some incorporeal
hereditaments (for instance an easement) rank as ‘land’ for this purpose: see Gaw
v Coras Iompair Eireann [1953] IR 232. As was pointed out by Romer LJ in
Grant v Edmondson [1931] 1 Ch 1 at p28, it is impossible in this
area of the law to argue safely either by reason or by analogy, for ‘the
established rules concerning it are purely arbitrary, and the distinctions, for
the most part, quite illogical’. We are, in any event, concerned with what is
the position in 1988 and not in 1540 and there being no direct decision upon
the point I am, for my part, not prepared to assume that the common law has not
developed in the four centuries which have elapsed since the Act of 1540 nor
that ‘land’ for the purposes of the common law rule has not, over this period,
come to bear the same meaning as it does in the context of landlord and tenant.
In my opinion,
the question of whether a surety’s covenant in a lease touches and concerns the
land falls to be determined by the same test as that applicable to the tenant’s
covenant. That test was formulated by Bayley J in Congleton Corporation
v Pattison (1808) 10 East 130 and adopted by Farwell J in Rogers
v Hosegood [1900] 2 Ch 388 at p395:
the covenant
must either affect land as regards mode of occupation, or it must be such as
per se, and not merely from collateral circumstances, affect the value of the
land.
The meaning of
those words ‘per se, and not merely from collateral circumstances’ has been the
subject-matter of a certain amount of judicial consideration and the judgment
of Sir Nicolas Browne-Wilkinson V-C in Kumar v Dunning [1987] 3
WLR 1167 (where the problem was identical to that in the instant case save that
the covenant was given on an assignment and not on the grant of the lease)
contains a careful and helpful review of the authorities. No useful purpose
would be served by repeating this here and I am both grateful for and content
to accept both his analysis and his conclusion that the correct principle was
that pronounced by Best J in Vyvyan v Arthur (1823) 1 B&C 410
at p 417, and approved by this House in Dyson v Forster [1909] AC
98:
The general
principle is, that if the performance of the covenant be beneficial to the
reversion, in respect of the lessor’s demand, and to no other person, his
assignee may sue upon it; but if it be beneficial to the lessor, without regard
to his continuing owner of the estate, it is a mere collateral covenant, upon
which the assignee cannot sue.
The
Vice-Chancellor stated his conclusion at p1177:
From these
authorities I collect two things. First, that the acid test whether or
not a benefit is collateral is that laid down by Best J, namely, is the
covenant beneficial to the owner for the time being of the covenantee’s land,
and to no one else? Secondly, a covenant
simply to pay a sum of money, whether by way of insurance premium, compensation
or damages, is a covenant capable of touching and concerning the land provided
that the existence of the covenant, and the right to payment thereunder,
affects the value of the land in whomsoever it is vested for the time being.
It is objected
that this states the matter too broadly because, for example, it is said that
it would involve the conclusion that a simple covenant to pay an annuity of £x
per annum to the owner for the time being of Blackacre would then be treated as
a covenant touching and concerning the land because it would enhance the value
of the land. This is, I think, to read the Vice-Chancellor’s words too
literally, for it is, as it seems to me, implicit in them that he is referring
to a monetary obligation related to something which issues out of or is to be
done on or to the land. His approach to the problem (which, again, I respectfully
adopt) emerges from the following passage from his judgment at p1174:
The surety
covenant is given as a support or buttress to covenants given by a tenant to a
landlord. The covenants by the tenant relate not only to the payment of rent,
but also to repair, insurance and user of the premises. All such covenants by a
tenant in favour of the landlord touch and concern the land, ie the reversion
of the landlord. The performance of some covenants by tenants relate to things
done on the land itself (eg repair and user covenants). Other tenants’
covenants (eg payment of rent and insurance) require nothing to be done on the
land itself. They are mere covenants for the payment of money. The covenant to
pay rent is the major cause of the landlord’s reversion having any value during
the continuance of the term. Where there is privity of estate, the tenant’s
covenant to pay rent touches and concerns the land: Parker v Webb
(1693) 3 Salk 5. As it seems to me, in principle, a covenant by a third party
guaranteeing the performance by the tenant of his obligations should touch and
concern the reversion as much as do the tenants’ covenants themselves. This
view accords with what, to my mind, is the commercial common sense and justice
of the case. When, as in the present case, the lease has been assigned on the
terms that the sureties will guarantee performance by the assignee of the
lease, justice and common sense ought to require the sureties, not the original
tenant, to be primarily liable in the event of default by the assignee. So long
as the reversion is not assigned, that will be the position. Why should the
position between the original tenant and the sureties be rendered completely
different just because the reversion has been assigned, a transaction wholly outside
the control of the original tenant and the sureties?
I entirely
agree and would add only this. It has been said that the surety’s obligation is
simply that of paying money and, of course, in a sense that is true if one
looks only at the remedy which the landlord has against him in the event of
default by the tenant. But for my part I do not think that this is a complete
analysis. The tenant covenants that he will do or refrain from doing certain
things which undoubtedly touch and concern the land. A surety covenants that
those things shall be done or not done as the case may be. Now it is true that
the remedy for breach will sound in damages only, but the primary obligation is
the same, namely that that which is covenanted to be done will be done. Take, for
instance, the tenant’s covenant to repair. There is nothing here requiring
personal performance by the tenant. The effect of the covenant is that the
tenant must procure the premises to be kept in repair. Equally, a guarantee by
the surety of the repairing covenant is no more than a covenant or warranty
that the guarantor will procure that the tenant, in turn, procures the premises
to be kept in repair. The content of the primary obligation is, as it seems to
me, exactly the same and if that of the tenant touches and concerns the land
that of the surety must, as it seems to me, equally do so.
Formulations
of definitive tests are always dangerous, but it seems to me that, without
claiming to expound an exhaustive guide, the following provides a satisfactory
working test for whether, in any given case, a covenant touches and concerns
the land:
(1) The covenant benefits only the reversioneer
for time being, and if separated from the reversion ceases to be of benefit to
the covenantee.
(2) The covenant affects the nature, quality,
mode of user or value of the land of the reversioner.
(3) The covenant is not expressed to be personal
(that is to say neither being given only to a specific reversioner nor in
respect of the obligations only of a specific tenant).
(4) The fact that a covenant is to pay a sum of
money will not prevent it from touching and concerning the land so long as the
three foregoing conditions are satisfied and the covenant is connected with
something to be done on, to or in relation to the land.
For my part, I
am entirely satisfied that the decision of the Court of Appeal in Kumar
v Dunning [1987] 3 WLR 1167 was correct and was reached for the correct
reasons. The instant case is indistinguishable in any material respect. Nothing
I think turns upon the precise terms of the covenant in either case. It follows
that I would dismiss this appeal.
LORDS KEITH OF
KINKEL, ROSKILL and ACKNER agreed with the speeches of Lord Templeman and Lord
Oliver of Aylmerton and would allow the appeal for the reasons they gave, Lord
Roskill adding that he would dismiss the appeal for those reasons as well as
for those given by Sir Nicolas Browne-Wilkinson V-C in Kumar v Dunning
[1987] 3 WLR 1167.
