Landlord and tenant — Surety covenant — Unusual covenant by surety in lease — Whether covenant ran with reversion — Purported express assignment of covenant after reversion had been assigned — Appeal from decision of Court of Appeal dismissed — P & A Swift Investments v Combined English Stores Group plc followed
in a 21-year lease a surety covenanted with the landlords that, in the event of
the tenants’ going into liquidation and their lease being disclaimed, the
surety would accept a lease of the demised premises from the landlords for a
term equal to the unexpired residue of the disclaimed lease and on the same
terms and conditions — The landlords after some years assigned the freehold
reversion to the present respondents but without any express assignment of the
surety’s covenant — Later the tenants went into liquidation and the liquidators
disclaimed the lease — The original landlords then purported to assign to the
respondents the benefit of the surety’s covenant — The respondents called upon
the surety to take a lease in accordance with the covenant and, on its failure
to do so, brought proceedings against the surety, claiming specific performance
— They succeeded before Rose J and the Court of Appeal, from whose decision the
surety now appealed to the House of Lords
of Appeal there had been two issues — The first was whether the benefit of the
surety’s covenant passed automatically to the assignees of the reversion — The
second was whether, if the benefit did not so pass, it passed under the
subsequent express assignment — On the first issue it was conceded that the Court
of Appeal was bound by its previous decision in the case of Kumar v Dunning to
decide against the surety; that case was good law unless or until it was
overruled by the House of Lords — On the second issue, the court held, in
favour of the surety, that the purported assignment of the covenant after the
assignment of the reversion was a nullity — Leave was given to appeal to the
House of Lords on both points
present appeal was heard the House had, in P & A Swift Investments v Combined English
Stores Group plc, expressly approved the decision in Kumari v Dunning — They
had decided in the Swift case that the surety’s covenant to pay the rent
touched and concerned the land and the benefit of it ran with the reversion
without express assignment — In the present case the House held that in
principle the surety’s covenant was indistinguishable from that in the Swift
case — The House rejected a submission that the covenant to take a lease
conferred an option on the landlords to create a new lease, contrary to the
rule that (with the anomalous exception of an option for the tenant to renew)
such a provision did not touch and concern the land and was thus not exempt
from the rule against perpetuities — The House held that the options cases, on
which the appellants relied, did not apply to the position where, as in the
present case, a new lease was simply substituted for an old lease which,
through no fault of the lessors, had ceased to be effective — As Lord Templeman
had said in the Swift case, ‘A surety for a tenant is a quasi tenant who
volunteers to be a substitute or twelfth man for the tenant’s team and is
subject to the same rules and regulations as the player he replaces’ — The
issue as to the purported late assignment of the benefit of the covenant was
not discussed in the House — Appeal dismissed
The following
cases are referred to in this report.
Hunter’s
Lease, Re [1942] Ch 124
Muller v Trafford [1901] 1 Ch 54
Swift (P
& A) Investments v Combined English Stores
Group plc [1988] 3 WLR 313; [1988] 2 All ER 885; [1988] 2 EGLR 67; [1988]
43 EG 73, HL
Vyvyan v Arthur (1823) 1 B&C 410; 2 D&R 670; 1 LJ (os) KB
138
Woodall v Clifton [1905] 2 Ch 257
This was an
appeal by Ingall Industries plc, the surety, from the decision of the Court of
Appeal (reported at [1988] 2 EGLR 44) dismissing their appeal from the decision
of Rose J in favour of the present respondents, Coronation Street Industrial
Properties Ltd, whereby Ingall Industries plc were held liable as surety to
accept a new lease of premises at Willenhall, Walsall.
Gavin Lightman
QC and Miss Elizabeth Weaver (instructed by George Carter & Co) appeared on
behalf of the appellants; Roger Ellis (instructed by Wigram & Co)
represented the respondents.
In his speech
LORD TEMPLEMAN said: The question raised by this appeal is whether a covenant
by a surety to accept a lease replacing a lease disclaimed on behalf of an
insolvent tenant is a covenant which touches and concerns the land so that the
benefit of the covenant runs with the reversion.
By a lease
dated August 30 1972, made between the original landlords, Griffiths Bentley
& Co Ltd of the first part, the tenant, Griffiths Bentley (Engineers) Ltd
of the second part, and the appellant surety, Ingall Industries plc (then
Ingall Industrial Ltd), of the third part, premises at Willenhall, Walsall,
were demised to the tenant for the term of 21 years from August 30 1972 at a
rent and subject to covenants on the part of the tenant to pay the rent, to
repair and decorate and to perform and observe other obligations which touched
and concerned the land so as to be enforceable by assignees and successors in
title of the original landlords against the tenant and the successors in title
of the tenant without express assignment of the benefit of the tenant’s
covenants. Clause 5 of the lease was in these terms:
5 The surety at the request of the lessee and
in consideration of the demise hereinbefore contained hereby covenants and
guarantees with and to the lessor that the lessee or the surety will at all
times hereafter duly pay the rents and other sums hereby reserved . . . and
duly perform and observe all the covenants on the part of the lessee and
conditions herein contained and also that the surety will at all times
hereafter pay and make good to the lessor on demand all losses costs, damages
and expenses occasioned to it by the non-payment of the rent and other sums or
any part thereof or the breach or non-observance of any of the said covenants
and conditions . . . and in the event of the tenant (being a company) going
into liquidation or (being an individual) becoming bankrupt and this lease
being disclaimed by a liquidator or a trustee in bankruptcy . . . the surety
hereby covenants with the lessor that it will accept from the lessor a lease of
the demised premises for a term commencing on the date of such disclaimer and
continuing for the residue then unexpired of the term hereby granted such lease
to be at the cost of the surety and to contain the like lessee’s and lessor’s
covenants respectively and the like provisos and conditions in all respects
(including the proviso for re-entry but excluding any provisions for a surety)
and to reserve the like rents and other sums as are herein reserved and made
payable provided always that the surety shall not be bound to accept any such
lease unless the lessor within the period of three months after such disclaimer
serves upon the surety a notice in writing so to do . . .
On August 4
1981 the original landlords conveyed to the respondent landlords, Coronation
Street Industrial Properties Ltd, the freehold reversion of the premises
demised by the lease subject to and with the benefit of the lease. The benefit
of the covenant by the surety contained in the lease was not expressly
assigned.
On May 18 1984
the tenant went into voluntary liquidation. Pursuant to an order of the
Companies Court made on February 4 1986 the liquidators of the tenant on March
11 1986 disclaimed all the interests of the tenant in the lease. On June 5 1986
the respondent landlords gave notice to the surety requiring the surety to take
a lease of the demised premises in conformity with the covenant on the part of
the surety contained in the lease. In these proceedings the respondent
landlords sought and obtained an order requiring the surety to take a lease
accordingly. The surety appeals on the grounds that the covenant on the part of
the surety to take a lease did not touch and concern the land. Therefore the
benefit of the surety’s covenant does not run with the reversion and in the
absence of an express assignment of the benefit of the covenant, the respondent
landlords cannot enforce the covenant.
In P &
A Swift Investments v Combined English Stores Group plc [1988] 3 WLR
313* this House considered the covenant by a surety in a form set out at p 317
and indistinguishable from the present covenant by the surety. In that case the
tenant defaulted in payment of rent, went into voluntary liquidation, and
disclaimed the lease. An assignee of the reversion sought and was held entitled
to be paid rent on the grounds that the covenant by the surety to pay the rent
touched and concerned the land and the benefit of the covenant ran with the
reversion without express assignment of the benefit of the covenant. Lord
Oliver of Aylmerton reaffirmed, at p 318, the validity of the pronouncement by
Best J in Vyvyan v Arthur (1823) 1 B & C 410 at p 417 to the
following effect:
The general
principle is, that if the performance of the covenant be beneficial to the
reversioner, 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.
*Editor’s
note: Also reported at [1988] 2 EGLR 67; 43 EG 73.
Lord Oliver
made the following observations [1988] 3 WLR 313 at p 320:
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 reversioner or 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.
The surety’s
obligation to take a new lease after a disclaimer gives effect to the surety’s
obligation to procure compliance with the terms of the old lease. In these
circumstances, it seems to me that the considerations which led this House in
the Swift Investments case [1988] 3 WLR 313 to hold that the covenant by
the surety touched and concerned the land apply in equal measure to the whole
covenant including the covenant to take a new lease after disclaimer. On behalf
of the surety, however, Mr Lightman, in the course of an ingenious and
painstaking submission, argued that the decision of this House in the Swift
Investments case applied only to that part of the surety’s covenant which
deals with the payment of rent and performance and observance of the tenant’s
covenant and did not deal with the second part of the covenant by the surety
which obliges the surety to accept a lease after disclaimer.
Mr Lightman
submits that the covenant by the surety to take a lease conferred an option on
the landlords to create a new lease. A provision in a lease which provides for
the creation of a new lease only touches and concerns the land, he submitted,
in the case of a covenant to renew the lease and that exception to the general
rule is anomalous and should not be extended.
The rule
against perpetuities does not apply to a covenant which touches and concerns
the land; the courts, anxious to limit the grant of estates in the future to a
perpetuity period, will not extend the
concerns the land demised. In Muller v Trafford [1901] 1 Ch 54 a
covenant by a mesne landlord to grant a further term to a subtenant, if the
mesne landlord acquired a further term from the head landlord, was held not to
be a covenant for renewal and therefore not to run with the land. Farwell J
said, at pp 60-61:
It is said
that this is a covenant running with the land. If so, then no question of
perpetuity would arise. A covenant to renew has been held for at least two
centuries to be a covenant running with the land . . . . Now, if, as has been
argued, the rule that covenants for renewal run with the land, and are not,
therefore, within the rule of perpetuity, is a mere technical rule, resting on
authority and not on any rational principle, then I answer technicality with
technicality, and say that this is not a covenant for renewal at all; and I
should not be prepared to extend what has been stated in the arguments to be an
anomaly, without any reason underlying it, to a case which is not strictly a
covenant for renewal.
Similarly, in Woodall
v Clifton [1905] 2 Ch 257, an option conferred on a tenant to
purchase the fee simple was held not to touch and concern the land demised.
Romer LJ said, at p 279:
The covenant
is aimed at creating, at a future time, the position of vendor and purchaser of
the reversion between the owner and the tenant for the time being. It is in
reality not a covenant concerning the tenancy or its terms. Properly regarded,
it cannot, in our opinion, be said to directly affect or concern the land,
regarded as the subject matter of the lease, any more than a covenant with the
tenant for the sale of the reversion to a stranger to the lease could be said
to do so. It is not a provision for the continuance of the term, like a
covenant to renew, which has been held to run with the reversion, though the
fact that the covenant to renew should be held to run with the land has by many
been considered as an anomaly, which it is too late now to question, though it
is difficult to justify.
In Re
Hunter’s Lease [1942] Ch 124 a covenant by a landlord to pay a sum to the
tenant on the expiration or sooner determination of the lease was held not to
touch and concern the interest which was the subject-matter of the lease and
Uthwatt J said, at p 131:
To hold that
the burden of the covenant here in question runs with the reversion would be to
extend the operation of the rule stated by the Court of Appeal to be anomalous
but a covenant to renew touches and concerns the thing demised.
It does not
seem to me that the option cases upon which Mr Lightman relies were concerned
with the position where a new lease is substituted for an old lease which,
through no fault of the landlords, ceases to be effective. It is true that the
covenant by the surety in the present case involves the creation of a new
tenancy and the creation of a new landlord and tenant relationship, but the new
tenancy which replaces the old tenancy is no more perpetuitous than the old.
For the benefit of the creditors of an insolvent tenant company and in order to
enable the assets of the insolvent company to be distributed, the Companies
Acts enable the liquidator to disclaim a lease with the consent of the court.
Such consent must have been given in the present instance in the belief that
the landlords would not be prejudicially affected by the disclaimer. The new
tenancy is substituted for the old disclaimed tenancy with the substitution of
the surety for the tenant because the surety covenanted in the first place to
ensure that the tenant’s obligations under the old tenancy would be performed
and observed throughout the term granted by the old tenancy. The landlords
insisted on a covenant by a surety in the old lease in order to provide against
the very possibility which happened, namely, the insolvency of the tenant. In
these circumstances I adhere to the views which were expressed in P & A
Swift Investments v Combined English Stores Group plc [1988] 3 WLR
313 at p 316:
A surety for
a tenant is a quasi tenant who volunteers to be a substitute or twelfth man for
the tenant’s team and is subject to the same rules and regulations as the
player he replaces.
As a result of
the disclaimer the tenant retires mortally wounded and the surety is the
substitute. The covenants by the surety in the old lease touch and concern the
land demised and the benefit of and the right to enforce that covenant ran with
the reversion and became vested in the respondent landlords when the old
tenancy was assigned to the respondent landlords.
Accordingly, I
would dismiss this appeal.
Agreeing, LORD
JAUNCEY OF TULLICHETTLE said: I have had the advantage of reading in draft the
speech of my noble and learned friend Lord Templeman, with which I entirely
agree, and I wish to add only a few words of my own. The gravamen of Mr
Lightman’s argument was that, with the single anomalous exception of an option
to the tenant to renew his lease, options in leases did not touch and concern
the land and consequently did not run with the land. The provision with which
this appeal was concerned was an option in favour of the lessor. I very much
doubt whether it is correct so to describe the provision. I would prefer to
describe it as a contingent obligation by the surety on the lease being
disclaimed on behalf of the lessee to accept a lease of the premises for the
unexpired portion of the lease. The contingency is a timeous demand being made
by the lessor.
Mr Ellis was,
in my view, well founded in submitting that the second part of the covenant was
analogous to the first part. Indeed I would go further and say that it was both
analogous and complementary thereto. The first part protects the lessor’s
interest by guaranteeing performance of the lessee’s obligations to the lessor
while the lease subsists. The second part protects that interest by covenanting
to accept a lease for the residue of the term on the same conditions in the
event of the lease being disclaimed on behalf of the lessee. The second
covenant satisfies the working test suggested by Lord Oliver of Aylmerton in P
& A Swift Investments v Combined English Stores Group plc [1988]
3 WLR 313 at p 320. If the lessor had not conveyed the reversion to the
respondents the surety would have been bound on a disclaimer by the lessee’s
liquidator to accept a lease if called upon timeously to do so. He would have
been similarly bound if the lessor had previously conveyed the reversion and
had expressly assigned the benefit of the surety’s covenant. Why, then, should
he be able to avoid the performance of his covenant because events have
occurred which affect neither the extent of the obligations of the lessee nor
of himself and over which neither of them had any control? So far as the surety is concerned, the only
effect of the conveyance of the reversion is that he receives a lease from,
pays rent to and otherwise performs his obligations as tenant to someone other
than the original lessor. In my view, neither justice nor common sense requires
that he should be relieved of his obligations in these circumstances.
LORDS KEITH OF
KINKEL, BRANDON OF OAKBROOK and LOWRY agreed that the appeal should be
dismissed and did not add anything.
