Landlord and tenant — Arrears of rent — Liability of original tenant — Agreement with occupying tenant by assignment releasing assignee from all claims under the lease — Whether release by accord and satisfaction releases an intermediate assignee of a lease
dated May 19 1972 the plaintiff granted a term of a factory unit at Eley’s
Estate, Eley Road, Enfield, to CWC Tempest Ltd (‘the original tenant’) for 20
years from March 25 1972 — On February 18 1974 the plaintiff granted licence to
the original tenant to assign the term to the second defendant, CT London Ltd,
the second defendant covenanting with the plaintiff to pay the rent and observe
and perform the covenants and conditions on the part of the lessee during the
residue of the term — The second defendant acquired the term by an assignment
dated February 18 1974 — On January 8 1986 the plaintiff granted its licence to
assign the term to the first defendant, who covenanted with the plaintiff to
pay the rent and observe the covenants during the residue of the term — By an
assignment made on January 8 1986 the first defendant acquired the term of the
lease — On July 7 1987 the present action was commenced to recover arrears of
rent of £11,566 from the first and second defendants — On February 26 1988 the
plaintiff took out a distress warrant and on March 2 1988, the day the bailiffs
entered and took walking possession, the first defendant agreed to surrender
the lease ‘in consideration of you accepting the goods set out in the inventory
below in full and final settlement of all claims and demands against me under
the terms of the . . . lease’ — That document was accepted and ratified by the
plaintiff — Following a demand on behalf of the plaintiff, the second defendant
compromised with the plaintiff, paying £18,000 by way of arrears of rent and
interest, having been given credit for the value of the first defendant’s goods
which had been sold for the sum of £309 — Upon seeking to recover this sum and
costs from the first defendant under the covenant for indemnity in the
assignment of January 8 1986, the second defendant became informed, for the
first time, of the agreement of March 2 1988 — In the present proceedings the
second defendant counterclaimed for a rescission of the compromise agreement
and repayment of the £18,000 on the basis of misrepresentation — Following
amendments to pleadings and a concession by the plaintiff, the sole issue at
trial between the parties was whether the agreement of March 2 1988 amounted to
a release by accord and satisfaction releasing the second defendant from its
covenant with the plaintiff
can be drawn from the decided authorities — First, a release of one joint
contractor releases the others as there is only one obligation — A release may
be under seal or by accord and satisfaction, but a covenant not to sue is not a
release — It is a question of construction of the contract between the creditor
and the joint debtor in the light of the surrounding circumstances whether the
contract amounts to a release or merely a contract not to sue — Second, the
same principles apply to a contract between the creditor and one of joint and
several debtors — The document of March 2 1988 was a release from the
obligations under the lease purchased by an immediate surrender of the term and
the goods in the inventory; this was a clear case of accord and satisfaction —
The plaintiff could not say that it never intended to release its rights
against the second defendant
The following
cases are referred to in this report.
Allied
London Investments Ltd v Hambro Life Assurance
Ltd (1983) 269 EG 41, [1984] 1 EGLR 16
Armitage,
Re, ex parte Good (1877) 5 ChD 46; 6 LJ Bcy 65; 36
LT 338; 25 WR 422, CA
Baynton v Morgan (1888) 22 QB 74
EWA, Re,
A Debtor [1901] 2 KB 642; 70 LJKB 810; 85 LT 31; 49
WR 642, CA
House
Property & Investment Co Ltd v Bernardout
[1948] 1 KB 314; [1947] 2 All ER 753
Matthey v Curling [1922] 2 AC 180
Nicholson v Revill (1836) 4 A&E 675; [1835-42] All ER Rep 148; 6
Nev & MKB; 1 Har & W 756; 5 LJKB 129
North v Wakefield (1849) 13 QB 536
Selous
Street Properties Ltd v Oronel Fabrics Ltd
[1984] EGD 360; (1984) 270 EG 643 & 743
Warnford
Investments Ltd v Duckworth [1979] Ch 127;
[1978] 2 WLR 741; [1978] 2 All ER 517; (1977) 36 P&CR 295
Watters v Smith (1831) 2 B&A 889
This was a
claim by the plaintiff landlord, Deanplan Ltd, in respect of arrears of rent,
interest and costs arising out of a lease dated May 19 1972 and made between
the plaintiff and CWC Tempest Ltd relating to a factory unit at Eley’s Estate,
Eley Road, Enfield. The claim against the first defendant, Salah Mahmoud, was
for breach of the covenant to pay rent under the lease. The second defendant,
CT London Ltd, was an immediate assignee holding the term of the lease prior to
its assignment to the first defendant.
Constance
Whippman (instructed by B Erlich) appeared for the plaintiff; Nicholas Harrison
(instructed by Rowe & Maw) represented the second defendant.
Giving
judgment, JUDGE BAKER said: The issue in this case is whether an
original lessee, or an intermediate assignee of a lease, who has given a direct
covenant to pay the rent and observe the covenants, is released from liability
following an agreement between the lessor and the occupying assignee of the
lease, under which the lessor takes a surrender of the lease and some of the
assignee’s goods in return for releasing the assignee from all claims under the
lease. In short, does the release by accord and satisfaction of one covenantor
release other covenantors undertaking the same obligation?
The issue
would appear to be a novel one so far as the researches of counsel go. Before
addressing it, I must set out the facts, which are not in dispute to any
significant degree.
By a lease
dated May 19 1972 and made between the plaintiff, Deanplan Ltd (‘Deanplan’) and
CWC Tempest Ltd (‘Tempest’) and some sureties, Deanplan demised a factory unit
on its industrial estate, known as Eley’s Estate, Eley Road, Enfield, to
Tempest for a term of 20 years from March 25 1972 at a rent of £3,850 for the
first five years, with reviews at five-yearly intervals thereafter. There were
certain additional rents for insuring and servicing the common parts. The lease
contained the normal covenants for the payment of rent, full repairing
covenants, a user covenant confined to the business of ‘home improvement
contractors’, and the usual qualified covenant against assignment, to which was
appended the following proviso:
Provided
always that every assignment or underlease or tenancy of any kind relating to
the premises shall, if required by the landlord, contain a covenant by the
assignee and the lessee or tenant, as the case may be, directly with the
landlord to observe and perform the covenants and conditions in this lease
contained, and covenants directly with the landlord in the terms of subclauses
(a) and (b) hereof, and covenants that any subunderleases, whether mediate or
immediate, shall contain covenants with the landlord in the terms of such subclauses.
The lease
contained the usual proviso for forfeiture for non-payment of rent and failure
to perform other covenants and concluded with a covenant by the sureties in the
normal form.
By a licence
made on February 18 1974 between Deanplan of the first part, Tempest of the
second and the second defendant, CT London Ltd (‘CT’), of the third part,
Deanplan granted its licence to assign the lease to CT and consented to the
user being changed to that of the business of ‘light engineering works’. CT
covenanted with Deanplan that:
as from the
date when the estate and interest in the lease shall be assigned to it,
pursuant to the licence hereinbefore contained and thenceforth during the
residue of the term granted by the lease, the assignee will pay the rent thereby
reserved and observe and perform the covenants and conditions on the part of
the lessee therein contained. In particular, without prejudice to the
foregoing,
the premises demised by the lease without the consent in writing of the
landlord for that purpose having obtained.
On the same
day (February 18 1974) the lease was assigned by Tempest to CT in consideration
of the sum of £8,000 paid by CT to Tempest.
By a licence
made on January 8 1986 between Deanplan and CT and Mr Salah Mahmoud (the first
defendant), Deanplan granted its licence to assign the lease to Mr Mahmoud and
Mr Mahmoud covenanted with Deanplan to pay the rent and observe the covenants
during the residue of the term. On the same day an assignment was entered into
between CT and Mr Mahmoud, and the first clause of that assignment is that:
In
consideration of the sum of £4,000 paid by the vendor to the purchaser
— that is by
CT to Mahmoud —
the vendor as
beneficial owner assigned to the purchaser the property to hold to the
purchaser for the unexpired residue.
Going down to
clause 3:
The purchaser
hereby covenants with the vendor by way of indemnity only that the purchaser
and the persons deriving title under him will henceforth and at all times duly
pay all rents becoming due under the lease and observe and perform all
covenants, agreements and conditions therein contained on the part of the
tenant or persons deriving title under it to be observed and performed, and
also will at all times keep the vendor and his successors in title effectively
indemnified against all proceedings, costs, claims, expenses and liabilities in
respect thereof.
So, Mr Mahmoud
was paid £4,000 to take the lease. At the date of this assignment the annual
rent payable under the lease was £9,800. The rent as from March 25 1987 (the
final review date) was agreed between Deanplan and Mr Mahmoud at £12,600.
Mr Mahmoud was
not a satisfactory tenant and soon fell into arrears with the rent. The rent from
June 1986 (just six months after taking over) was not paid on time. On January
29 1987 Deanplan recovered judgment in Romford County Court for part of the
outstanding rent. Matters did not improve, so on July 7 1987 the present action
was commenced, by which time the arrears amounted to £11,566. The claim was
simply for arrears of rent and interest. There was no claim for possession
pursuant to the proviso for forfeiture. CT was joined as second defendant, but
the statement of claim disclosed no cause of action against it, as it failed to
plead the covenant contained in the licence of February 18 1974. It was not the
original lessee, so was not liable under the covenant to pay rent in the lease
itself after assigning over.
A summons
under Ord 14 was due to be heard on November 23 1987. On November 16 Mr Mahmoud
through his solicitors stated that he was selling the property and ‘it is hoped
that contracts will be exchanged prior to the 23rd of November. If so, our
client states that all arrears of rent will be paid when the sale takes effect,
which we understand will be very shortly’. In consequence, with the consent of
all parties the Ord 14 summons was adjourned generally. Nothing came of the
proposed sale. In January 1988 Deanplan wished to gain access to allow its
insurers to inspect and affix sprinklers. Mr Mahmoud made difficulties about
this, whereupon Deanplan demanded entry under the clause allowing entry to view
the condition of the premises. There was no response to this nor was there any
payment of rent or news of any proposed assignment.
On February 26
1988 Deanplan took out a distress warrant in respect of the outstanding rent,
then said to amount to £17,866. On March 2 1988 two bailiffs attended to
execute the warrant. According to Mr Mahmoud, he admitted them because they
pretended to have come on behalf of the insurers. Be that as it may, they
gained access and proceeded to make an inventory of the goods there, mostly
supplies of cloth, particularly linings. Mr Joseph Kasner, a director of Deanplan,
who later saw the interior of the premises, says that they were four-fifths
empty, the goods occupying only about one-fifth of the premises. He estimated
the goods to be worth about £3,000. Mr Mahmoud thought they were worth
something like £60,000, although he admitted that to realise that sum would
require careful and skilled marketing. When half of the goods were subsequently
put up for sale by auction they realised £309. That, however, is to anticipate.
On the day
that the bailiffs entered and took walking possession (March 2 1988), there
ensued negotiations by telephone between Mr Mendelson, Deanplan’s solicitor,
and Mr Mahmoud, whose proposals and comments were relayed to Mr Mendelson by
one of the bailiffs. The upshot was a written document signed by Mr Mahmoud
and, as I understand it, by the other bailiff. It is addressed to Deanplan Ltd
and dated March 2 1988 and it reads:
Dear Sirs,
Re: Factory premises at Eley’s Estate, Eley Road, Edmonton, London. I hereby
surrender the lease at the above premises dated 19th of May, 1972 in
consideration of you accepting the goods set out in the inventory below in full
and final settlement of all claims and demands against me under the terms of
the said lease and specified in the Notice of Distress dated the 2nd of March,
1998.
And that is
signed by Mr Mahmoud and a Mr D J Bennett. The inventory consists of three
pages listing items of cloth. The document was accepted and ratified by
Deanplan, as one can see in para 6 of the reply:
Whereby, the
Plaintiff admits for the purposes of this action, that on the 2nd of March,
1988 it agreed to accept a surrender of the lease from the First Defendant, and
that by its agents, D Moore, Certified Bailiffs, and as advised by the Third
Party, it recorded this surrender in a Memorandum of the 2nd of March, 1988.
Mr Kasner’s
explanation for thus acting and accepting the proposal was the following in his
evidence to me:
I had a phone
call from Mr Mendelson [the solicitor]. He asked me if I would agree to accept
half of the stock of Mr Mahmoud on condition that I would not go to court
against him. I said I agreed. I didn’t care very much whether it was a half or
a seventh. The goods were of no value to me. I wanted to show him I wanted the
premises. If I did not take the goods out, he would stay there. I did not
intend to discharge CT. I gave the solicitors instructions to pursue CT after
the surrender. I acted in good faith.
In consequence
of the agreement, Mr Mahmoud gave up possession to Deanplan. Within a day or so
the goods had been divided between Deanplan and Mahmoud and removed from the
premises. CT had no part in these negotiations and did not immediately become
aware of their outcome. On April 22 1988 Deanplan, through its solicitors,
demanded payment of the balance of the rent, giving credit for the £309. In
their letter, the solicitors did not disclose that there had been a release of
all claims against Mr Mahmoud. On the basis of that letter, CT came to a
compromise with Deanplan by which it paid £18,000. It then sought to recover
this sum and costs from Mr Mahmoud under the covenant for indemnity contained
in the assignment of January 8 1986. Thereupon, it was informed of the
agreement of March 2 1988. In these proceedings CT counterclaimed for a
rescission of the compromise and repayment of the £18,000 on the basis of
misrepresentation. During the first day of the hearing and following amendments
of the counterclaim, which I allowed, Deanplan conceded that the compromise
agreement between it and CT should be set aside, leaving as the sole issue
whether the agreement reached on March 2 1988 between Mr Mahmoud and Deanplan,
and its performance by Mr Mahmoud, is a defence to the claim of Deanplan
against CT. Accordingly, the issue arises as stated at the outset of this judgment.
Before passing
to it, I should say that I heard oral evidence from Mr Mahmoud, called on
behalf of CT, and Mr Joseph Kasner, the director of Deanplan. I have already
made some reference to it. I was much more impressed by Mr Kasner’s evidence
than that of Mr Mahmoud, but I do not think that they differ on any material
point. It is obvious that Mr Mahmoud was impecunious.
Mrs Whippman’s
submissions on behalf of the plaintiff landlord are simple and straightforward.
In the 1974 licence to assign, CT, then itself about to take an assignment of
the lease, entered into a direct covenant with the landlord to pay the rent and
observe and perform the covenants and conditions on the part of the lessee
contained in the lease during the residue of the term. That amounted to a
separate and independent cause of action. The only defence available to CT
would be that the covenants had been performed, either by itself or some other
covenantor or assignee. If it had to perform them, it has a remedy over and
against its assignee by an express covenant for indemnity contained in the
assignment to Mr Mahmoud in 1986. She put the case as high as this: that a
discharge by accord and satisfaction is not a performance, so that CT would be
liable for the whole of the unpaid rent. The plaintiff was not bound to give
credit for the value of the goods sold (£309), although it was proposing to do
so.
Mr Harrison’s
careful and closely argued submissions opened by pointing out what he described
as the ‘commercially absurd consequences of the landlord’s case’. Suppose a
landlord claims against an assignee for rent and is met by a counterclaim for
damages for breach of the landlord’s covenants: suppose for that that the claim
and counterclaim are compromised on the footing that neither
Harrison, the landlord would be entitled to sue the original lessee for the
rent, notwithstanding the compromise. The original lessee could then recover
from the assignee under the indemnity. This possibility demands a careful
analysis of the basis of the liability of the original lessee and of an
intermediate assignee who enters into a direct covenant with the landlord.
For the
purposes of the analysis, there is no difference between those two cases. Mr
Harrison accepts that the liability of the original lessee and other direct
covenantees is a primary liability and not a collateral or secondary liability,
eg by way of surety. He further accepts that the obligations of the original
lessee and an assignee are not joint. However — and this is the crucial point —
while the liability of each is several only, it is not cumulative; payment by
one discharges the other. Normally, one meets a non-cumulative several
liability only where it is annexed to joint liability. But there is no reason
why it should not exist independently of joint liability.
In any event,
it is instructive to consider the effect of an accord and satisfaction reached
with one joint and several contractor on the liability of the other. Mr
Harrison submits that the discharge of one joint and several debtor by accord
and satisfaction discharges all the others, unless there is an intention to the
contrary which may require express reservation of rights against the others. If
this were not done, the benefit to the released debtor would be nullified by
the operation of the indemnity covenant. Moreover, the covenant to perform on
the part of the original lessee is merely a covenant to perform in so far as
another party, similarly liable, has not performed or otherwise discharged the
obligation. These arguments apply just as much where there is a non-cumulative
several liability, not annexed to a joint liability, as they do where it is so
annexed.
Both counsel,
in support of their respective submissions, referred me to a number of
authorities, to which I must now turn. I will deal first with those concerned
with covenants in leases and then to those concerned with other joint and
several obligations. I was also referred to passages in Professor Glanville
Williams’ monograph on Joint Obligations, published in 1949, and to the
treatment of the same subject in Chitty on Contracts, 26th ed (1989),
paras 1301 to 1314, especially para 1307.
The first case
in the former group (landlord and tenant cases) is the decision of the Court of
Appeal in Baynton v Morgan [1888] 22 QB 74. The plaintiff
landlord had demised premises to the defendant for 21 years. The premises had
been assigned. The assignee surrendered a small part of the premises to the
landlord and then assigned the remainder of the premises to an assignee who
became bankrupt, hence this claim for rent against the original assignee. It
was held that the liability of the original lessee was not extinguished by the
partial surrender. It had been argued that after assignment the liability of
the original lessee became one of suretyship which was discharged following an
alteration of the original contract without the consent of the guarantor. The
court rejected this argument. The liability of the original lessee was, and
remained, a primary liability. It was not affected by the surrender of part of
the premises, however large, although it would be terminated by a surrender of
the whole as then the term would have come to an end. The surrender of part did
not amount to an eviction of the assignee, it resulted from an agreement
between the assignee and the landlord — and one can see details of that in the
report of the divisional court at 21 QBD pp 101 and 102. By assigning, the
defendant, the original lessee, had given the assignee power to assign again,
which would include the power to surrender, in whole or in part, to the
landlord. There was an unresolved discussion in the case as to whether the
lessee continued to be liable for the entire rent or merely for an apportioned
part of it, which is all that the plaintiff claimed. There was some discussion
as to hardship, but that could cut both ways according to whether a large or
small part was surrendered, so that hardship was not a matter which could be
taken into account. Those were the main points discussed. There was nothing
bearing on the present question, whether a release by accord and satisfaction
of a claim for rent against an assignee would release the original lessee and
other covenantors.
The next case,
Matthey v Curling [1922] 2 AC 180, does contain some discussion
which is material. The decision itself is not of assistance. During the
currency of a lease a house was requisitioned by the military authorities.
Shortly before the end of the term and while it was still requisitioned it was
destroyed by fire. The issue concerned the liability of the lessee under the
repairing and insuring covenants. Defences of eviction by title paramount,
frustration and impossibility of performance were raised by the lessee and
rejected. The lease had been assigned and the relationship as between the
original lessee and the assignee was also discussed, though it did not play a
very important part in the case. However, in the judgment of Younger LJ in the
Court of Appeal, this passage occurs, at p 208 of the report:
And here it
is convenient to refer pointedly to the fact that it is Mr Matthey, the
original lessee, and not the Richardson executors, his assignees, who is defendant
to the action and the respondent on this appeal, as well as to the further fact
that it was these executors, and not Mr Matthey, who were the real and only
actors in the matters to which I have just been referring. In my judgment,
however, this is not of any importance as touching the liability of the
defendant under his covenants. The transactions just referred to of the
executors, his assignees, in relation to the lease bind him, in my judgment, in
a question with the plaintiff as if they had been carried out by himself. The
position of a lessee after assignment towards his lessor in relation to the
covenants in his lease is concluded in this Court, and I doubt not in all
Courts, by the decision of Baynton v Morgan. The lessee is not a
surety for the assignee, any more than is the assignee the agent of the lessee.
The lessee in a lease — the defendant so covenanted in this case — covenants in
effect that he or his assignee will perform the covenants and observe the
conditions contained in it; and when, as in the present instance, the defendant
sets up no performance by himself of the covenants sued on, his defence must be
either that his assignee has performed them or that his assignee is in some way
as between himself and the lessor absolved from performance. Baynton v Morgan
shows, amongst other things, that this last contention may not always be relied
on by the lessee; and accordingly the position of the defendant is not put
otherwise than favourably to himself if it is said that the measure of his liability
here, that of a lessee after an assignment, is the performance or
non-performance of the covenants in question by his assignees when he cannot
and does not aver any performance by himself.
In this
passage, Younger LJ recognises that an original lessee may have a defence if
the assignee not performing has in some way been absolved from performance. As
he goes on to point out, the contention may not always be relied on. For
example, the assignee may be absolved through the operation of the bankruptcy laws;
the classic case where an original lessee may have to pay. But there may be
cases where the landlord absolves his tenant from performance in ways which
release the other covenantors.
Lord Atkinson
in the House of Lords also discussed Baynton v Morgan but not in
a way which assists in the present case.
The next case
I mention is House Property & Investment Co Ltd v Bernardout
[1948] 1 KB 314. The assignee of a lease fell into arrears with the rent and
the landlords brought an action against him in 1941. He counterclaimed for
damages for breach of the covenant of quiet enjoyment and another claim
relating to the drains. Before the action came on for trial the defendant
applied for an adjustment of his liabilities under the Liabilities (Wartime
Adjustment) Act 1941. I need not go into the procedure under the Act. The
upshot was an arrangement endorsed by the court under which the rent was
reduced, the defendant paid a fixed sum and abandoned his counterclaim and the
lease was disclaimed. The effect of such an order under the Act is the same as
a discharge in bankruptcy. The present action was against the original lessee
for the balance of the outstanding rent. It was held that he was not absolved
as a consequence of the order made in the suit against the assignee. One of the
points taken on behalf of the lessee was that the proceedings before the county
court amounted to a compromise. Singleton J disposed of it as follows, at p
319:
The next
point taken by Mr O’Connor
— he was for
the lessee who was being sued —
was that in
any event there was a compromise before the county court judge. He reminded me
there was a counterclaim for £2,444 and that by the order the plaintiffs in
this action were released from any possible liability on the counterclaim. He
submitted that the order itself had made a compromise because it contained the
words ‘counterclaim withdrawn’ and because it dealt with the rent so that the
plaintiffs had no further claim in respect of it. In reply to that argument, Mr
Quass submitted that there was no evidence of any compromise at all. I take the
view that, having regard to the recitals and to the terms of the order, one can
read into the order itself the element of compromise, but again I do not think
it is important to the decision of this case; because the compromise, if
compromise it was, was between the plaintiffs and Jack Bernardout, and I do not
think it enures for the benefit of Joseph Bernardout, the defendant in these
proceedings.
I would not
regard those remarks as indicating that a compromise with an assignee could
never result in relieving the lessee from liability. It will be noted in that
case that the assignee, having obtained relief under the statute, was in the
position of one who had
co-covenantors; quite the contrary.
In Warnford
Investments Ltd v Duckworth [1979] Ch 127, Sir Robert Megarry V-C
held that the disclaimer of a lease by the liquidator of a company to which the
lease had been assigned did not relieve the original lessee from liability to
pay the rent throughout the remainder of the term. The original lessee was not
merely a guarantor or surety. The lease was determined only as between the
company and the landlord. The case has no direct bearing on the issues before
me, but the Vice-Chancellor’s judgment contains a full analysis of the original
lessee’s liability, admirably summarised, if I may say so, in the following
paragraph at p 137 G:
Generally
speaking, an original lessee prima facie remains liable to the reversioner for
the payment of the rent throughout the term, even after it has been assigned.
This is a direct and primary liability, though after an assignment it is
normally accompanied by rights of indemnity against the first assignee, and also,
where there have been further assignments, against the assignee in whom the
lease is for the time being vested.
The decision
of Walton J in Allied London Investments Ltd v Hambro Life Assurance
Ltd (1983) 269 EG 41, [1984] 1 EGLR 16 is more germane. In a licence to
assign a lease the potential assignee, a company, had covenanted with the
landlord to pay the rent and perform the covenants in the lease and that
covenant had been reinforced by a covenant given by a surety. The assignment
duly took place. The following passages from the judgment of Walton J describe
what happened thereafter. I am reading from the first page of the report, the
second column:
In due course,
the assignee underlet the premises comprised in the lease in two portions.
Thereafter, there were allegations of non-payment of rent, wants of repair, and
so forth, and ultimately there were no fewer than eight actions on foot: three
by the plaintiff against the assignee; one by the assignee against the
plaintiff; two actions by the assignee against its underlessees — one against
each — and two actions, one by each of its underlessees, against the assignee.
This legal
bonanza was obviously too good to last and ultimately matters were brought to a
head in a series of compromises, as a result of which the lease was forfeited
but the plaintiff abandoned all its money claims in the relevant action, other
than for arrears of rent, and — and for the present purposes this is the
crucial matter — the plaintiff released the surety unconditionally from his
personal guarantee contained in the licence of December 3 1973.
In the action
before Walton J, the landlord was suing the original lessee for the arrears of
rent. The lessee claimed that the release of the surety also released them from
liability. This argument was rejected by Walton J on the now familiar ground
that the lessee’s covenant was a primary liability, not that of a surety. In
the course of his review of the authorities, Walton J made extensive citations
from Baynton v Morgan, a case he described as ‘completely
decisive of the present case’, and also cited the passage from the judgment of
Younger LJ in Matthey v Curling, which I have already read, and
he concluded as follows:
These two
cases, then, make it perfectly clear that when he is sued, as in the present
case, on the covenants contained in the original lease, the original tenant’s
only possible defences are either, (1) that he has performed the covenants, or
(2) that the relevant assignee has performed the covenants, or (3) there has been
some other operation conducted upon a lease — for example, surrender of the
whole, which has put a complete end to the liability to pay rent. Short of
these three defences, there is no defence.
Although the
plaintiffs in that case had reached a compromise with the assignee and the
surety, it specifically did not involve releasing the assignee from the
liability to pay the arrears of rent. It was that liability for which the
original lessee was concurrently liable. Hence, that case is clearly
distinguishable from the case before me, where the liability of the assignee
has been discharged. The decision of Walton J went to the Court of Appeal, but
solely on a question of the date of the commencement of the interest on the
arrears. The appeal was dismissed: see [1985] 1 EGLR 45.
Finally in
this group of cases, I was referred to the decision of Hutchison J in Selous
Street Properties Ltd v Oronel Fabrics Ltd (1984) 270 EG 643,
described in the headnote, justifiably, as ‘an important and wide-ranging
decision’, the report of which extended over two issues of Estates Gazette.
For my purposes, it suffices if I say that one of the issues was whether an
original lessee is liable to pay a rent which has been increased by a variation
in the terms of the lease reached between the assignee and the landlord.
Hutchison J held that he was so liable, relying, inter alia, on Baynton
v Morgan and Allied London Investments Ltd v Hambro Life
Assurance Ltd. He founded himself on the principle that an alteration of
the terms of the lease agreed between the landlord and the assignee binds the
original lessee because the assignee has been put into the shoes of the
original lessee and can do all such things as the original lessee could have
done. That does not affect the issue with which I have to deal.
That concludes
the review of the cases concerned with covenants in leases, and none deal with
the issue here of a release of a covenantor by accord and satisfaction
operating as the release of another covenantor. The dictum of Younger LJ in Matthey
v Curling recognises the possibility.
I now turn to
the cases on joint and several debts in other branches of the law to which I
was referred.
The earliest
is Watters v Smith (1831) 2 B&A 889. The plaintiff had sued
one member, Hunter, of a committee of the management of a hospital which had
engaged him. Before the pleadings had got beyond the declaration the case was
compromised. Under it, the member paid part of the debt and costs to be taken
for the debt and costs in the action. The plaintiff then sued another member of
the committee for the balance. It was held that the other members of the
committee were not discharged. Lord Tenterden CJ saw the question thus:
Whether the
plaintiff intended to discharge the whole debt or only relieve the party
proposing to pay a proportion of the debt.
Lord Tenterden
CJ went on to point out that the first defendant would not have been relieved
from having to contribute to the defendant in the second case if the latter had
been compelled to pay a larger portion than his share. As might be expected,
the judgment of Parke J sets out the principles with precision. At p 894 of the
report:
It is not
necessary to consider what would have been the effect of the payment of £20 if
it had been made in full satisfaction of the demand against Hunter. If the case
rested upon this, it might be a bar to the action, on the authority of Longridge
v Dorville. But I think that question does not arise here from the
facts. Looking at the terms of the agreement as contained in the letter from
Hunter’s attorney, and the receipt, it is manifest that the payment was not
made in discharge of the plaintiff’s rights against all other parties; and the
result of the whole is, that it does not operate as a release, or matter which
could have been pleaded as an accord and satisfaction, but amounts merely to an
engagement not to sue Hunter, which can only be pleaded by himself; if the
action, therefore, had been brought against two parties, it would not have been
a discharge of both. Or, it may be considered as a release to one, qualified by
a reservation of the plaintiff’s rights against the other, as in Solly v
Forbes.
Taunton J adds
the point that a release given to one of two joint contractors enures to the
benefit of both. I emphasise the reference to ‘accord and satisfaction’ in the
judgment of Parke J, and it is also referred to in that of Taunton J. This
case, however, was one of joint contractors.
The next case
concerned joint and several contractors. It is Nicholson v Revill
(1836) A & E 675. Mr Harrison relies on it for the statement in the
judgment of Lord Denman CJ that:
The debtee’s
— an old word
for the creditor or payee —
discharge of
one joint and several debtor is a discharge of all.
It is
necessary, in my judgment, to look at the facts somewhat closely to see what
amounts to a discharge and how far the reasoning can be applied to the case not
of joint and several debtors but of several debtors alone, albeit all liable
for the same debt. The case was tried on special demurrer, that is a demurrer
based on specific objections to the form of the pleadings. The pleadings are
somewhat convoluted but must be referred to because they contain the facts, as
is normal in a demurrer. They open with a declaration based on two promissory
notes made on January 1 1832 by the defendant, John Revill, the younger,
promising to pay £110 13s 4d 25 months after date, and £56 13s 8d 31 months
after date. The plea or defence to this was that the notes were made jointly
and severally by the defendant’s father, John Revill, and Samuel Revill, as
well as by the defendant and that before the action the plaintiff, without the
defendant’s knowledge or consent, struck out the name of Samuel Revill on the
notes and wholly discharged him from liability. In the judgment, Lord Denman
states that the court need not inquire what the effect of a demurrer to that
plea would have been, thus hinting that if the plaintiff had then demurred, the
defence might not have been found sufficient. At all events, the plaintiff
pleaded over and in the replication or reply went on to state many additional
facts. From this it appeared that the father was the principal debtor in the
sum of £299. Initially, a note was given by the three parties as security for
payment of the sum. The note was unpaid and an action brought against the three
was compromised by the giving of three notes, one of January 1 1832 for 13
months in the sum of £52 18s 8d, and the
28 1834, before the payment dates of the second and third notes, Samuel Revill
offered and the plaintiff accepted £100 in discharge of his liability on the
three notes. It will be seen that the plaintiff obtained part payment on the
second note, the difference between £52 18s 8d and £100, ie £47 1s 4d, before
it was due. Hence, there is an element of consideration and the transaction can
be regarded as an accord and satisfaction. It was not simply a payment of part
of the debt. Having received that payment the plaintiff handed over to Samuel
Revill the first note and endorsed on the second (the note of £110 13s 4d)
‘received on account of Samuel Revill £47 1s 4d’, this sum, with the amount of
the first note, makes £100. He struck out Samuel Revill’s name on the second
note. The rejoinder by the defendant to this pleading alleged that the notes were
given by Samuel Revill and himself as sureties and were given for the securing
of part of the father’s debt and for no other consideration or purpose.
Pausing there
and turning to the judgment, Lord Denman stated that the court did not proceed
on any doctrine as to relation of principal and surety. Hence, I take it that
they were laying down principles in relation to joint and several debtors
generally.
Going back to
the rejoinder, it further alleged that the discharge of Samuel Revill was
without the knowledge, privity or consent of the defendant. The rejoinder
concluded with the verification (that is the normal way of ending a pleading
alleging new facts by way of confession and avoidance). It amounts to an
undertaking to prove those facts before the jury in due course. The plaintiff’s
surrejoinder purported to be a traverse, as is evidenced from its conclusion to
the contrary, the way of ending a pleading which raises no few facts and puts
the other party to proof. The pleading was, however, objectionable on various
formal grounds which formed the basis of the special demurrer. In accordance,
however, with the normal practice, the court considered the whole case and did
not confine itself to the objections in point of form to the surrejoinder.
Judgment was given on the substance of the case in the following terms — and
picking up the point that I have already mentioned:
But we do not
proceed on some of the grounds mentioned at the bar, such as the effect of the
plaintiff’s alteration of the instrument as making it void, or that the
defendant thereby lost his right to contribution from the joint makers of the
note; nor on any doctrine as to the relation of principal and surety. We give
our judgment merely on the principle laid down by Lord Chief Justice Eyre in Cheetham
v Ward, as sanctioned by unquestionable authority, that the debtee’s
discharge of one joint and several debtor is a discharge of all. For we think
it clear that the new agreement made by the plaintiff with Samuel Revill, to
receive from him £100 in full payment of one of the three notes and in part
payment of the other two, before they became due, accompanied with the erasure
of his name from those two notes, and followed by the actual receipt of £100,
was in law a discharge of Samuel Revill.
I take this to
be a decision that a release by accord and satisfaction reached with one joint
and several debtor discharges all. I should refer to the final paragraph in the
judgment:
This view
cannot perhaps be made entirely consistent with all that is said by Lord Eldon
in the case of Ex parte Gifford, where his Lordship dismissed a petition
to expunge the proof of a surety against the estate of a co-surety. But the
principle to which we have adverted was not presented to his mind in its simple
form; and the point certainly did not undergo much consideration. For some of
the expressions employed would seem to lay it down that a joint debtee might
release one of his debtors, and yet, by using some language of reservation in
the agreement between himself and such debtor, keep his remedy entire against
the others, even without consulting them. If Lord Eldon used any language which
could be so interpreted, we must conclude that he either did not guard himself
so cautiously as he intended, or that he did not lend that degree of attention
to the legal doctrine connected with the case before him, which he was
accustomed to afford. We do not find that any other authority clashes with our
present judgment, which must be in favour of the defendant.
The view in
that last paragraph, that the creditor could not reserve his rights against
others, has not prevailed. Lord Eldon’s views have proved more acceptable, as
is evident from the next case: North v Wakefield (1849) 13 QB
536. This also concerned a joint and several promissory note, to which the
defendant pleaded that the co-debtor had been released by deed on making a
composition with the creditors, but the deed contained a proviso that it should
not operate to prejudice the rights of others. It was argued for the defendant,
on the authority of Nicholson v Revill, that a creditor could not
release one joint and several debtor and hold another liable by reserving
remedies. Patteson J, for the court, said at p 540:
Now the deed
contained an express clause that the release to Goddard should not operate to
discharge any one jointly or otherwise liable to the plaintiff for the same
debts. It is plain, therefore, that it did not release the defendant. The
reason why a release to one debtor releases all jointly liable is, because,
unless it was held to do so, the co-debtor, after paying the debt, might sue
him who was released for contribution, and so in effect he would not be
released; but that reason does not apply where the debtor released agrees to
such a qualification of the release as will leave him liable to any rights of
the co-debtor.
Re
Armitage, ex parte Good (1877) 5 Ch D 46 is a case
where, on the somewhat special facts, a receipt given to one party did not
release the other party. The Court of Appeal held that the receipt could not be
construed as a release. The interest of the case for the present purposes is
the comment in the court below of Sir James Bacon, the chief judge in
bankruptcy, on Nicholson v Revill. I read from p 55:
Now, in point
of law, it is not to be disputed that a release to one of several joint debtors
releases them all. The case of Nicholson v Revill is one of the
many instances in which this rule of law has been applied, and the reason upon
which the rule is founded is as clear and plain as the rule itself. It is to
prevent circuity of action, inasmuch as if the released debtor were still
liable to an action for contribution by his co-debtor (who had been sued and
had paid), he would not in fact be released: North v Wakefield.
But this principle has no application to the present case; for Armitage, being
by the resolution of the creditors released from all his debts, could neither
sue himself nor could his trustee sue on his behalf, even if the supposed
partnership had existed, although the rights of the joint creditors against the
joint debtor would be unaffected by the bankruptcy, by sect 50 of the
Bankruptcy Act, 1869.
That reasoning
applies as much to several debtors each liable for the same debt as to debtors
jointly and severally liable for such a debt.
Finally, I
come to what is probably the most important case of all, the decision of the
Court of Appeal in Re EWA, a Debtor [1901] 2 KB 642. A and B were liable
on a joint and several guarantee to a bank for the account of a company. The
guarantee was limited to £6,000. Subsequently, the bank obtained judgment for
that sum against A and B jointly and severally. The judgment not being
satisfied, the bank presented a bankruptcy petition against B alone for the
whole debt. Terms were arranged on which the petition might be withdrawn upon
payment of £3,000. A document signed by the bank’s solicitors acknowledged
receipt of the sum of £3,000 in full discharge of all claims by the bank
against B in connection with the company and all guarantees given by him to the
bank in connection with that company and in settlement of any outstanding
questions as to the amount due to the bank. There was no reservation of rights
against A in that letter. The petition was withdrawn or dismissed. The bank
then served a bankruptcy petition on A for the other half. The Court of Appeal
held that he had been discharged by the release given to B. The sole-reasoned
judgment is given by Collins LJ, with whom Rigby LJ agreed. Collins LJ posed
the question as follows at p 648:
The question
really turns on this, whether or not this document has the effect of accord and
satisfaction in getting rid of the joint and several liability of B under the
judgment. If it has that effect, it is not disputed that the rule of law
applies, namely, that the release of one of two joint debtors has the effect of
releasing the other.
After
dismissing an argument that the doctrine as to release did not apply to a
judgment debt, he went on at p 648:
But now I
come to what was really the main point argued before us. It is clear that,
though a document in terms purports to release one of two joint debtors, yet it
may contain in terms a reservation of rights against the other joint debtor.
Where you find these two provisions you construe the document, not as a
release, but merely as an undertaking not to sue a particular individual, and
the result is that the right to proceed against the co-debtor is reserved and
can be put in force against him. Whenever you can find from the terms of the
document an agreement for the reservation of rights against the co-debtor,
then, I agree, the document cannot be construed as an accord and satisfaction
of the joint debt, and, therefore, as a release of the co-debtor. But it
appears to me that, on the face of this document, there is no intention shown
so to limit its effect, and that it is framed in the widest possible terms so
as to cover not only this particular debt, but all other claims by the bank in
connection with the Professional & Trade Papers Ltd, for it is admitted
that the foundation of the judgment was the guarantee, and at the time this
document was drawn up there was this joint liability on the judgment to the
extent of £6,000. And there is this circumstance to be observed, that this
document expressly states that the cash and bills are accepted ‘in full
discharge of all claims by the Capital & Counties Bank Ltd, against Mr B in
connection with the Professional & Trade Papers Ltd’.
Having regard
to some of the evidence before me, I should notice the following towards the
bottom of p 649:
Why, then,
should any limitation be placed upon the effect of the discharge of ‘all
claims’? If there is no limitation, the
effect of the document is that it releases the claim against both co-debtors.
If this legal consequence had been
what they intended, but that is a factor common probably in all cases to which
a release is given to one of two joint debtors. The person giving it may not
realise the full legal consequences of it as regards the release of a
co-debtor; but that is not, in my opinion, a sufficient ground for reading into
the document something that is not expressed in it; and unless you find in it
something qualifying the general words, it appears to me that the legal
consequences in the general words of discharge must follow, notwithstanding
that those consequences may go beyond what the person giving the document would
have intended if they had been pointed out to him at the time, and he had had
an opportunity of addressing his mind to them.
Collins LJ
also rejected the argument that surrounding circumstances qualified the prima
facie meaning of the document. He distinguished ex parte Good, that
there the other debtor had already been made bankrupt and hence no claim could
be made against him. Romer LJ did not dissent but expressed a doubt.
This decision
has been roundly criticised as ‘extraordinary’ by Professor Glanville Williams
in his Joint Obligations, at p 117, para 55. His point is that there was
simply an agreement to accept a lesser sum in satisfaction of the whole amount
and so could not amount to accord and satisfaction. I, of course, have to
accept the decision of the Court of Appeal as binding on me, whatever I or
others may think of it. I would, however, make the following comments. First,
it does not appear that any point other than the construction of the document
was argued (and I refer to the argument at pp 645 and 646 of the report).
Second, the proceedings were by way of bankruptcy petition. It by no means
follows that if B had been made bankrupt the dividend would have amounted to
the sum obtained, so that the bank might have got less.
From this long
review of the cases, I draw the following conclusions. First, a release of one joint
contractor releases the others. There is only one obligation. A release may
be under seal or by accord and satisfaction. A covenant not to sue is not a
release. It is merely a contract between the creditor and the joint debtor
which does not affect the liabilities of the other joint contractors or their
rights of contribution or indemnity against their co-contractor. It is a
question of construction of the contract between the creditor and joint debtor
in the light of the surrounding circumstances whether the contract amounts to a
release or merely a contract not to sue. Second, the same principles apply to a
contract between the creditor and one of joint and several debtors. If
one joint and several covenantor is released by accord and satisfaction, all
are released. Some have seen this as illogical, and so it would be if the only
reason for the rule that the release of one joint contractor releases the other
is that there is only one obligation. Professor Glanville Williams sees the
reason for the extended rule to have been an early uncertainty as to the nature
of a joint and several obligation (I refer to his book at p 135). Two other
reasons can be adduced. First, that where the obligations are non-cumulative,
ie the obligation of each is to perform in so far as it had not been performed
by any other party, the acceptance of some other performance in lieu of the
promised performance relieves the others. The covenantee cannot have both the
promised performance and some other performance which he agrees to accept.
Second, unless the co-covenantors were released following an accord and
satisfaction, they could claim a right of contribution or indemnity. Thus, by
suing the co-contractor the creditor commits a breach of the contract with the
released covenantor, for such an action will inevitably lead to the very claim
from which the release has been purchased by accord and satisfaction. Third,
the reasoning in the preceding paragraph applies equally to a number of
separate covenantors each liable to perform the same obligation as in the case
before me. Indeed, the dictum of Younger LJ in Matthey v Curling
already adverted to is consistent with this.
Returning now
to the facts of this case, we start with a document signed by Mr Mahmoud and
accepted by the plaintiff. The release from the obligations under the lease is
purchased by an immediate surrender of the term and his handing over of one
half of his goods. So, it would seem to be a clear case of accord and
satisfaction. Furthermore, there are no words reserving rights against any
other parties, nor can the document be read as a covenant not to sue. Is there
anything in the surrounding circumstances which would rebut the prima facie
meaning of the agreement? In some cases
it has been found in the exemption from liability of the released party to be
sued by his co-contractors, as where the released party is already bankrupt (ex
parte Good is an example of that). In the present case, Mr Mahmoud was not
bankrupt when he signed the documents and was open to a claim for an indemnity,
which has in fact been made. It might be said that at the time of the signing
of the document he was in no position to resist both the seizure of all
his goods under a distress and the forfeiture of his lease with no practical possibility
of relief. If the landlords had chosen to act in that way, the liability of CT
for the balance of the rent could not be resisted. The landlord, however, did
not choose to press his rights in that way but chose to enter into a bargain
with Mr Mahmoud so as to get possession speedily without the delay that further
proceedings would entail. He has, in my judgment, to accept the consequences of
that. It is certainly no good his saying that he never intended to release his
rights against CT.
Therefore, the
result is that I dismiss the claim as against the second defendant.
Plaintiff’s
claim against the second defendant dismissed.