Landlord and tenant — Liability of original lessee notwithstanding assignment — Whether such liability extends to the payment under a rent review clause of an increased rent agreed with an assignee of the term or otherwise determined so as to be the rent payable by such assignee — In present case the assignee, having agreed an increased rent under the review clause, failed to pay gales of the increased rent subsequently falling due — Held, applying the principle of Baynton v Morgan, and rejecting a submission that the agreement made by the assignee was res inter alios acta, that the original lessee was liable for the rent at the increased amount — Important decision — Judge’s suggestion should be noted that a tenant who wishes to ensure that no rent review should affect him in this way ought to consider an underlease rather than an assignment
In these two
actions, based on separate amounts of rent falling due on different quarter
days, the plaintiff lessors, Centrovincial Estates plc, claimed against the
defendants, Bulk Storage Ltd, the original lessees, rent due from Airfix
Products Ltd, assignees of the term in respect of a building known as Charlton
Works in Feltram Way, Woolwich, London SE7. The lease which had been assigned
contained a rent review clause providing for review from the expiry of the
first 14 years of the term, either by agreement or by the determination of a
surveyor acting as an expert.
Romie Tager
(instructed by Philip Hodges & Co) appeared on behalf of the plaintiffs;
Nigel Murray (instructed by Cartwright Cunningham Haselgrove & Co)
represented the defendants.
Giving
judgment, HARMAN J said: These two actions each claim £10,000, being a
quarter’s rent due respectively on Michaelmas Day 1981 and on Christmas Day
that year. The problem raised in both actions is, however, by no means limited
to a question of money unpaid. The real question is a point of law of some
interest and general application.
In broad terms
it may be stated as being whether an original tenant under a lease containing a
rent review clause is bound by privity of contract to pay the landlord for the
time being of the premises a rent agreed or otherwise determined with a
subsequent assignee of the term. That obligation, it was contended, arose
although the original tenant never authorised, or knew of, or had any
connection whatever with, the agreement or other process whereby the amount of
the new rent was determined. No suggestion was made during argument that the
landlord’s position could be different depending upon whether it was the
original landlord or, as here, a successor in title to the reversion. I have
therefore not attempted to consider that point, but have assumed it for the
purposes of this judgment.
On the
pleadings the matter stands as follows. The statement of claim alleges that
premises were let by a predecessor in title of the plaintiff to the defendant
by an underlease dated July 2 1965 for a term of 21 years from Christmas Day
1964. The rent reserved was £17,000 per annum, payable quarterly in advance on the
usual quarter days. The rent was to be reviewed with effect from the expiry of
the first 14 years of the term, either by agreement in writing or by a surveyor
acting as an expert.
In July 1978
the defendant assigned the residue of its term to Airfix Products Ltd. At that
date the first 14 years of the term had not expired.
By a document
dated January 17 1979 the plaintiff, which had acquired the reversion, and
Airfix Products Ltd, which was then the assignee of the term, agreed a revised
rent at a figure of £40,000 per annum. On Michaelmas Day 1981, a usual quarter
day, Airfix Products Ltd failed to pay the gale of rent then falling due, and
it remained unpaid at the date of issue of the writ on February 23 1982. A
further gale of rent fell due on the next due quarter day, Christmas Day 1981,
which was not paid then and remained unpaid at the date of issue of the second
writ on April 8 1982.
The defence
make proper admissions as to the underlease, subject to detailed reference to
its terms, and admit the devolution of the term and of the reversion. The
agreement allegedly recorded in the memorandum of January 17 1979 is put to
strict proof. The real thrust of the defence is in the second part of para 5,
which alleges that that agreement, if made, was res inter alios acta.
Further, in para 6, it is contended that the rent, if any, payable by the
defendant is limited to the original rent of £17,000 per annum.
Other points
were raised, such as that Airfix Products Ltd was firstly liable for the rent
and that the plaintiff had a duty to mitigate its loss and had failed to try to
do so. A reply was served and further and better particulars given, but at the
hearing before me Mr Tager for the plaintiff very sensibly limited his argument
to the points adumbrated above, thus saving what, in my present view, would
have been a fruitless inquiry into those matters. Further, at an early stage of
the opening, Mr Murray abandoned the contention that there was a duty to
mitigate, and no time was therefore taken up by (and I do not have to consider)
that issue.
The first
issue raised is one of fact. Did the plaintiff and Airfix Products Ltd make an
effective agreement, recorded in the memoranda attached to the underlease and
counterpart, both of which were proved in evidence before me? I hold on the evidence adduced that they did.
Mr Murray, who conducted the defendant’s case with skill and responsibility,
did not feel able to argue to the contrary at the conclusion of the evidence.
The matter
thus becomes an issue of law. Is the defendant, who had no knowledge of or
connection with the agreement made, bound to pay rent at the rate fixed by that
agreement? It appeared to me that clause
5(i) of the underlease, which referred to rent in an ‘amount . . . fixed by
agreement in writing . . . at least six calendar months before December 25
1978’ might have meant that only an agreement made before the specified date
was effective, and here the agreement was made after the specified date.
However, Mr Murray at an early stage of the hearing conceded expressly that, on
the basis of the decision in the House of Lords in United Scientific
Holdings Limited v Burnley Borough Council [1978] AC 904, the
agreement was effective within the terms of clause 5(i).
The issue of
law divides, as Mr Murray submitted, into two parts. Firstly, he contended that
in general terms an original tenant is not
contended that even if an original tenant can, in law, be bound by acts done by
an assignee, yet upon the true construction of this particular lease and the
terms of clause 5(i) itself the defendant here was not bound by the agreement
of January 1979.
Upon the first
part of the issue there is, to my mind surprisingly, little or no authority. As
a matter of principle Mr Tager submitted that each and every assignee of a term
— though it might be at three or four removes from, and never in any
contractual relationship with, the original tenant — was the agent of and had
authority to bind the original tenant to the assignee’s bargain. I do not find
the concept of agency apt for this relationship. Express agency is a matter of
contract; ostensible agency, of holding out. The idea of agency for an
undisclosed principal seems remote from any possible fact in a matter involving
original tenant and assignee. Further, when an assignee makes some arrangement
with the holder of the reversion, the assignee is almost always dealing on his
or its own behalf. The idea that the assignee is both principal and agent for
another principal involves difficulties which in my judgment point to the
relationship normally called agency being an inappropriate one by which to
classify the relationship of assignee and original tenant. In truth I believe
that the relationship is sui generis to the law of landlord and tenant.
There are many special features about the relationships arising in that field
of law not to be found in other branches of the law. The running of covenants
with land and the ancient origin of this branch of the law make it in my
judgment natural that the relationship does not fall easily into other
categories.
But if there
is, as I hold, no agency enabling an assignee to bind the original tenant, what
is the position? In my judgment the
basic answer which any real property lawyer would give to a question about an
assignee’s power to deal with a tenancy interest is that each assignee is the
owner of the whole estate and can deal with it so as to alter it or its terms.
The estate as so altered then binds the original tenant, because the assignee
has been put into the shoes of the original tenant and can do all such acts as
the original tenant could have done.
That basic
answer is supported by the decision of the Court of Appeal in Baynton v Morgan
(1888) 22 QBD 74. The first point decided by Lord Esher MR is that a covenant
by an original tenant in a lease is not a contract of guarantee. No question of
suretyship arises. The liability is a primary liability of the original tenant
(see pp 77-78). Fry LJ at pp 80-81 and Lopes LJ at p 83 arrive at the same
conclusion.
The other
point in the case was whether the liability of the original tenant to pay rent
ceased because of a surrender by the assignee of part of the demised premises.
It was argued that the covenant to pay rent was one entire obligation; it could
not be apportioned. And part of the demised premises having been surrendered,
it was said that the whole rent was not payable, and indeed was not claimed;
and since there could be no apportionment, no rent was payable by the original
tenant.
All three
members of the Court of Appeal rejected this argument. Lord Esher at the foot
of p 78 and the top of p 79 held that the covenant is to pay the rent on the
specified quarter day in the term. He went on to hold that an assignee is given
power by an assignment to do anything which the original lessee could have
done. It follows, he held, that since the surrender of part of the premises by
the original lessee does not determine the term, no more does a surrender of
part by the assignee determine the term. Consequently the term remains and the
covenant is enforceable. Fry LJ was to a similar effect. Lopes LJ at p 82
stated:
The rule of
law is that a lessee remains liable upon his express covenants, notwithstanding
an assignment and acceptance by the landlord of rent from the assignee . . .
He continued:
Then how can
the liability under the express covenant be got rid of? It may cease by reason of a surrender of the
term, a surrender of all the premises demised by the lease, an eviction, or a
release.
He goes on to
hold that none of those conditions applied and consequently the original
tenant’s covenant remained enforceable. That decision on principle, in my
judgment, governs this case.
I also had
cited to me an unreported decision of Mr David McNeill QC, as he then was,
sitting as a deputy judge of the Queen’s Bench. The case was entitled Haslemere
Estates Ltd v British Olivetti Ltd. The claim by a landlord was to
recover from an original tenant a rent increased by a rent review, agreed with
a second assignee of the term. As in the present case the original tenant knew
nothing of the rent review or of the agreement. In the Haslemere Estates
case, in addition, the first assignee was not concerned with the rent review.
Mr McNeill QC held, at p 12 of the transcript, B to G, that the original tenant
was bound by the second assignee’s agreement. He cited Baynton v Morgan
and held that the original tenant is, in law, a party to the agreement for a
review of rent because the assignee ‘stands in his shoes’. I am not bound by
that decision but I entirely agree with it. I reach the same conclusion myself
in this case.
I now turn to
the distinctions alleged to exist in the particular terms of this underlease
and clause 5. The terms are naturally different from those in the Haslemere
Estates case. Mr Murray argued valiantly that the differences were such as
to overcome the basic principle which I have held to exist, that an assignee
stands in the shoes of an original tenant and can alter the obligations
affecting the original tenant. He pointed out that the terms in the lease
defining the parties, which in the Haslemere Estates case included a
reference to assigns of the lessee as well as to successors in title, in this
present case include only a reference to successors in title; he referred to a
difference in the reddendum and other details, all of which Mr Murray most
helpfully set out in a typescript document comparing the two clauses. Clause 2,
which contains the vital covenant in this case, was in the Haslemere Estates
case a great deal more elaborate than in the Centrovincial case, this
present case, and the reference in clause 5(i) itself to an agreement in
writing between the parties all went to make the obligations here different
from those in the Haslemere Estates lease. In my judgment the
differences are semantic rather than substantial.
Mr Murray
suggested that the provisions of clause 5(i) referring to an ‘agreement in
writing between the parties’ required the agreement of those who executed the
underlease, they being in truth the parties to it, as well as the agreement of
the landlord for the time being and the tenant for the time being. In contrast,
he said, a rent fixed under clause 5(i) by a surveyor acting as an expert was
imposed on the lease itself. Mr Murray pointed to other oddities of wording,
notably clause 2(xvi) where the tenant’s covenants are modified to show that a
covenant not to compete is limited to competition with the original landlord.
This showed, said Mr Murray, that when the draftsman wished he knew how to make
obligations apply to particular estate-holders; he had not done so in clause
5(i).
Hard though Mr
Murray tried and elegantly as he put his points, I found them unconvincing. In
my judgment the basic principle to which I have referred is not excluded by any
term of this particular lease, and accordingly the plaintiff succeeds.
Further, the
result I have reached seems to me to accord with practical dealings between
landlords and tenants and their respective assigns. If an original tenant wishes
to ensure that no rent review is made without his or its consent the machinery
to secure that result is, as Mr Tager submitted, easily to hand. The original
tenant instead of assigning the residue of the term can simply grant an
underlease upon identical terms but for the same period less two or three days.
The difference in value between the residue of the term and a subterm of almost
the same period less two or three days. The difference in value between the
residue of the term and a subterm of almost the same duration would be very
small, if any. The distinction between assigning and subletting for a very
slightly shorter period, and the consequences in law on the relationships
between the various parties are, in my judgment, well known to all concerned in
the real property market.