Landlord and tenant — Original lessee’s right of recourse against sureties when assignees of lease defaulted on payments of rent — Appeal by original lessee against decision of Tucker J rejecting claim to recover from sureties arrears of rent paid to assignees of reversion — Appellant, plaintiff below, had assigned his underlease to a company which went into liquidation owing rent and other sums to the underlessors — Appellant paid the amount due and then claimed to be indemnified by the sureties — The surety covenant which was in issue was contained in the licence granted to the appellant to assign his lease of the property in question to the company which subsequently went into liquidation — The surety covenant, by which the sureties covenanted inter alia to make good any loss, through non-payment of rent, was not made with the appellant underlessee himself, but with the underlessors and the head landlords — The underlessors subsequently assigned the reversion in the underlease — There was no express assignment of the benefit of the surety covenant to the assignees of this reversion — It was common ground that the appellant, as the original underlessee, was liable to pay the rent to the assignees of the reversion, on the default of the assignees of the underlease, notwithstanding the fact that the rent due was largely in respect of a period before the assignment of the reversion — It was also accepted that the appellant, having paid the rent, was subrogated to any rights which the assignees of the reversion had against the sureties — The critical question was, therefore, whether the assignees of the reversion were entitled to recover the rent from the sureties — In submitting that these assignees were so entitled the appellant relied on (1) section 62 of the Law of Property Act 1925; (2) section 189(2) of that Act; (3) the claim that the surety covenant touched and concerned the land; and (4) the principle of Griffith v Pelton — The Court of Appeal rejected (1) and (2), but disagreed with Tucker J’s rejection of (3) — Held, after an analysis of the authorities, that the surety covenant in the present case did touch and concern the land — It affected the value of the reversion ‘per se and not merely from collateral circumstances’ — The covenant was therefore enforceable by the assignees of the reversion and the appellant was entitled to be subrogated to their rights — The principle of Griffith v Pelton did not need to be considered and, as the court had difficulty in understanding what it did decide, no view on it was expressed — Appeal allowed, but leave to appeal to House of Lords granted (the present case was the first occasion for the point to be considered by the Court of Appeal)
The following
cases are referred to in this report.
Coastplace
Ltd v Hartley (1987) 283 EG 64
Congleton
(Mayor of) v Pattison (1808) 10 East 130
Consolidated
Trust Co v Naylor [1936] 55 CLR 423
Dewar v Goodman [1909] AC 72
Distributors
& Warehousing Ltd, Re [1986] BCLC 129; [1986] 1
EGLR 90; (1985) 278 EG 1363
Downer
Enterprises Ltd, Re [1974] 1 WLR 1460; [1974] 2 All
ER 1074
Dyson v Forster [1908] 1 KB 629, CA; [1909] AC 98, HL
Grant v Edmondson [1931] 1 Ch 1
Griffith v Pelton [1958] 1 Ch 205; [1957] 3 WLR 522; [1957] 3 All ER
57, CA
Hua Chiao
Commercial Bank Ltd v Chiaphua Industries Ltd
[1987] AC 99; [1987] 2 WLR 179; [1987] 1 All ER 1110, PC
Parker v Webb (1693) 3 Salk 5
Pinemain
Ltd v Tuck, March 4 1986, unreported
Pinemain
Ltd v Welbeck International Ltd [1984] EGD
542; (1984) 272 EG 1166, [1984] 2 EGLR 91
Rogers v Hosegood [1900] 2 Ch 388
Sacher
Investments Pty Ltd v Forma Stereo Consultants
Pty Ltd [1976] NSWLR 5
Smith
& Snipes Hall Farm Ltd v River Douglas
Catchment Board [1949] 2 KB 500; [1949] 2 All ER 179; (1949) 47 LGR 627;
153 EG 486, CA
Thomas v Hayward (1869) LR 4 Ex 311
Vernon v Smith (1821) 5 B&Ald 1
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 the plaintiff, Kerten Surendra Kumar, from the decision of Tucker J
dismissing his action against the present respondents, Kevin Edward Dunning and
Pauline Marian Powell (sued as administratrix of the estate of Brian Stanley
Powell deceased), for money claimed to be due from them as sureties, in
reimbursement of payments made by the appellant in respect of an underlease of
premises at 198 and 200 Earl’s Court Road, London SW5. The decision of Tucker J
was reported at [1986] 2 EGLR 31; (1986) 279 EG 223.
N Primost
(instructed by How Davey & Lewis) appeared on behalf of the appellant;
Wayne Clark (instructed by Trower Still & Keeling) represented the
respondent Kevin Edward Dunning; W A Blackburn QC and R St John Knowles
(instructed by Milners Curry & Gaskell) represented the respondent Pauline
Marian Powell.
Giving
judgment, SIR NICOLAS BROWNE-WILKINSON V-C said: This appeal raises the
question whether an assignee of the reversion on a lease can enforce the
payment of rent by those who have entered into surety covenants guaranteeing
performance of the tenant’s obligations under the lease. The question has been
raised in a number of recent cases at first instance. This is the first time it
has come before this court.
By a head
lease dated April 30 1970 the then freeholder demised to Old Kentucky
Restaurants Ltd (‘OK’) the premises 198-200 Earl’s Court Road, London SW5, for
a term of 42 years. By an underlease dated October 9 1970 OK demised part of
the premises to the plaintiff for a term of 21 years from April 30 1970 at an
initial rent of £2,500 per annum with provisions for review. OK was defined as
‘the lessor which expression where the context admits includes the owner from
time to time entitled in reversion immediately expectant on the determination
of the term hereby granted’. The plaintiff was defined as ‘the lessee which
expression where the context admits includes his successors in title’. Clause
2(10) of the underlease contained a covenant against assigning or parting with
possession of the premises in terms which were subsequently amended by
agreement. As amended, clause 2(10)(b) included a covenant against assigning or
underletting the whole of the demised premises without the consent of the
lessor and the superior lessor. Clause 2(10)(d) then provided as follows:
For the
purpose of sub clause (10)(b) above the Lessor may require the proposed
assignee or under tenant to enter into direct covenants with the Lessor and the
Superior Lessor to perform and observe all the covenants and conditions herein
contained on the Lessee’s part to be performed and observed.
On May 31 1978
the plaintiff assigned the unexpired residue of the underlease to Sundowners
Ltd (‘Sundowners’). The licence to make such assignment was dated June 7 1978
and is the critical document in this case. The licence is made between the then
freeholder (defined simply as ‘the Lessor’) of the first part, OK (defined as
‘the Lessee’) of the second part, the plaintiff (defined as ‘the Underlessee’)
of the third part, Sundowners (defined as ‘the Assignee’) of the fourth part
and a Mr Dunning and Mr Powell (defined as ‘the Sureties’) of the fifth part.
Clauses 3 and 4 of the licence provide as follows:
3 The Assignee
hereby covenants with the Lessee that henceforth during the remainder of the
term created by the Underlease the Assignee will pay the rent and perform and
observe the covenants on the part of the Underlessee and the conditions therein
contained . . .
4 In
consideration of the Licence herein before contained the Sureties hereby
jointly and severally covenant with the guarantee to the Lessor and the Lessee
and with and to each of them as follows that is to say:
(i) that the Assignee shall at all times during
the term created by the Underlease duly pay the rent and will perform and observe
all the covenants on the part of the Underlessee therein contained,
(ii) that the Sureties will at all times hereafter
so long as aforesaid pay and make good to the Lessor and the Lessee or either
of them all losses costs damage and expenses occasioned to the Lessor and the
Lessee or either of them by the non-payment of the said rents or any of them or
any part thereof or the breach non-observance or non-performance of any of the
covenants or conditions as aforesaid including the covenants hereinbefore contained
. . .
The defendants
in this action are Mr Dunning and the executor of Mr Powell, the sureties under
the licence. It is to be noted that neither Sundowners nor the sureties entered
into any direct covenant with the plaintiff to perform the covenants in the
underlease.
Sundowners
went into liquidation on November 24 1982 and has paid no rent since that date.
At a date which is not known, OK assigned the headlease to Hedges & Butler
Ltd (‘H&B’). The assignment of the headlease is not in evidence. The
argument has, therefore, proceeded on the footing that there was no express
assignment to H & B of the benefit of the surety covenants.
H & B
demanded from the plaintiff, as the original underlessee, payment of rent
accruing due since the winding-up of Sundowners totalling £23,401.96. The
plaintiff, having paid this sum to H & B, in this action seeks to recover
it from the sureties. The judge dismissed the plaintiff’s claim.
There is a
substantial measure of agreement between the parties as to the relevant law. Mr
Blackburn, for the defendants, accepts:
1 That the plaintiff, as the original
underlessee, was liable to pay the rent to H & B as assignees of the
reversion, notwithstanding the fact that the rent was largely in respect of a
period before the assignment of the reversion to H & B;
2 That the plaintiff, having paid the rent,
is entitled to be subrogated to the rights of H & B: Re Downer
Enterprises Ltd [1974] 1 WLR 1460;
3 Accordingly, the plaintiff is entitled to
succeed if, but only if, H & B as assignee of the immediate reversion were
entitled to recover the rent from the sureties.
Therefore, the
only question we have to decide is whether, in the absence of any express
assignment to H & B of the benefit of the surety covenants contained in the
licence, H & B as assignee of the immediate reversion on the underlease is
entitled to enforce the surety covenants in the licence.
Mr Blackburn
first argues that the surety covenants are purely personal covenants between
the sureties on the one hand and OK on the other. As such, he submits, they
were incapable of assignment either expressly or by operation of law. He relies
primarily on the fact that, in the licence, ‘the Lessor’ and ‘the Lessee’ are
defined as meaning simply the freeholder and the headlessee, OK, respectively.
He emphasises that, in contra-distinction to the definitions in the underlease
itself, in the licence there is no provision extending the definition of ‘the
Lessee’ to mean the owner for the time being of the immediate reversion on the underlease.
Therefore, he submits, the covenant by the sureties with ‘the Lessee’ is simply
a covenant for the benefit of OK and was not intended to be capable of
assignment to, or enforcement by, anyone other than OK.
I have no
hesitation in rejecting this argument. The benefit of a surety contract, like
the benefit of any other contract, is normally assignable. The burden lies on
Mr Blackburn to show clear indications that in this case it was intended,
contrary to the general rule, that only OK should have the benefit. I do not
think the mere nature of the definitions by itself would be sufficient for that
purpose. But, as Mr Primost for the plaintiff has demonstrated, there are clear
indications that the surety covenant was intended to be for the benefit of the
reversioners for the time being. The licence contains a recital that the
consent of OK to the assignment was required ‘by reason of the covenant to that
effect contained in the . . . underlease’. Accordingly, the licence was entered
into pursuant to clause 2(10) of the underlease, subclause (d) of which
entitled ‘the Lessor’ (as defined by the underlease) to require an assignee to
enter into a direct covenant with ‘the Lessor’ (as so defined) to perform the
covenants in the underlease. Given the definition of ‘the Lessor’ as including
the owner from time to time of the immediate reversion on the underlease, one
would therefore expect clause 3 of the licence to be a covenant with ‘the
Lessor’ as defined by the underlease, ie as including the owners from time to
time of the reversion on the underlease. By clause 3 of the licence the
assignee covenants ‘during the remainder of the term created by the underlease’
to pay the rent and perform the covenants in the underlease. Accordingly, on
its proper construction, clause 3 imposed on Sundowners, as assignee, an
obligation to perform the tenant’s covenants throughout the term of the
underlease. In my judgment, it must have been intended that that obligation was
to be for the benefit of the person who was for the time being entitled to the
reversion on the underlease. When one turns to the surety covenant in clause 4
of the licence, one finds the sureties guaranteeing to ‘the Lessee’ that the
assignee will perform the covenants ‘at all times during the term created by
the underlease’ and ‘at all times hereafter so long as aforesaid’. In my
judgment, it is clear that the intention was to guarantee performance of the
covenants throughout the term, whoever was the reversioner. There is no ground
for saying that the intention was that the liability under the surety covenant
was to last only so long as OK was entitled to the immediate reversion.
For these
reasons, in my judgment, the surety covenant was capable of assignment and was
not a covenant intended to be for the benefit of OK alone.
The crucial
question is whether the benefit of the surety covenant has become vested in H
& B, as assignee, of the reversion on the underlease. There is no privity
of contract or estate between H & B and the sureties. Nor, it must be
assumed, has there been any express assignment to H & B of the benefit of
the surety covenant. How, then, can H & B enforce the surety covenant
against the sureties?
Mr Primost
puts his case in four different ways, viz:
1 that, whatever the terms of the assignment
of the reversion by OK to H & B, section 62 of the Law of Property Act 1925
operated to assign to H & B the benefit of the covenant as being a right
‘appertaining or reputed to appertain’ to the land;
2 that section 189(2) of the Law of Property
Act 1925 annexed the benefit of the surety covenant to the land;
3 that the surety covenant touches and
concerns the land and accordingly the benefit of the covenant passed with the
reversion to H & B;
4 the principle in Griffith v Pelton
[1958] Ch 205 enables H & B to enforce the covenant.
I will deal
with these submissions in turn.
1 Section 62 of the Law of Property Act 1925
Section 62 has
the side heading ‘General words implied in conveyances’. Subsection (1) reads
as follows:
A conveyance
of land shall be deemed to include and shall by virtue of this Act operate to
convey, with the land, all buildings, erections, fixtures, commons, hedges,
ditches, fences, ways, waters, watercourses, liberties, privileges, easements,
rights, and advantages whatsoever, appertaining or reputed to appertain to the
land, or any part thereof, or, at the time of conveyance, demised, occupied, or
enjoyed with or reputed or known as part or parcel of or appurtenant to the
land or any part thereof.
The main
intention of section 62 was to provide a form of statutory shorthand rendering
it unnecessary to include such words expressly in every conveyance. It is a
matter of debate whether, in the context of the section, the words ‘rights . .
. appertaining . . . to the land’ include rights arising under covenant as
opposed to strict property rights. However, I will assume, without deciding,
that rights under covenant are within the words of the section. Even on that
assumption, it still has to be shown that the rights ‘appertain to the
land’. In my judgment, a right under covenant cannot appertain to the land
unless the benefit is in some way annexed to the land. If the benefit of a
covenant passes under section 62 even if not annexed to the land, the whole
modern law of restrictive covenants would have been established on an erroneous
basis. Section 62(1) replaces section 6(1) of the Conveyancing Act 1881. If the
general words ‘rights . . . appertaining . . . to the land’ operate to transfer
the benefit of a negative restrictive covenant, whether or not such benefit was
expressly assigned, it would make all the law developed since 1881 unnecessary.
It is established that, in the absence of annexation to the land or the
existence of a building scheme, the benefit of a restrictive covenant cannot
pass except by way of express assignment. The law so established is
inconsistent with the view that a covenant, the benefit of which is not annexed
to the land, can pass under the general words in section 62.
Therefore, in
my judgment, the plaintiff cannot rely on section 62 unless, at the least, he
can show that the surety covenant touches and concerns the land so as to be
capable of annexation, a point which I consider at (3) below.
2 Section 189(2) of the Law of Property Act
1925
The subsection
reads as follows:
The benefit
of all covenants and powers given by way of indemnity against a rent or any
part thereof payable in respect of land, or against the breach of any covenant
or condition in relation to land, is and shall be deemed always to have been
annexed to the land to which the indemnity is intended to relate, and may be
enforced by the estate owner for the time being of the whole or any part of
that land, notwithstanding that the benefit may not have been expressly
apportioned or assigned to him or to any of his predecessors in title.
The plaintiff
submits that the surety covenant in this case is a covenant ‘by way of
indemnity against a rent . . . payable in respect of land’ and, therefore, the
benefit of such covenant, being annexed to the land, has passed to H & B.
There is a question whether a surety covenant guaranteeing to A performance by
B of B’s covenant to A is an ‘indemnity’ to A within the meaning of the
section. But, in any event, Mr Blackburn has satisfied me that section 189(2)
is not of general application but is directed only to a specific type of case,
ie a case where land charged with a rent has been divided. In the absence of
provision to the contrary, on the division of land subject to a charge for rent
each part of the land remains liable to the person to whom the rent is payable
for the whole amount of the rent. Before 1925 in such a case those liable for
the rent used to agree an apportionment of the liability to pay the rent, such
apportionment being supported by cross-indemnities between them similar to
those now implied by the Law of Property Act 1925, section 77 and the Second
Schedule. After 1925, the benefit of such implied covenants for indemnity
arising on the severance of land charged with the rent are annexed to the land
of the covenantee: see section 77(5). Section 189(2) produces the same
annexation where, on the severance of the land charged, the indemnities have
been given expressly and not merely by way of implication. In my judgment, read
in the context of the Act as a whole, the effect of section 189(2) is limited
to those indemnities against liability to pay a rent where land subject to a
single rent has been divided. The section, therefore, does not touch the
present case.
3 Does the surety covenant touch and concern
the land?
Mr Primost
submits that the surety covenant ‘touches and concerns’ the reversion to the
underlease in consequence of which the benefit of such covenant passed to H
& B automatically on the assignment of the reversion. As a result, he
submits, H & B is entitled to sue the sureties.
It must be
noted that there is no privity of contract between H & B and the sureties.
Nor is there privity of estate. Accordingly, the Grantees of Reversions Act
1540 (now sections 141 and 142 of the Law of Property Act 1925) is not directly
in point. Those provisions apply only to covenants between landlord and tenant.
Where there is neither privity of contract nor privity of estate, the benefit
of a covenant runs with the land of the covenantee at law if, but only if, the
covenant touches and concerns the land of the covenantee: Megarry and Wade’s
Law of Real Property, 5th ed, pp 764-5. Such a covenant, if it does touch
and concern the land, is enforceable by an assignee of the land against the
covenantor, whether or not the covenantor has any land: Smith and Snipes
Hall Farm v River Douglas Catchment Board [1949] 2 KB 500. Although
this case is not concerned directly with covenants between landlord and tenant,
authorities on the latter type of case are in point: as between landlord and
tenant only covenants which touch and concern the land are enforceable.
The test whether
a covenant touches and concerns land is that 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 p 395:
the covenant
must either affect the land as regards mode of occupation, or it must be such
as per se, and not merely from collateral circumstances, affects the
value of the land.
But although
the test is certain, its exact meaning when applied to different sets of
circumstances is very obscure. In Grant v Edmondson [1931] 1 Ch 1
at p 28 Romer LJ said:
In connection
with the subject of covenants running with the land, it is impossible to reason
by analogy. The established rules concerning it are purely arbitrary, and the
distinctions, for the most part, quite illogical.
Before seeking
to analyse the authorities, I will first state how the matter strikes me as a
matter of impression. 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 tenants’ 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?
Yet in all
save one of the cases decided at first instance, the court has held that the
surety covenant does not touch and concern the land. The exception is Pinemain
Ltd v Tuck (unreported), where the question was left open. In Pinemain
Ltd v Welbeck International Ltd (1984) 272 EG 1166, [1984] 2 EGLR
91, Mr Nugee QC sitting as a deputy High Court judge held that the surety
covenant did not touch and concern the land. He held that for a positive
covenant to run at law (as opposed to a negative covenant running with the land
in equity) it was necessary that the covenant should require something to be
done which affected the land itself, not merely its value. I find this view
difficult to reconcile with those cases which establish that a tenant’s
covenant to pay rent and to insure touch and concern the land. Moreover, Mr
Nugee’s view is, to my mind, inconsistent with the decision in Dyson v Forster
which I will mention later.
In Re
Distributors & Warehousing Ltd [1986] BCLC 129* Walton J held
that a surety covenant did not touch and concern the land. He pointed out that
payment by a surety does not constitute payment of rent by the tenant. He held
that the subject-matter of the surety covenant was not the land but the
tenant’s covenants themselves. He held, in the absence of authority being cited
to him, that a covenant at ‘this double remove’ could not itself touch and
concern the land. In the present case, Tucker J followed this reasoning. I will
refer later to certain authorities not cited to Walton J which might well have
led him to a different conclusion.
*Editor’s
note: Also reported at [1986] 1 EGLR 90 and (1986) 278 EG 1363.
In Coastplace
Ltd v Hartley (1987) (unreported† ) French J held that the surety
covenant did not touch and concern the land because it affected the value of
the land not per se but by a collateral circumstance. He held that as the
value of the surety covenant depended on the ability of the surety to meet his
obligations, which
matter. I cannot agree that the variations in the surety’s ability to meet his
liability necessarily lead to the conclusion that the value of the covenant to
the land is collateral. Exactly the same can be said of the tenant’s own
covenant to pay rent. Yet such covenants do touch and concern the land and,
therefore, cannot be said merely to affect the value collaterally.
† Editor’s
note: Now reported at p 43 post and (1987) 283 EG 64.
Reverting to
the test laid down in the Mayor of Congleton case, it is clear that the
surety covenant in the present case does not ‘affect the land as to the mode of
occupation’. The question is whether it affects the value of the reversion ‘per
se and not merely from collateral circumstances’. The meaning of those
latter words has been expounded in a number of cases which have not often been
cited subsequently. In Vernon v Smith (1821) 5 B & Ald 1 the
question was whether a covenant by the tenant to insure the demised premises
was enforceable by the assignee of the reversion. Although the case was one of
privity of estate, the enforceability of the covenant depended on whether the
covenant touched and concerned the land. It was argued that the covenant was
merely to pay money to a third party. The majority of the court decided that
the covenant was enforceable on the narrow point that the assignee of the
reversion would have an interest in the insurance moneys. Best J, while
agreeing on that point, also held that apart from that special factor, the
insurance covenant touched and concerned the land. He said at p 9:
A covenant in
a lease which the covenantee cannot, after his assignment, take advantage of,
and which is beneficial to the assignee as such, will go with the estate
assigned. If this were not the law, the tenant would hold the estate discharged
from the performance of one of the conditions on which it was granted to him.
The original covenantee could not avail himself of this covenant: he sustains
no loss by the destruction of the buildings, and therefore has no interest to
have them insured.
Later (at p
10) he said:
If a court of
equity will not interfere, either for the one or the other, still this covenant
is as beneficial to an assignee as it was to the covenantee. It secures to the
tenant the means of performing his covenant, and to the landlord, a solvent
instead of a ruined tenant. It is a covenant beneficial to the owner of the
estate, and to no one but the owner of the estate; and therefore may be said to
be beneficial to the estate, and so directly within the principle on which covenants
are made to run with the land.
Finally (at p
11) he said:
The covenant
here mentioned is not beneficial to the estate granted in the strict sense of
the word, because it has no effect until that estate is at an end, but it is
beneficial to the owner as owner, and to no other person. By the terms
collateral covenants, which do not pass to the assignee, are meant such as are
beneficial to the lessor, without regard to his continuing the owner of the
estate. This principle will reconcile all the cases.
In Vyvyan
v Arthur (1823) 1 B&C 410 at p 417 Best J repeated this test in the
following words:
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.
The test laid
down by Best J is, in my judgment, a sound one which in the normal case will
provide a satisfactory yardstick for differentiating between those covenants
which touch and concern the land in the true sense and those which are merely
collateral.
The test has
received the approval of the Court of Appeal and the House of Lords in Forster
v Elvet Colliery Co Ltd [1908] 1 KB 629 affirmed sub nom Dyson v Forster
[1909] AC 98. In that case, the owner of minerals, who did not own the
surface, granted a lease of the minerals. The lease contained a covenant by the
tenant with the lessor and with the owners or occupiers for the time being of
the surface, to pay compensation for damage caused to the surface by working
the minerals. The defendant was the assignee of the term: the plaintiffs
included persons who were for the time being surface owners but who had
acquired their land since the date of the lease. The case, therefore, was like
the present in that there was privity of neither contract nor estate between
the plaintiffs and the defendant. Moreover, the covenant did not require the
doing of any work but merely the payment of compensation for damage done to
land which was not the land of the landlord. It was held that the surface
owners were entitled to enforce the covenant against the defendant. In the
Court of Appeal Cozens Hardy MR (at p 635) said:
It is old law
that in cases not between lessor and lessee the benefit of a covenant will pass
if and in so far as it necessarily affects the value of the land, in this
sense, the owner of the land would get more for his land by reason of the
covenant being attached to and annexed to it . . . I see no reason why the
covenant to pay compensation for damage caused by the subsidence of the surface
should not be a covenant to which this principle applies. The analogy of a covenant
to insure against fire, which has been held to be a covenant which runs with
the land as between lessor and lessee — Vernon v Smith — seems to
be rather close.
Farwell LJ at
p 640 said:
I am further
of opinion that the benefit of these covenants as between the present
plaintiffs and the present defendants in all the actions does run with the
land. They certainly fulfil the first requisite — namely, they are ‘such as per
se and not merely from collateral circumstances affect the value of the
land’: Mayor etc of Congleton v Pattison. There is nothing in the
fact that the covenant sounds in damages to prevent it from so running — see The
Prior’s Case, where it was said that ‘the remedie by covenant doth runne
with the land to give damages to the partie grieved’ . . . and all the
covenants for title and quiet enjoyment sound in damages and run with the land.
In the House
of Lords, Lord Macnaghten in his speech, with which the other members of the
House concurred, said ([1909] AC at p 102):
The question
is, Does this covenant affect the nature, quality, or value of the land, or is
it a covenant simply collateral? It is
not, I think, simply collateral, for one reason which is sometimes proposed as
a test for the purpose of determining whether a covenant runs with the land or
not. It is beneficial to the surface owner and beneficial to no one else: see Vyvyan
v Arthur . . . I also think the covenant affects the value of the land
in respect of which it was given. Suppose the land, being properly drained,
were to be let for agricultural purposes, a tenant, I should suppose, would be
more likely to take it and would probably give more for it if he were assured
that compensation would be payable in the event of the drainage system being
dislocated by subsidence. Similar considerations would apply if the land were
to be let for building purposes.
It is clear,
therefore, that the House of Lords was accepting the test of what was
collateral laid down by Best J.
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?’ Second, 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.
Therefore, in my judgment, these cases (which were not cited to Walton J) show
that he was in error in holding that a covenant at double remove could not
touch and concern the land.
Applying the
test laid down by Best J, a covenant by a surety securing the performance of a
tenant’s covenants in a lease satisfies it. The surety covenant increases the
value of the reversion in that the landlord can look not only to the tenant but
also to the sureties for the payment of a sum equal to the rent and for damages
for failure to comply with the other tenant’s covenants. Such surety covenant
is of value to no one other than the owner for the time being of the reversion,
since it is in support of the tenant’s covenants and the tenant’s covenants can
be enforced only by the reversioner for the time being. Once the lease has been
assigned, the assignor cannot enforce the tenant’s covenants in respect of
breaches occurring after the date of assignment and a fortiori cannot
enforce the surety covenant. No one other than the landlord can enforce the
surety covenant. The fact that it is a covenant only to pay a sum of money or
damages is not inconsistent with its touching and concerning the land.
Mr Blackburn
cited a number of cases which, he submitted, were inconsistent with this
conclusion. He submitted, in reliance on Woodall v Clifton [1905]
2 Ch 257, that an option to purchase the freehold contained in a lease did not
run with the land. In that case, an assignee of the lease sought to exercise an
option to purchase the freehold against the assignee of the reversion. This
court held that the action failed because the option to purchase the freehold
did not touch and concern the land in question. They identified the land to be
touched and concerned as being the term granted by the lease: see at p 279. In
my judgment, that decision does not impinge on the present case but depends
wholly on the fact that the court held that the land to be touched and
concerned had to be the term of years: the right to purchase the freehold could
not touch and concern the term of years: it was ‘something wholly outside the
relationship of landlord and tenant’.
In Thomas
v Hayward (1869) LR 4 Ex 311 a covenant by the lessor
to touch and concern the land because its value to the tenant was collateral:
it related to the business he carried on, not to the land itself. The decision
was a hard one and is to be treated as authority for no more than that a
covenant the value of which is wholly dependent on the use of the land for a
specific business is collateral.
Next Mr
Blackburn relied on Dewar v Goodman [1909] AC 72. In that case, a
headlease contained a covenant by the headlessee to repair all buildings
erected on the land, which numbered some 211 in total. The headlessee granted
an underlease of two of the houses and covenanted with the underlessee to
perform the covenants in the headlease so far as they related to premises not comprised
in the underlease. The plaintiff was the assignee of the underlease: the
defendant was the assignee of the headlease. Because of a breach of the
covenant to repair in the headlease, the freeholder forfeited the headlease and
ejected the plaintiff. The plaintiff sued the defendant for damages for breach
of the lessor’s covenant in the underlease. The House of Lords held that the
covenant to perform the covenants in the headlease did not touch and concern
the land in the underlease because it did not require anything to be done on
the land demised: the covenant related to the buildings other than those
contained in the underlease. Surprisingly, there is little discussion of the
second limb of the test in the Congleton case, ie that it is sufficient
if the covenant per se affects the value of the land even though this
does not involve doing anything on the land of the covenantee itself. Even more
surprisingly, although both cases were decided within months of each other and
the argument and decision in the House of Lords in Dewar v Goodman
was given after the argument in the House of Lords in Dyson v Forster,
in neither case is the other referred to, although Lord Loreburn was party to
both decisions.
I find the two
cases very difficult, if not impossible, to reconcile. The performance of the
covenant by the headlessee in Dewar v Goodman was manifestly of
value to the underlessee for the time being and to no one else. Yet this point
is not dealt with in the judgment. The distinction may lie in this. In Dewar
v Goodman the doing of the covenanted act did not benefit the land of
the covenantee as such but only his estate in it. The covenant was to repair
adjoining premises: the breach of the covenant did not affect the land
comprised in the underlease but merely led to a forfeiture of the estate in the
land. In Dyson v Forster, on the other hand, the covenant
benefited the owner of the surface land whatever his estate in it, eg it
enabled him to let the land at a better price. The distinction, if any, is therefore
between a covenant which operates only to protect the estate or interest in the
covenantee’s land (which does not touch and concern the land) and a covenant
which affects the value of the land as such. If this is a valid distinction,
then a surety covenant falls squarely on the Dyson v Forster side
of the line: it increases the value of the landlord’s reversion as such,
whatever his estate. If, as I suspect, the two decisions are in fact
irreconcilable, I am free to choose between them. I prefer to follow Dyson
v Forster, which gives effect to the second limb in the Congleton
test (which everyone has treated as the true basic test) whereas Dewar v
Goodman appears to ignore the second limb completely.
Mr Blackburn
also relied on Hua Chiao Commercial Bank Ltd v Chiaphua Industries
Ltd [1987] 2 WLR 179. In that case a lease provided that at the
commencement of the term the tenant should pay to the landlord a substantial
security deposit on the terms that it would be repayable at the end of the term
if there was no breach of the tenant’s covenants. The landlord mortgaged the
reversion to the defendant bank, which went into possession. The tenant
committed no breach of covenant during the term and sought to recover the
security deposit from the bank, claiming that the provisions as to the deposit
touched and concerned the land. The Privy Council dismissed the claim, holding
that the covenant did not touch and concern the land. Lord Oliver, giving the
judgment on behalf of the committee, plainly rejected any general rule that
every covenant which is related, however obliquely, to some other obligation
which touches and concerns the land itself necessarily touches and concerns the
land: see at p 187C. But he did not rule out the possibility that a covenant
closely connected and bound up with a covenant which does touch and concern the
land can itself touch and concern the land. The ratio of the decision, in my
judgment, is to be found at p 187F-H. Lord Oliver points out that the assignee
of the reversion was not entitled to receive the deposit from the original
lessor on the assignment of the reversion: nor was an assignee of the term
entitled to recover it at the end of the term. The liability to repay the
deposit at the end of the term remained throughout on the original landlord and
was an obligation to repay to the original tenant. So viewed, the decision is
entirely consistent with the test laid down by Best J. The benefit of the
covenant to repay could not touch and concern the land because someone other
than the owner for the time being of the term could take the benefit of it.
Finally, Mr
Blackburn relied on two Australian cases. The first, Consolidated Trust Co
Ltd v Naylor [1936] 55 CLR 423, was a decision that under certain
Australian statutory provisions an assignment of a mortgage did not operate to
transfer the benefit of the covenant by a surety that the borrower would repay
the principal debt. I do not myself gain any assistance from that decision. A
surety for a mortgage debt is a surety for the payment of the principal debt.
The borrower’s own covenant to pay the principal has nothing to do with the
land and cannot touch and concern the land: there is, therefore, no reason why
a covenant by way of surety for such a payment should touch and concern the
land. It is quite different from a surety for the performance of a tenant’s
covenant which does touch and concern the land: such a surety covenant is
necessarily and inextricably bound up with the tenant’s obligations.
The other
case, Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd
[1976] NSWLR 5, was concerned with the assignment of the benefit of a covenant
guaranteeing performance of tenant’s covenants. But no argument appears to have
been advanced that such covenant touched and concerned the land. It therefore
does not provide any assistance.
For these
reasons, in my judgment, it is consistent with both principle and authority to
hold that a covenant by a surety, guaranteeing performance of covenants by a
tenant which touch and concern the land, itself touches and concerns the land
and is enforceable by an assignee of the reversion. It follows that H & B
could have enforced the surety covenant against the defendants and that,
accordingly, the plaintiff is entitled to be subrogated to the rights of H
& B and recover from the defendants the sums he has paid to H & B.
4 The principle in Griffith v Pelton
In the light
of my decision on the third issue, it is not necessary to consider this
principle. Since I have considerable difficulty in understanding what Griffith
v Pelton did decide, I express no view on it.
In my opinion
the appeal should be allowed and judgment entered for the plaintiff.
CROOM-JOHNSON
and NEILL LJJ agreed and did not add anything.
The appeal
was allowed and judgment entered for the appellant in the sum of £23,401.96
plus interest at a figure to be agreed. Leave to appeal to the House of Lords
was granted, with stay pending appeal on the usual terms.
