Landlord and tenant — Suretyship covenant — Construction of covenant — Whether sureties released from liability after assignment of lease — Difficulty in giving acceptable meaning to the combined effect of the definition of ‘tenant’, the restriction on assignment clause and the suretyship covenant — Wrong to place on words which in themselves are plain and unambiguous, with a commercially acceptable sense, a highly technical and artificial meaning
came before Millett J in the form of a preliminary issue — One of the defendant
sureties had pleaded in an action that an assignment of the lease had released
him from his guarantee — The landlords then took out a summons for summary
judgment under Ord 14 — Schiemann J, however, not only gave unconditional leave
to defend but expressed the view that the surety’s case was not merely arguable
but correct — His judgment, of course, led only to the grant of unconditional
leave to defend — Millett J had to decide the substantive question on the
preliminary issue
which was of commercial premises, was for a 25-year term from 1978 — In 1985
the lease was assigned by the original tenant to another company — The sureties
were, it appears, all shareholders or directors of the original tenant and
probably of the assignee as well — The relevant provisions of the lease were as
follows — There was a prohibition of assignment or subletting without the
landlord’s consent, but with a proviso which entitled the tenant at any time to
assign or sublet without such consent to a company with the same members as the
tenant — The lease contained the usual definition of ‘tenant’ as including the
tenant’s successors in title where the context so admits — The surety covenant
was
vested in the tenant’ — Schiemann J at the Ord 14 stage considered that these
quoted words were meaningless unless they were intended to confine the
liability under the guarantee to the length of time during which the original
tenant remained the tenant — Millett J came in the end to the same conclusion
in favour of the sureties, but only after pursuing the matter through some
intricate argument
argued that the sureties’ restricted construction of the guarantee produced an
uncommercial effect as it meant that the sureties, who were shareholders or
directors of the original tenant, could have procured the assignment of the
lease to another company with the same members, thereby putting an end to the
suretyship obligations — The only conclusion that Millett J drew from this was
that the combined effect of the clauses in the lease had probably not been
appreciated — The only safe course was to construe the words of the suretyship
covenant as they stood without any predilection — The sureties submitted that
if there was ambiguity or doubt the covenant should be construed in favour of
the sureties, the defendants — In the judge’s view this so-called rule of
construction was very much a matter of last resort
of the suretyship covenant indicated that it was not intended to continue
throughout the whole of the term granted by the lease; on the contrary, it was
intended to confine the liability of the sureties to some part only of the term
— At first sight the view of Schiemann J that the words were meaningless unless
they meant what the sureties said seemed unassailable — The landlords, however,
at this point suggested another possible interpretation, a somewhat unexpected
one — There is a possibility in every lease that the term may continue to
subsist although not in fact vested in anyone — This follows from the statutory
provisions for disclaimer in the event of the insolvency of a lessee — If the
original tenant becomes bankrupt or goes into liquidation and the lease is
disclaimed the term does come to an end and the liability of any surety is
discharged — But if the bankruptcy or liquidation is that of an assignee of the
term the disclaimer does not end the term although it determines the assignee’s
interest in the term, which continues to subsist although apparently having no
owner: Warnford Investments Ltd v Duckworth — It was therefore submitted that the words ‘so long as
the term hereby granted is vested in the tenant’ in the present case could have
the effect of excluding liability of the sureties during the period when the
term continued after a disclaimer on the insolvency of an assignee and before a
vesting order was made — It was possible to give the words the sense for which
the landlords contended without rendering the relevant words meaningless — The
context admitted of the extended definition of ‘the tenant’ in order to give
the covenant the meaning for which the landlords argued
rejected this interesting argument — He held that it would be wrong, by
reliance on the words ‘where the context so admits’, to place on words which in
themselves were plain and unambiguous, and had an acceptable commercial sense,
‘a highly technical and artificial meaning which only a very experienced
conveyancer and, I might add, insolvency practitioner at that would think of’ —
The construction placed on the suretyship covenant by the sureties was correct
The following
cases are referred to in this report.
Eastern
Counties Building Society v Russell [1947] 1
All ER 500
Warnford
Investments Ltd v Duckworth [1979] Ch 127;
[1978] 2 WLR 741; [1978] 2 All ER 517; (1977) 36 P&CR 295
This was a
preliminary issue in the action by the landlords, Johnsey Estates Ltd, against
five sureties who had guaranteed the tenant’s obligations under a lease of
commercial premises at Newport Industrial Estate, Lee Way, Newport, Gwent.
David
Neuberger QC (instructed by Le Brasseur Davis & Sons, of Newport, Gwent)
appeared on behalf of the plaintiffs, Johnsey Estates Ltd; Michael Driscoll
(instructed by Gartside Harding & Davies, of Newport, Gwent) represented
the defendants.
Giving
judgment, MILLETT J said: I have to decide a preliminary issue in this
action. The question is whether the defendants have been released from their
liability as sureties under a lease of which they were sureties from the outset
by an assignment of that lease which has subsequently taken place. The question
turns entirely upon the true construction of some unusual words in the clause
which contains the sureties’ covenant. The defendants’ case is that on the true
construction of those words, the sureties were released from their guarantees
as soon as the term granted by the lease ceased to be vested in the original
tenant.
The lease was
granted on June 5 1978 for a term of 25 years from May 10 1978. It was a lease
of commercial premises and it was granted to a company called Severndale Motors
Ltd. The tenant’s obligations were guaranteed by the defendants. On August 21
1985 the lease was assigned to a company called Severndale Trucks Ltd and
underlet. The sureties were all, as I understand it, and as the evidence
suggests, shareholders in or directors of the original tenant and it may well
be of the assignee as well.
The lease
contains amongst the tenant’s covenants a covenant at clause 3(o) which
contains a prohibition against assignment or subletting without the landlord’s
consent, subject to a proviso which entitles the tenant at any time to assign
or sublet without such consent to a company with the same members as the
tenant. The lease contains the usual definition of ‘tenant’ as including the
tenant’s successors in title where the context so admits.
The writ was
issued on November 6 1986. One of the defendants pleaded that the assignment
had released him from his guarantee and the plaintiffs then took out a summons
for summary judgment under Ord 14. Eventually that summons came on appeal
before Schiemann J. He gave unconditional leave to appeal, expressing his view
that the submissions made to him on behalf of the defendant on the true construction
of the suretyship covenant were not merely arguable but indeed right.
The covenant
in question is a covenant by the sureties with the landlord that ‘at all times so
long as the term hereby granted is vested in the tenant, the tenant will
pay the rent hereby reserved’ and so on. The question therefore is as to the
true meaning of the words ‘so long as the term hereby granted is vested in the
tenant’ and in particular whether the phrase ‘the tenant’ means the original
tenant or whether the context admits of the extended definition to include the
tenant or its successors in title.
Schiemann J
thought that the words ‘so long as the term hereby granted is vested in the
tenant’ were meaningless unless they were intended to confine the liability
under the guarantee to the length of time during which the original tenant
remained the tenant. I have heard more elaborate argument than that presented
before Schiemann J and I am, of course, not bound by his judgment, which led
only to unconditional leave to defend being given. I now have to decide the
question itself.
Before doing
so I should deal with some preliminary matters. Schiemann J relied to some
extent upon the fact that counsel were unable to point to any other place in
the lease where the narrow meaning of ‘the tenant’ as meaning the original
tenant only was apposite. From that he concluded that the use of the words
‘where the context so admits’ implied that there was somewhere in the lease a
phrase where ‘the tenant’ was confined to Severndale Motors Ltd.
In fact it is
not difficult to find places in the lease where ‘the tenant’ plainly does mean
Severndale Motors Ltd, in particular, for example, in the testimonium. However,
I do not accept the approach of the learned judge. The mere fact that the
draftsman has, by way of caution, qualified the definition of ‘the tenant’ as
including successors in title only where the context so admits by no means
leads to any implication that there must somewhere or other in the lease be
found a place where it does not.
Next, before
me the plaintiffs have placed great reliance upon the effect of clause 3(o) of
the lease under which the tenant is free to assign or sublet, and in particular
assign, without the landlord’s consent provided he does so to a company having
the same membership as the original tenant. It was submitted that the
defendants’ construction of the suretyship covenant gives the lease an
uncommercial effect because the sureties, who were the shareholders or
directors of the original tenant, could immediately the ink was dry on the
lease and without the consent of the landlord have assigned the lease to
another company of which they were members and thereby determined the suretyship
covenant, thus depriving the landlords of any effective continuing guarantee.
Accordingly, it was submitted, I ought if possible to construe the suretyship
covenant in the context of a lease containing clause 3(o) in order to give the
combined effect of the two clauses some effective commercial consequences.
But that
submission only means that if the combined effect of clause 3(o) and of the
limited suretyship covenant had been appreciated before the lease was executed,
it is probable that some change would have been made to one or the other. It by
no means follows that the change would have been made to the suretyship
covenant, still less that the sureties would have been willing to guarantee the
payment of the rent and performance of the tenant’s obligations at any time
after they had themselves ceased to have any control over the payment of the
rent and the performance of the covenants. Had the combined effect of the two
clauses been considered, it is more likely that some solution would have been
found in order to limit the sureties’ liability to the period during which the
original tenant or some other tenant having the same membership as the original
tenant had the lease vested in it.
The only
conclusion that I can reach from the fact that both clauses are present in the
lease is that their combined effect was probably not appreciated. In my
judgment the only safe course in such a situation is to construe the words of
the suretyship covenant as they stand and without any predilection to give them
some greater effect than the words properly construed have in order to overcome
the effect of clause 3(o) of the lease upon them.
Lastly, it was
submitted on behalf of the defendants that if there is an ambiguity or doubt
upon the meaning of the suretyship covenant I should construe it in favour of
the defendants and against the plaintiffs. Certainly it is true that neither
equity nor law will put a construction on a contract of guarantee which results
in imposing on the surety any greater obligation than that which on the
strictest construction of the instrument he must be said expressly to have
undertaken: see Eastern Counties Building Society v Russell
[1947] 1 All ER 500.
On the other
hand, the words have to be fairly construed in their context and in accordance
with their proper meaning without in any way favouring the guarantor, who is
not placed in any more favourable position in this regard than any other
contracting party. The so-called rule of construction is very much a matter of
last resort.
I turn back,
therefore, to the suretyship covenant in the present case. Its operation is
expressly limited ‘so long as the term hereby granted is vested in the tenant’.
It is clear that the covenant was not intended to continue throughout the term
granted by the lease. On the contrary it was intended to confine the liability
of the sureties to some part only of the term granted by the lease. At first
sight Schiemann J’s approach that those words were meaningless unless they had
the effect contended for by the defendants appears to be unassailable. What is
the difference between ‘the duration of the term hereby granted’ and ‘the
duration of the term hereby granted while it is vested in the original tenant
or one of his successors’?
Counsel for
the plaintiffs, however, has pointed out to me that there is in fact a
possibility in every lease that the term may continue to subsist while not in
fact being vested in anybody at all. That somewhat surprising conclusion
follows from the statutory provisions for disclaimer in the event of the
bankruptcy or liquidation of a lessee. If the original tenant becomes bankrupt
or goes into insolvent liquidation and the lease is disclaimed, the term comes
to an end and the sureties’ liability is automatically discharged. If, however,
the bankruptcy or insolvency is that of an assignee of the term, the disclaimer
of the lease does not bring the term to an end, although it determines the
interest of the assignee in the term, thus divesting the assignee of the term
which continues to subsist although apparently having no owner. It is, in my
judgment, plain both from the statutory language and from the decision of V-C
Sir Robert Megarry in Warnford Investments Ltd v Duckworth [1979]
Ch 127, that between the date on which the trustee in bankruptcy or liquidator
of the assignee disclaims the lease and the date when any vesting order is
made, the term continues to subsist but is not vested in any successor in title
of the original tenant.
Accordingly,
under the normal formula of a guarantee which continues ‘during the term hereby
granted’ the sureties of the original tenant remain liable, and of course
remain liable both during the period of the disclaimer and after any vesting
order has been made. Counsel submitted that the words ‘so long as the term
hereby granted is vested in the tenant’ in the present case have the effect of
excluding liability of the sureties during the period when the term continues
after disclaimer by the trustee in bankruptcy or liquidator of an assignee and
before a vesting order has been made, because during that period the term
subsists but is not vested in any successor in title to the tenant, but have no
further or other effect.
It is
therefore possible to give the words the meaning for which the plaintiffs
contend without rendering the relevant words meaningless. The question is
whether that is the proper construction of the words. Had the words been ‘so
long as the term hereby granted is vested in the tenant or any successor in
title’ it would have been necessary for the court to find, if at all possible,
some meaning to give those words, and the meaning for which the plaintiffs
contend would have been available; but that is not the expression used. The
expression is ‘so long as the term hereby granted is vested in the tenant’ and
the question is whether the context admits of the extended definition in order
to give the covenant the meaning for which the plaintiffs contend.
The plaintiffs
submitted that the context does admit of the extended definition. It is
possible to give the extended definition of the words ‘the tenant’ some
meaning. The context therefore admits it and the lease requires the words to be
given their extended definition.
In my
judgment, that is not the effect of the words ‘where the context so admits’. They
are not the same as ‘save where the context otherwise requires’. Unless the
court is of opinion not only that the extended definition is capable of being
given effect but also that the context admits of that extended definition, then
the court must construe the words ‘the tenant’ as meaning only the original
tenant. In my judgment, it would be wrong, by reliance on the words ‘where the
context so admits’, to place on words which in themselves are plain and
unambiguous and have an easily understood and commercially acceptable sense, a
highly technical and artificial meaning which only a very experienced
conveyancer and, I might add, insolvency practitioner at that would think of.
It is, I think, beyond belief that anyone considering the suretyship covenant
for either party would have in mind the very limited period and very rare
occurrence during which a term of years may be divested from a bankrupt
assignee and yet not vested in some other party. Not only is it most unlikely
that either party had it in mind but it seems a most unlikely solution to the
problem of the surety who wishes to limit his liability to some relevant period
during which he can be properly expected to bear it. In my judgment, the
context does not admit of the extended definition. Accordingly, though for
rather different reasons and after hearing rather different argument, I, too,
think that the construction which is placed upon the suretyship covenant by the
defendants is correct.
