Terms of lease — Construction — Liability — Second defendant acting as surety for first defendant — First defendant failing to pay rent — First defendant in breach of repairing and decorating covenants — Whether liability of surety extending to these covenants — Whether surety’s guarantee continuing
The first defendant (D1) was the wholly-owned subsidiary of the second defendant (D2). D1 leased property in Stansted, Essex, from the claimant and D2 acted as surety under the lease. The lease reserved a rent of £240,000 pa, which D1 covenanted to pay, with interest being charged on rent in arrears. The lease also contained standard tenant’s covenants to repair and to decorate the property. The surety covenant provided that D2’s liability would be limited to an annual rent of £210,000. D1 failed to pay the rent agreed in the lease.
The claimant issued proceedings against both D1 and D2, seeking possession of the property and payment of the rent arrears. D2 was sued on its surety covenant. Judgment was entered against D1 for £107,500 plus interest, and against D2 for £57,500 plus interest, which D2 accepted was due under its surety covenant. The balance of the claim against D2 continued.
The claimant also sought damages for breach of the repairing and decorating covenants, and a schedule of dilapidations was subsequently served. The court was not concerned with the merits of the dilapidations claim per se. The questions to be decided where whether D2 was potentially liable under the terms of its surety covenant for any loss and damage suffered by the claimant as a result of D1’s failure to repair and decorate the property, and the extent of D2’s liability to pay rent in arrears. The preliminary issue was whether D2’s liabilities were: (i) limited to the payment of the rent reserved at a rate of £210,000 pa; and (ii) under a continuing guarantee, the payment of any balance outstanding in any one year, subject to a maximum of £210,000, or, under a specific guarantee, the first £210,000 of rent due to the claimant by D1 in any one year.
Held: The guarantee that the first defendant would at all times pay the rents reserved by the lease (£240,000) was the primary obligation. However, a proviso in the surety covenant in the lease stated that the liability of the surety was limited to payment of rent at a rate different from that reserved (£210,000 pa), and could not sensibly be construed as meaning that the liability of the surety should not exceed £210,000. The effect of the proviso was that for as long as D2 remained a surety, and, in so far as D1 had failed to make the rent payments, D2’s liability would be limited to the payment of rent only to a maximum of £210,000. Accordingly, the guarantee extended to the shortfall in rent, together with interest at the prescribed rate.
Mark Loveday (instructed by Gawor & Co) appeared for the claimant; the first defendant did not appear and was not represented; Edward Denehan (instructed by Hardwick Stallards) appeared for the second defendant.
Eileen O’Grady, barrister
