Contracts (Rights of Third Parties) Act 1999 — Former tenant guaranteeing liabilities of assignee — Supplemental deed between assignee and landlord stated to limit recovery against tenant or any previous tenant to assets of assignee — Whether deed intended to limit liability of previous tenant as guarantor — Whether previous tenant entitled to rely upon provisions of deed as third party upon which benefit conferred under section 1(1)(b) of 1999 Act
The respondents were the tenants of the appellant under a 1997 underlease of office premises for a term ending in December 2006. In 2001, the appellant granted a licence to the respondents to assign the underlease to an American partnership (A&G). The respondents and A&G were parties to that licence. The respondents agreed to act as guarantors for A&G’s obligation to pay the rent reserved by the underlease. By a supplemental deed, to which only the appellant and A&G were parties, it was agreed that “the liability of the Tenant under the lease… shall be limited to the Partnership” and that “consequently any recovery by the Landlord against the Tenant or any previous tenant under the Lease for any such default shall be limited to assets of the Partnership”.
A&G subsequently became bankrupt. The appellant sought to recover £1.5m in rent arrears and interest from the respondents in their capacity as A&G’s guarantors. The respondents denied liability and relied upon the terms of the supplemental deed. Issues arose as to whether: (i) the deed limited recoverability against a previous tenant to the assets of the partnership; and (ii) the respondents could rely upon the provisions of the deed, even though they were not parties to it, as third parties upon which it purported to confer a benefit within the meaning of section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999. Giving judgment for the respondents in the court below, Lindsay J held that although the obligation to pay rent remained the same, the limited recovery provisions of the supplemental deed restricted the appellant’s remedy to the extent of the described partnership assets, and the respondents could take advantage of those provisions. The appellant appealed.
Held: The appeal was allowed. Something had gone wrong with the drafting of the supplemental deed such that a construction based simply upon established rules of grammar and the ordinary meaning of the words used would be unsatisfactory. Construed in its factual context, the purpose of the supplemental deed was to ensure that the landlord would not be entitled to have recourse to the personal assets of the individual partners to recover any amounts due under or in connection with the lease. The deed did not affect the tenant’s obligations under the lease or the remedies available to the appellant, but merely restricted the assets to which the appellant could have recourse to enforce its rights. None of the parties to the transaction had contemplated that the relationship between the appellant and the respondents would be affected in any way as a result of the supplemental deed or that the scope of the respondents’ liability to the appellant would be limited. It was probable that the reference to “any previous tenant under the lease” had been inserted in the wrong place in the supplemental deed and that the relevant provision should read: “any recovery by the Landlord or any previous tenant under the Lease against the Tenant for any such default shall be limited to assets of the Partnership”. The intention had been to equate the respondents’ position with that of the appellant in the event that they chose to pursue a claim under the covenants contained in the assignment. The fact that it would be ineffective to accomplish that result without making the respondents parties to the deed did not outweigh the conclusion that that was what had been intended. So construed, the supplemental deed did not purport to confer any benefit upon the respondents, but rather purported to limit their rights against the individual partners of A&G. Consequently, it provided no defence to the appellant’s claim and no question arose as to the operation of the 1999 Act.
The following cases are referred to in this report.
Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191; [1984] 3 WLR 592; [1984] 3 All ER 229; [1984] 2 Lloyd’s Rep 235
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130; [1956] 1 All ER 256
Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1); Investors Compensation Scheme Ltd v Hopkin & Sons; Alford v West Bromwich Building Society; Armitage v West Bromwich Building Society [1998] 1 WLR 896; [1998] 1 All ER 98, HL
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; [1997] 2 WLR 945; [1997] 3 All ER 352; [1997] 1 EGLR 57; [1997] 24 EG 122; [1997] 25 EG 138, HL
Reardon Smith Line Ltd v Yngvar Hansen-Tanger [1976] 1 WLR 989; [1976] 3 All ER 570; [1976] 2 Lloyd’s Rep 621, HL
The Prudential Assurance Co Ltd v Ayres [2007] EWHC 775 (Ch); [2007] 3 All ER 946; [2007] 2 EGLR 31; [2007] 28 EG 122
This was an appeal by the appellant, The Prudential Assurance Co Ltd, from a decision of Lindsay J, sitting in the Chancery Division, dismissing its claim to recover rent arrears from the respondents, David Ayres and Christopher Grew, as guarantors of a tenant’s obligations under an underlease.
Anthony Trace QC and Philomena Harrison (instructed by Lovells LLP) appeared for the appellant; Alan Steinfeld QC and Richard Ritchie (instructed by Kingsley Napley) appeared for the respondents.
Giving judgment, Moore-Bick LJ said:
[1] This is an appeal against an order of Lindsay J dismissing the appellant’s claim for outstanding rent and other charges under a guarantee given by the respondents of the obligations of the tenant under an underlease of premises constituting part of an office building known as Hasilwood House, Bishopsgate. The appellant is the |page:6| well-known insurance company, The Prudential Assurance Co Ltd (the Prudential); the respondents are, or were at the material time, partners in Brobeck Hale & Dorr International (Brobeck), a firm of American lawyers.
[2] Hasilwood House is owned by the Leathersellers Company (the Leathersellers). On 21 December 1995, the Prudential entered into a lease of the premises that contained, among other things, a covenant against assignment or subletting without the landlord’s consent, such consent not to be unreasonably withheld.
[3] On 12 March 1997, the Prudential, with the consent of the Leathersellers, entered into an underlease of part of the premises, for a term expiring on 24 December 2006, with Mr Donald Joseph Guiney and Mr David Monroe Ayres, two partners in Brobeck. The underlease contained a similar covenant against assignment or subletting, but it entitled the Prudential, as a condition of giving its consent to any assignment, to require the tenant to execute a guarantee of the assignee’s covenants in a specified form complying with section 16 of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act). On 24 September 1998, by a deed of assignment, covenant, release and licence made between the Prudential, Mr Guiney, Mr Ayres and Mr Christopher Grew, Mr Grew replaced Mr Guiney as tenant under the underlease.
[4] This appeal arises out of a subsequent assignment of the underlease by the respondents to another firm of American lawyers, Altheimer & Gray (A&G), in June 2001. Since this appeal is not concerned with the headlease, it is convenient in the rest of this judgment to refer to the underlease simply as “the lease”.
[5] A&G became interested in acquiring the lease in early 2001, if not before. The normal way of carrying out a transaction of that kind would be for two partners residing in this country to take an assignment of the lease for the benefit of the firm as a whole, as had been the case with Brobeck, but A&G made it clear to all concerned from a very early stage that it wanted to take the assignment in the name of the partnership and that it was willing to proceed with the transaction only on the basis that there should be no recourse against the personal assets of the individual partners. The correspondence surrounding the negotiations for the assignment makes it clear that both the Prudential and the respondents were willing to accept those two demands, which do not appear to have been the subject of any significant negotiation. There were negotiations about the precise manner in which those requirements were to be implemented and also about the provision of additional security required by the Prudential in the form of a bank guarantee in respect of the payment of rent, but not about their substance. I think that it is clear, therefore, that the transaction proceeded on the footing that the position of A&G was to be equated for all practical purposes with that of a limited liability company whose shares were fully paid up.
[6] By 8 May 2001, the terms of the proposed assignment had been agreed in principle between the Prudential, the respondents and A&G and the documents intended to give effect to it had all reached their final form with one exception, to which I shall come in a moment. On that date, the respondents entered into an agreement with A&G to assign the residue of the lease on terms that A&G would enter into a covenant with them in the assignment to pay all rent becoming due under the lease from the date of completion.
[7] Before the transaction could be completed, however, it was necessary for the Prudential to obtain the Leathersellers’ consent to the assignment. That was achieved by the execution of a licence to assign (the licence) executed by all four interested parties, namely the Leathersellers, the Prudential, the respondents and A&G, on 8 June 2001. The terms of the licence have assumed some importance in this case and it is therefore necessary to refer to some of them in detail. They included the following:
3. The Assignee [A&G] hereby covenants:
3.1 with the Landlord [the Leathersellers] that the Assignee will perform and observe all the covenants on the part of the lessee and the conditions and provisions on the part of the lessee contained in the Underlease.
3.2 with the Tenant [the Prudential] that the Assignee will pay the rents in the manner and at the respective times appointed for payment thereof…
…
6. The Undertenant [the respondents] covenants with and guarantees to the Tenant that:
…
6.3 the Assignee shall punctually pay the rents and perform and observe the covenants and other terms of the Underlease;
6.4 if the Assignee shall… make any default in payment of the rents or in performing or observing any of the covenants or other terms of the Underlease the Undertenant will pay the rents and perform and observe the covenants or terms in respect of which the Assignee shall be in default and make good to the Tenant on demand and indemnify the Tenant against all losses damages costs and expenses arising or incurred by the Tenant as a result of such non-payment non-performance or non-observance notwithstanding:
6.4.1 any time or indulgence granted by the Tenant to the Assignee…
…
6.4.4 any other act or thing which but for this provision the Undertenant would have been released.
In addition, clause 6.5 of the licence contained a covenant on the part of the respondents to accept a new lease for a period equivalent to the residue of the old lease should the assignee disclaim prior to any further lawful assignment.
[8] The assignment itself was executed by the respondents and A&G on 21 June 2001. It contained, among others, the following provisions:
3.3 The Assignee covenants with the Assignor that the Assignee… will henceforth during the said term and any statutory continuation of it pay the reserved rent and perform and observe the tenant’s covenants and the conditions contained in the Lease and will at all times keep the Assignor indemnified against all proceedings, costs, claims and expenses whatsoever in respect thereof.
[9] On the same date, the Prudential (as landlord) and A&G (as tenant) executed a deed (the supplemental deed) that was expressed to be supplemental to the lease and which provided, so far as is material, as follows:
2. PARTNERSHIP LIABILITY
Whilst the Lease is vested in Altheimer & Gray or any Group Company of Altheimer & Gray or while Altheimer & Gray or any Group Company of Altheimer & Gray remains liable under an authorised guarantee agreement pursuant to Section 16 of the Landlord and Tenant (Covenants) Act 1995 (but notwithstanding any assignment or other transfer, or any disclaimer, of the same or any other event or circumstances whatsoever):
2.1 The liability of the Tenant under the Lease and all documents ancillary to or supplemental to the lease and the liability of the Tenant under any authorised guarantee agreement given in connection with any assignment of the Lease shall be limited to the Partnership (including, but not limited to all its assets, income and accounts) and such liability shall not extend to the personal assets of individual partners (present, past or future) therein. Consequently any recovery by the Landlord against the Tenant or any previous tenant under the Lease for any such default shall be limited to assets of the Partnership and shall not extend to the personal assets of any individual partners therein other than the capital and current accounts of such partners in the Partnership. Further, no partner (present, past or future) of the Tenant shall be required by the Landlord at any time to loan or contribute personal money or property to the Tenant to enable it to discharge any obligation owed to the Landlord.
2.2 In the event of the liquidation of Altheimer & Gray… in circumstances where the liquidator would have a right to bring a claim against the separate estate of any of the individual partners or to prove for the same by reason of any insufficiency in the joint estate for the payment of the joint expenses and joint debts with or without interest thereon, then the Landlord shall not be entitled to any payment, dividend or other distribution from any such liquidator, in either case to the extent that [t]he liquidator may be or become entitled to make or have made any claim or submit or have submitted any proof against the individual partners themselves or their separate estates. The Landlord undertakes that when submitting any proof of debt in any such liquidation it will notify the liquidator of the terms of this Deed and will complete such proof of debt so as to give effect to the intent of this Clause 2.2.
[10] Unfortunately, the affairs of A&G did not prosper and, on 21 November 2003, the firm went into Chapter 11 bankruptcy in the US. In those proceedings, the court made an order authorising it to reject the |page:7| lease and it purported to do so, but no steps were taken to wind up the affairs of the partnership in this jurisdiction until May 2006. On 23 June 2006, the official receiver, as liquidator, formally disclaimed the lease. By that time, there remained outstanding in respect of rent and other charges payable under the lease a sum of approximately £1.3m. The amount outstanding is now agreed to be a little more than £1.5m, excluding interest.
[11] The present proceedings were commenced by the Prudential against the respondents as long ago as 13 May 2004. By its claim form, the Prudential sought a declaration that the respondents were obliged to accept a new lease of the premises following the purported disclaimer of the lease pursuant to the order of the court made in the bankruptcy proceedings in the US. However, that claim was later abandoned and the particulars of claim were amended to claim for outstanding rent and other charges under the covenants contained in clauses 6.3 and 6.4 of the licence.
[12] The respondents do not dispute that A&G has failed to pay the rent and other charges due under the lease, nor do they deny that clauses 6.3 and 6.4 of the licence on their face render them liable for the outstanding amounts. Their primary argument is that the effect of the supplemental deed is to prevent the Prudential from recovering from them any greater sum than it can recover from A&G in the liquidation. In their defence, the case is pleaded in the following way:
15. b. The effect of clause 2 of the Supplemental Deed is that the claimant has agreed that during the period in which the Underlease is vested in Altheimer & Gray the rent shall be limited to the amount it can recover out of the assets of the Altheimer & Gray partnership.
c. Altheimer & Gray is not in default of its obligations under the Underlease as those obligations have been expressly varied by clause 2 of the Supplemental Deed…
That is reflected in para 1 of their respondents’ notice, in which they seek to uphold the judge’s order on the grounds that:
the effect of the Supplemental Deed was to reduce the liability of Altheimer & Gray under the lease and hence pro tanto the liability of the respondents under their guarantee.
[13] In the event, however, the arguments ranged rather more widely than that. The respondents relied strongly upon what they submitted was the natural meaning of the words used in clause 2.1, read according to their ordinary grammatical sense. They argued that the clear purpose of the supplemental deed collected from its provisions as a whole was to protect the personal assets of the partners in the event of any failure by A&G to perform the covenants in the lease, no matter the route by which claims might be made against the partnership, and that limiting the Prudential’s rights of recovery against themselves as previous tenants and assignors was consistent with that objective. Although they were not parties to the supplemental deed, the respondents submitted that they were entitled to enforce it in their own right under the terms of the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act). They also argued that if clauses 6.3 and 6.4 of the licence impose on them a greater burden than that assumed by A&G under the lease, they were to that extent void by virtue of sections 16 and 25 of the 1995 Act.
[14] The judge thought that there was some force in the respondents’ primary argument in the light of the language of the first sentence of clause 2.1, which states that “the liability of the tenant… shall be limited… “. He accepted that the rent reserved by the lease remained unchanged, but he considered that clause 2.1 indicated a binding willingness on the part of the Prudential to accept less than the reserved rent in certain circumstances. He regarded it as amounting to a partial waiver of the covenant as to rent and likened the case to Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. He then moved to consider the second sentence of clause 2.1, which he held should be given its ordinary grammatical meaning, reflecting what he described as “the commanding purpose” of the deed as a whole, namely to protect the partners’ personal assets. He rejected the Prudential’s argument that such a construction flew in the face of business common sense by effectively depriving it of the benefit of the covenants obtained under the licence only a few days earlier. He therefore held that the supplemental deed limited the Prudential’s rights of recovery against the respondents and thus conferred on them a benefit that, although they were not parties to it, they could enforce by virtue of the 1999 Act. In the light of his conclusion on the effect of the first sentence of clause 2.1 the judge concluded that the 1995 Act did not assist the respondents. His judgment is reported at [2007] EWHC 775 (Ch); [2007] 3 All ER 946*.
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* Editor’s note: Also reported at [2007] 2 EGLR 31
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[15] Mr Anthony Trace QC submitted, on behalf of the Prudential that although the judge had carried out a careful analysis of the language of the supplemental deed, he had failed to take proper account of the commercial background to the transaction and, as a result, had reached a conclusion that is absurd in business terms and fails to reflect the intention of the parties. His argument rested primarily, although not entirely, on the fact that, only a fortnight before the lease was assigned to A&G, all four parties interested in the transaction had entered into the licence under which the respondents gave unqualified covenants guaranteeing the payment of rent by the assignee. He submitted that in the absence of any evidence that the essential nature of the transaction had undergone any alteration in the intervening period, it cannot possibly have been intended that the respondents should effectively be released from their obligations under those covenants. The supplemental deed should not be construed simply by reference to the natural meaning of the words used or the ordinary rules of grammar, but in such a way as to give effect to the intention of the parties. In support of that submission, he relied principally upon the well-known authorities of Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749†, and Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896.
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† Editor’s note: Also reported at [1997] 1 EGLR 57
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[16] In Mannai, the House of Lords was concerned with a notice to determine a lease pursuant to a break clause that allowed the tenant to give six months’ notice “to expire on the third anniversary of the term commencement date.” The term commenced on 13 January 1992. On 24 June 1994, the tenant gave notice to expire on 12 January 1995, but the landlord contended that it was ineffective to determine the lease because the third anniversary of the commencement date was 13 January, not 12 January. The argument therefore centred on whether it was essential for the notice to comply on its face with the terms of the lease or whether it was sufficient for it to make it clear to the landlord that the tenant intended to exercise its right under the break clause. A majority of their lordships held that the notice communicated the tenant’s intention to terminate the lease in accordance with the clause and that it was therefore effective. The case is important, therefore, not merely as the leading authority on the construction of contractual notices but also as authority for the general proposition that commercial documents of all kinds ought to be construed in accordance with the way in which language is used in everyday life so as to give effect to the intention of the parties.
[17] The need to take into account the background to the documents of that kind had earlier been recognised by Lord Wilberforce in Reardon Smith Line v Yngvar Hansen-Tanger [1976] 1 WLR 989, and the importance of construing commercial documents in accordance with business common sense had been recognised by Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191. In Mannai, Lord Steyn and Lord Hoffmann expounded the principles that lie behind that approach and, in doing so, explained why they are generally applicable to oral and written statements of all kinds. At p774C-G, Lord Hoffmann said:
I propose to begin by examining the way we interpret utterances in everyday life. It is a matter of constant experience that people can convey their meaning unambiguously although they have used the wrong words. We start with an assumption that people will use words and grammar in a conventional way but quite often it becomes obvious that, for one reason or another, they are not doing so and we adjust our interpretation of what they are saying accordingly. We do so in order to make sense of their utterance: so that the different parts |page:8| of the sentence fit together in a coherent way and also to enable the sentence to fit the background of facts which plays an indispensable part in the way we interpret what anyone is saying. No one, for example, has any difficulty in understanding Mrs Malaprop. When she says “She is as obstinate as an allegory on the banks of the Nile,” we reject the conventional or literal meaning of allegory as making nonsense of the sentence and substitute “alligator” by using our background knowledge of the things likely to be found on the banks of the Nile and choosing one which sounds rather like “allegory.”
Mrs Malaprop’s problem was an imperfect understanding of the conventional meanings of English words. But the reason for the mistake does not really matter. We use the same process of adjustment when people have made mistakes about names or descriptions or days or times because they have forgotten or become mixed up. If one meets an acquaintance and he says “And how is Mary?” it may be obvious that he is referring to one’s wife, even if she is in fact called Jane. One may even, to avoid embarrassment, answer “Very well, thank you” without drawing attention to his mistake. The message has been unambiguously received and understood.
[18] Both Lord Steyn (who also emphasised that the law generally favours a commercially sensible construction) and Lord Hoffmann were at pains to emphasise that the court is concerned with the objective meaning of the words used. However, Lord Hoffmann was concerned to point out that that does not mean that the court is required to give them a meaning that is inconsistent with that which the parties themselves would give them. At p775B-D, he said:
It is of course true that the law is not concerned with the speaker’s subjective intentions. But the notion that the law’s concern is therefore with the “meaning of his words” conceals an important ambiguity. The ambiguity lies in a failure to distinguish between the meanings of words and the question of what would be understood as the meaning of a person who uses words. The meaning of words, as they would appear in a dictionary, and the effect of their syntactical arrangement, as it would appear in a grammar, is part of the material which we use to understand a speaker’s utterance. But it is only a part; another part is our knowledge of the background against which the utterance was made. It is that background which enables us, not only to choose the intended meaning when a word has more than one dictionary meaning but also, in the ways I have explained, to understand a speaker’s meaning, often without ambiguity, when he has used the wrong words.
[19] These passages are directed primarily at the construction of particular words or phrases, but as one can see from this latter passage, the grammatical structure of a document is itself only part of the material used to understand its meaning and one is here reminded of Lord Diplock’s observation in Antaios Compania, at p201D, that:
if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.
[20] Investors Compensation Scheme arose out of claims made against the fund established by the Financial Services Act 1986 to provide compensation for those who had unsatisfied claims against persons authorised under that Act to carry on investment business. Many people who had suffered significant losses as a result of entering into home income plans, under which they mortgaged their houses to building societies on the advice of independent financial advisers, made claims against the fund. Investors seeking compensation from the fund were required to complete a form that contained an assignment of the investor’s rights against third parties, subject to the reservation of certain rights against the building society. By clause 3(b), these rights included:
Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against [the society] in which you claim an abatement of sums which you would otherwise have to pay to that society in respect of sums borrowed by you from that society in connection with the transaction and dealings giving rise to the claim (including interest on any such sums).
[21] The issue before the court was whether (as the words might suggest) investors retained all claims for an abatement of what was owing to the society or whether the commercial context required the clause to be given a more restricted meaning. Evans-Lombe J, at first instance, considered that to give the clause the wide meaning that its language would ordinarily require would lead to a ridiculous result that the parties were unlikely to have intended, and that it should therefore be construed as providing that the investor should retain any claim for an abatement of his debt that arose out of a claim for rescission, whether for undue influence or otherwise. That amounted to construing the clause as though it read:
Any claim sounding in rescission (whether for undue influence or otherwise) that you have or may have against [the society]…*
The Court of Appeal thought that the judge had gone too far, but the majority in the House of Lords, agreeing with Lord Hoffmann, upheld his conclusion.
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* Editor’s note: See Investors Compensation Scheme Ltd v Cheltenham & Gloucester plc [1996] 2 BCLC 164, at p182C
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[22] In a lengthy passage, at pp912F-913F, Lord Hoffmann summarised the effect of the earlier decisions concerning the approach to the construction of documents and statements in general. It is unnecessary to cite that passage at length, but as he observed, the result of those decisions (not the least important of which was Mannai) has been to assimilate the way in which such documents are interpreted by judges to the way in which they are interpreted in ordinary life. Perhaps the most significant aspect of this development is the acceptance that what is commonly referred to as the “background” to the contract includes any information (other than evidence of negotiations or subjective intention) that was reasonably available to both parties at the time of entering into the contract and that would have affected the way in which the language of the document would have been understood by a reasonable man. Viewed in that way, the background may enable the reasonable man to conclude that the parties must, for whatever reason, have used the wrong words or syntax. It is important to note that Lord Hoffmann specifically rejected any suggestion that judges cannot, short of rectification, decide that the parties must have made mistakes of meaning or syntax.
[23] At this point, it is necessary to return to the background to the supplemental deed. I think that it is clear that the Prudential and the respondents accepted from an early stage that the assignment to A&G could proceed only on the basis that the landlord should not be entitled to have recourse to the personal assets of the individual partners to recover any amounts due under or in connection with the lease. That was a departure from normal practice, which made it necessary to make some formal provision for limiting or excluding the rights that would otherwise be available against the individual partners, and it was that which was the subject of the supplemental deed. However, there is no evidence to suggest that any of the parties to the transaction contemplated that the relationship between the Prudential and the respondents would be affected in any way as a result. Certainly, the execution, on 8 June 2001, of the licence containing the unqualified covenants in clauses 6.3 and 6.4 (which expressly provided that the respondents’ liability should not be affected by any transactions between the Prudential and A&G) suggests that they had intended that it should not be. That is of some significance given the fact that the terms of the supplemental deed had been settled before the end of March.
[24] Although it is not clear whether the Prudential had actual knowledge of the terms of the agreement to assign or of the assignment itself, it would be normal practice for it to include a covenant on the part of the assignee in favour of the assignor to pay the rent due and to perform the other obligations under the lease. Moreover, any suggestion that the respondents’ rights against A&G or the individual partners should be restricted would undoubtedly have led the respondents to raise with the Prudential the scope of their own liability. One can therefore fairly summarise the position as known to both parties immediately prior to the execution of the supplemental deed as follows: (i) the Prudential had agreed to an assignment of the lease to A&G on terms that the respondents guaranteed payment of the rent and the performance of all its other terms, notwithstanding any arrangements that it might itself make with A&G; (ii) the respondents |page:9| had agreed to assign the lease to A&G on terms that A&G undertook to perform its terms and to indemnify them against any failure to do so; (iii) the Prudential had agreed to limit its right of recourse in the event of any default by A&G in the performance of the lease to partnership assets; (iv) the respondents were aware of that; (v) the scope of the respondents’ liability to the Prudential had not arisen for consideration; and (vi) the scope of A&G’s liability to the respondents had not arisen for consideration.
[25] Against that background, I come to consider the terms of the supplemental deed. Perhaps the first point to make is that it is one of a number of formal documents created to give effect to a transaction involving four different interests: those of the Leathersellers, the Prudential, the respondents and A&G. That is significant in the light of the fact that the parties to the supplemental deed are the Prudential and A&G alone; neither the Leathersellers nor the respondents are parties, as one would expect them to be if it had been intended to affect their rights or obligations. (It will be recalled that clause 3.1 of the licence contained covenants by A&G in favour of the Leathersellers.) The next point to note is that the deed is expressed to be supplemental to the lease alone. It is not expressed to be supplemental to the licence or to the assignment, in which A&G gave unqualified covenants in favour of the Leathersellers and the respondents respectively, and it makes no reference of any kind to either of those documents. In my view, these are all powerful indications that the supplemental deed was not intended to affect the position of any parties other than those of the Prudential and A&G under the lease.
[26] It is convenient to consider first the respondents’ argument that the effect of the supplemental deed was to limit the amount recoverable by way of rent while A&G remained the lessee or otherwise liable in respect of rent. That is said to follow from the first sentence of clause 2.1, which provided as follows:
The liability of the Tenant under the Lease… shall be limited to the Partnership (including, but not limited to all its assets, income and accounts) and such liability shall not extend to the personal assets of individual partners (present, past or future) therein.
[27] The judge regarded that sentence as demonstrating a binding willingness on the part of the Prudential to accept less than the reserved rent if A&G raised the inadequacy of the partnership assets, so that although the obligation remained the same, the Prudential would have no remedy beyond the extent of those assets. With respect to the judge, I think that there is a danger here of confusing the scope of the tenant’s obligations with the remedies available to the landlord in the event of default and the steps available to the landlord to enforce those obligations. Although Mr Alan Steinfeld QC submitted that the effect of clause 2.1 was to reduce the liability of A&G under the lease, that seems to me to be both inconsistent with the remainder of the clause and contrary to business common sense. It would be completely unworkable for A&G’s obligation to pay rent and the Prudential’s right to recover it to vary in accordance with the state of the partnership assets, which could be expected to be constantly fluctuating. Whether one were looking at gross or net assets, it would be impossible to know at the time rent fell due how much was to be paid. Mr Steinfeld recognised this difficulty and accepted that if, as occurred in this case, the tenant went into liquidation, the Prudential could prove for the full amount of the reserved rent. If so, however, it follows that the firm’s obligation and the remedies available to the Prudential were unaffected by the supplemental deed. All that it achieved was to restrict the assets to which the Prudential could have recourse to enforce its rights.
[28] Quite apart from that, however, I think that it is clear from the language of clause 2.1 as a whole that its purpose was to give effect to what had always been the parties’ intention, namely that, for the purpose of enforcing obligations arising under the lease, recourse should be limited to partnership assets and that the personal assets of the individual partners should be immune from execution. That is quite clearly the effect of the second sentence of clause 2.1, but is also consistent with the first sentence that purports to limit liability under the lease to the partnership itself. It is also consistent with the third sentence of clause 2.1 and the whole of clause 2.2, all of which are designed to prevent individual partners from being exposed to any liabilities arising from the insolvency or failure of the partnership as an enterprise. In other words, the clause was designed to put the partners of A&G in the same position for practical purposes as shareholders in a limited liability company. It follows that in the event of a failure to pay rent in full, the Prudential was entitled to sue the partnership (and, thus, all the partners personally) and recover judgment for the full amount outstanding, but could execute that judgment only against partnership assets as defined in the supplemental deed. In that sense alone were its remedies limited.
[29] The important question for present purposes, however, is whether the effect of the supplemental deed was to impose a similar restriction on the Prudential’s rights against the respondents. Such an argument would have no prospect of success were it not for the inclusion of the words “or any previous tenant” in the second sentence of clause 2.1, but, on one view, those words are of critical importance. They can refer only to the respondents and, according to the ordinary rules of syntax, are governed by the words “any recovery by the Landlord against”. Not surprisingly, therefore, Mr Steinfeld submitted that this sentence can be construed only as limiting the Prudential’s right to recover against the respondents in the same way as it limits its right to recover against A&G.
[30] Although he recognised that this particular sentence, and indeed the clause as a whole, is not well drafted, the judge felt obliged to give effect to what he regarded as its ordinary grammatical meaning. In my view, it must be accepted that, notwithstanding its blemishes, the sentence as drafted does not exhibit obvious grammatical deficiencies. This is not a case, therefore, where one can see from the language itself that words have been mistakenly omitted or misplaced. None the less, the construction for which the respondents contend gives rise to obvious difficulties. What is meant by the words “such default” in that context? As the judge observed, the drafting is inelegant in so far as there is no previous reference to any default, but there is at least a reference to the tenant’s liability under the lease or guarantee agreement and it is a short step in this context from liability to default. There is no reference of any kind, however, to the liability of a previous tenant. Moreover, although it makes sense to speak of recovery against the tenant “under the lease”, it makes little sense in this context to speak of recovery against any previous tenant “under the lease”, since that could not be of any concern to A&G.
[31] The difficulties do not end there. On this view of the matter, the clause goes on to limit the Prudential’s right of recovery against the respondents to the partnership’s assets, but the partnership’s assets would not be amenable to execution of a judgment against the respondents, much less the personal assets of the partners that the clause is designed to protect. If the clause is to be construed as limiting the Prudential’s rights against the respondents, it is necessary to read it as though it provided that the amount that could be recovered from the respondents should not exceed the value of the assets of the partnership or, perhaps, the amount that could be recovered from the partnership in a liquidation. Such a construction gives rise to great uncertainty, however, because in the event of a failure to pay rent, the Prudential might wish for purely practical reasons to pursue the respondents rather than A&G. If it were to do so, there would be considerable uncertainty about how much it was entitled to recover and the date at which that was to be determined. Both the background to the transaction and the absence of any provision addressing questions of that kind suggest that it was not what the parties had in mind.
[32] In my view, the difficulties to which I have referred themselves cast serious doubt on a construction of the second sentence of clause 2.1, which depends simply upon the application of established rules of grammar and giving the words their ordinary meaning. In those circumstances, it is appropriate to look both at the clause as a whole and the background to the deed (in the wide sense in which that expression has been used in the authorities) to ascertain the objective intention of the parties. |page:10|
[33] Mr Trace submitted that the construction put forward by the respondents cannot have been what the parties had intended because it leads to a result that is commercially absurd, depriving the Prudential of the benefit of the respondents’ covenants in the licence in the very circumstances in which they are most likely to be needed. He submitted that the answer to all these difficulties lay in recognising that the words “or any previous tenant” are parenthetical, in the sense of representing an afterthought inserted to make good an omission that had occurred earlier in the sentence. The argument is easier to demonstrate by use of the appropriate inflection when reading the text, but he submitted that it could be adequately represented by restructuring the sentence as follows:
Consequently any recovery by (a) the Landlord against the Tenant or (b) any previous tenant under the Lease for any such default shall be limited to assets of the Partnership and shall not extend to the personal assets of any individual partners therein other than the capital and current accounts of such partners in the Partnership.
[34] Given the background to the supplemental deed, I find it very difficult to accept that the parties to it intended to limit the scope of the respondents’ liability to the Prudential or the Prudential’s right to enforce that liability in the ordinary way. Had that been their intention, they would surely have made the respondents a party to the supplemental deed and would have included a provision that clearly limited the scope of their liability to the Prudential. Equally, it is highly unlikely that, having settled the terms of the supplemental deed some months earlier, they would have entered into a licence containing unqualified covenants on the part of the respondents in relation to the performance of the obligations under the lease. I think that there is much force in Mr Trace’s submission that the respondents’ construction substantially deprives the Prudential of the benefit of those covenants in the very circumstances in which they were most needed. Although, as the judge pointed out, there might well be circumstances in which it would suit the Prudential to pursue a claim against the respondents rather than A&G itself, even for a limited recovery, that is unlikely to have been at the forefront of the parties’ minds when entering into the licence. As both parties to the supplemental deed must have known, what the Prudential wanted from the respondents, and was entitled to insist upon, was an unqualified undertaking to pay the rent. Such an undertaking represents a fundamental element of the landlord’s protection in the event of the assignee’s insolvency, and no landlord having obtained the benefit of a covenant of that kind would be likely to render it substantially worthless in the relatively informal manner suggested in this case. The fact that the Prudential also had the benefit of a bank guarantee and a right to require the respondents to enter into a new lease in the event of a disclaimer does not really answer the point. In my view, all that the parties intended to achieve was to prevent a claimant from having recourse to the personal assets of the partners in the event of a default under the lease. The deed is concerned with claims directly against the partners, not with claims made by the Prudential against the respondents.
[35] These considerations compel me to the conclusion that something has gone wrong with the drafting of the supplemental deed. It is clear that some care was taken to ensure that the restriction on the Prudential’s right to execute on the partners’ personal assets could not be circumvented by the action of a liquidator. What I think must have happened is that someone realised that there was a risk that the respondents, as former tenants, might pursue a claim under the covenants contained in the assignment and added the words “or any previous tenant under the lease” to the second sentence of clause 2.1 in an attempt to equate the position of the respondents to that of the Prudential. However, the words were inserted in the wrong place; they should have been inserted after “the Landlord” so that the sentence read:
Consequently any recovery by the Landlord or any previous tenant under the Lease against the Tenant for any such default shall be limited to assets of the Partnership and shall not extend to the personal assets of any individual partners therein other than the capital and current accounts of such partners in the Partnership.
[36] With the sentence worded in that way, clause 2.1 as a whole still makes grammatical sense, avoids the anomaly of limiting the Prudential’s rights of recovery against the respondents by reference to the partnership’s assets and gives effect to what I consider to have been the intention of the parties. However, it must be recognised that it, too, is open to a number of objections. The first and most obvious is that without making the respondents a party to the supplemental deed the clause is ineffective to accomplish its purpose as far as they are concerned. That is, of course, true, but the point is neutral, since the failure to make the respondents parties to the deed is inexplicable whichever construction is preferred. It is not plausible, in my view, to suggest, as the respondents must, that although the Prudential and A&G intended to confer a benefit on the respondents by restricting the measure of the Prudential’s right of recovery against them, they were content to rely upon the uncertain effect of the 1999 Act in order to do so. No doubt the respondents would have been happy to become parties to the deed for that purpose. On the other hand, if the intention was to restrict the respondents’ right of recourse to the partners’ personal assets, it was necessary to make them parties to the deed if it was to be effective.
[37] The second objection is that if the respondents were viewed as potential claimants, one would have expected some reference to them to be found in the third sentence of clause 2.1 and in both sentences of clause 2.2. Again, that is true, and if the supplemental deed showed signs of having been drafted with a greater degree of skill and care the argument might have carried some weight. However, the fact is that on any view of the matter the supplemental deed is poorly drafted, and in so far as it deals with the position of previous tenants I am left with the impression that a few words were added to cover their position without any real thought being given to the consequences for the remainder of its provisions. Accordingly, I find it difficult to accept that the omission of any references to the respondents in the third sentence of clause 2.1 and clause 2.2 points strongly to the conclusion that they were intended to be treated as persons against whom claims were envisaged rather than as persons making claims.
[38] The third objection is that this construction is itself at odds with the unqualified covenants given by A&G in the assignment. That again, however, is an essentially neutral point in as much as the inconsistency (on this view of the matter) between the supplemental deed and the unqualified covenants in the assignment is matched (on the alternative view) by the inconsistency between the supplemental deed and the unqualified covenants in the licence. On either view of the matter, something seems to have gone inexplicably wrong.
[39] In my view, these objections are not sufficiently strong to outweigh the conclusion that the parties to the supplemental deed intended to assimilate the position of the respondents to that of the Prudential in respect of claims against the partnership.
[40] The judge felt unable to accept the Prudential’s argument in this case because it involved an ungrammatical reading of the second sentence of clause 2.1, which he regarded as part of a conscious design to exclude recourse by the Prudential to the partners’ personal assets through the medium of the respondents. I can quite see that, from the partners’ perspective, that would be a desirable course, but it is one that has significant implications for the Prudential and for the respondents themselves. Taking an objective view of the language used by the parties in the supplemental deed set against the background to which I have referred, I think that it is clear that the purpose of the supplemental deed was to limit the scope of the assets to which a claimant should be entitled to have recourse to enforce claims under the lease. I find it impossible to accept that the parties intended to alter, in a significant way, the nature of the relationship between the Prudential and the respondents that had been established under the licence.
[41] I recognise that to construe the supplemental deed in this a way may be said to do violence to its language, but I am fortified by the approach taken to the not dissimilar problem in Investors Compensation |page:11| Scheme. There, too, the judge felt that the construction he favoured as reflecting the parties’ intention might be open to the criticism that it did violence to the language of the document, but his approach was upheld by a majority of their lordships, who clearly did not draw the line at correcting errors of syntax in the course of interpreting the document in the manner that reflected the intention of the parties.
[42] For these reasons, I have reached the conclusion that, properly construed, the supplemental deed does not purport to confer any benefit on the respondents; rather, it purports to limit their rights against the individual partners of A&G. As such, it provides no defence to the Prudential’s claim and no question arises as to the operation of the 1999 Act.
[43] The only remaining question, therefore, is whether clauses 6.3 and 6.4 of the licence are void by reason of sections 16 and 25 of the 1995 Act. Section 16(5), which is the relevant subsection for these purposes, provides (so far as material) as follows:
an authorised guarantee agreement may
(a) impose on the tenant any liability as sole or principal debtor in respect of any obligation owed by the assignee under the relevant covenant;
(b) impose on the tenant liabilities as guarantor in respect of the assignee’s performance of that covenant which are no more onerous than those to which he would be subject in the event of his being liable as sole or principal debtor in respect of any obligation owed by the assignee under that covenant;
[44] Section 25(1) provides as follows:
Any agreement relating to a tenancy is void to the extent that
(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act…
[45] Mr Steinfeld submitted that the language of section 16 ties the tenant’s liability under the guarantee to the obligation actually owed by the assignee, rather than to any theoretical obligation; and that since even a restriction on the scope of the assets to which recourse may be had by way of execution renders the obligation less onerous than it would otherwise be, the guarantee is void under section 25(1)(a) in so far as the tenant’s liability is not limited to the same extent.
[46] I am unable to accept that submission, which assumes that A&G’s obligations under the lease are limited by the supplemental deed to the value of the partnership assets, whereas that of the respondents under the covenants in the licence are not. For the reasons set out above, I do not think that the partnership’s obligations under the lease are affected by the supplemental deed, which does no more than restrict the assets of the partners to which the Prudential is entitled to have recourse in order to satisfy them. The purpose of section 16(5) is to prevent a landlord from imposing on a tenant that wishes to assign the remaining term of a lease more onerous obligations in the form of guarantees of due performance of the covenants in the lease than those to which it would have been subject had it remained a party to it. The subsection is concerned, therefore, only with the nature and scope of the obligations imposed upon the tenant under the guarantee, not with any arrangements that may have been made between the landlord and assignee as to the manner in which the obligations under the lease may be enforced. The ordinary rules of law relating to guarantees (in particular, those relating to the discharge of sureties) are preserved by subsection (8), but they do not assist the respondents in the present case because the terms of clause 6.4 of the licence allowed the Prudential to enter into arrangements with A&G of a kind that would ordinarily discharge a surety without affecting its liability.
[47] For these reasons, I have reached the conclusion that neither the supplemental deed nor the terms of the 1995 Act operate to relieve the respondents from liability under the covenants contained in the licence, and I would therefore allow the appeal.
Moses LJ said:
[48] I agree.
Ward LJ said:
[49] I also agree.
Appeal allowed.