J U D G M E N T
(As approved by the Judge)
MASTER MONCASTER:
1. I now have to give Judgment on the first set of questions in this claim, the first set of questions being those that relate to the effect and validity of the surrender of the Underlease.
2. The Claimant is the head landlord of commercial premises at
3. The Licence to underlet contained fairly stringent provisions for the benefit of the Landlord. In particular of prime importance to this case is 5.4 headed “Forfeiture or Disclaimer of the Lease”, which contains a definition of “Event of Default” as meaning
“ the forfeiture of the Lease by the Landlord, the disclaimer of the Lease by either a Trustee in Bankruptcy of the Tenant or Liquidators of the Tenant, the disclaimer of the Lease by the Crown, or the striking off of the Tenant from the Register of Companies.”
So there are four different events of default, forfeiture, disclaimer on bankruptcy or liquidation, disclaimer by the Crown and striking off. “The Landlord’s Notice” means a notice in writing requiring the Undertenant and the Guarantor to take a new Lease served by the Landlord on the Undertenant within three months of the event of default. “The New Lease” is the new lease is which the guarantor has to take. Clause 5.4 (b) provides
“If, following an Event of Default, the Underlease ceases to subsist and the Landlord serves a Landlord’s Notice, the Under-Tenant and the Guarantor shall accept a new lease, execute a counterpart of the New Lease and pay the Landlord’s Solicitor’s costs” and so on.
4. What has happened here is that the Liquidators did disclaim the Lease on the
13th October last year, and the Landlord has served notice under 5.4, but that notice is, it is contended by the Defendants, of no effect because unknown to the Landlord the Underlease had been surrendered on the 29th September. Therefore the Underlease had ceased to exist before and not following, an event of default, and therefore it is said that the notice was of no effect, and the Undertenant and its Guarantor were not obliged to take that new lease. The Landlord is aggrieved by this turn of events, and particularly aggrieved because the surrender was made in consideration of £100,000, which was paid by the Undertenant to the Tenant.
(There are difficulties of construction in clause 5.4(b) because it appears to have been drafted in the misconception that on all the events of default the underlease would cease to subsist, but I leave those difficulties over for the moment.)
5. To overcome this difficulty raised by the surrender, the Landlord contends, and has brought these proceedings alleging, that the surrender was in fact a breach by the Tenant of a covenant in the Underlease, clause 4.23.1. Clause 4.23 has a general heading, “Assignment and Underletting clauses”.
4.23.1 reads:
“The Tenant is not to assign, underlet, part with possession or share occupation of the whole or any part of the Premises, hold the whole or any part of the Premises on trust for any other person, or enter into any agreement to do so, except and to the extent that it is expressly permitted to do so by the terms of this Lease.”
What is submitted by the Landlord is that the surrender is a breach of that covenant because the Undertenant – that is the tenant in that underlease I have been reading – gave up possession of the premises to the Head Tenant, and therefore is in breach of that clause even though the clause does not on its face make any reference to surrender or expressly prohibit a surrender.
6. And then further, alternatively, it is claimed against the Tenant that it is in breach of clause 6.1 in the Licence which was granted to permit the underletting, which itself is a very elaborate document. That clause reads:
“The Tenant shall not at any time, without the consent in writing of the Landlord waive the provisions and the covenants contained in the Underlease, and shall upon demand by the Landlord enforce such provisions and covenants in the event of any breach of the same by the Undertenant.”
Why it is said that there is a breach of that clause, again a clause which makes no reference on its face to surrender, is that the covenants have been released and therefore there has been a waiver of the covenants in breach of that clause. And indeed in the surrender at clause 4, headed “The release of the Tenant”, the Landlord does release the Tenant and its predecessors in title from all the tenant covenants of the lease and from all liability for any subsisting breach of any of them. Further the Agreement to surrender had been made in consideration of the Tenant agreeing to pay the premium which was £100,000 as I said, and the
Landlord and Tenant agreeing to grant the releases contained in the Deed of Surrender.
7. While I am dealing with those documents, I draw attention to the fact that Clause 2.1 of the surrender goes on to say:
“In consideration of
£100,000 paid by the Tenant to the Landlord…and
((b) the releases by the Landlord…
the Tenant surrenders and yields up to the Landlord all its estate interest and rights in the Property, and the Landlord accepts the surrender.”
The liquidators are parties to that Deed. By Clause 8 of the Agreement to Surrender there is a provision for vacant possession.
“The Tenant shall give vacant possession of the property to the Landlord on the Completion Date.”
And in fact that was done. So the surrender undoubtedly did involve the Tenant giving vacant possession to the Landlord, and the Landlord releasing the Undertenant from all liability. There are also claims made against the Liquidators for inducing a breach of contract, because of the breaches which it is alleged there have been of the Underlease and of the Licence.
8. I had, if I may say so, very refined – I do not intend that to be a derogatory term – arguments from distinguished Landlord and Tenant practitioners, both written and oral. But on the question of the construction of Clause 4.23.1, it seems to me that the position is really quite plain, and I hope I am not considered as being too plain a man in the views that I express. Clause 4.23.1 is a perfectly common form of covenant which is inserted in, I suppose, all commercial leases. It restrains assignment. It restrains under-letting. It restrains parting with possession. It restrains sharing occupation, sharing occupation now needing to be included because it has been held that sharing occupation is not parting with possession. It restrains holding the premises on trust, that provision also having to be included because it has been held that that declaring a trust for a third party is not an assignment or parting with possession. So the wording of the clause has been built up over the years, but it is a perfectly common form. It seems to me really to be beyond doubt that if one has merely one simple lease which contains a covenant in this form that the surrender of the lease would not be a breach of that covenant. It is true that the effect of a surrender is that the tenant ceases to be entitled to possession and is obliged to give up the possession to his landlord, but in my view it is obvious that such a clause is not intended to catch consensual arrangements between the landlord and the tenant such as a surrender. It is not the intention by this common form of wording to make a surrender, or the acceptance of a surrender, a breach of the covenant. It would be senseless to do so, because it is a matter between the landlord and the tenant as to whether to surrender and accept the surrender of the Lease or not. It is not the case that a surrender would be a technical breach of the covenant, but one which the Landlord does not bother about, or which he is to be treated as having waived. A surrender simply is not a transaction at which such a clause is aimed, and therefore a surrender is not a breach of that clause. And that is the position regardless as to the precise meaning to be attached to the words “part with possession”. I repeat that factually the tenant on a surrender does give up possession of the land to the landlord, but it does not follow from that that a covenant against parting with possession, a covenant which is contained in virtually every lease in the land, has the extraordinary effect of prohibiting a surrender. As I say, I hope I am not being too plain a man in expressing my views in this way, but it does seem to me to be quite beyond argument in the case of a simple transaction between two parties to a lease that a surrender is not within the intendment of a covenant against alienation and is therefore not prohibited by a covenant against alienation in common form
Therefore, as I see it, to succeed in this case the Landlord has to show that the covenant can bear a different or wider meaning from the ordinary meaning which
it bears.
9. Mr. Fancourt, for the Landlord, said that in questions of construction context is all, and no doubt as a general principle of construction that is right, but the context here is really just this series of elaborate documents which have been produced.
It is to be noted that the Underlease does not in fact contain a direct covenant by the Under-Tenant with the Head Tenant to observe the covenants, those covenants being incorporated in thee underlease in modified form, clause 4.23.1 beinmg one of such modified clauses. Although in fact by Clause 4.23.7 of the head lease the Tenant does covenant that it will on the grant of an underlease cause the underlessee to enter into a direct covenant with the Landlord to observe the tenant’s covenants in the head lease despite that provision in the Head Lease, the Underlease – it is accepted by Mr. Fancourt – does not in fact contain a direct covenant by the Underlessee with the Head Landlord. That, presumably, was deliberately, choice, for some reason by the parties to the agreement, and made partly following from the fact that the Tenant’s covenants in the Underlease are not in precisely the same form as the covenants in the Head Lease but are in varied form, which it is set out in Schedule 1. Nor does the Licence contain a covenant, a direct covenant, in my judgment. Although in clause 5 of the Licence, which is headed “Under-Tenant’s Covenants”, clause 5.1 is headed
“To observe the terms of the Underlease and the Lease.”
It actually reads:
“The Undertenant shall pay the rent and other sums payable under the Underlease, and observe and perform the covenants and conditions on the part of the Undertenant contained in the Underlease”.
I am unable to see, myself, how the circumstances in which the Underlease was entered into can have had the effect of altering the plain meaning of the common form provision in Clause 4.23.1 which, in my view, as I said, simply was never intended to cover a surrender, and therefore does not apply to a surrender.
10. Mr. Fancourt, in his written submissions, said that the structure of the alienation covenant is to prohibit all dealings in the demised premises save only for those dealings expressly permitted by the terms of the Underlease which are set out in 4.23.2 to 4.23.9. They do not include a surrender of the term. That, it seems to me, is putting matters back to front, or is begging the question. What clause 4.23.1 prohibits is the list of matters I have referred to, the five matters of assignment, underletting, parting with possession, sharing occupation, or holding the premises on trust. Those are the things that are prohibited, save to the extent to which they are permitted by the following sub-clauses. A surrender is not prohibited, and the law of landlord and tenant is that the tenant can do anything, generally speaking, except what is prohibited, and it is arguing back to front to say that this covenant is to be taken as a covenant prohibiting all dealings, including a surrender, and therefore because a surrender is not permitted a surrender is a breach. One only gets to that position if one first establishes that a surrender is in fact prohibited by the clause itself. He then submits that Clause 5.1 of the Licence makes it an agreement with the Landlord also. But I have alreadt set out the wording of that clause which is simply to perform the covenants in the Underlease, and I cannot see how that covenant with the Landlord can vary the meaning of the covenant in the Underlease or give it an entirely different effect from the effect which it would ordinarily have in a covenant in a lease.
11. He also submits that the structure of the underletting was created to preserve value in the Sub-Tenant covenants and the Underlease, and that that is the reason for this clause, and also for Clause 6.1 in the Licence prohibiting a tenant from waiving obligations. In my view one cannot posit a general intention to preserve value and use that as a starting point from which one can reach an unusual construction of this common form covenant. This is not a case, as I see it, where the Investors’ Compensation Scheme principles of construction can be relied upon by the Landlord. This is not a case where the covenant, as construed in the ordinary way, which is the way contended for by the Defendants, simply does not make commercial sense. It makes perfect commercial sense on that construction. It would no doubt make perfect commercial sense also on the Landlord’s construction. It may well be the case that the Landlord, if it had thought about the matter more deeply at the time these documents were being drafted, would have included such a covenant. On the other hand it is extraordinary, it seems to me, to say that one can construe the covenant in the way the Landlord seeks, when one sees in the Underlease that, in relation to sub-Underleases granted by the Undertenant, there is at 4.23.8.5 an obligation not to exercise any right of re-entry or accept the surrender of the whole of the premises let by the Underlease without in each case obtaining the prior written consent of the Landlord. Therefore, the draftsman – these documents, it is common ground, the Licence, the Underlease all being drafted at the same time – knew how, if he wanted to, to restrain surrenders, and in the case of sub-Underleases expressly inserted a provision against accepting a surrender, and indeed against forfeiture. No such provision was included in the Tenant’s own covenant in the Lease, and it seems to me therefore really impossible to construe the covenant in 4.23.1 as though it in fact included the same obligation against surrenders, which was expressly included in 4.23.8.5.
12. As I have said I do not myself see that the argument as to what is to be understood by parting with possession is the vital point here. Possession, in the sense of possession of this building, was parted with, but that by itself is neither here nor there, because it simply – I repeat – is not the case that an ordinary common form of covenant against alienation in this form comprehends a surrender. It may be that Mr. Cole’s elegant argument is an additional answer in that the possession which is not to be parted with is the possession under the Lease, and that therefore parting with possession on a surrender is not parting with possession because it is not possession under the Lease. It is not possession of the Premises, with a capital P. That means premises which are actually demised. But I do not, myself, rest my conclusions on that rather refined argument, and therefore I do not consider that Mr. Fancourt really gets any assistance from the authorities about parting with possession. They, so to speak, go too far. If he shows that the parting with possession that has happened here is within the meaning of parting with possession under the authorities, that shows not that the covenant against parting with possession has been breached but simply shows that parting with possession on a surrender is just not something which is in contemplation here.
Mr. Cole is, I should have thought, right to rely upon the authorities which provide that:
“If a Landlord wishes to restrict the free alienation by his tenant in his estate the burden lies on him to express that restriction in clear terms so that there can be no doubt what the restriction consists of, especially as the penalty for a breach is forfeiture.”
That is a quotation from Woodfall and the cases relied on there. Such clauses are construed restrictively against the Landlord. And that is why a declaration of trust is not a breach of a covenant against assignment; why sharing possession is not a breach of a covenant against parting with possession If the Landlord had intended to provide against a surrender, he should have done so by words which admitted no other meaning. All that, I think, is the right approach here.
13. The Landlord’s case that by taking a surrender the Tenant has committed a breach on which his Lease could be forfeited is, it seems to me, contrary to the general rules. The Landlord has simply failed to provide for a breach to have occurred in the event of a surrender, and that omission by the Landlord has had the unfortunate effect, from the Landlord’s point of view, that the scheme for compelling the Undertenant and his guarantor to take a direct lease upon the disclaimer which has occurred has been frustrated is the Landlord’s misfortune, It is a simple case of an omission by the Landlord to provide that this shall be a breach. There is no principle on which that omission by the Landlord is to be corrected as a matter of construction, so that although he did not make a surrender a breach, the documents are to be construed as though he, in fact, had done so. Therefore, in my judgment, there was no breach of 4.23.1, and therefore the Defendants are entitled to summary judgment on that issue.
14. The next issue is whether the Tenant was in breach of Clause 6.1 in the Licence, which I read again:
“The Tenant shall not at any time without the consent in writing of the Landlord waive the provisions and covenants contained in the Underlease, and shall upon demand by the Landlord enforce such provisions and covenants in the event of any breach of the same by the Undertenant.”
And I have read already the provisions in the agreement to surrender, 2.1 and 6.1, and then the surrender itself in 2.1 and 4. The issue is whether the acceptance by the Tenant of a surrender of the Underlease with a release of the Undertenant’s covenants and for liability is a breach of the covenant not to waive the covenants in the Underlease. The starting point, as always, must be the wording of the clause. It is not, on its face, a covenant against accepting a surrender of the Lease. It is a conventional covenant not to waive the covenants in the Underlease, and on demand by the Landlord to enforce the covenants on a breach of them by the Undertenant. The second limb of the clause, to enforce the covenants in the underlease on demand by the Landlord, can plainly, so it seems to me, only be operative so long as the underlease remains in existence. Once the underlease has come to an end, then no covenants can be enforced and the Landlord cannot demand their enforcement. And further, it seems to me – and I think this is accepted by Mr. Fancourt – it is impossible to say that it is implicit in this covenant that the Tenant must keep the underlease alive for the whole term. The underlease contains the conventional proviso for re-entry, and the Tenant is entitled to forfeit the Lease, and this clause did not take away that right of the Tenant to forfeit the Lease, if he chose to do so. But it is submitted that although the Tenant can forfeit the Lease and thereby bring it to an end if he chooses to do so, the effect of the clause is to prevent him from accepting a surrender. It is difficult, I think, to see why there should be any such distinction, or why the Landlord should want to be able to prevent a surrender of the underlease but not to be able to prevent a forfeiture.
The Landlord’s argument is rather similar to his position on 4.23.1, where a provision against parting with possession is said to prevent a surrender because that necessarily included parting with possession, and here it is said the covenant against waiver prevents the surrender since that necessarily includes a release of the covenants. But, as in the case of 4.23.1, I reject the submission that this clause has the effect of preventing a surrender despite the absence of any reference in it to a surrender. Again the contrast with 4.23.8.5 is striking. There, there is the express prohibition on the Undertenant exercising any right of re-entry or forfeiting the sub-Underlease granted by him. The corresponding provision in the Underlease to 9.1 is in fact at 4.23.8.1, which is a covenant to enforce the terms of the Underlease and not to waive any breach of them or vary the terms of the Underlease. That is the equivalent to 9.1, and expressed in stronger terms. Again, it seems to me inconsistent to construe 9.1 as having similar effects to 4.23.8.5 when in fact that was not included in the Licence. And when indeed the draftsman’s view seems to be that 4.23.8.1 is not sufficient to prevent a surrender or forfeiture and that an express covenant against surrender and forfeiture is required in 4.23.8.5. To construe 9.1 as equivalent to 4.23.8.5, in so far as it relates to surrender, seems to me quite illegitimate.
16. It is submitted by Mr. Fancourt that the release and the surrender is the clearest possible waiver of the covenants. Undoubtedly the release has brought an end to all liability under the covenants but that is not, in my judgment, a waiver of the covenants. I accept Mr. Cole’s submissions that the waiver of the covenants contemplated by 6.1 is a waiver of the covenants contained in the underlease while subsisting, before the acceptance of the surrender. A surrender is not in any normal sense a waiver of the terms in a lease. It is bringing the lease to an end altogether. The waiver contemplated is a waiver of an existing breach under the Underlease or of future breaches during the continuance of the Underlease. In my view, the fact that the surrender contains an express release cannot be significant, and cannot make this particular surrender a breach, whereas a surrender without an express release would not be a breach. The question is what is the effect of surrender and whether a surrender is within the intendment of 9.1? In my judgment, it is not. Again the analogy is striking with the Landlord’s argument under 4.23.1 where he submits that despite the absence of any reference to surrender, surrenders are in fact caught because of the reference to parting with possession) and here, it is submitted that, despite any express reference to surrenders, they are caught by a reference to waiving the covenants. In my judgment this cannot be achieved by the general words in 6.1 against waiver. Again, the Landlord must spell it out, if surrender is something he is seeking to prohibit, just as it is spelled out in 4.23.8.5.
17. Again, Mr. Fancourt relies on an argument that the anti-waiver provision was intended to preserve the value of the underlease, and that surrender of the underlease is the most extreme form of waiver and exactly what the covenant is intended to protect the Landlord against. But, just as in his argument on 4. 23.1, that seems to me to be begging the question. The covenant in 6.1 is a covenant against waiver. It is agreed that it is not a covenant against forfeiture, that the landlord under the underlease is free to forfeit it. Therefore, there simply is no general obligation imposed on the Tenant to preserve the value of the underlease because he is free, if causes arise entitling him to do so, to put it to an end by forfeiture. If he can do that, why can he not accept a surrender, which also has the effect of destroying the Underlease?
18. I am also not persuaded that a release included in a surrender is to be treated as a waiver of the covenants. There seems to me to be a real difference between wishing to prevent the Tenant, the Head Tenant, whilst the underlease continues in existence waiving the covenants in it and from wanting to prevent him from taking a surrender. A landlord’s position, or the reality, it seems to me, of the commercial position, is different where you have the Underlessee in possession, but where the covenants against him are released, and the position where the underlessee has gone out of possession, and surrendered to the head tenant so that the head tenant is back in possession, and again I do not think that Lord Hoffman’s rules of construction, where something has plainly gone wrong in a commercial document, apply.
19. Although the Licence is not itself an actual lease, it seems to me that one needs to construe it in an analogous way, and the general rule is still that a tenant is free to do anything that is not prohibited, and you cannot, by positing an intention upon the Landlord’s part to conserve the value of the Underlease, conclude from that that you should construe this covenant in anotherwise impermissible way so as to prevent a surrender. Therefore, I consider that the Defendants are entitled to judgment on this issue also.
20. I think it follows from that, that the surrender having been a valid, lawful surrender, that the put option, enabling the Landlord to require a new lease to be taken by the Under-Tenant and its Guarantor, cannot take effect because whatever the effect of clause 5.4 may be, it is the case on my conclusion that the Underlease ceased to subsist in any sense before the forfeiture notice was served by the Liquidators, and therefore the device, as the Landlords no doubt see it, used by the Liquidators has been successful, and the put option contained in clause 5.4 is not exercisable. In those circumstances I need not wrestle, I think, with how one would set about construing 5.4 in different circumstances. I think, probably, that Lord Hoffman’s principles would apply here, and that sense has somehow or other to be given for the provision for a put option following disclaimer and the like, despite the inapposite words that “following the event of default the Underlease ceases to subsist” rather than simply accepting that it is ineffective. In fact I need not deal with them because the difficult situation has not arisen, because the surrender took effect validly before the disclaimer. It also, I think, follows from what I have decided, that as there has been no breach of the covenants in either the underlease or the licence there can be no secondary liability on any of the parties for procuring such a breach, and I therefore do not need to consider whether such secondary liability is arguable, and would have been arguable, had there in fact been a breach.
JUDGMENT (draft)
1 I have already given summary judgment in this case in favour of the defendants, the immediate tenant, the under tenant and the under tenant’s guarantor, on the claim by the superior landlord for breach of covenant of the underlease and licence to underlet. I now have to deal with a claim by the superior landlord against the under tenant founded on a notice given under section 6 of the Law of Distress Amendment Act 1908. I am using the terminology used in that Act to describe the parties. The under tenant seeks summary judgment on this claim also. The main issue argued between the parties is one of law, namely whether a section 6 notice only continues in effect until the sum of arrears specified in it has been paid, as the under tenant, which is the fourth defendant, contends, or whether it operates as, so to speak, a standing instruction to the under tenant who must continue paying his rent to the head tenant so long as there is any rent at all, not just the arrears specified in the notice, unpaid by the immediate tenant, as the claimant superior landlord contends. Mr Fancourt and Mr Cole, who appeared for the superior landlord and the under tenant respectively, and who are both specialist counsel in this field, told me that they had been unable to discover any authority on the point, despite the fact that the Act has now been in force for a century. But although this was the main point argued, the answer to it is in my view academic on the facts of this case, because the liability of the under tenant under his underlease, and hence, in my judgment, under the section 6 notice has come to an end by virtue of the surrender of the underlease to the immediate tenant.
2 The head lease is one expiring at Christmas 2016. The expiry date of the underlease was 23rd December 2016. The rent under both leases was payable quarterly in advance on the usual quarter days. The quarterly rent payable under both leases for the relevant period was identical, £53,587.54, inclusive of VAT. The Christmas 2007 rent under the headlease was unpaid. On7th January 2008 administrators were appointed of the immediate tenant. On 29th January the superior landlord served a section 6 notice on the under tenant. The covering letter with the notice read as follows:
We act on behalf of your superior landlord…
The intermediate landlord…owes to our client arrears of rent and other sums due payable as additional rent and VAT. As at the date of this notice the total sum due is £53,587.54
As the undertenant of the premises and in accordance with section 6 of the Law of Distress Amendment Act, we enclose by way of service on you a Notice under section 6 of the …Act requiring you to pay direct to our client all rents payable under the Underlease until such time that the arrears are paid in full…
Kindly acknowledge safe receipt of this letter and notice.
The notice itself was in the following form
1. You are the undertenant of the premises …at
2. Bourne End One…owes arrears of rent and other sums payable as additional rent (including insurance, service charge and management fees) and Vat to the Superior Landlord. At the date of this notice, the arrears of rent, etc total £53,587.54
3. The Superior Landlord requires that all future payments of rent, whether the same has already accrued due or not, be paid direct by you to the
4, The payment direct to the Superior Landlord shall operate until such arrears owed by the Intermediate Landlord shall have been duly paid. At this time, the Superior Landlord will serve a further notice on you giving you due notice that the arrears are cleared.
5. This notice operates to transfer to the Superior Landlord the right to recover, receive and give a discharge for such rent and other sums owed.
3 At the date of that notice (though this was unknown to the superior landlord) the under tenant had paid its Christmas rent to the immediate tenant so that there were no sums due from the under tenant to the immediate tenant when the notice was served. The first payment of rent under the underlease on which the notice could operate was the Lady Day rent. The under tenant paid that rent, which was of the identical amount to the sum in the notice, direct to the superior landlord. (The under tenant had requested the superior landlord to send a VAT invoice so that it could recover the VAT and the claimant did so. That invoice dated 3 March gave as the due date 25 March, gave as the description “Quarterly Rent in Advance” from 25 March 2008 to 23 June 2008 in the amount of £53,587.54, inclusive of £7,031.12 VAT.) Therefore by that payment the under tenant paid the whole sum specified in the section 6 notice. However by the time that payment was made a further quarter’s rent had become due under the headlease and was unpaid. The immediate tenant went into winding up on 4th June. The superior landlord did not serve a further section 6 notice on the under tenant, but invoiced it for the Midsummer rent which the under tenant paid.
4 The under tenant has paid no further rent to the superior landlord. On Michaelmas Day itself it surrendered the underlease to the liquidators of the immediate tenant paying them a reverse premium of £100,000, and being released from all liabilities under the underlease. On 13th October the liquidators disclaimed the head lease. It is common ground that, the surrender having been effected on Michaelmas Day , as between the under tenant and the immediate tenant the Michaelmas rent never became in arrears. Therefore the undertenant has paid to the superior landlord all the sums due under the underlease up to the date of the surrender.
5 When the proceedings were issued the claimant was under the misapprehension that the under tenant had not paid its Christmas rent and the primary claim made was for payment of that sum. It is now admitted that the Christmas rent had been paid by the under tenant to the immediate tenant before the service of the section 6 notice so that the claim as pleaded for payment of the Christmas rent is no longer tenable. In his skeleton argument Mr Fancourt relies on an argument based on the construction of the Act to salvage the section 6 notice claim. In that argument he does not claim that the Christmas rent is payable, but he claims that the Michaelmas rent is payable to the claimant and (very surprisingly) that all subsequent quarterly payments which would have been due under the underlease if it had not bee surrendered will be payable by the (former) under tenant to the claimant. This argument is set out as follows
45 On 29.1.08 Landlord served on subtenant a notice pursuant to s 6…This meant that Subtenant had to pay its rent to Landlord until arrears of rent under the lease were cleared. For the purposes of recovery, there was a direct relationship of landlord and tenant between Landlord and Subtenant: s 3.
46 The arrears of rent under the lease were not cleared, despite Subtenant’s payment of the March and June quarters’ rent to Landlord
47 Subtenant was therefore bound to pay the September 2008 (and subsequent quarters’) rent under the Underlease to Landlord
48 Tenant was in no position to release Subtenant from this liability. The purported surrender could not affect Landlord’s accrued right to be paid the rent due under the underlease [ including future arrears] [This was explained in the oral argument as being the effect of section 3 of the Act]
49 Subtenant is therefore liable to pay the rent under the underlease to Landlord until the arrears of rent under the lease are cleared. The disclaimer of the lease only operates to terminate Tenant’s liabilities under the lease and not the lease itself (Hindcastle v Barbara Attenborough Assiciates}and so rent remained due and payable under the lease so far as Subtenant is concerned.
50 In consequence, Subtenant has a continuing liability to make payment of rent and is indebted to Landlord as claimed (and continuing)
6 When I made it clear in the course of argument that I considered Mr Fancourt’s argument that the under tenant’s liability continued despite the surrender was impossible he then advanced further arguments based on appropriation and estoppel. He said the under tenant had appropriated the payments it made at Lady Day and Midsummer to the Lady Day and Midsummer rent due under the headlease, or that the Landlord had appropriated or could still appropriate them in that way, and therefore the Christmas rent under the headlease, which was the arrears specified in the section 6 notice remained unpaid. He also submitted that there was an arguable estoppel because by making the Midsummer payment to the landlord without any section 6 notice having been served after the first payment which covered the amount stated in the notice the under tenant had, I take it, represented that it would continue to make payments without the need for any further section 6 notices to be served. But for this representation the landlord would have served further section 6 notices. I will deal first with the submissions in the skeleton argument, based on the construction of the Act, and then separately with the appropriation and estoppel arguments
7 Section 1 of the Act enables an under tenant (and others) to prevent a superior landlord from proceeding to levy distress or from proceeding further with a distress on his goods if a superior landlord levies or threatens a distress on them by serving a declaration in writing on the superior landlord that the chattels distrained or threatened with distress are not the property of the immediate tenant and undertaking to pay his rent to the superior landlord until the arrears for which the distress was levied have been paid off. Section 6 enables the parties to avoid distress altogether by the superior landlord, where the rent under the headlease is in arrears, serving a notice on the under tenant directing him to pay his rent direct to the superior landlord until the arrears have been paid. Section 3 deems the under tenant to be the immediate tenant of the superior landlord for the purposes of the recovery of any rent payable under a section 1 undertaking or a section 6 notice. It is Mr Fancourt’s submission that although the liability under a section 1 undertaking extends only to the amount of rent for which the distress was levied, the liability under section 6 is not so limited but continues indefinitely so long as there are any arrears under the headlease. He submits that this follows from the different language employed in the two sections.
8 Section 1 provides as follows
If any superior landlord shall levy, or authorise to be levied, a distress on any furniture, goods, or chattels of
(a)any under-tenant liable to pay by equal instalments not less often than every…quarter…
(b) any lodger
(c) any other person whatsoever not being a tenant…
for arrears of rent due to such superior landlord by his immediate tenant such under tenant …may serve such superior landlord…with a declaration in writing…setting forth that such intermediate tenant has no right of property in the …chattels so distrained or threatened to be distrained upon and that such chattels are the property or in the lawful possession of such under tenant…
and also in the case of an under tenant…setting forth the amount of rent (if any) then due to his immediate landlord, and the times at which such future instalments of rent will become due to his immediate landlord, and the amount thereof, and containing an undertaking to pay to the superior landlord any rent so due or to become due to his immediate landlord, until the arrears of rent in respect of which the distress was levied or authorised to be levied have been paid off …
It is clear from this wording that the undertaking only has effect until the rent distrained or threatened to be distrained for has been paid and that when it has been paid the under tenant has no further liability whether or not the rent under the headlease remains in arrear.
9 Section 6, which in Mr Fancourt’s submission has a quite different and greater effect, reads as follows
In cases where the rent of the immediate tenant of the superior landlord is in arrear it shall be lawful for such superior landlord to serve upon any under tenant or lodger a notice…stating the amount of such arrears of rent, and requiring all future payments of rent, whether the same has already accrued due or not , by such under tenant…to be made direct to the superior landlord giving such notice until such arrears have been duly paid, and such notice shall operate to transfer to the superior landlord the right to recover, receive, and give god discharge for such rent
Certainly at first blush, and looking only at this section, it appears to me equally clear that the effect of the notice lasts only until “such arrears”, that is to say, the amount of arrears stated in the notice, have been paid. Mr Fancourt , however, submits that the wording of the two sections is only superficially similar. He fastens on the word “duly” which does not appear in section 1 and says that if section 6 had been intended to have the same effect as section 1 the words which would have been used would have been not “until such arrears of rent have been duly paid” but the equivalent words to those used in section 1 namely “until the arrears of rent in respect of which the notice was served have been paid off”. Undoubtedly there is this difference in the drafting but I am quite unable to see how it can result in any difference in the effect of the two sections. The difference between the longer phrase in section 1 “the arrears of rent in respect of which the distress was levied or authorised to be levied” rather than the more succinct “such arrears” in section 6 is due, I think, simply to the fact that in section 1 there is no earlier reference to a stated amount of arrears, but only to the unquantified “arrears of rent due” so that to use “such arrears” would not make it as clear what sum is in question as the words used “the arrears of rent in respect of which the distress was levied or authorised” do. In section 6, by contrast, there is not just the earlier general reference to the tenant being “in arrear” but the requirement of a notice “stating the amount of such arrears” so that the subsequent wording of “until such arrears have been duly paid” can be used referring back to the amount of arrears specified in the notice. That is in my judgment a sufficient reason for the difference in wording of the two sections, and “such arrears” under a section 6 notice are the arrears specified in the notice.
10 In my judgment the reference in section 6 to such arrears having been “duly paid”, on which Mr Fancourt places great emphasis, does not alter the meaning of “such arrears”. The reason for specifying a time limit in section 6 “until such arrears shall have been duly paid” whereas none is specified in section 1 is probably, I should have thought, because under section 1 the under tenant has to give an undertaking to pay to the superior landlord all rent payable under the underlease until the arrears of rent for which distress was levied have been paid off as the price for getting the distress withdrawn and the phrase used is “paid off”, rather than “duly paid”, because what is in contemplation is the performance by the under tenant of his obligation, and that is seen as the primary way in which his liability will come to an end. Where notice is served under section 6, in contrast, the under tenant’s liability will come to an end when the arrears are “duly paid” whether by the immediate tenant the particular under tenant or any other under tenant or lodger on whom a section 6 notice has been served. But his liability does come to an end then. Of course the under tenant cannot know when the arrears have been duly paid unless the superior landlord tells him. But it is impossible, in my view, to infer from the fact that the under tenant can (in the usual case) only know that the arrears have been paid if the superior landlord tells him, that his liability continues indefinitely until the superior landlord tells him the arrears have been paid, so that the reference to “duly paid” has the remarkable effect that, in contradiction to what seem to me the plain words of the section, the under tenant’s liability will continue indefinitely until the landlord has told him that the arrears have been duly paid. If that were so, what would be the point of requiring the notice to state the amount of the arrears? Surely that amount is required to be stated because that is the limit of the sum for which the under tenant can be liable.
11 Mr Fancourt submitted that there was an ambiguity in section 6 and therefore one should look at the purpose for which the section was enacted on order to construe it. In my judgment however there is no ambiguity, so that there is no scope for a purposive construction. But even if a purposive construction were to be adopted there is in my judgment no purpose such as Mr Fancourt identifies. He submitted that the purpose of the section was to encourage the superior landlord not to levy distress and that section 6 was a quid pro quo for superior landlords to compensate them for the interference by section 1 with their rights. I do not accept that section 6 is intended solely or even primarily as a benefit to the landlord. It benefits both parties by avoiding the cumbersome and expensive remedy of distress. Both the superior landlord and the under tenant are benefitted by the ability to have the under tenant’s rent diverted direct to the superior landlord, with the consequence that the need to levy distress is avoided. In particular the very simple section 6 machinery is far more beneficial to the under tenant than the cumbersome section 1 machinery which requires him to serve a declaration in writing on the superior landlord containing an undertaking to pay, with a “correct inventory” annexed, with the criminal sanction attached to making a declaration and inventory knowing them to be untrue in any material particular, and the need to make sure that he serves his declaration and inventory before the distress has been completed. The purpose of section 6 is, as its sidenote states, “to avoid distress”.
12 I therefore conclude that a section 6 notice only remains operative until the arrears stated in it have been paid. It is therefore strictly unnecessary for me to consider whether, if such notices do continue in effect so long as there are any arrears owing to the superior landlord, the notice would continue to be effective notwithstanding the surrender of the underlease. As however the point was argued I briefly state my view on this point
13 Mr Fancourt’s remarkable submission that notwithstanding the surrender of the underlease the under tenant remains liable to continue paying the rent under it to the head landlord until the expiry of the term is based on the deeming provision in section 3 of the Act:
For the purpose of the recovery of any sums payable by an under tenant or lodger to a superior landlord under such an undertaking as aforesaid, or under a notice served in accordance with section six of this Act, the under tenant or lodger shall be deemed to be the immediate tenant of the superior landlord, and the sums payable shall be deemed to be rent
This has to be read with the concluding provision of section 6:
And such notice shall operate to transfer to the superior landlord the right to recover, receive, and give discharge for such rent
Mr Fancourt submits that the effect of section 3 is to prevent an under tenant on whom a section 6 notice has been served from surrendering the underlease without the consent of the superior landlord because the section effects a statutory assignment of the reversion, rather as in the case where there is a severance of the reversion. I am not clear whether Mr Fancourt would submit that a lodger would also be unable to determine his contract prematurely, nor whether the section would require a notice to quit to be served on the superior landlord as well as the immediate tenant. However I need not explore those points because it is plain in my judgment that section 3 does not have this remarkable effect. The deeming provision is for the purpose of the recovery of any sums payable either under a section 1 undertaking or a section 6 notice. Therefore it is a prerequisite of the operation of the deeming provision that there is a sum payable by the under tenant or lodger. If there is such a sum then it is “deemed to be” rent under section 3, and the right to recover “such rent” is transferred to the superior landlord by section 6. Why, in the case at any rate of liability under a section 6 notice the under tenant is also deemed to be the immediate tenant of the superior landlords, and what this deeming provision in section 3 adds to the other provision in that section deeming the sums payable to be rent is not clear to me. What is clear, however, is that the deeming provision only applies to future payments of rent payable by the under tenant. The right to recover, receive and give a discharge which is transferred to the superior landlord is the right to recover, etc “such rent”. If no rent is payable by the under tenant then there is no right to recover it so that section 6 becomes inoperative. The superior landlord cannot recover from the under tenant rent for which the under tenant is not liable to his immediate landlord. If rent ceases to be payable by the under tenant because his underlease has come to an end, whether by forfeiture, surrender, service of a notice to quit or otherwise, then there is no rent recoverable by the superior landlord because none is payable by the under tenant. There is nothing for the deeming provision to operate upon. I t is fanciful to suppose that in 1908 Parliament in an Act, described in its long title as one to amend the Law as regards a Landlord’s right of Distress for Rent, can have been intended to confer on landlords a power by the service of a section 6 notice to interfere with the freedom of contract of the under tenants and lodgers of their immediate tenants, and to prevent them from dealing with their underleases and lodging agreements as they chose.
14 I turn therefore to the submissions that even if I reject the claimant’s submissions on the construction and effect of the 1908 Act, nonetheless the claimants are entitled on the particular facts of this case to recover one quarter’s more rent from the under tenant. This is advanced by Mr Fancourt on two bases, first, appropriation and secondly estoppel.
15 The appropriation claim rests on the form of the invoices submitted by the landlord to the under tenant on which the Lady Day and Midsummer payments were made. It is common ground that the under tenant requested the landlord to submit a VAT invoice to it. I was told by Mr Cole that the reason for this was so that the under tenants could recover the VAT themselves. Although this was not in evidence it cannot be doubted that this was the reason. The landlords complied with that request, submitting invoices for rent due at Lady Day and at Midsummer, which were paid by the under tenants and receipted by the landlords. In their Defence the under tenants plead (para9)
Since service of the notice under section 6…the Undertenant has paid to the Claimant a total sum of £110,646.08 in the following instalments:(1) on 3rd April 2008 the sum of £53,587.54 in respect of the quarter’s rent due under the lease in advance on 25th March 2008; (2) on 24th June 2008 the sum of £53,587.54 in respect of the rent due in advance under the Lease in advance on 24th June 2008; (3) on 1st October 2008 the sum of £3471 being an apportioned part of the insurance premium demanded for the period from 2nd May 2008 to 2nd May 2009.
This, Mr Fancourt submits, shows that the under tenant appropriated their rent payments to the sum due under the headlease on Lady Day and Midsummer with the result that the Christmas rent was never paid and remains due and owing by the under tenants. He further submits that even if the under tenants did not appropriate the payment s when they made them it is open to the landlords as the receiving party now to appropriate them. The remarkable effect, if this submission is correct, is that although the only sum (on my view of the law) for which the under tenant was liable to the landlord was twice £53,587.54, and although the under tenant has paid this sum to the landlord, that by operation of the rules about appropriation the under tenant has made itself liable to pay to the landlord a further sum of £53,587 for which, apart from the supposed appropriation it would not have been liable. In my judgment it is impossible for the rules about appropriation to lead to such a result.
16 In my judgment Mr Fancourt’s submissions on appropriation are misconceived. At the time when the under tenant paid the Lady Day rent to the superior landlord there was one and only one debt due from it to the superior landlord, namely, the quarter’s rent which became payable under the underlease. The under tenant was not liable for the rent under the superior lease at all. How section 6 of the Act operates is to require the under tenant to pay his rent under the underlease direct to the superior landlord until such arrears shall have been duly paid. “Such notice shall operate to transfer to the superior landlord the right to recover, receive, and give a discharge for such rent”. The effect of the notice is therefore to effect a statutory assignment to the superior landlord of the rent payable under the underlease, and the debt owed by the under tenant to the superior landlord is the rent payable under the underlease. It is under the underlease alone that the under tenant is liable. By section 3 the under tenant is deemed to be the immediate tenant of the superior landlord, and the sums payable shall be deemed to be rent. This would be perfectly obvious in a case where the rent payable under the underlease is less than that payable under the headlease or the dates for payment under the two leases are different. It is only because in the present case the rents payable under the two leases are identical and payable on the same days that any confusion could arise and it might be thought that the under tenant was liable for the rent under the headleasse. I think that the draftsman of the defence fell into this confusion when he said that the payment made by the under tenant just after Lady Day was in respect of the Lady Day rent due under “the Lease”, that is the headlease, It was not. It was in respect of the Lady Day rent due under the underlease, and was payable because of the Christmas arrears under the headlease which were the subject matter of the section 6 notice.
17 If the under tenant had not paid its Christmas rent to the immediate tenant, so that on Lady Day there were two instalments of rent owing by it, then it might have been possible to run an argument based on appropriation. But it is now accepted by the superior landlord that the Christmas rent had been paid by the under tenant before the service on it of the section 6 notice. It therefore follows that when the under tenant paid its Lady Day rent to the superior landlord that was the only debt payable by it to the superior landlord and there is therefore no scope for the operation of the rules about appropriation of payments. The position is the same for the Midsummer payment. That was the only debt then due (on Mr Fancourt’s construction of the Act) to the superior landlord and there was therefore no scope for the operation of the rules about appropriation.
18 The argument based on estoppel is in a different position. I can see that it may well be arguable that the under tenant by paying the Midsummer rent, when it was demanded by the superior landlord invoicing it for it made a representation that the under tenant would continue to make future rent payments direct to the superior landlord when they fell due without requiring the service of a further section 6 notice, and that it was in reliance on that representation that the superior landlord did not serve a section 6 notice. Where the argument falls down, it seems to me, is that the failure to serve a further notice has not made any difference to the position of either party. No further rent fell due before the surrender and therefore even if the landlord had served a further section 6 notice it would have had no effect, because the surrender would have prevented the superior landlord from recovering the Michaelmas rent from the under tenant.
