Landlord and tenant – Surety – Liability – Respondent acting as surety of tenant’s obligations under lease of commercial premises – Tenant effecting substantial alterations to demised premises under licence granted by landlord – Surety not a party to licence or consenting to it – Whether appellant landlord entitled to enforce surety obligations of respondent – Whether respondent discharged from liability by reason of alterations – Rule in Holme v Brunskill (1878) 3 QBD 495 – Whether application of rule displaced by forbearance clause in lease – Appeal dismissed
The appellant was the landlord under a lease of a garden centre for a 35-year term from May 1981. The respondent was a party to that lease as surety for the liabilities of the tenant. The lease contained tenant’s repairing covenants and a covenant against alterations. The premises had originally comprised a retail warehouse and customer parking areas, but had since been altered and extended, pursuant to a licence granted by the previous landlord in 1987, to add a new garden centre to one side of the original warehouse and a high perimeter security fence. The terms of the licence did not oblige the tenant to carry out the works, which therefore did not affect the calculation of rent, but they did provide for reinstatement of the premises at the end of the term if the landlord reasonably so required.
The tenant went into administration in 2011 and was subsequently dissolved. The appellant sought to enforce the respondent’s obligations as surety by requiring it to pay arrears of rent and also to take a new lease of the premises for the residue of the original term.
The respondent contended that, under the rule in Holme v Brunskill (1878) 3 QBD 495, it had been released from all liability as surety by reason of the variation of the lease effected by the 1987 licence for alterations, to which it had not consented or been a party. The appellant argued that the variation was always envisaged by the lease, resulted in no detriment to the respondent and was covered by a “forbearance clause” in the lease, to the effect that neglect or forbearance by the landlord to enforce the observance or performance of any covenant would not “release or exonerate or in any way affect” the liability of the surety.
In the court below, the deputy judge held that the variation of the lease had released the respondent from its surety obligations in their entirety. He found that the variation, by permitting substantial alterations that increased the bulk of the structures on the land, had increased the scope of the tenant’s repairing obligations and consequently the risk of default and the burden on the respondent as surety, and that it could not be regarded as a mere “forbearance”: [2013] EWHC 1445 (Ch); [2013] EGILR 17. The appellant appealed.
Held: The appeal was dismissed.
(1) The scheme of the lease envisaged that the burden on the tenant could be increased in certain respects, in particular by way of rent review. However, the position was different with regard to the tenant’s repairing covenants. The respondent would have known, at the time when it became a party to the lease, that the burden under those covenants could not be increased as a result of additions, alterations or improvements to the demised premises, since these could not be made unless the landlord consented to them outside the framework of the lease, and it was entitled to expect that its consent would also be sought in that event. In those circumstances, the 1987 licence for alterations had the clear potential to increase the obligations on the tenant and hence on the respondent as surety in the event of the tenant’s default. The rule in Holme v Brunskill applied accordingly to release the respondent from liability.
(2) The application of the rule was not displaced by the forbearance clause in the circumstances of the case. The purpose of that clause was to ensure that the respondent was not released by a mere failure of the landlord to enforce the covenants in the lease. The word “forbearance”, construed in its context and in accordance with the purpose of the relevant lease provision, connoted a decision by the landlord not immediately to enforce the observance or performance of a covenant against a tenant who was in breach of that covenant, but rather to tolerate the breach for the time being. It was therefore concerned with failure to enforce in the event of a breach, not with prior authorisation. There had been no forbearance by the landlord in respect of the alterations carried out by the tenant pursuant to the 1987 licence. The tenant had not been in breach of the covenant against alterations at the time and, rather than merely deciding not to enforce the covenant, the landlord had positively authorised the tenant to carry out the works: Selous Street Properties Ltd v Oronel Fabrics Ltd [1984] 1 EGLR 50; (1984) 270 EG 643 & 743, Howard de Walden Estates Ltd v Pasta Place Ltd [1995] 1 EGLR 79; [1995] 22 EG 143 and Unicomp Inc v Eurodis Electron plc [2004] EWHC 979 (Ch); [2004] PLSCS 113 considered. The licence could not be regarded as merely postponing until a later date the time at which the landlord was entitled to call on the tenant to remove the works. It had granted permission for those works at a time when the tenant was not in breach of the covenant against alterations and, further, the licence did not give the landlord an absolute right to require reinstatement of the premises but instead permitted it to do so only if that was reasonable: Selous Street Properties distinguished.
Jonathan Seitler QC (instructed by Thrings LLP) appeared for the appellant; Edward Cole (instructed by TLT LLP, of Bristol) appeared for the respondent.
Sally Dobson, barrister