Landlords’ claim against guarantor of obligations under lease — Default in payment of rent by assignees of lease — Whether guarantee covered not only the assignees’ obligations during the contractual term of the lease but also their obligations during the statutory continuation of the tenancy by virtue of Part II of the Landlord and Tenant Act 1954 — Answer required a careful construction of the contract of guarantee and consideration of the position of the creditors (landlords) and principal debtors (assignees of the lease) — The statutory continuation of the tenancy might have gone on for years and there might have been an order for a substantial interim rent — Held that the guarantor’s obligations related to the contractual term alone, not to its statutory continuation — GMS Syndicate Ltd v Gary Elliott Ltd distinguished and Junction Estates Ltd v Cope followed — If it is desired that the guarantor’s obligations should extend to the statutory continuation of the tenancy, some such wording as ‘or any statutory continuation thereof’ should be included in the guarantee covenant or instrument — Judgment for defendant
In these
actions the plaintiffs, A Plesser & Co Ltd, lessors of premises at 113
Middlesex Street, London E1, sued the defendant, Arnold Davis, as guarantor of
the obligations, including the
defendant was a party to the licence to assign granted by the plaintiffs to the
original lessees. (There were actually two actions commenced by the plaintiffs.
The first was endorsed with a statement of claim which was found to be
defective, and a second writ was issued.)
Paul Morgan
(instructed by Janners) appeared on behalf of the plaintiffs; Nicholas Elliott
(instructed by Max Bitel, Greene & Co) represented the defendant.
Giving
judgment, FRENCH J said: The plaintiffs’ claim is for sums allegedly due under
a guarantee given by the defendant whereby the defendant guaranteed due
performance of obligations under a lease by the assignees of that lease, and
the claim raises the question of the true construction of the guarantee. It
raises in particular the question whether the guarantee covers not only the
assignees’ obligations during the contractual term of the lease but also their
obligations during a statutory continuation of the tenancy by virtue of Part II
of the Landlord and Tenant Act 1954.
The lease was
made on April 4 1977 between the plaintiffs and Leslie Wise Ltd. The premises
in question are 113 Middlesex Street, London E1, and they consist, it would
appear, of a warehouse. The term was for three years from December 25 1976. The
rent clause so far as material reads as follows:
PAYING
THEREFOR unto the Landlord yearly during the said term and so in proportion for
any less period than a year the exclusive yearly rent of NINE THOUSAND POUNDS
(£9,000.00) and such rent to be paid by equal quarterly payments in advance on
and here I
interpose to say ‘the usual quarter days in every year’
the first of
such payments to commence from December 25 1976,
and so on.
On June 28
1978 the plaintiffs gave to Leslie Wise Ltd, the original lessees, licence to
assign the lease to Archie Davis Ltd. The latter company had been formed at the
instance of the defendant, Mr Arnold, otherwise Archie, Davis. It was formed so
that the defendant’s wife and the wife of some friend or associate of the
Davises, a Mr Monty Curtis, could carry on, using that new company as a
vehicle, the trade of vendors of ladies’ ‘outer garments’. The idea was that
Archie Davis Ltd should take an assignment of the lease from Leslie Wise Ltd,
whose effective proprietor was acquainted with Mr Arnold Davis.
The defendant
was a party to the licence which the plaintiffs granted to the assignor
company, Leslie Wise Ltd. By that licence the defendant covenanted with the
lessor in clause 4(a)
that the
Assignee will duly pay the rents reserved by the Lease on the days and in the
manner therein provided and will duly perform and observe all the Lessee’s
covenants therein contained and that in case of default in such payment of
rents or in the performance or observance of such covenants as aforesaid the
Surety will pay and make good to the Lessor on demand all losses damages costs
and expenses thereby arising or incurred by the Lessor,
etc.
The assignment
was duly executed on June 28 1978. The defendant was a party also to that
assignment and purported to enter into certain obligations by way of guarantee
under that assignment. However, the obligations springing from that document
have not been pleaded nor have they been relied upon in the course of this
litigation. Accordingly, I do not concern myself with them.
The garment
business of the two ladies did not prosper. The defendant and his wife decided
that they would pull out, and this occurred within a matter of weeks, or maybe
a few months, of the inception of the business. The defendant’s wife sold her
two-thirds interest in the business, or more strictly her two-thirds interest
in the company, to Mrs Curtis. The defendant by oversight retained his single
share, which qualified him no doubt to be a director of the company and also,
no doubt by oversight, continued at least nominally in the office of director.
However, neither he nor his wife had any more thereafter to do with the
business than they could help. Unhappily, at least for him, the defendant had
entered into a bank guarantee for the company’s overdraft and of course to that
extent his involvement did continue.
On June 18
1979 the plaintiffs served a notice under section 25 of the Act to terminate
the tenancy on December 25 1979, that being the date when the lease would, but
for Part II of the 1954 Act, have expired. The notice cited four grounds of
opposition to the grant of a new tenancy. One of those grounds alleged slow
payment of rent, though it is right to say that the rent was, even if slowly,
paid in full down to the end of the contractual term, that is to say until
December 25 1979. The assignee company, Archie Davis Ltd, served in due time a
counternotice and also in due time applied to the court for a new tenancy.
Things dragged on until, on June 16 1980, the assignee company gave notice to
terminate the tenancy under section 27 of the Act, and on the expiry of that
notice, namely September 29 1980, the tenancy duly ended. Between December 25
1979 and September 29 1980 the assignee company paid no rent.
On June 24
1980 the plaintiffs issued the first writ in this action endorsed with a
statement of claim claiming against the defendant the two quarters’ rent which
by then had accrued due from the assignee company. That statement of claim was
woefully defective. I will not burden this judgment nor embarrass the pleaders
by going into detail. It was twice amended, but it remained defective. On
December 4 1981 the plaintiffs issued a fresh writ. The statement of claim
endorsed upon that writ this time pleaded a demand of the guarantor, the
defendant; a demand made, be it noted, as recently before the issue of that
second writ as November 12 1981. That second writ claimed from the defendant as
guarantor the three quarters’ rent unpaid by the assignee company. It also
claimed, as had the earlier writ, the sum of £530-odd for insurance premiums,
which by the terms of the lease the lessee was bound to pay — but which these
assignees, it was alleged, had not paid — to the plaintiffs. It is agreed by
the defendant that, if liable under the guarantee at all, then the sum of
£6,750, the amount of the three unpaid instalments of the yearly rent, is the
proper sum. The defendant was also prepared to agree that, subject to some
documentary proof from the plaintiffs that the plaintiffs had paid the premium
and had not been reimbursed by the assignee company, that sum also was due from
the defendant, supposing always that he was liable at all. No evidence oral or
written was advanced before me to show that the plaintiffs had paid the
premiums or that the assignee company had failed to reimburse them. The
plaintiffs sought to overcome this difficulty by claiming a declaration in the
broadest possible terms to the effect that the defendant is bound to indemnify
the plaintiffs pursuant to the lease in respect of the period from June 28 1978
to September 29 1980. Application was made for leave to amend the second
statement of claim to seek such a declaration and I gave leave yesterday for
that amendment to be made.
I now approach
the principal question which I have to decide. Is the defendant liable under
the guarantee for the three quarters’ rent which fell due during the statutory
continuation of the tenancy? The manner
in which I should approach this problem seems respectfully to me to be set out
with admirable clarity in the judgment of May LJ in Associated Dairies Ltd
v Pierce (1982) 265 ESTATES GAZETTE 127 at p 129, where the learned lord
justice said the following:
When the
underlying contract between creditor and principal debtor and the contract of
guarantee are still subsisting, then in order to ascertain the extent of the
surety’s liability, if any, to the creditor, it is first necessary to determine
the amount and nature of the principal debtor’s debt to the creditor and the
circumstances in which it has arisen. Having done so, one must then construe
the contract of guarantee strictly and see whether it covers the nature, extent
and circumstances of the principal debt sought to be recovered from the surety.
The plaintiff
of course submits that in answering the question posed I should come to the
conclusion that the answer should be ‘yes’. He submits that the tenancy as created
by the lease and as continued by the 1954 Act is one and indivisible. The
parties, it is said, must have been aware of the provisions of the 1954 Act.
When the defendant covenanted ‘that the Assignee will duly pay the rents
reserved by the Lease on the days and in the manner therein provided’, those
words should be construed to include that they would duly pay the rents payable
during any statutory continuation of the contractual period.
Reliance is
placed on the judgment of Nourse J in the case of GMS Syndicate Ltd v Gary
Elliott Ltd [1982] Ch 1. In that case the learned judge had before him an
assignment of a sublease with the consent of the lessor and of the lessee. The
assignees had covenanted with the head lessor during the residue of the term
granted by the underlease as extended by a supplemental agreement to perform
certain covenants in the underlease inter alia against nuisance and
against immoral user of the premises. The assignees claimed that when the
underlease as extended by the supplemental agreement expired and they (that is
the assignees) continued in occupation under the 1954 Act, they could with
impunity carry on an immoral massage parlour in the premises and with impunity
cause a nuisance to other
that contention. He construed the covenants as being covenants in favour, be it
noted, not of the mesne landlord but the head landlord and as continuing during
the statutory continuation of the sublease. I do not doubt the correctness of
that decision, but I do doubt its applicability as persuasive authority in the
very different circumstances of the instant case.
On facts very
much closer to those which concern me and on wording which for all practical
purposes I find indistinguishable MacKenna J held in favour of the guarantor:
see Junction Estates Ltd v Cope (1974) 27 P & CR 482.
At the time
the defendant in this case executed the licence agreement the contractual term
had about half its course yet to run. Any statutory continuation might, for all
he knew, have continued for years, even for decades. The plaintiffs might have
got an order for a swingeing interim rent, depending upon the ravages of
inflation of possibly an increase in property values, and counsel for the
plaintiffs felt constrained in the course of argument to concede that the
defendant would not be bound by the terms of the guarantee to pay in default an
increased interim rent under section 24(A) of the Act. It seems to me anomalous
in those circumstances that he should be bound to pay the rent at all during
the continuation period so long as the interim rent remained the same as the
contractual rent.
If the
plaintiffs are right, the defendant was binding himself for an indefinite
period and, on one view at least, in respect of unascertainable sums. I cannot
construe the relevant words so as to produce this result. It is clear that in
some contexts and for some purposes the contractual term and the statutory
continuation thereof are to be regarded if not as one and the same, then at
least as part of one continuum. See Scholl Mfg Co Ltd v Clifton
(Slim-Line) Ltd [1967] Ch 41, in the course of which Diplock LJ (as he then
was) gave an analysis of the effect of Part II of the 1954 Act in words which I
would not have the temerity to applaud, but which Winn LJ described as having
been given in terms of such cogency and lucidity as he (that is to say Winn LJ)
could not possibly have matched.
But while that
is clear, it is equally clear that a contractual term and a statutory
continuation are distinguishable as concepts. A document may be couched in
language which without doubt or equivocation points to a guarantee of liability
in respect of contractual term obligations or in respect of statutory
continuation obligations or it may be of both. An example is to be found in the
documents which the court had before it in Associated Dairies Ltd v Pierce.
Clause 31 of each of the leases under consideration in that case started with
the words: ‘To yield up at the expiration or sooner determination of the term or
any statutory continuation thereof as the case may be.’ Some such expression could have been used
here and, in my judgment, should have been used here in order to produce the
result for which the plaintiffs contend.
I construe the
defendant’s obligations as relating to the contractual term alone. Accordingly,
I find for the defendant. If I am wrong in that conclusion, then it is right
that I should say something about the declaration which I gave leave to the
plaintiffs to include in their statement of claim. I would in any event have
refused the declaration sought. In my judgment it is much too wide in its
terms, in the first place, and in the second place its purpose is not genuinely
to seek a declaration as to the rights of the parties. Its purpose is to supply
the deficiency in the evidence which the plaintiffs were able to produce before
this court, a deficiency which is explained, if explained at all, only by the
absence of the moving spirit in the plaintiff company out of the jurisdiction.
As a matter of discretion, come what may I would not have granted the
declaration sought.
Both actions
(1980 and 1981) were dismissed with costs.