Landlord, tenant and surety — Liability of surety under contract of guarantee, guaranteeing payment of rent and performance of covenants in the lease, including the covenant to yield up the demised premises at the end of the term — Judgment had been given against tenant for possession, arrears of rent and mesne profits — In the present case the judge held surety liable both for the landlord’s loss of rent and for damages for loss of use of the premises until recovery of possession, ie the period covered by the landlord’s claim for mesne profits — It was argued for surety that he was not liable for damages in respect of the period between service of the writ on the tenant and recovery of possession — It was submitted that the landlord had elected to sue the tenant in tort, mesne profits being damages for trespass, whereas the surety had only guaranteed contractual obligations — Held, rejecting these arguments and affirming decision of county court judge, that the surety was liable for the loss suffered by the landlord both by non-payment of rent and failure by the tenant to yield up possession after service of the writ — Surety’s appeal dismissed
This was an
appeal from a decision of Judge Stabb QC, sitting as an additional judge of the
High Court, who had held the appellant liable as surety for damages in respect
of a failure by a tenant to pay rent and yield up possession of the demised
premises, units 4, 5 and 6, High Cross Development, Mount Pleasant, Newport,
Gwent, at the end of the lease. Mr Allan Paul Pierce, the present appellant,
was the defendant in the proceedings before Judge Stabb in Leeds District
Registry, the plaintiff and present respondent being Associated Dairies Ltd.
Judge Stabb’s judgment was reported at (1981) 259 EG 562, [1981] 2 EGLR 41.
D Iwi
(instructed by Gregory, Rowcliffe & Co, agents for David Parry & Co, of
Grays, Essex) appeared on behalf of the appellant; P Pelham (instructed by Ward
Bowie, agents for Booth & Co, of Leeds) represented the respondent.
Giving judgment,
WALLER LJ said: This is an appeal from Judge Stabb sitting as a High Court
judge when he found in favour of the respondent that the appellant was liable
on guarantees which he had given in a licence to assign a lease of property
described as units 4, 5 and 6, the licence being dated June 12 1974, and in a
lease of property described as unit 7, the lease being dated January 31 1975.
The aggregate rent was £5,500 and this was paid quarterly until December 25
1976, when no rent was paid.
On April 12
1977, a writ was issued by the landlord against the tenant and judgment was
given by order of the deputy district registrar for possession for £1,543.03
arrears of rent and insurance, and for £1,235.62 mesne profits from March 25 to
June 14.
In September
1978, the present proceedings were started against the appellant as surety in
respect of unpaid rent and for damages and/or mesne profits. The claim was
based on breaches of covenant which had caused loss to the landlord. The terms
of clause 31 of each of the leases are as follows:
31. To yield
up at the expiration or sooner determination of the term or any statutory
continuation thereof as the case may be the demised premises and all additions
and improvements made thereto in the meantime (and not required to be removed)
and all fixtures and fittings of every kind therein and thereon except tenant’s
or trade fixtures and fittings in such condition as shall be in accordance with
the lessee’s covenants hereinbefore contained and if not so yielded up to pay
all expenses (including solicitors’ costs and surveyors’ fees) incurred by the
Lessor in assessing any damage to which the Lessor shall become entitled by
reason of a breach of this covenant.
The clause
relating to the surety, clause 4 of the licence and clause 7 of the second
lease, so far as is relevant, reads as follows:
The Surety of
the request of the Lessee and in consideration of the demise hereinbefore
contained HEREBY COVENANTS AND GUARANTEES with and to the Lessor that the
Lessee or the Surety will at all times hereafter duly pay the rents and other
sums hereby reserved and made payable in the manner and at the respective times
herein appointed for the payment thereof and duly perform and observe all the
covenants on the part of the Lessee and conditions herein contained AND ALSO
that the Surety (or his legal personal representatives for the time being or
some or one of them) will at all times hereafter pay and make good to the
Lessor on demand all losses costs damages and expenses occasioned to it by the
non-payment of the said rents and other sums or any part thereof or the breach
or non-observance of any of the said covenants and conditions on the part of
the Lessee . . .
The judge held
(inter alia) that the appellant was liable to pay the respondent’s damages
for the loss of use of the premises from March 25 to August 12 1977, when they
finally recovered possession. The appellant submits that damages are not
payable for breach of contract by the surety because the original action was
for mesne profits and therefore for damages in tort and accordingly an election
has been made. The defendant as surety only guarantees those matters, is the
submission, for which the landlord has established its right against the
tenant.
In construing
the clause relating to the surety we have been referred to the judgment of
Hilbery J in Eastern Counties Building Society v Russell [1947] 1
All ER 500 where, at p 503, the judge said this:
Neither
equity nor law will put a construction on the document which results in
imposing on the surety any more than, on the strictest construction of the
instrument, he must be said expressly to have undertaken or so as to detract
from the right given to the surety by the proviso defining the circumstances in
which the surety is to be held discharged. If authority is needed for saying
that the surety’s contract has been said to be one strictissimi juris, I
would refer to Bacon v Chesney (1816) 1 Stark 192, Stamford,
Spalding & Boston Banking Co v Ball (1862) 4 De GF & J 310
and Blest v Brown (1862) 4 DeGF & J 367 . . . there is plenty
of authority for saying that the courts treat a surety as a favoured debtor . .
. Such then are the principles which I must apply in construing the document in
question.
It follows
therefore that the guarantee clause must be strictly construed.
There is,
however, no room for doubt as to the plain meaning of the words ‘The surety
will . . . pay . . . to the lessor on demand all losses . . . occasioned . . .
by . . . the breach . . . of any of the said covenants . . . on the part of the
lessee. . . .’ The lessee covenanted to
‘yield up at the . . . determination of the term . . . the demised premises. .
. . ‘ In this case the tenant did not yield
up the premises at the determination of the term, that is, on April 16 when the
writ was served in the action, but remained in possession in effect as a
trespasser until August 12. As a result the landlord was deprived of the use
and occupation of the premises and so suffered loss.
We were
referred to the case of Junction Estates Ltd v Cope and
in this case. There the question was how long the guarantee continued. In this
case the question is how to calculate the loss or damages which flow from an
admitted breach of covenant to which the guarantee applied.
The appellant
attaches importance to the order of the deputy district registrar adopted by
the judge awarding mesne profits from March 25 to a day in June. The writ
claiming possession and forfeiting the lease was issued on April 12 and served
on April 16 and therefore the tenant continued to be a tenant until the writ
was served. In Canas Property Co Ltd v K L Television Services Ltd [1970]
2 QB 433, at p 442, Lord Denning MR said:
My conclusion
is that where a tenant has been guilty of a breach which has not been waived,
then, in order to effect a forfeiture, the lessor must actually re-enter, or do
what is equivalent to re-entry, namely, issue and serve a writ for
possession on the lessee or assignee, as the case may be. If the lessee or
assignee is a partnership firm (or joint tenants) service on one of them is
enough for that purpose: see Doe d Bennet v Roe (1849) 7 CB 127.
The lease is determined as from the date on which the writ is served. The rent
is payable up to the date of service. Mesne profits are payable after the date
of service.
If ‘rent’ is
described as mesne profits, not too much attention should be given to the
phrase. It was ‘rent’ up to April 14 and mesne profits thereafter.
The judge held
that the liability of the surety was coextensive with the liability of the
tenant. Our attention has been called to Moschi v Lep Air Services
Ltd [1973] AC 331. In that case one of the questions being considered was
whether the fact that the creditor treated the debtor’s conduct as repudiation
of the contract also terminated the guarantor’s liability. Lord Reid, at p
344G, said this:
With regard to
making good to the creditor payments of instalments by the principal debtor
there are at least two possible forms of agreement. A person might undertake no
more than that if the principal debtor fails to pay any instalment he will pay
it. That would be a conditional agreement. There would be no prestable
obligation unless and until the debtor failed to pay. There would then on the
debtor’s failure arise an obligation to pay. If for any reason the debtor
ceased to have any obligation to pay the instalment on the due date then he
could not fail to pay it on that date. The condition attached to the undertaking
would never be purified and the subsidiary obligation would never arise.
On the other
hand, the guarantor’s obligation might be of a different kind. He might
undertake that the principal debtor will carry out his contract. Then if at any
time and for any reason the principal debtor acts or fails to act as required
by his contract, he not only breaks his own contract but he also puts the
guarantor in breach of his contract of guarantee. Then the creditor can sue the
guarantor, not for the unpaid instalment but for damages. His contract being
that the principal debtor would carry out the principal contract, the damages
payable by the guarantor must then be the loss suffered by the creditor due to
the principal debtor having failed to do what the guarantor undertook that he
would do.
(See also Lord
Diplock at 351B.)
In that case
the House of Lords were of opinion that the surety’s liability was a primary
liability, that is to say not coextensive. Applying those principles to the
present case, in my judgment the clause imposing liability of the surety for
loss, the clause with which this case is concerned, was a primary liability,
that is to say not coextensive with the debtor.
In such
circumstances the surety will, in my opinion, be liable for the loss suffered
by the landlord as a result of the tenant’s failure to pay rent from December
25 1976, and failure to yield possession to the landlord from April 16 1977,
when the writ was served. No question arises before us about the rent before
March 25. However, on the determination of the tenancy there will be rent owing
up to April 16 and then damages for failure to hand over possession until
August 12. These damages are mesne profits but they form the loss suffered by
failure to yield possession. In my judgment unless there is some compelling
reason to the contrary the surety is responsible under the deed to pay this to
the landlord.
The appellant
submits, however, that the fact that the landlord sued for mesne profits was an
election to sue for tort, and therefore the landlord cannot now claim for a
contractual loss under the covenant. In United Australia Ltd v Barclays
Bank Ltd [1941] AC 1 at p 18, Viscount Simon LC says:
The true
proposition is well formulated in the Restatement of the Law of Restitution
promulgated by the American Law Institute, p 525, as follows: ‘A person upon
whom a tort has been committed and who brings an action for the benefits
received by the tortfeasor is sometimes said to ‘waive the tort’. The election
to bring an action of assumpsit is not, however, a waiver of tort but is the
choice of one of two alternative remedies’. Contrast with this, instances of
true waiver of rights, the waiver of forfeiture by receiving rent.
And at p 21 the
Lord Chancellor makes it clear that where it is merely procedural there is no
waiver if there is no satisfaction of the first judgment.
In my
judgment, in this case there is no substance in the argument that the landlord
had waived its right to sue the surety in contract. The contract that we are
considering is between the landlord and the surety, not the landlord and the
tenant. The loss which the landlord suffered was the loss of use of the
premises, the subject of the lease. The measure of damage is not described as
use and occupation because to do so might have the effect of giving the former
tenant rights. The measure of damage is described as mesne profits. The loss
which resulted from the failure to yield possession was the mesne profits
between April 16 and August 12. I find it difficult to say that the landlord in
suing for mesne profits was making an election which would bar a claim for
loss, ie mesne profits. Even if it would otherwise be an election, since the
judgment was fruitless and the parties are different, the difference between
suing for mesne profits because the tenant has held over in breach of covenant
and suing for breach of covenant is procedural and therefore does not bar the
claim.
Finally, I
would be disposed to hold in this case that it would be carrying technicality
too far to say that the tortious element barred the claim where damages for
mesne profits are part of the loss occasioned by the failure to yield
possession.
Accordingly,
although in one respect for a different reason, I would uphold the decision of
the judge and dismiss this appeal.
Agreeing,
ACKNER LJ said: I have had the benefit of reading in advance the judgments of
Waller LJ and May LJ. I agree with them that this appeal fails and I add a few
words of my own.
The appellant,
as surety, undertook a primary liability. He covenanted, inter alia, in
these terms:
The surety at
the request of the Assignee and in consideration of the Licence hereinbefore
granted hereby covenants and guarantees with and to the Landlord that the
Assignee or the Surety will at all times duly pay the rents reserved by the
Lease . . . and duly observe and perform all the covenants on the part of the
lessee and conditions therein contained.
Rent was not
duly paid, and the covenant to yield up possession at the determination of the
lease was not complied with. The assignee has neither paid the rent outstanding
until forfeiture nor the mesne profits due following forfeiture until
possession was finally obtained. I can therefore see no answer to the claim by
the landlord against the surety for the arrears of rent and mesne profits.
Mr Iwi has
accepted that the appellant is liable for such damages for breach of covenant
as can be established in relation to the failure to yield up the premises in
the state of repair and decoration required by the covenant. I can see no basis
for differentiating between the obligations under the repairing covenants and
the obligation to pay the rent and yield up possession on the determination of
the lease.
Mr Iwi’s
submissions in regard to the technical meaning of ‘mesne profits’ and his
exposition on the doctrine of waiving a tort do not seem to me to have any
bearing upon the clear liability of his client arising out of the covenant to
which I have referred. I, too, would accordingly dismiss this appeal.
Also agreeing
that the appeal should be dismissed, MAY LJ said: The appellant’s arguments in
this case were based on what counsel contended were two well-established legal
principles. First, that the liability of a surety is coextensive with that of
the principal debtor to the extent of his guarantee. Secondly, that where on
given facts one party acquires simultaneously a cause of action in tort and a
cause of action in contract against another, then if the first chooses to sue
in contract, if, as it is said, he ‘waives the tort’, then this is an election
to which he can be held.
In its
simplest form the appellant’s argument was that as the landlord had chosen to
sue the assignee for mesne profits, that is to say for damages for trespass, in
respect of the period between March 25 and August 12 1977 it had thereby
abandoned its contractual rights against it, in particular its right to sue for
damages for breach of the covenant to deliver up the demised premises with
vacant possession on the determination of the lease. Consequently, since the
surety, the present appellant, had only guaranteed the assignee’s contractual
rights, the landlord’s claim was unsustainable, since the surety’s liability
was coextensive with that of the assignee.
In my opinion,
however, such an argument, though superficially attractive, is based upon an
incorrect over-simplification of each of the legal principles to which I have
referred.
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.
If it does, then the surety is liable: if it does not, in whole or in part,
then pro tanto the surety is not liable. It is within these strict
limitations only that it is correct to say that a surety’s liability is
coextensive with that of the principal debtor.
The situation
where the underlying contract has determined, either by repudiation and
consequent rescission, or, as in this case, by forfeiture, is similar and was
considered by the House of Lords, in Moschi v Lep Air Services Ltd [1973]
AC 331 to which Waller LJ has referred. That the first essential is strictly to
construe both the underlying contract and the contract of guarantee is made
clear by the passage from the speech of Lord Reid which has been quoted and by
the sentence in the report immediately preceding it. There are passages in the
speeches of both Lord Diplock and Lord Simon of Glaisdale which also make this
clear but which it is unnecessary to quote in this judgment.
Once this has
been done, however, where it appears that the contractual promise of the
guarantor is to guarantee the performance by a debtor of his obligations to a
creditor — arising out of a contract, this gives rise to an obligation on the
part of the guarantor to see to it that the debtor performs his own obligations
to the creditor — see per Lord Diplock at p 348 and Lord Simon of Glaisdale at
p 355. This being so, the resulting legal position between the parties upon the
rescission, or forfeiture, of the underlying contract between creditor,
principal debtor and guarantor was expressed by Lord Diplock, at p 351 of the
report, in this way:
. . . upon
rescission of the contract the primary obligation of the debtor to pay the
instalments was converted by operation of law into a secondary obligation
either to pay damages for failure to perform it; or, as these were instalments
of a debt existing at the date of the contract, it may be a revived obligation
to pay the balance of the whole debt immediately.
The
guarantor’s obligation under his contract of guarantee does not, as the Court
of Appeal appear to suggest, depend upon the debtor’s primary obligation
continuing to exist after the contract had been rescinded. Nor is it affected
by whether the debtor’s secondary obligation which was substituted for it by
operation of law is classified as an obligation to pay damages or as an obligation
to pay the debt. It was the debtor’s failure to perform his primary obligation
to pay the instalments in circumstances which put an end to it that constituted
a failure by the guarantor to perform his own primary obligation to the
creditor to see that the instalments were paid by the debtor, and substituted
for it a secondary obligation of the guarantor to pay to the creditor a sum of
money for the loss he thereby sustained. It is the guarantor’s own secondary
obligation, not that of the debtor, that the creditor is enforcing in his claim
for damages for breach of his contract of guarantee.
It is only in
this manner and to this extent that in such circumstances it is correct to say
that a surety’s liability is co-extensive with that of the principal debtor.
In so far as
the second basic principle upon which the appellant based his argument is
concerned, as Waller LJ has said, this was considered by the House of Lords in United
Australia Ltd v Barclays Bank Ltd [1941] AC 1. The effect of their
Lordships’ decision in that case was summarised by Lord Diplock in the judgment
of the Privy Council in Mahesan v Malaysia Housing Society Ltd [1979]
AC 374, at p 382:
The
authorities to this effect are discussed at length in the speeches in United
Australia Ltd v Barclays Bank Ltd [1941] AC 1, a case in which the
House of Lords confirmed the principle that where the same facts gave rise in
law to two causes of action against a single defendant, one (formerly lying in
assumpsit) for money had and received and the other for damages for tort, the
plaintiff must elect between the remedies. It held, however, that such election
was not irrevocable until judgment was recovered on one cause of action or the
other. The House of Lords also held that where the same facts gave rise in law
to a cause of action against one defendant for money had and received and to a
separate cause of action for damages in tort against another defendant,
judgment recovered against the first defendant did not prevent the plaintiff
from suing the other defendant in a separate action: but that to the extent
that that judgment was actually satisfied this constituted satisfaction pro
tanto of the claim for damages in the cause of action against the second
defendant.
When the two
principles upon which the appellant relied are fully and precisely stated in
this way, what is the result in the present case?
First, during
the period between March 25 and April 16 the relevant lease remained in being.
No question of election or estoppel, in favour of either the assignee or, more
particularly, the appellant guarantor, can alter the legal position which
existed, namely, that until the lease was forfeited on April 16, rent continued
to be payable in accordance with its terms. Such rent was not paid by the
assignee, and thus there can be no answer to the appellant’s liability in
respect of it.
Secondly,
after the forfeiture of the lease, the landlord’s cause of action against the
assignee was either for mesne profits or for damages for breach of the covenant
to deliver it up. I think that the first lay in tort, the second in contract. I
respectfully feel that one may be introducing possible doubt into
well-established principles of landlord and tenant law if it is not clearly
recognised that mesne profits are damages for trespass, are a remedy for a
tort, and do not arise out of contract. Where an occupant is liable
contractually to an owner of land in respect of his occupation of it, but not
pursuant to a lease or tenancy, then in my opinion the claim should be one for
the appropriate sum of money for use and occupation of that land.
As between the
landlord and the assignee, the former sued and obtained judgment for mesne
profits. As between these two parties, on the law that I have sought to
outline, this was therefore a judgment in tort. By it the landlord waived its
right to proceed thereafter against the assignee for damages for breach of
contract. However, there was no waiver of any such right against the appellant
guarantor. As the passage from Lord Diplock’s speech in Lep Air Services Ltd
case which I have quoted makes clear, the appellant guarantor was liable,
after the forfeiture of the lease and upon the assignee’s failure thereupon to
deliver up possession of the demised premises, to pay damages for his failure to
see to it that the assignee complied with this covenant. The measure of those
damages is the amount of the rent which would otherwise have been payable for
the premises had the lease remained in being, together with the costs of
obtaining the unsatisfied judgment against the assignee.
I would add
that I respectfully agree that the decision in Junction Estates Ltd v Cope
[1974] 27 P & CR 482 is of no assistance in the present case. That
decision was one which turned on the proper construction of the relevant
guarantee. That is not an issue in the present case, which concerns the loss
and damages flowing from a failure to pay rent and an admitted breach of
covenant to which the guarantee clearly applied.
In my opinion,
therefore, the respondents rightly recovered judgment for the aggregate sum of
£2,577.55 against the appellants herein, though in some respects for differing
reasons from those relied on by the learned judge below. In these circumstances
I, too, would dismiss this appeal.
The appeal
was dismissed with costs, to include costs of Order 14 proceedings. Leave to
appeal to the House of Lords was refused.
