Landlord and tenant — Assignment — Insolvency — Variation of lease — Liquidation of second assignee of term — Disclaimer of lease — Liability of original tenant and first assignee — Principles in Friends Provident Life Office v British Railways Board — Whether liable under rent review memorandum varying rents payable — Vesting order — Rent payable under lease created by vesting order
By a lease
dated September 18 1981 business premises were let to BHP Petroleum Ltd (BHP)
for a term of 25 years, at an initial rent from November 30 1981 of £210,000 pa
subject to five-year rent reviews. On March 20 1985 BHP assigned the lease to
Sevington Properties Ltd (Sevington) pursuant to a licence dated March 5 1985.
The licence contained a covenant by Sevington to pay the rent during the
residue of the term and a direct covenant, as surety, by Sevington’s parent
company, Land Securities plc. By a licence dated November 4 1985, and made
between the then landlord, Sevington, and Clive Lewis & Partners (Clive
Lewis), consent was given to an assignment of the term (which had already
occurred) to Clive Lewis. By the licence the parties agreed to vary the lease
by advancing the first rent review period one year, so that it would run for
six years; the agreed rental value for the first review period was £225,000. By
a rent review memorandum the landlord and Clive Lewis agreed the rent review
from September 29 1991 by way of stepped annual rents rising from £355,000 to
£395,000. On January 4 1994 Clive Lewis was renamed Stratton Street Property
Investments Ltd (SSPI). On July 7 1995 Beegas Nominees Ltd (Beegas) acquired
the reversion to the lease. In February 1996 SSPI went into liquidation and on
July 12 1996 the liquidator filed a notice of disclaimer of the lease. In June
1996 Beegas commenced proceedings against BHP and Sevington, claiming arrears
of rent. In October 1996 Sevington issued an originating application seeking an
order under sections 181 and 182 of the Insolvency Act 1986 vesting the lease
in itself at a current rent of £210,000, alternatively £225,000. In the court
below it was accepted, or decided, that: (a) the disclaimer did not exonerate
BHP or Sevington from their contractual liabilities as, respectively, original
lessee and covenantee under the 1985 licence; (b) BHP were not bound by the
1985 licence and therefore the starting point for their liability was not
£225,000 then agreed; (c) although the rent review clause might still operate
against BHP, BHP were not bound by the stepped rent arrangements in the 1992
rent memorandum; (d) Sevington was bound by the 1995 licence, and the starting
point for rent liability on its part was £225,000; and (e) rent payable by
Sevington in respect of the lease to be vested in it should be the current
rental value as at September 29 1996. Beegas appealed and BHP and Sevington
cross-appealed in respect of the issues at (d) and (e) and contended that BHP
and Sevington are bound by the 1992 rent memorandum.
Sevington was dismissed. The stepped rent arrangements in the 1992 rent
memorandum were variations to the lease which were not authorised by the lease
itself, and so fell within the fourth principle of Sir Christopher Slade in Friends
Provident Life Office v British Railways Board [1995] 2 EGLR 55. BHP
and Sevington were not bound by the rent memorandum. The 1992 rent memorandum
did not operate as an accord and satisfaction of the 1991 rent review.
Accordingly, the liability of BHP and Sevington for unpaid rent is £210,000 and
£225,000 respectively, subject to the operation of the rent reviews for 1991
and 1996. The rent payable by Sevington pursuant to the vesting order in
respect of the disclaimed lease should be determined in accordance with the reddendum
to the lease on the basis of an initial rent of £225,000 and reviews to current
rental values as at September 29 1991 and 1996.
The following
cases are referred to in this report.
Baynton v Morgan (1888) 22 QB 74; affirming 21 QBD 101
City of
London Corporation v Fell [1993] QB 589;
[1993] 2 WLR 710; [1993] 2 All ER 449; 91 LGR 151; (1992) 65 P&CR 229;
[1993] 1 EGLR 93; [1993] 04 EG 115, CA
Clarke v Findon Developments Ltd [1984] 1 EGLR 129; (1984) 270 EG
426
Deanplan
Ltd v Mahmoud [1993] Ch 151; [1992] 3 WLR
467; [1992] 3 All ER 945; (1992) 64 P&CR 409; [1992] 1 EGLR 79; [1992] 16
EG 100
Fawke v Viscount Chelsea [1980] QB 441; [1979] 3 WLR 508; [1979] 3
All ER 568; (1979) 38 P&CR 504; [1979] 1 EGLR 89; [1979] EGD 146; 250 EG
855, CA
Friends
Provident Life Office v British Railways Board
[1996] 1 All ER 336; [1995] 2 EGLR 55; [1995] 48 EG 106
Gus
Property Management Ltd v Texas Homecare Ltd
[1993] 2 EGLR 63; [1993] 27 EG 130
Hindcastle
Ltd v Barbara Attenborough Associates Ltd
[1997] AC 70; [1996] 2 WLR 262; [1996] 1 All ER 737; [1996] 1 EGLR 94; [1996]
15 EG 103
National
Westminster Bank Ltd v BSC Footwear Ltd
(1980) 42 P&CR 90; [1981] 1 EGLR 89; [1981] EGD 295; 257 EG 277, CA
This was an
appeal by Beegas Nominees Ltd, the plaintiff in the first action, in
proceedings claiming arrears of rent against the defendants, BHP Petroleum Ltd
and Sevington Properties Ltd, and the second defendant in the second action in
which the plaintiff, Sevington Properties Ltd, sought a vesting order by
originating application against Christopher Adams (as liquidator of Stratton
Street Property Investments Ltd) and the second defendant, and cross-appeals by
BHP Petroleum Ltd and Sevington Properties Ltd, the appeal and cross-appeal
from the decision of Lindsay J.
Kim Lewison QC
(instructed by Rowe & Maw) appeared for Beegas Nominees Ltd; Paul Morgan QC
(instructed by Nabarro Nathanson) represented BHP Petroleum Ltd and Sevington
Properties Ltd.
Giving
judgment, MORRITT LJ said: This is an appeal of the plaintiff, Beegas
Nominees Ltd (Beegas), and a cross-appeal of BHP Petroleum Ltd (BHP) and
Sevington Properties Ltd (Sevington), brought, in each case, with the leave of
the judge, from the orders of Lindsay J made on March 25 1997. The questions
for his determination arose out of the disclaimer made by the then lessee,
Stratton Street Property Investments Ltd (SSPI), on July 12 1996 of a lease
dated September 18 1981 whereby Associated Newspapers Ltd
from September 1 1981 (the lease). There were two basic questions: first, what
was the liability in respect of the rent unpaid by SSPI of the original lessee,
BHP, and the intermediate lessee, Sevington, which had covenanted directly with
the landlord to pay the rent; and, second, arising out of the first, what
should be the rent payable by Sevington under the lease to be vested in it
pursuant to section 181(3) of the Insolvency Act 1986.
First, it is
necessary to describe the material provisions of the lease. They were as
follows:
(a) ‘the
Landlord’ and ‘the Tenant’ were defined so as to include their respective
successors in title;
(b) ‘Rent
periods’ were defined as successive periods of five years commencing on
September 29 1986, 1991, 1996 and 2001, in the last case terminating on August
31 2006;
(c) ‘the
initial rent’ was defined as the yearly rent of £210,000;
(d) ‘the
current yearly rental value’ was defined as:
the rack
rental value of the demised premises agreed between the Landlord and the Tenant
or failing agreement the amount determined as the rack rental value at the
relevant date by an Arbitrator … so that in case of any such arbitration the
amount to be determined by the Arbitrator shall be the amount which shall in
his opinion represent the yearly rack rent at which the demised premises could
be let at the commencement of the relevant rent period by a willing landlord to
a willing tenant in the open market without taking a fine or premium for a term
equal to the residue then unexpired of the term of this Lease taking into
account …
(e) The rent
payable from September 1 1981 to November 30 1981 was a peppercorn; from then
until September 28 1986 was the initial rent and thereafter:
(3) During
each rent period whichever of the three following rents is the greater (that is
to say):
(a) The
initial rent
(b) A rent
equal to the rent payable during the last year of the preceding rent period (if
any) or
(c) A rent
equal to the current yearly rental value of the demised premises at the
commencement of the relevant rent period.
Provided that
if the rent provided for under paragraph (c) hereof shall not have been
ascertained sooner than the last day before the commencement of the relevant
rent period a rent equal to the rent payable immediately before the
commencement of the relevant rent period shall be payable until such time as
the rent provided for under paragraph (c) aforesaid shall be ascertained whereupon
the rent so ascertained (if greater than the rent payable immediately before
the commencement of the relevant rent period) shall then be payable during the
remainder of the then current rent period.
(f) Clause
3(18)(b) contained a covenant against assignment without the landlord’s
consent. There was also a provision that words importing the singular should
include the plural, but no party relied on it.
On March 5
1985 the then landlord, Williams & Glyns Trust Co Ltd, granted to BHP a
licence to assign the term to Sevington. The licence contained a covenant with
the landlord by Sevington, as the assignee, ‘to pay the rent reserved by the
lease … from the date upon which the lease is assigned to it … and thenceforth
during the residue of the term …’. On March 20 1985 BHP assigned the term to
Sevington and its parent company, Land Securities plc, covenanted direct with
the landlord by way of surety to pay the rent should Sevington fail to do so.
The term did
not remain vested in Sevington for long. On October 4 1985 Sevington, without
any licence so to do, assigned the term to Clive Lewis & Partners. The
omission of a licence was made good on November 4 1985 when a licence to assign
to Clive Lewis & Partners was given to Sevington by the then landlord, Royal
Bank of Scotland plc. By the same deed the three of them agreed to a variation
of the lease in a number of respects: first, the first rent period was to run
from September 29 1985 to September 28 1991, thereby advancing its commencement
and prolonging it to six years; second, and in consequence, the initial rent
was to be paid down to September 28 1985; and third, the current yearly rental
value for the first rent period should be £225,000. It was provided in para 4.7
that the lease should continue in full force save as thereby modified. In
addition Clive Lewis & Partners covenanted to pay the rent reserved by the
lease and to perform and observe the covenants from the date on which the lease
was assigned thenceforth during the residue of the term thereby granted.
On May 7 1992
the landlord, Royal Bank of Scotland plc, and the tenant, Clive Lewis &
Partners, which by then had been incorporated, subscribed what was described as
a rent review memorandum thereby to:
record the
fact that the rent reserved by the Lease has been reviewed with and pursuant to
the provisions in the Lease and it has been agreed that the revised rent
(subject to further review of rent as provided in the Lease) takes effect as
follows …
There were
then set out the details of a stepped annual rent from September 29 1991 to
September 29 1995 increasing by £10,000 each year from £355,000 to £395,000.
On January 4
1994 Clive Lewis & Partners changed its name to Stratton Street Property
Investments Ltd (SSPI). By July 7 1995 at the latest, Beegas had become
entitled to the reversion to the term created by the lease. On February 20 1996
SSPI went into liquidation.
On June 27
1996 Beegas issued its writ endorsed with a statement of claim seeking payment
by BHP and Sevington of the unpaid rent with interest. On July 12 1996 the
liquidator of SSPI filed a notice of disclaimer under section 178 of the
Insolvency Act 1986 disclaiming ‘all the company’s interest in’ the premises.
In consequence, on October 15 1996, Sevington issued an originating application
seeking an order under sections 181 and 182 of the Insolvency Act 1986 vesting
the unexpired term in itself ‘at a current yearly rent of £210,000 per annum,
alternatively £225,000 per annum and otherwise on the terms of the lease’.
On November 20
1996 BHP and Sevington issued a summons seeking an order under RSC Ord 14A to
determine certain questions of law and points on the construction of the lease.
These were the summonses which came before Lindsay J. The questions for his
determination and his conclusions on them may be summarised as follows:
(a) Whether
the disclaimer exonerated BHP and Sevington from any liability under the lease.
It was not disputed and the judge held that section 178(4) of the Insolvency
Act 1986, as interpreted by the House of Lords in Hindcastle Ltd v Barbara
Attenborough Associates Ltd [1996] 2 WLR 262*, did not operate so as to
exonerate BHP or Sevington from their contractual liabilities as, respectively,
the original lessee and covenantee under the licence dated March 5 1985.
*Editor’s
note: Also reported at [1996] 1 EGLR 94
(b) Whether
the contractual liability in respect of the rent payable by BHP as at the date
of disclaimer was £210,000 pa, being the initial rent defined in the lease, or
£225,000 pa, being that subsequently agreed in the deed of variation dated
November 4 1985 to be the current yearly value. The judge decided, and it
appeared to be common ground, that the variation of the lease effected by the
deed of variation dated November 4 1985 did not bind BHP so that the starting
point for consideration of the liability of BHP at the date of the disclaimer
was not £225,000.
(c) What was
the effect (if any) on the contractual liability of BHP of the memorandum of
May 7 1992? Lindsay J considered that the memorandum did not bind BHP as its
provisions for a stepped rent were not within the contract comprised in the
lease to which it was party. But he also held that the rent review clause in
the lease might still be operated as against BHP.
(d) What was
the liability of Sevington before any vesting took place under the Insolvency
Act 1986, having regard to the facts that it had entered into a direct covenant
to pay the rent in the licence dated March 5 1985 and was a party to but not a
direct covenantor in respect of the deed of variation made on November 4 1995?
The judge
1995. Consequently, the starting point for the consideration of the liability
of Sevington at the time of the disclaimer was £225,000. With those exceptions
relevant to the arrears of rent for the period September 29 1985 to September
28 1991, Lindsay J considered that the position of Sevington was the same as
that of BHP.
(e) What, in
the exercise of its discretion under section 181 of the Insolvency Act 1986,
should the court fix as the rent payable by Sevington in respect of the lease
to be vested in it pursuant to the provisions of that section? The judge
decided that the rent should be the current yearly rental value as at September
29 1996, the latest review date under the disclaimed lease, to be agreed or in
default of agreement determined by an arbitrator in accordance with the
provisions of the original rent review clause.
Beegas appeals
from the judge’s conclusions in respect of the issues I have summarised in
paras (d) and (e). It contends, contrary to the views of the judge, that BHP
and Sevington were bound by the rent review memorandum, because a stepped rent
was within the scope of the rent review clause contained in the original lease
and BHP and Sevington were contractually bound to pay rent so increased. If
this submission were well founded then the rent payable under the lease at the
time of the disclaimer would have been £395,000 pa. It is contended, in the
alternative, that if a stepped rent was not authorised by the rent review
clause in the lease, then at least BHP and Sevington were bound by the increase
provided for in the first step, namely £355,000. In the final alternative
Beegas relies on the conclusion of the judge summarised in para (c) that the
rent review clause might still be operated against BHP and Sevington so as to
provide for the rent which would have been arrived at in the review as at
September 1991, it being agreed that the rent payable then was more than that
payable at the time of a similar review as at September 1996. In respect of the
issue summarised at (e) Beegas contends that the rent payable in respect of the
lease to be vested in Sevington should be £395,000 as prescribed by the rent
review memorandum, alternatively £225,000 as prescribed by the deed of
variation dated November 4 1985, subject, in each case, to upward review with
effect from September 29 1991 and 1996. In effect Beegas contended for the
highest rent for which Sevington was liable under the disclaimed lease
available in the light of this court’s conclusions on Beegas’ other submissions.
BHP and
Sevington resist these submissions. They accept that they are liable
contractually for a minimum of £210,000 and £225,000 respectively; the former
sum as the initial rent provided for in the lease to which BHP was a party, the
latter being the substituted figure for the initial rent to which Sevington,
but not BHP, agreed in the licence to assign dated November 4 1995. They also
accept that the rent review clause may be operated against each of them in
respect of the rent periods commencing on September 29 1996. They do not accept
that the rent review memorandum dated May 7 1992 is binding on either of them.
But they go further and contend that the effect of its provisions is to exclude
the operation of the rent review clause in respect of the rent periods
commencing on September 29 1991. They claim that this is the result of the
agreement between the then landlord and SSPI recorded in the memorandum for the
stepped rents commencing on September 29 1991. They submit that such agreement
amounts to an accord and satisfaction sufficient to exclude the review clause
for all purposes during the period the memorandum was operative. Accordingly,
in the light of the liability which they admit, they support the terms on which
the judge ordered the vesting of the disclaimed property in Sevington.
It is common
ground that the starting point for the resolution of the various questions that
arise is the application of the basic principles set out in the judgment of Sir
Christopher Slade in Friends Provident Life Office v British Railways
Board [1996] 1 All ER 336*, at p351a. They are:
*Editor’s
note: Also reported at [1995] 2 EGLR 55
(1) The
assignment of a lease does not destroy the privity of contract which exists
between the landlord and the original tenant; in the result, the original
tenant remains liable on all his covenants contained in the original lease,
notwithstanding the assignment.
(2) If the
contract embodied in the original lease itself provides for some variation in
the future of the obligations to be performed by the tenant (eg by a rent
review clause), the original tenant may be bound to perform the obligations as
so varied, even though the variations occur after the assignment of the lease —
this will depend on the construction of the relevant covenant(s) in the
original lease.
(3) The
actual decision in Centrovincial Estates is justifiable on ground (2)
above, though the decision in Selous Street Properties is less easily
justifiable on that ground because there the assignee had altered the premises
in breach of covenant, arguably so as to increase their value, before the rent
review.
(4) If, on
the other hand, an assignee of the lease by arrangement with the landlord
agrees to undertake some obligation not contemplated by the contract contained
in the original lease, the estate may be altered, but the variation does not
affect the obligations of the original tenant; suggestions to the contrary in
the last two-mentioned decisions are based on a misunderstanding of the obiter
dictum of Lord Esher MR in Baynton v Morgan (1888) 22 QBD 74
at 78.
The questions
which arise for our determination are:
(a) Whether
the agreement recorded in the rent review memorandum for stepped rents with
effect from September 29 1991 until September 28 1996 or any of them was a
variation of the terms of the lease provided for and authorised by the lease
itself, so as to be within the second of the principles referred to by Sir
Christopher Slade; or whether it was not so authorised so as, therefore, to
fall within the fourth such principle.
(b) If the
terms of the memorandum are not binding on BHP or Sevington because they fall
within the fourth principle rather than the second, whether the respective
contractual liabilities of BHP and Sevington for the rent might be increased by
the operation of the rent review clause in the lease as at September 29 1991
both during that rent period and, by establishing a rent under para 3(b) of the
reddendum, for such of the succeeding rent periods for which the current
yearly rental value at the commencement of that period was less.
(c) Whether
the judge correctly exercised his discretion as to the terms on which the
disclaimed property was to be vested in Sevington.
I will
consider these questions in the order in which I have set them out.
As Sir
Christopher Slade made clear in the second of the principles he set out, the
answer to the first question depends on the proper construction of the lease.
Did the rent review clause permit the agreement for stepped rents? Lindsay J
decided that it did not. He noted that clause 1(9) was concerned with
ascertaining by agreement or arbitration the rack-rent value of the demised
premises. He considered that the provision for arbitration envisaged a single
figure for the whole of the relevant rent period and precluded an arbitrator
from making an award for stepped rents during such a period. He determined that
the parties might not agree what the arbitrator might not award and concluded
that:
The lease, in
my judgment, contemplates for each rent period rent being payable at some
unchanging rate which, when the agreement limb is employed, is to be a figure
agreed as the rack rental value at the commencement of the period on the
implied hypothesis of a letting for the whole period at one unchanging rate.
That figure, in my view, cannot be derived from an agreement as to a series of
figures for stepped rents over the period. BHP is thus not bound by the stepped
provisions of the memorandum of May 1992 as those provisions are outside the
contemplation of its contract.
Beegas submits
that the judge was wrong. It is submitted that the parties are free to agree
whatever they like, so long as they do so in good faith and are not bound by
any limitations on the jurisdiction of an arbitrator. It relies on Fawke
v Viscount Chelsea [1980] QB 441* as indicating that, depending on the
evidence, a stepped rent may well be the best way to determine the rack-rent
value over a period of years
while the lease does not require a stepped rent it does not forbid one either.
BHP and Sevington support the judge’s conclusion for substantially the reasons
he gave.
*Editor’s note:
Also reported at [1979] 1 EGLR 89
I agree with
the judge. The contractual liability of both BHP under the lease, clause 3(1),
and of Sevington under the licence dated March 5 1985, was to pay the rent
reserved by the lease. The reddendum, which I have already quoted, made
it plain that for each of the specified periods there was to be a single rent.
This point is clear beyond argument in relation to clause 2(1) and (2), which
provide for a peppercorn and the initial rent as defined respectively. The rent
referred to in clause 2(3) is the greater of three distinct alternatives. The
first alternative, the initial rent, is a single figure. In my view, the second
alternative can only be a single figure also, for it is to be equal to the rent
payable during the last year of the preceding period. Likewise, the third
alternative must be a single figure. The result of the comparison of those
three single figures is to provide a single figure that is the greatest of
them. That is to be the rent ‘during each rent period’. In my view, the
structure of the reddendum and the evident purpose in making provision
for ‘the rent periods’ is quite inconsistent with stepped rents during a single
rent period. If there were any doubt about the matter then, in my view, it
would be resolved by the proviso to the reddendum, which provides in
terms that the subsequently ascertained current yearly rental value ‘shall … be
payable during the remainder of the then current rent period’. Such a provision
could not be operated if the rent so ascertained was a stepped rent. This
construction is quite consistent with the definition of ‘the current yearly
rental value’. That too can only be a single amount representing, as required,
the rack-rent at which the demised premises could be let at the commencement of
the relevant rent period.
I do not think
that the reference to Fawke v Chelsea [1980] QB 441 assists on
this point of construction. The case established that, depending on the
evidence, a stepped or variable rent might be determined by the court under
section 34(1) of the Landlord and Tenant Act 1954 on the grant of a new
business tenancy. Thus, it depended on the proper construction of that section
and has no wider application. In any event, in other cases in which it has been
cited, the courts appear to have leaned in favour of a single rather than a
stepped or variable rent, eg National Westminster Bank Ltd v BSC
Footwear Ltd (1980) 42 P&CR 90*; Clarke v Findon Developments
Ltd [1984] 1 EGLR 129; and Gus Property Management Ltd v Texas
Homecare Ltd [1993] 2 EGLR 63, at p65E–G. For my part, I derive no
assistance from any of these cases. The question is one of construction of this
lease.
*Editor’s
note: Also reported at [1981] 1 EGLR 89
Accordingly, I
would resolve the first question in the same way as the judge. In my view, the
rent review memorandum fell within the fourth, not the second, of the
principles referred to by Sir Christopher Slade. It is convenient at this stage
to deal with a subsidiary submission for Beegas to which I have already
referred. Beegas contended that even if the rent review memorandum as a whole
fell within the fourth principle, the agreement it recorded with regard to the
rent to be paid during the year commencing on September 29 1991 came within the
second.
If this were
right then such agreement would provide a minimum rent of £355,000 for all
subsequent years or rent periods. It was submitted that as that step was agreed
the rack-rent value could not be lower than the lowest step. I do not accept
that submission. It is plain from the terms of the rent review memorandum that
the first step, as opposed to all five steps as a whole, was not agreed as the
rack-rent value. I agree with the submission of counsel for BHP and Sevington
that they are either bound by all the terms of the memorandum or by none of
them.
Accordingly, I
proceed to the second question on the basis that BHP and Sevington are not
bound by the rent review memorandum. For Beegas it is submitted that on that
hypothesis it may now operate the rent review machinery provided for in the
lease, so as to determine the current yearly rental value of the demised
premises as at September 29 1991. If this were so then it could provide a
figure within para (3)(c) of the reddendum to be compared with the
initial rent provided for in (3)(a). I observe in passing that it is common
ground that there could be no figure within para (3)(b) for the purposes of the
rent period commencing on September 29 1991, because the rent payable during
the last year of the previous rent period arose from the variations agreed in
1985 which fell within the fourth, not the second, of Sir Christopher Slade’s
principles. But it is material to a later stage in the argument to note that a
figure falling within para (3)(c) for the purposes of the 1991 review will be a
figure within para (3)(b) for the succeeding review in 1996. If, as is common
ground, at that stage, the figure falling within para (3)(c) is lower than that
within para (3)(b) then the latter will be the rent for the next rent period as
well.
The judge
accepted the argument for Beegas. He considered:
Had the May
1992 memorandum disclosed the conscious making of a decision to employ a system
in clear substitution for the system of the lease, I would have seen force in
[BHP and Sevington’s] argument. As it is, the memorandum contemplates, albeit
mistakenly, that what it was doing was pursuant to the provisions of the lease.
If I am right as to its terms not representing an agreement of the character
required by the lease, then I see no good reason why the alternative limb of
arbitration available ‘failing agreement’ should not still be available to the
landlord.
BHP and
Sevington contend that the judge was wrong. They seek to support their
contentions by reference to principles and authorities to which the judge was
not referred. It is necessary to explain what that argument is. By section
77(1)(C) of and Schedule II, para IX to the Law of Property Act 1925 and
section 24(1)(b) of the Land Registration Act 1925 on the assignment of
leasehold property, be the title registered or unregistered, the assignee
covenants with the assignor to pay the rents reserved by the lease and to
indemnify the assignor from any liability in respect of such rent. In Deanplan
Ltd v Mahmoud [1993] Ch 151* a series of assignees had covenanted
directly with the landlord to pay the rent reserved by the lease. The last of
them was unable to do so and the landlord reached an agreement with him to
accept certain goods in full and final settlement of all claims and demands
against him under the terms of the lease. The landlord then sought to recover
the balance of the rent unpaid from a previous assignee. Judge Paul Baker QC
held that he was not entitled to do so because a release by accord and
satisfaction of one covenantor released all other covenantors undertaking the
same obligation. One reason for that view (p170) was that it would be a breach
of the contract with the released assignee to proceed for the balance of the
rent against an earlier assignee who might in turn seek indemnity from the
assignee who had been released. That case was considered by the Court of Appeal
in Friends Provident Life Office v British Railways Board [1996]
1 All ER 336. The members of the court did not consider that the proposition
thereby established was applicable because the deed of variation with which
they were concerned could not be construed as a clear and unequivocal release
of the obligation.
*Editor’s
note: Also reported at [1992] 1 EGLR 79
It is
submitted that in this case the rent review memorandum was an accord and the
subsequent performance of its terms a satisfaction between the then landlord
and SSPI, releasing SSPI from the rental obligations under the lease. It is
contended that it operated to release BHP and Sevington from the same
obligations for which they too were liable though not parties to the
memorandum. I acknowledge the ingenuity of the argument, but I am quite unable
to accept it.
First, the
rent review memorandum cannot be construed as a release of any obligation. On
its face it is the implementation, not the release, of the terms of the lease.
Second, the implementation of the rent review memorandum is not repugnant to
the operation of the rent review clause. There is no need for the current rent
payable by an assignee to be the same as the rent for which the prior tenant is
contractually liable. Thus, the rent review machinery might be operated to
ascertain the current yearly rental value of the demised
in order to determine the rent payable under para (3) for the rent period
commencing on September 29 1991. If the rent so determined is less than the
figures agreed in the rent review memorandum, then in the event of default by
the current tenant, the liability of the original tenant to the landlord would
be limited to the amount thereby determined. Likewise, the right of the
original tenant to an indemnity from the current tenant in default would be
similarly restricted. Thus, there could be no question of the claim by the
landlord against the original tenant constituting a breach of the contract
between him and the current tenant. If the rent so determined is more than the
amount of the current rent, there might be an issue whether the landlord was
able to recover from the original tenant more than the current rent unpaid. But
the existence of such an issue in that event cannot amount to such a repugnancy
between the rent review memorandum and the rent review machinery as to
necessitate the extinction of the rent review machinery altogether. Third, the submission
is inconsistent with the decision of the Court of Appeal in Baynton v Morgan
(1888) 22 QB 74. In that case the landlord sued the original tenant for rent
unpaid by a subsequent assignee of the term. An intermediate assignee had
surrendered to the landlord part of the demised premises. His assignee of the
term went bankrupt. The landlord’s claim against the original tenant was for an
apportioned part of the original rent. The claim so limited was successful. The
Court of Appeal was unanimously of the view that the covenant for payment of
the rent had not been extinguished by the surrender, but found it unnecessary
to decide whether the landlord was bound to limit his claim in the way he did.
If a surrender of part of the demised property is not repugnant to the original
covenant for payment of the rent for the whole of the demised property, then I
see no reason why an agreement as to the amount of the rent should do so. If it
were otherwise then there would be little, if any, difference between cases within
the second and fourth of the principles referred to by Sir Christopher Slade.
It was also
suggested by counsel for BHP and Sevington, though somewhat diffidently, that
procedurally it would be difficult to operate the rent review machinery in
relation to earlier tenants contractually bound, but not the current tenant.
Certainly it would be unusual. But I see no reason in relation to the rent
review machinery in this case to conclude that it would be so difficult as to
give rise to a repugnancy on that account.
Accordingly, I
agree with the conclusion of the judge on the second question also. The
consequence is that, in my view, the liability of BHP and Sevington to Beegas
for unpaid rent is £210,000 and £225,000 respectively, subject in each case to
the operation of the rent review machinery and the determination of the rent
under para (3) of the reddendum for the rent periods commencing on
September 29 1991 and 1996. It is from that standpoint that I consider the
third question.
By section 178
of the Insolvency Act 1986 a company that is being wound up in England or Wales
may, by means of a specified notice given by its liquidator, disclaim onerous
property. The phrase ‘onerous property’ is defined by section 178(3)(b)
to include:
any other
property of the company which is unsaleable or not readily saleable or is such
that it may give rise to a liability to pay money or perform any other onerous
act.
Such a
disclaimer:
(4)(a)
operates so as to determine, as from the date of the disclaimer, the rights, interests
and liabilities of the company in or in respect of the property disclaimed; but
(b)
does not, except so far as is necessary for the purpose of releasing the
company from any liability, affect the rights or liabilities of any other
person.
Section 181(3)
enables the court on the application of a person who claims an interest in the
disclaimed property or a person who is under any liability, not discharged by
the disclaimer, in respect of the disclaimed property to:
make an
order, on such terms as it thinks fit, for the vesting of the disclaimed
property in, or for its delivery to —
any such
applicant. Subsection (4) prohibits such an order in favour of a person under a
liability in respect of the disclaimed property:
except where
it appears to the court that it would be just to do so for the purpose of
compensating the person subject to the liability in respect of the disclaimer.
Section 182
precludes an order under section 181 vesting property of a leasehold nature in
any person claiming under the company as underlessee or mortgagee:
except on
terms making that person —
(a) subject
to the same liabilities and obligations as the company was subject to under the
lease at the commencement of the winding up, or
(b) if the
court thinks fit, subject to the same liabilities and obligations as that
person would be subject to if the lease had been assigned to him at the
commencement of the winding up.
The effect of
these provisions in a case such as the present was described by Lord Nicholls
of Birkenhead in Hindcastle Ltd v Barbara Attenborough Associates Ltd
[1997] AC 70, at p88G, in these terms:
The statute
provides that a disclaimer operates to determine the interest of the tenant in
the disclaimed property but not so as to affect the rights or liabilities of
any other person. Thus when the lease is disclaimed it is determined and the
reversion accelerated but the rights and liabilities of others, such as
guarantors and original tenants, are to remain as though the lease had
continued and not been determined. In this way the determination of the lease
is not permitted to affect the rights or liabilities of other persons. Statute
has so provided.
The vesting
order provisions do not run counter to this analysis. If a vesting order is
made, the court order operates by virtue of the statute to vest the lease in
the person named on the terms fixed by the court. That the lease may have
ceased to exist meanwhile is neither here nor there. If necessary, there will
be a statutory recreation.
Lindsay J
recorded that Sevington sought a vesting order and Beegas did not oppose it,
the only issue being the terms on which it should be made. He rejected the
argument for Beegas that such a vesting should be at the rent agreed in the rent
review memorandum with effect from September 29 1995, namely £395,000 pa, or
such higher rent as the operation of the rent review clause as at September 29
1996 might yield. His reasons were that the original lease had in fact come to
an end and the provisions of section 181(3) conferred a discretion on the court
as to the terms on which it should be recreated. He then considered whether,
and if so how, the incidents of the disclaimed lease should be altered. In that
context he considered two factors that he thought to be neutral. His decision
and the reason for it was:
[Counsel for
BHP and Sevington] submits that it would be more fitting that the rent should
be reviewed to the current market value rather than the value as at September
29 1991, from which I may take it that a current rent is likely to be less than
a September 1991 rent. However, as between those two, I see no injustice in
keeping Sevington to the closest approach to the original consequences of its
own bargained for position and in giving to the landlord that which, given that
Sevington had become an assignee of the lease with Land Securities plc as its
surety, the landlord had good reason to be able to rely upon.
Accordingly,
at and from the date of the vesting order I intend that the tenant shall pay a
rent equal to the current yearly rental value of the demised premises as at
what would have been the last to have fallen review date under the unamended
provisions of the lease, namely September 29 1996, the same, if not agreed
between landlord and tenant, to be determined by an arbitrator under the
provisions in the lease.
This
conclusion was criticised by both sides. For Sevington it was contended that
the rent should be £225,000 only. This was on the footing that that was its
liability immediately before the vesting. But, having rejected that submission
in connection with the liability of BHP and Sevington for arrears of rent, I
would reject it for the same reasons in connection with the terms on which the
vesting is to be effected. Accordingly, the only outstanding criticism of the
judge’s conclusion
£355,000 pa or such other rent for which Sevington was contractually liable
with effect from September 29 1991.
The argument
in support of the claims for £395,000 or £355,000 are that those were the rents
payable by SSPI under the rent review memorandum and as such were ‘imprinted on
the term’ at the time of the disclaimer, per Nourse LJ in City of
London Corporation v Fell [1993] QB 589*, at p604. Beegas submits
that it is the term so imprinted that would be vested in Sevington because that
was ‘the disclaimed property’ within section 181(3). I do not accept that
submission. First, the alternative sum of £355,000 pa was not, on any view,
imprinted on the term at the time of the disclaimer because it was only payable
pursuant to the rent review memorandum for the year commencing September 29
1991. But, in any event, it seems to me to be clear that assuming the
disclaimed property to be the lease as it existed and with all its incidents as
at the time of the disclaimer, the court still has a discretion as to the terms
on which the vesting should be made. That this is so seems to me to be made
plain by the terms of section 182(1). If in all cases the vesting of the
disclaimed property was necessarily on the same terms as subsisted before the
disclaimer, then there would be no need to make the exception provided for by
that section in the case of sublessees. In these circumstances it is
unnecessary to deal with the interesting and somewhat metaphysical arguments of
whether the disclaimed property is the term or the land in which the leasehold
interest subsisted; nor whether, if it is the term, such term is extinguished
by the disclaimer; and if so whether it is recreated; and if so whether the
recreation is the work of the statute or of the order of the court. These
interesting questions must await resolution on another occasion.
*Editor’s
note: Also reported at [1993] 1 EGLR 93
The more
fundamental objection of Beegas to the judge’s order is the contention that his
judgment on this point is internally inconsistent. Beegas points out,
correctly, that the judge had earlier decided that the rent review machinery
remained enforceable against BHP and Sevington with effect from September 29
1991 as well as September 29 1996. In the passage from his judgment I have
already quoted he also considered that there was no injustice in keeping
Sevington to the closest approach to the original consequences of its own
bargained for position. Yet his order, evidently intended to give effect to
that principle, was that the rent payable should be equal to the current yearly
rental value, ascertained in accordance with the lease with effect from
September 29 1996.
In my view,
there is substance to this criticism. In the light of the judge’s findings,
with which so far I have agreed, the contractual liability of Sevington was to
pay a rent of £225,000 or such greater sum as might be determined in accordance
with the provisions of clause (3) of the reddendum. The rent reviews
provided for in the lease were operable with effect from September 29 1991.
When operated at that date, if a higher figure than £225,000 was produced, then
that would be the rent for the ensuing rent period. When operated with effect
from September 29 1996, the current yearly rental value would not be the rent
for the next rent period unless it was higher than both £225,000 pa and the
rent payable during the previous rent period. The judge recognised that in fact
it was not. But the effect of the judge’s order is to treat the current yearly
rental value with effect from September 29 1996 as though it would have been
the contractual rent payable for the next rent period when in fact it would not
have been.
In my view, in
all the circumstances of this case the principle the judge sought to apply,
namely to place Sevington and its parent company in the same position in
relation to the rent review clause and the rent payable as they would have been
in contractually had there been no disclaimer, was correct. But his order
failed to give effect to that principle because, I suspect, he overlooked the
fact that the rent for the previous rent period came within para (3)(b) of the reddendum.
The fact that the judge was exercising his discretion does not prevent this
court from correcting an error in the implementation of the proper exercise of
that discretion; and, in my view, the court should do so in this case.
For all these
reasons I conclude that:
(a) the
liability of BHP and Sevington for the rent unpaid by SSPI is to be determined
by operating the rent review clause as at September 29 1991 and 1996 and then
applying para (3) of the reddendum on the basis that the initial rent
was £210,000 and £225,000 respectively;
(b) the rent
payable by Sevington pursuant to the vesting order in respect of the disclaimed
lease should be determined in accordance with para (3) of the reddendum
in the disclaimed lease on the basis of an initial rent of £225,000 and reviews
as to the current yearly rental value as at September 29 1991 and 1996.
It follows
that I would dismiss the appeal of BHP and Sevington and, to the limited extent
indicated, allow the appeal of Beegas.
SIR PATRICK
RUSSELL and SIR STEPHEN BROWN P agreed and
did not add anything.
Appeal of BHP
and Sevington dismissed; appeal of Beegas allowed to the extent indicated;
leave to appeal to the House of Lords refused.
