Commercial lease – Repairing covenant – Claimant acquiring premises subject to lease – Tenant selling business to defendant – Tenant having right to indemnity – Claimant alleging tenant’s breach of repairing covenant – Tenant assigning right to indemnity to claimant – Whether claimant having right to enforce indemnity against defendant – Ruling in favour of the claimant
The claimant owned the freehold of commercial premises. The property was subject to a lease dated 1 October 2005, which the claimant’s predecessor had granted to a tenant for a term of 20 years. It included an option for the tenant to determine the lease at the end of the 10th year, subject to giving the landlord at least six months’ written notice. It also contained covenants requiring the tenant to keep and yield up the property in good repair, condition and decoration, and with any alterations reinstated. In July 2001, the tenant’s parent company sold the tenant’s business and business assets to the defendant. The sale agreement provided that the defendant would occupy the premises and included an indemnity from the defendant to the parent company and the tenant in respect of any liability to the claimant. Pursuant to the sale agreement, the defendant had taken possession of the premises and remained in occupation until the lease came to an end. In March 2005, the tenant served notice to determine the lease on 30 September 2005.
The claimant’s surveyor served a schedule of dilapidations on the tenant. The claimant contended that the tenant had breached various covenants in the lease, giving rise to a liability of approximately £335,000.
By a deed of assignment dated February 2006, the parent and the tenant assigned to the claimant the rights each had against the defendant in respect of the occupation and use of the premises. By clause 4 of the deed, the claimant could assign back the back the rights to the parent company and the tenant. The claimant brought an action for damages against the defendant as assignee of the tenant’s rights. A preliminary issue arose as to whether the claimant was entitled to be indemnified in respect of the tenant’s liabilities under the lease.
Held: The court ruled in favour of the claimant.
The claimant had the right to bring an action against the defendant by reason of the assignment. When the lease expired, the tenant was liable for the breaches of covenant and was entitled to be indemnified by the defendant in respect of those liabilities. The tenant had assigned its right to be indemnified, which was the assignment of a cause of action and not a debt. An assignment of that entitlement did not affect its enforceability, nor did it release the defendant.
While the defendant could not be placed in a worse position by the assignment, the assignment did not diminish its liability. The court had to ensure that a wrongdoer did not escape liability merely because the cause of action was in the hands of someone other than the person who had suffered loss. The deed of assignment did not terminate the tenant’s liability: Technotrade Ltd v Larkstore Ltd [2006] EWCA Civ 1079; [2006] 42 EG 246 applied.
The court should endeavour to give effect to the aims and commercial purpose of the deed of assignment. This was to transfer to the claimant the rights and remedies available to the parent and the tenant against the defendant, including the right to be indemnified. In its commercial context, clause 4 applied to claims arising out of the sale agreement and other claims of a similar nature relating to the defendant’s occupation of the premises. The requirement for reassignment did not operate to suspend the tenant’s liability to the claimant: Yorkbrook Investments Ltd v Batten [1985] 2 EGLR 100 considered.
Furthermore, the deed of assignment did not compromise the claimant’s claim against the tenant and did not release the defendant from its liability under the indemnity. The reassignment provisions in clause 4 merely suspended the rights of the tenant to pursue its claims against the defendant, and the potential for future liability remained.
Stephen Jourdan (instructed by Halliwells) appeared for the claimant; Stephen Eyre (instructed by Harrison Clark, of Worcester) appeared for the defendant.
Eileen O’Grady, barrister
