Surety covenant — Assignment of reversion — No express assignment of surety covenant — Liquidation of tenant/company — Liquidator disclaiming lease — Covenant by surety to take up new lease — Whether surety covenant touches and concerns land — Whether surety covenant runs with reversion — Whether surety obliged to take up new lease — Appeal by surety dismissed
In August 1972 Griffiths Bentley & Co Ltd granted a 21-year lease of the subject premises to Griffiths Bentley (Engineers) Ltd. The appellants, now known as Ingall Industries plc, were a party to that lease as a surety. By clause 5 of the lease: “The surety … 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 … that the surety 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 rent … and in the event of the tenant…going into liquidation … and this lease being disclaimed by a liquidator … the surety hereby covenants with the lessor that it will accept from the lessor a lease of the demised premises for a term commencing on the date of such disclaimer and continuing for the residue then unexpired of the term hereby granted”. In August 1981 the original lessors conveyed the freehold reversion to the respondents, although the benefit of the surety covenant was not expressly assigned. In May 1984 the original lessee went into voluntary liquidation and in March 1986 the lessee’s liquidators disclaimed the lease. In June 1986 the respondent lessors called on the surety to take a lease in conformity with the surety covenant. The appellant surety appealed from the decision of the Court of Appeal ([1988] 2 EGLR 44), which had dismissed its appeal from a decision of Rose J (July 16 1987); he had held that the benefit of the surety covenant was enforceable by the assignee of the reversion. The appellants contended that the decision of the House of Lords in P & A Swift Investments v Combined English Stores Group plc [1988] 2 EGLR 67 could be distinguished; an obligation to take a new lease is like an option on the lessor to create a new lease, and the benefit of options of this nature do not run with the reversion for the benefit of assignees in the absence of express assignment.
Held The appeal was dismissed.
The House of Lords in the Swift Investments case considered a surety covenant which was indistinguishable from the covenant in the instant case. They held that an assignee of the reversion was entitled to enforce the benefit of a surety covenant to pay rent, as such a covenant “touches and concerns” land and runs with the reversion without express assignment of the benefit of the covenant. In the instant case, the surety’s obligation to take a new lease after a disclaimer gives effect to the surety’s obligation to procure compliance with the terms of the old lease. The considerations which led the House of Lords in the Swift Investments case to hold that the covenant by the surety touched and concerned the land apply in equal measure to the whole covenant, including the covenant to take a new lease after disclaimer.
The option cases, on which the appellants relied, were not concerned with the position where a new lease is substituted for an old lease which, through no fault of the lessors, ceases to be effective. In the instant case, the lessors insisted on a covenant by a surety in the old lease in order to provide against the very possibility which happened, namely the insolvency of the lessee; the surety merely replaces the lessee as a substitute.
Gavin Lightman QC and Elizabeth Weaver (instructed by George Carter & Co) appeared for the appellants; and Roger Ellis (instructed by Wigram & Co) appeared for the respondents.