Assignment of lease – Insolvency – Tenant’s covenants – Appellant tenant covenanting to guarantee liability of assignee under tenant’s covenants – Liquidator of assignee disclaiming lease – Whether appellant remaining liable to respondent landlord in respect of tenant’s covenants – Appeal dismissed
The respondent’s predecessor granted a tenancy of a retail unit to the appellant for a term of 10 years from March 2004 at a rent of £16,000 pa, subject to review. The lease contained tenant’s covenants in respect of liability to pay insurance, rent, costs incurred by the landlord in securing payment and interest on outstanding moneys.
In August 2005, the appellant assigned the lease to a third party and entered into an authorised guarantee agreement (AGA) with the then landlord (the respondent’s mother). The terms of the licence to assign included a covenant by the appellant, in the form of the AGA, to guarantee the performance of the tenant’s covenants by the corporate assignee.
The respondent became entitled to the freehold reversion on her mother’s death in 2007 and was registered as the freeholder of the premises. The corporate assignee was in financial difficulties. It fell into arrears with the rent and a judgment was entered against it; it vacated the premises and went into liquidation. The liquidator disclaimed the lease and a dispute arose concerning liability for the rent and other payments under tenant’s covenants in the lease.
The respondent sought to make the appellant liable under the AGA, but the appellant argued that her guarantee liability terminated with the disclaimer that terminated the lease. The respondent maintained that the guarantee liability continued by virtue of the express terms of the AGA construed in the context of the deeming effect of section 178(4) of the Insolvency Act 1986. She contended that the appellant had agreed with the landlord to pay the rents remaining unpaid by the assignee and in accordance with the express terms of section 178(4)(b), her liability as guarantor was unaffected by the liquidator’s disclaimer.
The respondent brought successful proceedings in the county court for arrears of rent and insurance rent together with costs, fees and interest. The appellant appealed.
Held: The appeal was dismissed.
The effect of section 178(4) of the 1986 Act was that although the tenant (or an assignee) ceased to be liable for any of the tenant’s covenants following disclaimer, the guarantor remained liable on the guarantee. That objective was achieved by deeming the tenant’s obligations to continue so far as the guarantee agreement was concerned. The rights and liabilities of landlord and guarantor continued as though the lease had continued. The effect of section 178(4)(b) was that the rights and obligations under the guarantee agreement remained as they were. However, the section was not intended to alter those rights and liabilities. If the parties in terms stated that the guarantee was to terminate on disclaimer, effect had to be given to that agreement: Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 EGLR 94; [1996] 15 EG 103 applied.
That was the legal landscape in which the crucial question had to be decided whether the liability period as defined in the AGA had come to an end. The meaning and effect of the guarantee obligation, of which the defined liability period formed part, fell to be determined in the context of section 178(4). The duration of the liability period was linked to whether the assignee was bound by the tenant’s covenants in the lease. On the disclaimer, the determination, by virtue of section 178(4)(a), of the assignee’s liability under the lease was subject to the qualification in section 178(4)(b) that, except for the purpose of releasing the assignee from liability, the disclaimer did not affect the liability of any other person. The appellant was such a person with a guarantor liability. She remained liable as guarantor if the assignee was bound by the tenant’s covenants. Although the lease was determined and the assignee ceased to be liable to the respondent under the tenant’s covenants, the assignee was, so far as other parties such as the appellant were concerned, still bound by the tenant’s covenants as though the lease had not been determined. The liability period of the appellant’s guarantee and her liability to the respondent had not therefore terminated. The guarantee liability to the landlord under the AGA survived the disclaimer.
Furthermore, the landlord’s option under the lease of requiring the tenant/guarantor to enter into a new lease was neither inconsistent with the continuation of the surety liability after the disclaimer of the lease nor did it indicate that the parties had intended the liability under the guarantee to come to an end on disclaimer.
Eileen O’Grady, barrister
