These are
nervous times for those who have guaranteed the obligations of commercial
tenants. Recessions are no fun for anyone, but those who stand to pick up the
tab in the event of a business failure are nearer the front line than most of
us would choose to be. It is hardly surprising, therefore, that when guarantors
find themselves on the hook they wriggle fast and furiously. This week we look
at two cases in which such efforts met mixed success.
In Cerium
Investments Ltd v Evans [1991] 20 EG 189, the defendants were
seeking to escape their liabilities as guarantors of a company which had taken
an assignment of a lease of which the plaintiffs were the landlords. Their
obligations stemmed from the licence to assign in which the landlords had given
consent, the assignee had entered into a direct covenant with the landlord, and
the defendants had covenanted that the assignee would perform its obligations
and that, in the event of its default, they would make good all losses. The
lease required any assignment to be registered within one month and the licence
provided that it (the licence) would become absolutely void if any assignment
were not registered in accordance with the lease. The assignment took place but
was never registered, so the defendants were arguing that the licence had
become void and that their liabilities, accordingly, had never arisen.
The
landlords contended that the defendants’ obligations amounted to both a
guarantee that the assignee would perform its obligations under the lease, and
an indemnity that, in the event of nonperformance by the assignee, the sureties
would pay any losses to the landlord. The failure to register was an obligation
under the lease, the non-performance of which was a simultaneous breach by both
the assignee and the guarantors. Accordingly, in seeking to avoid their
obligations under the contract of guarantee, the defendants were relying on
their own wrong and there is a long line of authority making clear that this
will not be allowed. The guarantors responded that the failure to register
meant that their obligations had never come into effect and that they were not,
therefore, relying on their own breach.
The Court of
Appeal ruled in favour of the landlords. The precise wording of the licence —
‘this Licence shall become null and void . . .’ — made it clear that it was,
initially, to have legal effect. Once this had happened, the defendants
themselves became obliged to register and could not rely on non-registration to
end their responsibilities.
In the
second case — William Hill (Southern) Ltd v Waller [1991] 1 EGLR
271 — the guarantors were, temporarily at least, more successful. Here, the
plaintiffs who, as original tenants, had been called upon to pay, and had paid,
rent due from their assignee were seeking an indemnity from that assignee’s
guarantors. Although the plaintiffs obtained summary judgment under Ord 14, the
defendants were seeking to have this set aside on the basis that they had an
arguable defence.
When the
assignee ceased trading in March 1986 the defendants had taken over payments of
rent until June 1986; the rent which had been paid by the plaintiffs was for
the five quarters commencing June 1986. However, the guarantors claimed that
the lease had been determined in September 1986, following the operation of a
break clause, and therefore were accepting liability only in respect of the
rent from June to September.
For safety’s
sake the plaintiffs had added the landlords as parties to the action, so that
they could claim the return of the rent which they had paid, if the guarantors
turned out to be correct. For good measure the landlords were counterclaiming
against the plaintiffs for the rent after 1987!
The crux of
the present case was whether the guarantors had an arguable defence that the
break clause had been operated. Two letters, one in July 1984 and the other in
January 1986, attempting to give six months’ notice in accordance with the
break provision, had been sent and it was on these that the defendants had
relied when the case came before the Master. These were both ineffective,
primarily because they had been served not by the tenant but by the guarantors.
On appeal to
the judge, on fresh legal advice, the defendants also based their defence on
estoppel, claiming that the landlords had led them to believe that their
letters had been effective and that their liability would cease in September
1986. The judge rejected this as an arguable defence; he felt they were vague
assertions, hastily put together with little or no evidence to support them.
Although
agreeing that the draft defence lacked detail and that the factual basis for
the defence seemed ‘slim’, the Court of Appeal decided that there was an
arguable defence and that the matter should go to trial.
The court
also rejected the landlords’ assertion that there was, in law, no right to
break because the clause, as is usual, required the tenant to have paid the
rent and performed its obligations; in this case, the obligations had been
performed not by the tenant but by its guarantors and the original tenants. As
Nicholls LJ put it: ‘. . . I am unable to accept that the precondition . . .
does require any such literal degree of performance . . . What matters to the
landlord is that there are no subsisting breaches at the material date. I am
unable to accept a construction . . . which would have the consequence that, if
at any time prior to the date of termination, the payee of the rent was someone
other than the tenant for the time being, that would forever preclude the
exercise of the right of termination unless the current tenant went through the
suggested formality of tendering a sum which is no longer payable. . . . That
would be formalism and literalism run amok.’
Whatever its
final outcome, this case does highlight the need for guarantors to obtain
prompt and accurate legal advice. Where the lease does contain a break
provision they have the opportunity to limit the duration of their liability,
provided that they perform the tenant’s obligations.
It will be
touch and go whether the sureties in the William Hill case do escape;
the matter would have been put beyond all doubt by the service of a proper
notice to terminate.
relief
Where one
person acts in a way which breaches another’s legal rights the courts will
normally grant an injunction to stop him, unless the interference is very
trivial and readily compensatable by an award of damages. Needless to say,
within this simple and apparently uncontentious proposition lurks a veritable
minefield. What is the position, for example, if it is very questionable
whether the alleged activity does amount to a breach and the matter takes a
long time to get to court? Must the
defendant halt his activities, despite contending that they are not a breach,
until such time as a court decides the matter?
If so, what if the judge rules against the plaintiff — does the latter
carry any responsibility for losses caused to the defendant?
In such
circumstances a plaintiff is in a dilemma; the obvious step is to seek an
interlocutory injunction but, if the courts make such an order, it is usually
conditional upon the plaintiff giving an undertaking to pay damages to the
defendant should his action prove unsuccessful. This in itself is a huge
deterrent, but if the plaintiff does not obtain an interlocutory injunction his
chances of being granted an injunction at trial can be diminished. An
illustration of these difficulties arises where development is alleged to be in
breach of a private right, such as a restrictive covenant or a right to light.
Stopping the building by obtaining an interlocutory injunction can involve the
risk for the plaintiff of becoming liable, on the undertaking, for very
substantial damages, but an unwillingness to take that risk means that the
works may continue, in which case the court may prove unenthusiastic about
making the defendant pull down a newly constructed building. Equally, a
defendant against whom a writ has been issued, but no interim injunction
obtained, has to decide whether to risk continuing with works, which the court
may order him to undo. These issues have been before the courts on two recent
occasions.
In Blue
Town Investments Ltd v Higgs & Hill plc [1990] 32 EG 49; [1990]
2 EGLR 181 the defendants were seeking to have struck out the plaintiff’s claim
for a permanent injunction to stop building works which were infringing the
latter’s undisputed right to light. Before the works had started the plaintiff
had indicated that a financial settlement could be reached. The judge held
that, although he would not strike out as such, because an injunction at trial
was ‘almost inconceiveable’ the plaintiff could proceed only if it gave an
undertaking in damages — just what the latter had been seeking to avoid.
However, in Oxy
Electric Ltd v Zainuddin [1990] 2 Ch 902 a similar application to
strike out was refused. Here, again to avoid an undertaking in damages, the
plaintiff was seeking a permanent injunction to stop building works which were
alleged to be in breach of a restrictive covenant. Although the plaintiff’s
case was a stronger one in any event, Hoffmann J made it clear that he did not,
in principle, agree with the Blue Town decision. Provided a case is not
unarguable, frivolous or vexatious, and in the absence of malice, a citizen has
the right to bring a bonafide claim which does not have to be purchased by an
undertaking in damages.
