Business premises – Underlease – Guarantee – Appellants assigning underlease to third party – Appellants guaranteeing assignee’s rent and service charge liability – Respondent landlord undertaking to notify second appellant of rent arrears – Assignee failing to pay rent and respondent seeking to enforce guarantees – Appellants disputing liability and counter-claiming – Whether respondent’s breach of undertaking terminating liability under guarantees – Whether undertaking constituting condition precedent to guarantor’s liability – Appeal dismissed
The respondent company was the landlord of basement premises occupied by the first appellant company pursuant to an underlease for a term expiring in September 2032. By clause 2 of the underlease, a rent of £95,000 per annum was payable by equal quarterly payments in advance, together with a service charge. The first appellant was wholly owned and controlled by the second appellant who acted as guarantor for the underlease. In 2007, the underlease was assigned to a third party (the assignee) with the consent of the first appellant. As a term of the licence to assign, both the appellants guaranteed the assignee’s liabilities in respect of rent and tenant’s covenants. They were released from their original covenants by the operation of section 5 of the Landlord and Tenant (Covenants) Act 1995.
By clause 8 of the licence, the respondent undertook to use all reasonable endeavours to give notice in writing to the second appellant if any rent payable by the assignee was more than two months in arrears. There were arrears of rent and service charge payments within the first few months of the assignment and by the time the first quarterly instalment of rent became due, more than two months’ rent were in arrears. The respondent served on the appellants a notice pursuant to section 17 of the 1995 Act in respect of the last six months’ rent but no notice had yet been served under clause 8 in respect of arrears unpaid for at least two months. Further section 17 notices were served on the appellants, after which the respondent issued proceedings for recovery of arrears.
The assignee did not resist the claim but the appellants disputed liability under their guarantees and counterclaimed on the ground that the respondent had acted in breach of its obligations under clause 8 of the underlease by failing to notify the second appellant whenever an instalment of rent became more than two months in arrears. That obligation was said to be a condition precedent to the liability under the guarantee, so that a failure to provide the requisite notice barred recovery of the arrears. In the alternative, clause 8 constituted a condition or fundamental term of the contract, breach of which had discharged the appellants’ liability under the guarantees.
The judge held that clause 8 was not a condition precedent to the appellants’ liability. Its breach gave rise to a liability in damages but, on the evidence, no loss had been suffered and nominal damages were awarded on the counterclaim. The appellants appealed.
Held: The appeal was dismissed.
If clause 8 was to have the effect contended for by the appellants, it had to operate outside, rather than through, the terms of the guarantees. What had started as an enforceable liability in the first two months of the arrears would determine, in the event that the respondent failed to use reasonable endeavours to give notice of the arrears once the two month period had expired. That meant that clause 8 operated more as a condition subsequent rather than as a condition precedent to liability.
The giving of notice was not expressed as a pre-condition to the operation of the guarantor’s covenant, but was a separate obligation of the respondent in the main body of the licence. Coupled with the fact that the guarantor’s liability had arisen and would be enforceable in the two month period following the contractual date for payment of the rent, it was impossible to treat compliance with clause 8 as a condition precedent to liability under the guarantee. The second appellant could only succeed on the basis that a breach of clause 8 by the respondent had released both the appellants from further performance of the guarantee.
There was no doubt that clause 8 had been inserted in order to impose upon the respondent a contractual obligation to notify the appellants of rent arrears. Although prompt notice would have given the second appellant an early opportunity to bring pressure on the assignee to meet the arrears, his options would have been limited since the assignee had not been subject to any form of legal control by the second appellant beyond being contractually liable to indemnify the appellants for any rent met under the guarantee. There was no prospect of the second appellant acquiring the reversion of the underlease from the respondent and terminating his liability under the guarantee. Thus it was difficult to attribute to the parties to the licence an intention to treat any breach of clause 8 as going to the root of the contract so as to entitle the appellants to be discharged from their liabilities as guarantors.
A breach of clause 8 had never been envisaged as releasing either of the appellants from their guarantees. The structure of the licence was that the first appellant was primarily liable for the due performance of the tenant’s covenants by the assignee. The second appellant’s guarantee only operated in the event that the first appellant failed to perform its obligations as guarantor. He had undertaken no direct responsibility to the respondent for the conduct of the assignee. Accordingly, clause 8 had not been intended to operate as a condition, but merely to give the second appellant a warning of a problem with the assignee so that he could take whatever informal steps were open to him to minimise his exposure.
Raymond Cox QC (instructed by TG Jones & Associates) appeared for the appellants; John McGhee QC and Paul Clarke (instructed by Birketts LLP) appeared for the respondent; the assignee did not appear and was not represented.
Eileen O’Grady, barrister
