Alleged breach of covenant — Landlords claiming forfeiture of lease — Judgment in default of defence — Tenants’ applications to set aside dismissed — High Court allowing appeal against that decision — Landlords’ claim struck out and action dismissed
On May 12 1993 the plaintiff landlords granted a lease of 4-8 Grosvenor Street, London W1, to the defendant tenants for a term of 30 years from September 29 1993. The premises consisted of five ground-floor shop units and office premises. The rent for the office premises was £861,500 pa. The lease contained covenants on the part of the tenants: (1) not to assign or part with possession of the premises; and (2) not to underlet the whole of the premises. The lease also contained options on the part both of the landlords and tenants to serve notice on each other as from November 16 1995 (conditional upon the lease subsisting on that date) doubling the rent received in respect of the office premises and requiring the landlords in return to pay to the tenants the sum of £7.75m.
The tenants triggered that provision and assigned the right to payment of the sum to their mortgagee, Barclays Bank, which was granted a first fixed charge over the lease. The total rent was above the market rent. The tenants and their sureties were hopelessly insolvent, unable even to pay the initial rent, and administrative receivers were appointed. The landlords were facing a liability to pay £7.75m. The landlords alleged breaches of covenant by the tenants; claimed possession of the premises; mesne profits; and entered judgment in default of defence. Master Barrett dismissed the tenants’ application to set aside that judgment, but the tenants appealed.
Held The appeal was allowed.
1. The administrative receivers were empowered in the name of the tenants to defend the action and to apply to set aside the judgment.
2. The nature and purpose of a charge was to give the chargee and any receiver appointed by him (so long as they acted in good faith) the right to forward the legitimate interests of the chargee in obtaining repayment of his debt, notwithstanding the wishes of or adverse consequences for the liquidators, other creditors or third parties.
3. If the lease was held not to have been forfeited, the disclaimer by the liquidator would allegedly result in the landlords proving in the liquidation for the amount by which the reserved (double) rent exceeded the market rental value of the premises over the residue of the terms of the lease, in excess of £10m. There would also allegedly be effected a gross injustice against the landlords who would be required to pay £7.75m as a windfall for the bank. However those considerations were not relevant to the exercise of the court’s discretion to set aside the judgment.
4. The injustice and prejudice to the landlords, liquidator and creditors might constitute grounds to preclude the bank obtaining payment but that was to be decided in proceedings constituted for the purpose and on the merits. In all the circumstances the judgment should be set aside.
5. On the evidence there had been no breach of covenant. The action was bound to fail and the landlords’ action was struck out.
Kirk Reynolds QC and Terence Bergin (instructed by Slaughter & May) appeared for the landlords; Nicholas Patten QC, Edwin Johnson and Antony Zacaroli (instructed by Lovell White Durrant) appeared for the tenants; Adam Goodison (instructed by Richards Butler) appeared for the liquidator.
