Assignee in insolvent liquidation — Liquidator disclaimed lease — Whether disclaimer determining original assignee’s liability and his surety — High Court giving judgment for lessor — Court of Appeal dismissing appeal — Liability of original lessee continuing after disclaimer — House of Lords dismissing appeal
A lease was granted on October 20 1983 for a term of 20 years from September 12 1983, in respect of 297 Oxford Street, London W1, between the lessor and the first defendant, as original lessee. The initial rent was £13,626 pa, with periodic upwards-only rent reviews. It was not assignable except with the consent of the lessor. In 1987 it was assigned to the second defendant pursuant to a licence to assign, which contained a direct covenant on the part of the second defendant with the lessor to pay the rent and observe and perform the covenants in the lease. The third defendant guaranteed the performance of the obligations undertaken by the second defendant. In 1989 the second defendant assigned the lease with the lessor’s consent to P Ltd. In October 1992 the company went into creditors’ voluntary liquidation. The liquidator gave notice of disclaimer of the lease pursuant to section 178 of the Insolvency Act 1986. The High Court found in favour of the lessor for rent arrears due. The Court of Appeal dismissed an appeal by the second and third defendants: see [1994] EGCS 109. They appealed to the House of Lords. The original lessee did not appeal.
Held The appeal was dismissed.
1. Prior to the Bankruptcy Act 1883, a disclaimer by the trustee in bankruptcy of an assignee of a lease had no effect on the continuing liability of the original lessee or his surety.
2. In Hill v East & West India Dock Co (1884) 9 App Cas 448 the assignee of a lease had become bankrupt and his trustee had disclaimed the lease. The House of Lords decided that the original tenant remained liable for rent notwithstanding the deemed surrender of the lease.
3. Thus, the Act of 1883 had made explicit what Hill v East & West India Dock Co held was implicit in the Bankruptcy Act of 1869. It had introduced for the first time the machinery enabling a trustee in bankruptcy to disclaim leases.
4. From an early date therefore, the courts had refused to give a literal construction to section 23 of the 1869 Act which referred to a disclaimed lease as being “deemed to have been surrendered”.
5. Section 178(4)(b) of the Insolvency Act 1986 provided that a disclaimer: “does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person”. The ancestor of this form of disclaimer provisions was the Bankruptcy Act 1883.
6. In Stacey v Hill [1901] 1 KB 660, the defendant had guaranteed payment of the rent by the tenant. The tenant became bankrupt and his trustee disclaimed the lease. The landlord did not resume possession. The court held that the guarantor was not liable for rent after the lease was disclaimed.
7. Disclaimer operated to determine the insolvent’s liabilities under the lease, not to affect the rights or liabilities of other persons. The release of the insolvent debtor was not to discharge a surety from his liabilities to the lessor.
8. An original tenant guaranteed that the tenants for the time being would perform their obligations. There was no practical justification for distinguishing his position from that of a formal guarantor. In all the circumstances the decision in Stacey v Hill would be overruled.
David Oliver QC and Carolyn Walton (instructed by Houghtons) appeared for the appellants; Kim Lewison QC and Jonathan Arkush (instructed by Chethams) appeared for the respondent lessor.