Landlord and tenant — Liability of sureties — Whether liability discharged by variation in the obligations of the lessee and assignees
On November 24
1987 the plaintiff landlords granted two leases to the first defendant, Pasta
Place Ltd, of premises for use as a delicatessen; the landlords forbid the sale
of wines. The second, third and fourth defendants were sureties to the two
leases; the surety covenants containing a proviso that their obligation should
not be released by any deeds or documents given to the tenant supplemental to
the leases. On February 9 1989 the first defendants assigned the leases to NB
Ltd. On August 4 1989 the landlords permitted NB Ltd to serve Italian wine to
persons consuming food at the premises, eight tables having earlier been
permitted in the premises. On July 16 1990 the landlords granted a licence to
use the premises as an off-licence and a licence to use the adjoining premises
as a fire escape. NB Ltd went into administrative receivership on October 1990.
The landlords who had obtained a judgment for arrears of rent against the first
defendants on October 27 1992, which was not satisfied, claimed the arrears
from the sureties. The sureties contended that they had been discharged from
their liabilities because of the variation of the obligations of the lessee by
the three licences granted by the landlords on August 4 1989 and on July 16
1990.
(1878) 3 QBD 495, and in deciding whether alterations to the obligations of
the lessee are substantial or prejudicial to the surety, the court must assess
the alteration objectively. It is not for the court to decide whether in fact
there has been material prejudice. The licence granted on August 4 1989 and the
two granted on July 16 1990 would be likely to increase the rental value of the
premises; the existence of the licences is a factor of potential commercial
value, likely at least to a degree to influence a lessee in deciding what the
rent would be that he would be prepared to pay. The sureties’ liabilities were
therefore charged and were not saved by the proviso in the leases which
envisaged a breach or apprehended breach of covenant.
The following
cases are referred to in this report.
Holme v Brunskill (1878) 3 QBD 495
Selous
Street Properties Ltd v Oronel Fabrics Ltd [1984]
1 EGLR 50; [1984] EGD 360; (1984) 270 EG 643 & 743
This was the
hearing of a claim by the plaintiffs, Howard de Walden Estates Ltd, for arrears
of rent against the sureties of two leases of premises at 102 Marylebone High
Street, London W1.
Martyn Zeidman
(instructed by Michael Conn & Co) appeared for the plaintiffs; Mark Warwick
(instructed by Brecher & Co) represented the second, third and fourth
defendants; the first, fifth and sixth defendants did not appear and were not
represented.
Giving
judgment, Morland J said:
Despite the excellent and stimulating submissions of Mr Martyn Zeidman for the
plaintiff, in my judgment, this claim fails.
The action so
far as I am concerned, concerns three sureties, the second, third and fourth
defendants, of two leases in respect of 102 Marylebone High Street, London W1,
of which the plaintiffs (Howard de Walden Estates) are the lessors. The issue,
in short, is whether there has been a variation in the obligations of the lessees
or their assignees, by reason of the grant of certain licences which I will
described in greater detail later in this judgment, so as to discharge the
sureties from their obligations.
The premises,
102 Marylebone High Street, were tenanted by the first defendants, Pasta Place
Ltd, prior to November 24 1987. They operated those premises as a delicatessen.
They wished to sell wines as part and parcel of the delicatessen business, but
they were refused by the plaintiff landlords.
On the
November 24 1987, two leases were granted by the plaintiffs to the first
defendants. It is not necessary to go into details with regard to many of the
provisions in the leases. The first lease related to the ground floor and
basement and the second to the rear of the ground floor. The term of the lease
was for a period of 16 years from March 25 1986, and the total rent reserved
for the two leases was £24,000 reviewable every four years. Under clause 7 in
one lease, and clause 8 in the other lease, the sureties entered into obligations
in relation to the compliance with the obligations of the lessees in the two
leases.
It is
necessary to explain what has happened to the various other parties to the
proceedings. The first defendants, as the original lessees, remain liable for
the rent that was unpaid following the assignment of the lease to a company
called Nice Bright Ltd. The assignment took place following a licence to assign
on February 9 1989. Nice Bright Ltd, which was run by Mr Loizou, who gave
evidence before me, and is the sixth defendant, after the first rent review
became in arrears of rent. Nice Bright went into administrative receivership on
October 22 1990 and Mr Loizou who had been a surety in respect of Nice Bright
Ltd’s obligation, went into individual voluntary arrangement on the September
10 1993.
The plaintiffs
then obtained judgment under Ord 14 against the first defendants (Pasta Place
Ltd) the original lessees, on October 27 1992. That judgment is not satisfied
and the company was wound up on March 3 1993. That left the three sureties, the
second, third and fourth defendants, as the people against whom the plaintiffs
would be able to recover the rent due which they otherwise have not been able
to obtain from the other parties.
On September 8
1988, a licence was granted by the plaintiffs to the first defendants to put
eight tables in the premises. That presumably was to allow, particularly at
lunchtime or thereabouts, people in Marylebone High Street not only to buy made
up dishes at these premises, but to eat them in the premises. But the change of
user from a pure retail shop to, in part, a cafe, was extremely limited. The
terms of the licence were that the tenant was to be
at liberty to
place eight tables in approximate positions indicated on the plan which is attached
to the deed of licence for the consumption of food on condition that the table
accommodation shall be used for the consumption of food and non-alcoholic
beverages only and for not other purposes.
Following
assignment of the lease to Nice Bright Ltd and at the same time as the
assignment, a licence in similar terms was granted by the landlords, the
plaintiffs, to Nice Bright Ltd, that is for eight tables and the service of
non-alcoholic drinks at the tables.
We now move
ahead towards the time of the first rent review. The first rent review date was
March 25 1990. Prior to that, on August 4 1989, the plaintiffs granted a
licence to Nice Bright to serve Italian wine. That licence was revocable on six
months’ notice. That particular licence says:
The tenant
shall be at liberty to serve Italian wines to persons consuming food on the
firstly demised premises and the secondly demised premises as ancillary
to their meal and for consumption only on the premises.
When the
question of the review came up and an increased rent was put forward by the
plaintiffs through their agents, surveyors and valuers, particularly Mr John
Broomfield, at the same time while negotiations were going on between the
plaintiffs and Nice Bright with regard to what the new rent should be following
the review, licences were granted in July of 1990, in particular for the use of
the premises as an off-licence for the sale of beers, ciders and wines and also
a licence was granted on the same date, July 16 1990, for the use of the
adjoining premises which were owned by the plaintiffs as a fire escape from the
basement of the demised premises, that is the adjacent premises at 101
Marylebone High Street.
It was not
until October 1990 that a final agreement was reached between Nice Bright Ltd,
acting through Mr Loizou and the plaintiffs, with regard to the new rent. There
was some dispute, and it matters not for the purposes of this case, whether the
rent was agreed at £35,000 or £36,000. It was after that time when, as emerged
in evidence, Mr Loizou got involved in other business transactions, some
premises, I understood it in Beecham Place, that he had difficulties with his
bank and the rent fell into arrears and thus the action was brought against all
the parties to this action.
That is a
brief factual summary of the background to the matter that I have to determine.
This is not a case where it is for me to make findings of fact in relation to
the oral evidence that has been given before me. Essentially, in deciding
whether the sureties are discharged it is a matter of law I have to consider
whether the licences that were granted to Nice Bright in particular, and only
it is submitted the licences for the sale of Italian wine, the licence in relation
to permitted use as an off-licence and the licence in relation to the fire
escape, amount to an alteration of the agreement that was guaranteed by the
sureties. The general principle of law applicable to this issue is set out in
the judgment of Cotton LJ in Holme v Brunskill (1878) 3 QBD 495,
where Cotton LJ said at p505:
The cases as
to discharge of surety by an agreement made by the creditor, to give time to
the principal debtor, are only an exemplification of the rule stated by Lord
Loughborough in the case of Rees v Berrington: ‘It is the
clearest and most evident equity not to carry on any transaction without the
knowledge of him [the surety], who must necessarily, have a concern in every
transaction with the principal debtor. You cannot keep him bound and transact
his affairs (for they are as much his as your own) without consulting him.’
The true rule
in my opinion is, that if there is any agreement between the principals with
reference to the contract guaranteed, the surety ought to be consulted, and
that if he has not consented to the alteration, although in cases where it is
without inquiry evident that the alteration is unsubstantial, or that it cannot
be otherwise than beneficial to the surety, the surety may not be discharged;
yet, that if it is not self-evident that the alteration is unsubstantial, or
one which cannot be prejudicial to the surety, the Court, will not, in an
action against the surety, go into an inquiry as to the effect of the
alteration, or allow the question, whether the surety is discharged or not, to
be determined by the finding of a jury as to the materiality of the alteration
or on the question whether it is to the prejudice of the surety, but will hold
that in such a case the surety himself must be the sole judge whether or not he
will consent to remain liable notwithstanding the alteration, and that if he
has not so consented he will be discharged.
In deciding
whether alterations are unsubstantial, or cannot be prejudicial to the surety,
the court must assess the alteration objectively. It is not for the court to
decide whether in fact there has been material prejudice. This approach, which
in my judgment is clearly right, was followed by Hutchison J in Selous
Street Properties Ltd v Oronel Fabrics Ltd [1984] EGD 360*, where he
said at p396:
*Editor’s
note: Also reported at [1984] 1 EGLR 50.
I have
already stated two conclusions: the first, that the presence of the toilets
once they were legitimised by the licence, was something which could
arguably have increased the rental value of the premises; the second,
admittedly on very sparse evidence, that their presence, so legitimised, did
not have that effect. It seems to me that the second of these conclusions is
analogous to the jury’s finding in Holme v Brunskill and that I
ought not in the present context to place reliance upon it. The important
finding in the light of that authority is the first, because here is an
alteration in the contract between the creditor and the principal debtor which
is not self-evidently unsubstantial, which is not one which cannot be
prejudicial to the surety. If that conclusion be correct, then it seems to me
that what happened was sufficient to discharge the surety, subject to the
proviso.
The parties to
the agreement, in this case the sureties, may limit the application of the
general law so that sureties are not discharged if certain alterations in the
contract between the creditor and principal debtor are made.
The surety
clause in the two leases reads as follows:
The surety in
consideration of this lease having been granted at his request hereby covenants
with the landlord
(a) that the
tenant will throughout the term hereby granted including any statutory
extension or continuation thereof pay the rents hereby reserved on the days and
in the manner herein specified and will perform observe and comply with all the
covenants and obligation on the part of the tenant herein and any deed or
document supplemental hereto contained as well after as before disclaimer of
this lease by a trustee in bankruptcy or liquidator and in the case of default
in any such payment of rent or in the performance or observance of or
compliance with such conditions and obligations as aforesaid the surety will
pay and make good to the landlord on demand all losses damages costs and
expenses thereby arising or incurred by the landlord provided always and it is
hereby agreed that any neglect or forbearance of the landlord in endeavour to
obtain payment of the rents hereby reserved when the same become payable or to
enforce performance of the said covenants and obligations on the part of the
tenant herein or any deed or documents supplemental hereto contained at any
time which may be given whether to the tenant by the landlord or the landlord
by the tenant shall not release or exonerate or in any affect the liability of
the surety under this covenant.
In my
judgment, the three licences granted to Nice Bright, the first, on August 4
1989, to permit the sale of Italian wine, the second, on July 16 1990, to
permit the ground floor as an off-licence for the sale of beers, ciders and
wines, and, the third, on July 16, to permit the use of the adjoining premises,
101 Marylebone High Street, owned by the plaintiff as a fire escape, will not
only increase the rental value of the premises, but is likely to do so, albeit
the licence is revocable at six or three months’ notice. In my judgment, on a
rent review during negotiations between lessor and lessee, the existence of the
licences is a factor of potential commercial value, likely at least to a degree
to influence a lessee in deciding what the rent would be that he would be
prepared to pay.
The format of
the licences, making them part of the leases, therefore, prima facie,
they become a factor in the rental value of the leases. If one looks at the
Italian wine licence it is expressly stated that the licence is supplemental to
the two leases, supplemental to the licence granting permission to Pasta Place
to have eight tables on the premises, supplemental to a similar licence granted
to Nice Bright, having set out what the licence granted, which includes a
restriction on the service of Italian wines until the requisite planning
consents had been obtained by the tenant, it is again said in para 3 of the
licence that:
the tenant
covenants with the landlord to observe and perform the foregoing stipulations
and conditions and this covenant shall be deemed to be incorporated in the
first lease and the second lease and the condition or power of re-entry therein
contained shall be construed and have effect accordingly.
Indeed, in so
far as it assists me, both the two experts called respectively for the
plaintiffs and the defendants, did at least indicate in part that the existence
of these licences was a factor to be taken into account in deciding what was
the appropriate rent on a rent review on these leases. It was Mr Broomfield in
his proof of evidence — although in oral evidence he somewhat back-tracked on
this — who said:
It would not
have been appropriate in my view for the lease rents to have had any
substantial regard for the terms of licences which could at any time be
withdrawn upon service of a notice.
Mr Zeidman
took the view that they would have an affect and might indeed justify an increase
in the rent above that which would be appropriate without the licences of some
15 or 20%. But I do not decide this case on the oral evidence, but on the basis
of my judgment that on a rent review the rental value of the premises
demonstrably is likely to be enhanced because of the existence of these three
licences. Therefore, as a matter of general law, the second, third and fourth
defendants would be discharged as sureties.
The next
question is can the plaintiffs rely upon the proviso to override the general
law? In my judgment, on a proper construction of the proviso, they clearly
cannot. The proviso, and I accept to this extent the analysis of Mr Zeidman,
does envisage a landlord having a wide discretion in dealing with a tenant,
but, in my judgment, it is a wide discretion in dealing with a tenant who
either has broken his obligations under the lease, or is likely to break his
obligations under the lease. Mr Zeidman submitted that so far as a surety was
concerned, if one of these sureties had been asked in this case, ‘Well are you
agreeable still be bound? The rent’s going up but the landlords are making
various concessions to the tenant. They can sell beers, ciders and wines for
consumption off the premises. They can provide wine, with meals on the premises.
They can use the fire escape by going through the next-door premises at no 101.
The turnover will be increased as a result of this permitted changed user’ and
inevitably Mr Zeidman says the sureties would say: ‘Well, we are much more
likely not to be called on our guarantee because the tenant is in a much better
position to honour his obligations under the leases and, in particular, to pay
the rent’.
The proviso,
in my judgment, has to be construed in a way to give purpose to the object of
the proviso which is, as I accept in the argument of Mr Zeidman, to give a wide
discretion to the lessor or landlord. On the other hand, in my judgment, the
words of the proviso are clear, that they are designed for the situation where
there is either a breach or an apprehended breach of covenant or an apprehended
failure to pay the rent.
This case
differs factually from the Selous case decided by Hutchison J where
there had been a breach of covenant by the tenant in the erection of toilets.
At p387 of that case, Hutchison J said:
Prior to the
execution of the licence, the toilets constituted an unauthorised alteration or
addition to the premises and were, accordingly, precarious in the sense that
the landlords might require the tenant immediately to remove them (see cl
2(8)(d) of the lease). It seems to me, therefore, that had the licence not been
granted, any assessment of the rent on the rent review ought to have
disregarded the presence of the toilets, at least as a factor enhancing the
rental value of the premises. The licence, therefore, by legitimising the
toilets in the sense that it precluded the landlords’ requiring their removal
until the end of the term, converted them from something which could not to
something which conceivably could result in the fixing of a higher rent on the
review.
In the present
case, the three licences were granted before the date the rent review was
agreed. There was no question here of any breach of covenant, or the giving of
time to remedy the breach. In the Selous case Hutchison J, dealing with
the position of the surety in that case, Mr Morgan, said [at p397]:
I now return
to Mr Cherryman’s third point in answer to the arguments advanced in favour of
Mr Morgan’s being discharged — namely, his reliance on the terms of the proviso
to cl 5(a).
I interpose
here to say that for the purposes of this action there is no material
difference between the proviso in the present case and the proviso in the Selous
case. I continue quoting now from Hutchison J where he says:
He points to
the fact that the proviso mentions three things — neglect on the part of the
lessor in endeavouring to obtain payment of rent or to enforce the covenants in
the lease, forbearance by the lessor in respect of the same matters, and the
giving of time by the lessor to the lessee. He relies essentially on two
contentions, the first of which is that forbearance must be taken to add
something to neglect — the latter word importing merely passive acquiescence —
but forbearance being apt to apply to a binding agreement. The second argument
is that in the context of the proviso the words ‘any time which may be given’
must envisage a contractual giving of time as opposed to mere inactivity or
acquiescence and that in reality all that the licence amounted to was a binding
agreement to give extra time for the removal of the toilets by postponing the
landlord’s right to require immediate removal until the end of the tenancy. I
shall consider each of these arguments separately.
I reject the
argument based on the word ‘forbearance’ simply as a matter of construction of
the proviso. This is because I read the two words ‘in endeavouring’ as
qualifying both of the clauses (‘to obtain … and to enforce …’) which follow.
Thus what this part of the clause is saying is that any neglect or forbearance
of the lessor in endeavouring to obtain payment of rent or in endeavouring
to enforce performance of the covenants shall not release or exonerate the
guarantor. I think that if it had been intended that the words ‘in
endeavouring’, should apply only to payment of rent, then the clause in
relation to covenants would have read ‘in enforcing performance of the several
covenants’, rather than, as it does, ‘to enforce performance of the several
covenants.’
So far (I
interpose) I respectfully agree with the construction given to the proviso by
Hutchison J. Hutchison J went on to say:
If my construction
be correct, then it is difficult to see how, even allowing that forbearance
adds something to neglect, it can sensibly be said to envisage a binding
agreement not to enforce the covenants.
With that dicta
I also agree.
I should add,
in any event
— says
Hutchison J —
that I am not
convinced by an argument that depends upon importing to the word ‘forbearance’,
some significantly different meaning to that connoted by the word neglect,
because it is common experience to find that legal documents, like the Book
of Common Prayer, use two words to convey the same meaning.
I interpose to
say that, in my judgment, with respect to Hutchison J, the use of the two words
does connote a different meaning. The different meaning, in my judgment, is:
neglect indicates a passive non-mental approach, whereas forbearance connotes a
deliberate decision to forebear; the purpose of the forbearance is in order to
achieve later the fulfilment of the contractual obligations, either in the
payment of rent, or of the covenants and obligations under the lease.
Hutchison J
went on to say:
I regard the
argument based on the giving of time as a more formidable one.
That is the
reason (I interpose to say) why Mr Morgan lost in the Selous case:
The starting
point (see Halsbury’s Laws (4th ed), vol 20, para 261 and Rowlatt on
Principle and Surety (4th ed), pp 164–65) is that a surety claiming to be
discharged because time has been given is only discharged if a binding
agreement is made between the creditor and the principal debtor that time shall
be given and that mere delay by the creditor in enforcing his rights does not
discharge the surety, even in the absence of any proviso. Mr Cherryman argues,
therefore, that what must be being referred to here is a contractual giving of
time, because otherwise the provision would be otiose. He reinforces this
argument by submitting that in the context the giving of time must mean
something different from neglect or forbearance. In this connection, it is to
be observed that the words ‘any time which may be given to the lessee by the
lessor’ are not qualified by a reference to obtaining payment of rent but
appear in the proviso in a place which suggests that they are intended to be of
quite general application.
Plainly there
are two questions here: first whether the words I am considering are apt to
apply to a binding agreement to give time, as opposed merely to a failure to
enforce a time provision in the contract; and second whether, if they are, they
can properly be applied to the licence in the present case. As to the first, I
cannot help being influenced by the reflection that to reject Mr Cherryman’s
submission would involve that the proviso as a whole was redundant in the sense
that it gave to the creditor no advantage that he would not have enjoyed even
without it. Moreover, it seems to me that the words ‘any time which may be
given’, while they are not consistent only with, are nevertheless perfectly apt
to apply to, a contractual giving of time. Accordingly, I uphold the first part
of Mr Cherryman’s submission based on this passage in the proviso.
As to the
second point, it must be remembered that I have already considered and rejected
arguments to the effect that, quite apart from the legitimising of the toilets,
the licence imposed additional onerous obligations on the tenant by virtue of
cl 3(2). In so far as it legitimised the toilets while imposing an obligation
to remove them if required at the end of the tenancy, can it properly be said
that all it was effectively doing was postponing until the latter date the time
at which the landlord was entitled to call upon the tenants to remove them? It
seems to me that it can and that, accordingly, Mr Cherryman’s contention based
upon the latter part of the proviso succeeds, with the result that Mr Morgan is
not entitled to claim that he has been discharged by virtue of the licence.
In my
judgment, these licences on a proper construction of the proviso are outside
the ambit of the proviso and it cannot be said that the alterations, viewed
objectively from the point of view of a surety, were unsubstantial, or that the
surety would not be prejudiced. For those reasons, in my judgment, this claim
must fail.
