Landlord and tenant — Surety of lease — Company associated with tenant company in possession — Rent accepted from company in occupation — Tenant in liquidation — Lease disclaimed — Whether implied acceptance of surrender of lease — Whether surety liable for arrears of rent — Whether landlord under duty to mitigate loss by recovering possession
The appellant
was surety for the tenant under a 21-year lease dated March 10 1986 between the
defendant, as landlord, and Alpine Computer Services Ltd, as tenant. In 1991
the landlord accepted rent from GA, a company which had sought consent to the
assignment of the lease to itself, ‘on the basis that you have paid the same on
behalf of Alpine Computers’. Further rent was demanded and accepted from GA
during 1992. The landlord regarded Alpine Computers and GA as sister companies
under the same control, and he regarded the occupation by GA as under some form
of informal licence, with GA paying rent on behalf of Alpine Computers. Alpine Computers
went into creditors’ compulsory liquidation and the liquidator disclaimed the
lease in June 1996. A statutory demand for the arrears of rent from June 24
1996 to March 25 1997 was made on the surety. The surety’s application to set
aside the statutory demand was dismissed by the registrar. The surety appealed
contending that the conduct of the landlord in allowing GA into possession and
thereafter requesting and accepting rent from GA amounted to an implied
surrender by Alpine Computers and an acceptance of GA as their new tenant.
[1893] 2 Ch 75, as recognised by the Court of Appeal in Foster v Robinson
[1951] 1 KB 149, was that to constitute a surrender by operation of law there
must be first an act of purported surrender invalid by reason of non-compliance
with statutory or other formalities. But there was no evidence that there was
an offer by Alpine Computers to surrender or anything amounting to a purported
surrender. There was no evidence that GA took possession with the consent of
the landlord in reliance on an agreement to surrender or a purported surrender.
The landlord had not failed to mitigate his losses by failing to take
possession of the premises.
The following
cases are referred to in this report.
Foster v Robinson [1951] 1 KB 149; [1950] 2 All ER 342, CA
Hindcastle
Ltd v Barbara Attenborough Associates Ltd
[1997] AC 70; [1996] 2 WLR 262; [1996] 1 All ER 737; [1996] 1 EGLR 94; [1996]
15 EG 103, HL
Willis
v Hand [1893] 2 Ch 75
This was an
appeal by the appellant, Efghar Singh Bhogal, from a decision of Mr Registrar
Baister, dismissing the appellant’s application to set aside a statutory demand
served by the respondent, Mohinder Singh Cheema, in respect of rent arrears.
Anthony
Allston (instructed by Barnes Sarney & Game, of Rayleigh) appeared for the
appellant; Declan O’Mahoney (instructed by Aina Khan Partnership) represented
the respondent.
Giving
judgment, SIR JOHN VINELOTT said: This is an appeal from a decision of
Mr Registrar Baister dismissing an application by Mr Efghar Singh Bhogal to set
aside a statutory demand served by Mohinder Singh Cheema. The statutory demand
was founded upon arrears of rent due under a lease dated March 10 1986 between
Mr Cheema, as landlord, and a company, Alpine Computer Services Ltd (Alpine
Computers), as tenant, and Mr Bhogal, as surety. Alpine Computers went into a
creditors’ compulsory liquidation in the summer of 1996, and in June 1996 the
liquidator of Alpine Computers disclaimed the lease. The statutory demand was
served on June 7 1997 and is founded on arrears of rent payable in advance on
June 24, September 29, December 25 1996 and March 25 1997. Mr Bhogal, the
surety, raised a number of defences to the claim; they were dismissed and for
the most part are not pursued on this appeal. The main issue in this appeal is
a claim by the surety that the lease was surrendered by operation of law before
Alpine Computers went into liquidation.
The facts can
be shortly stated. The lease was for a term of 21 years from February 14 1986
of industrial premises known as unit 5, London Industrial Park, Beckton, at a
rent of £3,900 pa, payable quarterly in advance on March 25, June 24, September
29 and December 25 in every year, and with a provision for upward-only reviews
on the third, sixth, ninth, 12th, 15th and 18th years. The lease contains a
usual covenant against assignment or parting with possession without the
landlord’s consent and, in the case of a permitted assignment, a covenant to
obtain from the assignee a direct covenant with the landlord to pay the rent
and observe the covenants in the lease. The lease also contains a covenant in
clause 4.1 by the surety that the tenant will at all times pay the rent and
observe the tenant’s covenants in the lease, ‘as well after as before any
disclaimer of this lease by a liquidator or trustee in bankruptcy and that in
the case of default in such payment of rent or in the performance or observance
of such covenants 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’.
That is
followed in subclause 2 by a covenant that, if the tenant goes into liquidation
and the liquidator disclaims the lease, and if the landlord gives notice in
writing within three months after disclaimer requiring the surety to accept a
lease of the demised premises for a term commensurate with the residue of the
lease and on the same terms, the surety will accept such lease and execute and
deliver a counterpart.
Finally, the
lease contains a covenant by the landlord in clause 4.2 to keep the demised
premises fully insured, and in the event of damage or destruction by any
insured risk to lay out the insurance moneys in reinstating the demised
premises, and a provision in clause 4.5 that if the demised premises are
damaged or destroyed by an insured risk the payment of rent will be suspended
during the period of reinstatement, but with an option for the landlord in
certain events to terminate the lease.
The history
after the grant of the lease can be followed in the correspondence. On June 11
1991 a firm of solicitors, Hargreaves, wrote a letter to the landlord’s
solicitors, Hirschfields, which is headed ‘Unit 5 Alpine Business Centre, Beckton.
Our client — GA Computer Services Ltd’. Hargreaves, after stating that they
‘acted for the above named’, sought confirmation that the landlord would
consent to an assignment to a Mr Cain. There was some correspondence as to the
suitability of Mr Cain as an assignee, in the course of which Hirschfields
asked whether Alpine Computers were still in existence. Having learned that
they were, they wrote to Hargreaves on August 9 1991 asking them to explain why
the application was made by GA Computers. The reply on August 16 was that the
application should have been made by Alpine Computers.
In September
1991 Hirschfields gave notice, calling for a review of the rent with effect
from February 14 1992. There followed correspondence as to whether the tenant
would accept the new rent put forward by the landlord’s surveyors. By this time
the proposed assignment had fallen through. On November 4 1991 Hirschfields
wrote to Alpine Computers direct, with copies to the surety and to Shane Roscoe
& Bracewell, a firm associated with Hargreaves, to say that there were
arrears of rent and fire insurance premiums and proceedings would be instituted
to recover the arrears with interest and landlord’s costs unless the arrears
were paid off. The reply to that letter came from GA Computers. They wrote to
Hirschfields on November 8 1991 enclosing a cheque for the arrears, but
cavilling at the amount of the landlord’s costs that had been claimed. The
reply was important. On November 13 1991 Hirschfields wrote a letter addressed
to a Mr Gough to say that the cheque was accepted ‘on the basis that you have
paid the same on behalf of Alpine Computers’. Hirschfields wrote again to
Alpine Computers on January 15 1992 chasing a further instalment of the rent,
as increased with effect from the first review date, which was due on December
25 1991. Again, they sent copies to the surety and to Shane Roscoe &
Bracewell.
Shortly
afterwards, on January 27 1992, a firm of surveyors, Glenny, wrote to
Hirschfields to say that they had been approached by ‘the tenants’ in respect
of the approaching rent review. After a reminder had been sent, Hirschfields
said that they were not instructed and suggested that Glenny should write to
the landlord direct. Next, on May 14 1992, new solicitors acting for the landlord,
Sharma Singh & Co, wrote to GA Computers requiring payment of arrears of
rent which were overdue. There is a note on this letter to say that the arrears
of rent were received on May 25 1992. On December 14 1992 a new firm of
surveyors, Finbow Bishop, wrote this time to Mr Gough of GA Computers, pressing
for arrears of rent to be brought up to date.
There the
correspondence so far as exhibited rests, until May 25 1996 when another firm
of solicitors, Paul Robinson & Co, wrote to the landlord on behalf of GA
Computers to say that, as a result of fire damage which had spread from an
adjoining unit on April 5 1996, unit 5 had been rendered uninhabitable and that
GA Computers were moving out and relocating to other premises. They asked for
confirmation that under the provisions in the lease, to which I have referred,
rent would be suspended while the premises were under repair and that the
landlord would bear the costs of relocation.
The premises
were fully insured and the insurance moneys were laid out in restoring unit 2.
There is some dispute in the affidavit evidence as to whether the restoration
of unit 2 was completed before June 24 1996, the date from which the landlord
seeks to recover rent. However, the surety did not pursue a claim made in the
correspondence that unit 2 was not repaired and ready for occupation until
after June 24 1996.
The case for
the surety is that the conduct of a landlord in allowing GA Computers into
possession and thereafter accepting rent from GA Computers and in requesting
the payment of rent and insurance premiums from GA Computers amounted to an
implied acceptance of a surrender by Alpine Computers and acceptance of GA
Computers as its new tenant. It is, I think, doubtful whether the landlord did
accept rent from GA Computers. When GA Computers first went into occupation of
the demised premises, the landlord’s solicitors made it clear that they
regarded Alpine Computers as the tenant and were accepting the rent proffered
by GA Computers as paid on behalf of Alpine Computers. The landlord, in his
affidavit evidence, says that Alpine Computers and GA Computers are sister companies
under the same control and that he regarded GA Computers, so far as in
occupation, as being there on the invitation of Alpine Computers under some
form of informal licence and as having paid rent throughout on behalf of Alpine
Computers. The question whether the landlord accepted rent from GA Computers
knowing that GA Computers had
had been assigned without consent, the conduct of the landlord in accepting
rent from GA Computers would have sufficed to bar the landlord from relying on
the absence of consent. However, it lends no support to the proposition
advanced on behalf of the surety that there was an implied surrender of the
lease and a regrant to GA Computers.
Mr Anthony
Allston relied on the principle applied by Chitty J in Willis v Hand
[1893] 2 Ch 75 and recognised by the Court of Appeal in Foster v Robinson
[1951] 1 KB 149, which is stated in Foa’s Landlord and Tenant, 7th ed,
pp617 and 618, in these terms:
It has been
laid down that in order to constitute a surrender by operation of law there
must be, first, an act of purported surrender invalid per se by reason
of non-compliance with statutory or other formalities, and secondly, some
change of circumstances supervening on, or arising from, the purported
surrender, which, by reason of the doctrine of estoppel or part performance,
makes it inequitable and fraudulent for any of the parties to rely upon the
invalidity of the purported surrender.
Equity would
not allow the statute to be used as a cloak for fraud.
However, there
is no scintilla of evidence that there was any offer by Alpine Computers to
surrender or anything amounting to a purported surrender or anything that could
be taken as acceptance of a surrender by the landlord, nor is there any
evidence that GA Computers took possession with the consent of the landlord in
reliance on an agreement to surrender or a purported surrender.
That was the
surety’s main contention before the registrar, and, in my judgment, he was
right to reject it. However, counsel for the surety raised another contention.
It was that, after a disclaimer, the landlord was under a duty to mitigate the
loss of rent from Alpine Computers. The registrar observed:
It would have
been open to Mr Bhogal to approach Mr Cheema and offer to take over the lease
and/or to seek a vesting order following disclaimer. Had he done so, he could
himself have taken steps to dispose of the lease. In my view, the primary
purpose of a landlord, including provision in a lease for a guarantor to assume
obligations for the performance of a tenant’s duties and to take a lease is to
put the onus on the guarantor to take those steps. They are available too
following disclaimer. In the circumstances I do not believe I can accept the
argument put forward on Mr Bhogal’s behalf under this heading.
I agree that
the claim that the landlord was under a duty to mitigate is misconceived. The
position of a landlord after the disclaimer of a lease by the liquidator of a
tenant is fully explained by Lord Nicholls in his speech in Hindcastle Ltd
v Barbara Attenborough Associates Ltd [1996] 1 All ER 737*. If no
vesting order is made and the landlord takes possession for his own purposes or
by granting a lease in possession to a new tenant, then, at p738g–h:
*Editor’s
note: Also reported at [1996] 1 EGLR 94
By his own
act he has demonstrated that he regards the lease as ended for all purposes.
His conduct is inconsistent with there being a continuing liability on others
to perform the tenant’s covenant in the lease. He cannot have possession of the
property and at the same time claim rent for the property from others.
However, the
landlord cannot be compelled to take possession and, of course, it will not be
in his interest to do so if the market rent of the premises is less than the
rent payable under the lease, unless possibly he takes the view that his remedy
against the surety is unlikely to yield the full amount of the rent. If the landlord
does not take possession, it is open to the surety to mitigate the burden of
his guarantee by applying to the court for a vesting order and then obtaining
such return as he can by selling or letting the property. There is no evidence
that the landlord has taken any step towards taking possession, and indeed the
claim by the surety that the landlord ought to have mitigated the burden which
falls on the surety of paying the rent in full implicitly assumes that he has
not. The surety has not applied for a vesting order and, if an application is
to be made, the surety will have to seek an extension of time. However, the
landlord has made it clear that he will not oppose an extension of time.
Alternatively, the landlord is now willing, with the consent of the tenant, to
exercise his rights under clause 4.2 of the lease and to call on the surety to
take a lease of the demised premises for the residue of the term granted by the
lease and on the same terms.
In my
judgment, therefore, there is no possible defence to the claim for arrears of
rent and this appeal must be dismissed, with costs.
