Landlord and tenant — Surety covenants — Forfeiture by action — Compromise of forfeiture action by acquisition of lease by landlord — Whether sureties liable for rent arrears post commencement of forfeiture proceedings
The plaintiff
was the landlord under a lease granted in 1981 of commercial premises let for a
term of 26 years at a rent which, from September 1991, had been reviewed to
£175,000 pa. The lease contained a right of re-entry should the tenant suffer a
receiver to be appointed. The sureties to the lease included the three
defendants. In June 1993 receivers were appointed of the tenant. Following the
service of a notice under section 146 of the Law of Property Act 1925,
a writ claiming forfeiture was issued in July 1993. A second writ claiming the
same relief was issued in January 1994. The proceedings were compromised in
February 1994 by the transfer of the lease to the plaintiff; it was a provision
of the compromise agreement that the plaintiff was not releasing any rights it
had against the sureties. The plaintiff then issued the present proceedings
claiming arrears of rent and service charges against the defendants. The claim
was dismissed and the plaintiff appealed.
of the plaintiff. The service of a writ claiming forfeiture and possession
operated as an unequivocal election by the landlord to rely on a breach of
covenant or condition as a forfeiture and to forfeit the lease; it does not
itself determine the lease. The lease was not forfeited and came to an end only
by merger when it was acquired by the plaintiff. The compromise agreement was
effective to ensure that the liabilities of the sureties remained unaffected.
The following
cases are referred to in this report.
Billson v Residential Apartments Ltd (1990) 60 P&CR 392, Ch;
[1991] 3 WLR 264; [1991] 3 All ER 265; [1991] 1 EGLR 70; [1991] 18 EG 169 &
[1991] 19 EG 122, CA; [1992] 1 AC 494; [1992] 2 WLR 15; [1992] 1 All ER 141; [1992]
1 EGLR 43; [1992] 01 EG 91, HL
Dendy v Evans [1909] 2 KB 894; [1910] 1 KB 263, CA
Driscoll v Church Commissioners for England [1957] 1 QB 330; [1956] 3
WLR 996; [1956] 3 All ER 802; (1956) 7 P&CR 371; [1956] EGD 259; 168 EG
521, CA
Meadows
v Clerical Medical & General Life Assurance
Society [1981] Ch 70; [1980] 2 WLR 639; [1980] 1 All ER 454; (1979) 40
P&CR 238; [1980] 2 EGLR 63; 255 EG 883
This was an
appeal by the plaintiff, Ivory Gate Ltd, from a decision of Mr Alan Tyrell QC,
sitting as a deputy judge of the Queen’s Bench Division, who had dismissed
claims by the plaintiff against the first and second defendants, Carlo
Christopher Spetale and Emmanuel Montague Freedman, for breach of surety
covenants.
Stephen
Jourdan (instructed by Olswang) appeared for the appellant; Michael Roberts
(instructed by Stephen Mitchell) represented the second respondent; the first
respondent did not appear and was not represented.
Giving
judgment, SIR JOHN VINELOTT said: This is an appeal from a decision of
Mr Alan Tyrell QC, sitting as a deputy High Court judge. The main issue in this
appeal is whether if proceedings are commenced by a lessor for the forfeiture
of a lease on the ground of breach of covenant, and if the proceedings are
afterwards compromised on terms that the action is discontinued and the lease
transferred to the lessor, sureties for the due performance of the covenants in
the lease, for the payment of rent and otherwise, are liable for the rent which
accrued after the date of the issue of the proceedings and before the lease was
assigned to the lessor and merged with the reversion.
The relevant
facts can be shortly stated:
1. By a lease
dated October 30 1981 and made between Hambro Life Assurance Ltd, as landlord,
Independent Leisure Ltd, as tenant, and four named individuals, Carlo
Christopher Spetale, Emmanuel Montague Freedman, Colin Fisher and John Julian
Marks, as sureties, premises in Princes House and Princes Arcade, Piccadilly,
were demised to Independent Leisure Ltd for a term of 26 years from September
29 1981 at a rent of a peppercorn up to September 25 1982 and thereafter
£66,000 pa, subject to review on September 29 1986, September 29 1991,
September 29 1996 and September 29 2001. The lease contained the following
provisions:
(a) A covenant
by the tenant not to assign.
(b) A proviso
for re-entry by the landlord in the event (among other things) that the tenant
should ‘suffer a Receiver to be appointed’.
(c) Covenants
by each of the sureties that in the event of default by the tenant in payment
of any of the rents reserved by the lease, the surety would pay the rent in
respect of which the tenant should have defaulted ‘notwithstanding any time or
indulgence granted by the Landlord to the tenant’.
(d) Provision
for the review of the rent on the dates I have stated, under which in default
of agreement as to the amount of the new rent, the new rent would be assessed
by a surveyor agreed between the landlord and the tenant or in default of
agreement appointed by the president for the time being of the Royal
Institution of Chartered Surveyors.
2. On February
14 1985 Hambro Life Assurance Ltd gave Independent Leisure Ltd licence to
assign the lease to Capital City Leisure Ltd (Capital City). The third defendant,
Geoffrey Neville Wright, was joined as an additional surety. Capital City was
duly registered as the proprietor of the lease and on July 26 1985 Capital City
executed a debenture in favour of Lloyds Bank plc, charging all its property
and assets, and a legal charge charging its interest in the leasehold premises
to secure its liabilities to Lloyds Bank. On April 25 1991 the plaintiff, Ivory
Gate Ltd, was registered as the freehold proprietor of the premises.
3. On January
6 1992 an arbitrator, Mr Newberry frics,
was appointed by the president of the Royal Institution of Chartered Surveyors
to determine the new rent following the review on September 29 1991. There was
considerable delay before Mr Newberry made his award on September 13 1993; the
delay was occasioned by a dispute which had to be determined in High Court
proceedings.
4. In the
meantime, on June 16 1993, Lloyds Bank exercised its powers under the debenture
and legal charge by appointing two chartered accountants to be administrative
receivers of Capital City. That was followed on June 25 by the service of a
notice under section 146 of the Law of Property Act 1925. The notice, after
referring to the appointment of receivers over Capital City, required Capital
City ‘to remedy the aforesaid breach, insofar as it may be capable of remedy
and to make compensation in respect thereof to the Landlord’. It gave notice
that in the event of failure to comply with the notice within a reasonable time
from the service of the notice it was the intention of the landlord to forfeit
the lease, and stated that the landlord considered 14 days to be a reasonable
time.
5. A writ
claiming forfeiture was issued on July 13 1993 and served 18 days after the
service of the section 146 notice. The statement of claim endorsed on the writ
claimed possession and mesne profits. A defence and counterclaim was
served by Capital City. In its defence, Capital City claimed that the ‘alleged
breach of covenant’ was a breach capable of remedy either by assignment to a
suitable assignee in respect of whom no receiver had been appointed or by the
removal of the joint administrative receivers and also that the section 146
notice did not give Capital City a reasonable time for compliance with it. The
counterclaim contained a usual claim for relief from forfeiture.
6. On
September 13 1993 Mr Newberry gave an interim award determining the rent as
from September 29 1991 in the sum of £175,000 pa.
7. Shortly
thereafter on September 16, an order was made by consent adding Lloyds Bank as
a defendant to the forfeiture action. On September 28 a defence and
counterclaim by Lloyds Bank was delivered in terms which in all material
respects reflect the defence and counterclaim by Capital City. Finally, in
November 1993, Ivory Gate delivered their reply to the defence and their
defence to the counterclaim by Lloyds Bank. In the defence to the counterclaim,
Ivory Gate stated that it would not oppose the grant of relief from forfeiture
to Lloyds Bank by the vesting of the demised premises in Lloyds Bank on
appropriate terms, including the payment of all arrears of rent.
8. On January
18 1994 a further forfeiture action was commenced by Ivory Gate. In the
statement of claim, Ivory Gate, after reciting the pleadings in the earlier
action and the allegation by Capital City that the period allowed for remedying
the breach alleged in the section 146 notice was not a reasonable time for
compliance, set out the contention that the breach was not capable of remedy
and that if it was so capable and if no reasonable time had been allowed
between the service of the section 146 notice and the service of the writ in
the first action, the
step was taken in that action.
9. On January
18 1994 negotiations were on foot for the settlement of the issues raised in
both actions. Those negotiations resulted in the execution of a deed dated
February 18 1994 between Ivory Gate (1), Capital City (2), the administrative
receivers (3) and Lloyds Bank (4). The deed recites the lease and the amount of
the current rent ‘payable’, the covenants by the sureties, the licence to
assign, the covenant by Mr Wright as additional surety, the debenture and legal
charge and the appointment of the administrative receivers. Finally, it recites
that by a transfer of even date Lloyds Bank ‘has transferred the premises to
Ivory Gate for a consideration of £100,000’.
Clause 1.1 of
the operative part contains a covenant by Ivory Gate with Capital City and the
administrative receivers and Lloyds Bank, that it will not take any steps to
enforce any rights against them in respect of their liabilities under the
lease, and clause 1.2 contains a covenant by Capital City and Lloyds Bank that
they will not enforce any rights which they may have against the sureties or
the additional surety whether in respect of the premises, the debenture or the
legal charge unless they are given notice in writing by Ivory Gate that it has
no objections to them so doing. It is further provided that in the case of the
additional surety, if Ivory Gate decides not to take any steps to enforce its
rights against the additional surety it will within 14 days of such decision
give notice to Lloyds Bank in the foregoing terms and that, in any event, such
notice is to be deemed to be issued if by the date of 12 months from the date
of the deed Ivory Gate has not obtained a bankruptcy order against the
additional surety.
Clause 2 is of
central importance and I should cite it in full:
It is hereby
expressly agreed and declared that nothing in this Deed is intended to or shall
operate as a release by Ivory Gate of any of its rights or remedies against the
Sureties or the Additional Surety in respect of their respective liabilities
pursuant to the Lease (and in respect of the Additional Surety the said Licence
to Assign) and Ivory Gate shall remain entitled (and fully reserves its rights)
to enforce any such rights or remedies in any manner which it shall see fit.
10. On the
same day Ivory Gate gave notice to the Mayor’s and City of London Court (to
which the forfeiture action had been transferred) discontinuing the action and
certifying that they had that day given like notice to Capital City and Lloyds
Bank. Notice was also given on the same day to the Mayor’s and City of London
Court by Capital City and Lloyds Bank discontinuing their counterclaims, notice
having been given on the same day of the withdrawal of the counterclaims to
Ivory Gate.
11. The
transfer, also dated February 18, was a transfer by Lloyds Bank as mortgagee in
exercise of a power of sale conferred by the legal charge.
The writ in
the action, which is now before this court, was issued on July 25 1994. The
substantial claim is for arrears of rent, insurance premiums and service
charges due from Capital City up to February 18 1994 with interest (payable
under the terms of the lease) on those arrears. Two of the original sureties,
Carlo Christopher Spetale and Emmanuel Montague Freedman, are joined as
defendants together with the additional surety, Mr Wright. Defences were served
by Mr Spetale and Mr Wright and a separate defence was served by Mr Freedman.
Mr Spetale took no part in the proceedings and did not appear at the trial
which commenced on November 12 1995. Mr Wright, who was not represented by counsel,
wrote to the court to say that he would be unable to attend through illness. He
did not appear on the first day of the trial and counsel for Ivory Gate elected
to proceed against Mr Freedman, who was represented by counsel, Mr Michael
Roberts, while further inquiries were made as to Mr Wright’s state of health.
Later a letter was received from his general practitioner confirming that he
was ill. The trial therefore continued against Mr Spetale and Mr Freedman, the
latter acting through Mr Roberts. The case against Mr Wright stands adjourned.
The trial lasted for four days. On November 17 Mr Tyrell handed down a written
judgment giving his reasons for his conclusion that Ivory Gate’s claims against
Mr Spetale and Mr Freedman failed, though he recorded his finding that the
amount due if the claim had succeeded would have been £240,313.15 plus interest
to October 7 1996 of £81,812.41. On December 20 1996 he gave formal judgment
for Mr Spetale and Mr Freedman and ordered that Ivory Gate pay Mr Freedman’s
costs of his defence.
In my
judgment, there was no arguable defence to the claim by Ivory Gate, and Ivory
Gate would have been entitled, if it had applied, to summary judgment under Ord
14. It was held as long ago as 1909 in Dendy v Evans [1909] 2 KB
894, that where a writ claiming forfeiture of a lease and possession is served,
the writ does not put an end to the lease; the issue and service of the writ do
not without more put an end to an underlease granted by the tenant. The Court
of Appeal ([1910] 1 KB 263) rejected the claim that where relief was given in
an action for forfeiture pursuant to section 14 of the Conveyancing Act 1881
(the predecessor of section 146), the effect was to resuscitate the lease as
from the date of the order giving relief or to create a new lease as from that
date. The effect of the order giving relief was that ‘the right of entry for
forfeiture is got rid of’: see Lord Cozens Hardy MR, at p269. That was the
position before 1881 both under the inherent jurisdiction of the Chancery Court
to grant relief against forfeiture and under the Landlord and Tenant Act 1730
and the Common Law Procedure Act 1852. The Conveyancing and Law of Property Act
1881 did not alter the principle on which relief was given, though it extended
relief which the law granted for non-payment of rent to forfeiture for breach
of covenant.
That principle
has been applied in a many cases. I need only refer to two of them.
In Driscoll
v Church Commissioners for England [1957] 1 QBD 330 the appellant
acquired the leases of a number of dwelling-houses. He applied to the landlords
for permission to use them as clubs and hostels. The landlords refused consent
save on terms which the appellant found unacceptable. The appellant then
applied to the Lands Tribunal under section 84 of the Law of Property Act 1925
for an order discharging or modifying the covenants restricting the use to
which the properties (all of which were held on long leases) could be put.
Thereafter, before the Lands Tribunal hearing the landlords issued writs
claiming forfeiture. In May 1956, the Lands Tribunal upheld the landlords’
contentions that the restrictions they required were reasonably necessary to
maintain the character of the neighbourhood and refused to grant the
application. Shortly thereafter, in July 1956 Pearce J granted the appellant
relief from forfeiture. An appeal against the refusal of the Lands Tribunal to
vary the covenant then came before the Court of Appeal, and at the hearing of
the appeal the landlords raised the preliminary point that service of the writ
determined the leases so that there were no subsisting covenants which could
have been discharged or modified by the Lands Tribunal. That contention was
rejected by the Court of Appeal. Denning LJ (as he then was) said, at p340:
I do not
agree with that argument, for this reason: that, although a writ is an
unequivocal election, nevertheless, until the action is finally determined in
favour of the landlord, the covenant does not cease to be potentially good. For
instance, the forfeiture may not be established; or relief may be granted, in
which case the lease is re-established as from the beginning … It seems to me
that so long as the covenant is potentially good, Mr Discroll, or anyone in
like position, has a locus standi to apply to the tribunal for a
modification of the covenant. So I think that Mr Driscoll is not to be defeated
on any technical point.
In the well
known case Meadows v Clerical Medical & General Life Assurance
Society [1981] Ch 70*, an underlease of business premises contained
repairing covenants by the tenant. The underlessor served on the tenant a
section 146 notice requiring him to remedy breaches of covenant. Shortly
thereafter, the defendants, the head landlords, served notice under section 25
of the Landlord and Tenant Act 1954 to determine the tenancy. The tenant gave a
counternotice. The
on the ground of breach of the repairing covenant; the tenant claimed relief
against forfeiture. The master, by consent, gave judgment for the underlessor
and adjourned the tenant’s application for relief. The head landlord applied to
have the tenant’s application under the 1954 Act dismissed on the ground that
the underlease had been forfeited and that there was no tenancy to which the
Act of 1954 applied, the underlessor not being in possession. Sir Robert
Megarry V-C, dismissing the claim by the headlessor said, at p74:
*Editor’s
note: Also reported at [1980] 2 EGLR 63
A number of
authorities were discussed in argument, but none of them had any direct bearing
on this problem. It seems clear that the mere issue of a writ claiming
forfeiture of a lease does not bring about a forfeiture. On the other hand,
there is authority for saying that as soon as such a writ is served, there is a
forfeiture, though not until judgment will it be determined whether the
forfeiture was justified.
A little
later, at p75, he observed
There are, of
course, curiosities in the status of a forfeited lease which is the subject of
an application for relief against forfeiture. Until the application has been
decided, it will not be known whether the lease will remain forfeited, or
whether it will be restored as if it had never been forfeited. But there are
many other instances of such uncertainties. When the validity of a notice to
quit is in dispute, until that issue is resolved it will not be known whether
the tenancy has ended or whether it still exists. The tenancy has a trance-like
existence pendente lite; none can assert with assurance whether it is
alive or dead. The status of a forfeited underlease which is the subject of an
application for relief seems to me to be not dissimilar; at least it cannot be
said to be dead beyond hope of resurrection.
It is
unnecessary to refer to the many other cases in which the court has approved
the principle that service of a writ claiming forfeiture and possession of
demised premises does not by itself bring the lease to an end. It operates as
an unequivocal election by the landlord to rely on a breach of covenant or
condition as a forfeiture. However, in the words of Sir Robert Megarry V-C, the
lease ‘has a trance-like existence pendente lite; none can assert with
assurance whether it is alive or dead’. If it is subsequently held that there
was no breach of the covenant or condition or that a notice given under section
146 was defective, it will be seen that the lease was never forfeited;
similarly, if an application for forfeiture succeeds the lease will be restored
to life as from the date of forfeiture. If the defence and any counterclaim for
relief both fail, the forfeiture will take effect retrospectively from the date
of service of the writ. The position is the same if there is a re-entry which
is at first contested and is later held to have been lawful.
Applying these
principles to the instant case there can, in my judgment, be no doubt that the
lease was not forfeited and came to an end only by merger when it was acquired
by Ivory Gate. On February 18 1994 the forfeiture action was discontinued and
the lease, free from the claim for forfeiture, was transferred to Ivory Gate.
The transaction was so structured as to ensure that the liabilities of the
sureties and the additional surety to Ivory Gate up to February 18 1994 should
remain unaffected and, in my judgment, it was effective to achieve that end.
In his
judgment, in the court below, the learned judge started with the proposition
that: ‘Service of a writ claiming forfeiture is an exercise of the right of
re-entry which determines the lease: Billson v Residential Apartments
Ltd [1992] 1 AC 494.’
I shall have
to come back to say something about that decision of the House of Lords, which
is the sheet-anchor of the argument presented to this court by Mr Roberts. I
should, however, observe at this point that the statement I have cited is not,
in my judgment, a wholly accurate statement of the law. Service of a writ
claiming forfeiture is an unequivocal election by the landlord to forfeit the
lease: it does not by itself determine the lease. Turning to the deed of
February 18 1994, the learned judge said:
The structure
of the deed raises two questions. First and most important, whether the lease
emerged from ‘twilight’ to resume the place it held on July 14 1993. Unless it
did, the liability of the sureties never emerged from ‘twilight’ either. There
was much discussion during argument as to the order of events. There is no
document which shows the relative timing of the notices of discontinuance and
the execution of the deed. Mr Barclay [who gave evidence on behalf of Ivory
Gate] believes that the deed may have been executed in advance subject to
completion on February 18 1994 by him, and that the notices of discontinuance
preceded completion. The deed states that by the time of its execution the
premises had already been transferred to the bank. Attempting to place these
events in order is altogether too artificial to govern the liabilities of the
parties. The entire arrangement was a single transaction. The various steps
taken to implement it must be regarded as simultaneous. On that basis, the
plaintiff took the assignment which instantaneously merged the underlease with
the plaintiff’s superior interest, and at the same time both sides in the
forfeiture proceedings discontinued them, leaving no time for the underlease to
be restored to its pre-forfeiture state.
The fallacy in
that reasoning lies, I think, in the assumption that it is necessary to dissect
the various steps which were taken on February 18 1994 and to place them in a
temporal order in order to ascertain whether there was a moment of time when
the lease emerged from ‘twilight’. The lease remained in existence albeit that
if the defences had failed and if the claims for relief had also failed, the
forfeiture would have been treated as having taken effect on the service of the
writ. However, in the event the action for forfeiture was discontinued thereby
removing the only defect in the title to the lease which Lloyds Bank as
mortgagee was free to dispose of. And that is what happened.
Mr Roberts
relied in this court as in the court below on observations made by Lord Templeman
in Billson v Residential Apartments Ltd (supra). In that
case tenants undertook works of reconstruction of demised premises without the
written consent of the landlords which was required under the terms of the
lease. The landlords served notice under section 146(1) requiring the tenants
to remedy the breach of covenant. The tenants failed to do so and, while the
building works were still in progress, the landlords peaceably re-entered,
changed the locks and fixed notices to the effect that the lease had been
forfeited. The question was whether the court had jurisdiction to grant relief
against forfeiture pursuant to section 146(2) notwithstanding the re-entry of
the landlord. It was held that where a landlord has physically re-entered
premises without obtaining an order of the court, a tenant can claim relief
against forfeiture on the footing that the landlord was still ‘proceeding’ to
assert his right of forfeiture within the meaning of section 146(2), the words
‘is proceeding’ in section 146(2) being read as ‘is taking the necessary steps’
or ‘proceeds’: see per Lord Oliver, at p544.
Mr Roberts
relied upon an observation in the speech of Lord Templeman, at p535, that: ‘The
effect of issuing and serving a writ is precisely the same as the effect of
re-entry; in each case the lease is determined’. In my judgment, it is quite
clear from the paragraph in which that observation occurs that Lord Templeman
did not intend to say that the service of a writ or peaceful re-entry has the
effect that the lease is determined for all purposes. Lord Templeman was
answering a submission that on the true construction of section 146(2) a tenant
cannot apply for relief against forfeiture after the landlord has re-entered
without obtaining a court order since, ‘Thereafter the landlord is no longer
proceeding to enforce his rights; he has succeeded in enforcing them’. Lord
Templeman equated the position of a landlord, who has served a writ claiming
possession, with the position of a landlord who has re-entered and concluded that,
‘In each case the tenant seeks relief because the lease has been forfeited’. It
is quite clear from subsequent passages in the speech of Lord Templeman that he
had well in mind the principle that, ‘Re-entry can only avail the landlord if
the entry is lawful’: see p536G. If the tenant challenges the claim by the
landlord that the right of re-entry has arisen by reason of breach of covenant
or otherwise, the question whether the lease has been forfeited must await the
outcome of the action; similarly, if the landlord serves a writ claiming
possession and the tenant claims that the landlord has no right to re-enter.
Again, in both cases if the tenant claims relief against forfeiture, the
question whether the lease will be restored to full life remains in abeyance
pending the determination of that claim. The position is even more clearly
stated by Lord Oliver, at p542, where he said:
It is clear,
for instance, that where a judgment for possession has been wrongfully obtained
because, for instance, no notice was served under section 146(1), it may, by
appropriate procedure, be set aside so as to enable one deriving title under
the lessee to defend: see Jacques v Harrison (1884) 12 QBD 165.
What defeats the claim to relief is not the fact of possession simpliciter but
possession under a final and unassailable judgment
Mr Roberts’
submission, if well founded, would have the result that the observation of Lord
Templeman he relies upon has overruled a long series of cases, none of which is
referred to in his speech and many of which were not even referred to in
argument. As Mr Stephen Jourdan, who appeared for Ivory Gate, pointed out, it
would have the absurd consequence that if a landlord peaceably re-entered
while, for instance, a tenant was on holiday and granted a lease to a third
party before the tenant could issue a writ claiming either that the re-entry
was unlawful or while admitting that the right of re-entry had arisen, claiming
that no notice had been served in accordance with section 146(1) or claiming relief
against forfeiture, the tenant would thereafter be debarred from obtaining
relief because it would affect rights accrued to a third party.
In my
judgment, the appeal succeeds on this short ground. There were other issues
before the learned judge: whether if the lease was forfeited by service of the
writ, Ivory Gate could claim the rent as determined by the arbitrator from the
rent review date until the service of the writ and whether the failure of
Capital City to deliver up possession was a further breach of covenant for
which damages could be recovered from the sureties. We have not heard argument
on these further questions and I express no opinion on them.
There was no
dispute before the learned judge as to the amount of rent and interest thereon
up to October 7 1996. The action will have to be restored before a master to
calculate interest accrued since October 7 1996, unless that calculation can be
agreed.
MAY and BELDAM LJJ agreed and did not add anything.
Appeal
allowed with costs.
