A non-recourse provision in an assignment can prevent a landlord from recovering unpaid rent from a former tenant, as a recent case illustrates
| ? A non-recourse provision between a landlord and an assignee can expressly preclude recourse against a former tenant ? The former tenant can claim the benefit of this by virtue of the Contracts (Rights of Third Parties) Act 1999 |
It used to be the case that a landlord of commercial premises could ensure ample protection in the event of tenant default. Not only could third-party guarantors be put in place but also, by the use of a raft of direct covenants whenever the lease was assigned, the right to recover against all former tenants could be assured.
The use of direct covenants was brought to an end by the Landlord and Tenant (Covenants) Act 1995. However, that Act did permit authorised guarantee agreements, whereby an assigning tenant could be made liable for any default by that assignee. Thus, it is now usual for a landlord to have a right of recourse against the immediately previous tenant.
Where a prospective assignee is particularly attractive it can be easy to lose sight of the desirability of keeping basic protective measures in place, as the landlord in the recent Chancery case of Prudential Assurance Co Ltd v Ayres [2007] EWHC 775 (Ch) [2007] 28 EG 122 (see p122) found to its cost.
Non-recourse agreement
In 1997, the claimant granted a 10-year lease of office premises in Bishopsgate to the defendants, who were partners in a law firm, at a rent of almost £400,000 pa. In 2001, the latter assigned the remainder of the lease to a firm of US attorneys, Altheimer & Gray (A&G).
The claimant consented to this, subject to the usual requirement that the defendants provide an authorised guarantee agreement. This they duly did.
At the same time, the claimant also entered into a supplemental deed with A&G, under which it agreed that the liability of A&G would be limited to the partnership assets and that there could be no recourse to the personal assets of individual partners.
In 2003, A&G was declared bankrupt in the
The issue for the court was the meaning of the non-recourse agreement with A&G and its effect upon the liability of the defendants.
The non-recourse agreement had clearly been intended to protect the personal assets of the partners in A&G. To this end, the agreement had been drafted so as to confer protection against both a direct front-door claim and any back-door claims. It therefore provided that the liability of A&G as tenant under the lease was limited to partnership assets. However, it also provided that the claimant’s right to recover from any previous tenant was similarly limited, as was its right to any distribution in the event of the bankruptcy of A&G.
These latter two provisions were designed to ensure that no indemnity claim could be made against personal assets by a former tenant whose guarantee had been relied upon by the claimant, nor could there be any bankruptcy claim by the claimant against personal assets.
Meaning of the agreement
Despite valiant attempts by counsel for the landlord to attack various infelicities in the drafting of the agreement, Lindsay J concluded that it did clearly limit the liability of both A&G and previous tenants.
Although the claimant argued that it could have had no possible commercial motive for entering into such an agreement, the judge agreed with the defendants that this was not the concern of the court.
It was plain that A&G had insisted upon the non-recourse agreement and that the claimant had agreed to it. It might have been that it was thought that there was no real risk that a substantial
Having reached this conclusion as to the plain meaning of the agreement, the issue for the court was whether the defendants could rely upon it.
The defendants, of course, were not parties to it and the law used to be that, generally, only a party to a contract could enforce it. However, the Contracts (Rights of Third Parties) Act 1999 has made significant changes in this area of the law and the defendants argued that they were within the scope of its provisions.
The Act provides that someone who is not a party to a contract can enforce a term if either the contract expressly so provides or if the term “purports to confer a benefit on him”. The third party must be expressly identified in the contract, either by name or as a member of a class or description. However, no claim can be made if it is clear that the parties did not intend the term to be enforceable by the third party (as is often achieved, in practice, by an express exclusion of the Act).
It was clear that the defendants were sufficiently identified as “previous tenants”. There was no indication (indeed, it would have destroyed the purpose of the agreement) that the parties did not intend the term to be enforceable by the previous tenants.
Equally, the agreement did not “expressly” confer the benefit of the agreement on the defendants. The key question was, therefore, whether in restricting recoverability against any previous tenant the term “purport[ed] to confer a benefit on” them.
A risk worth thinking about
Previous case law has established that the Act does not require that the predominant purpose of the term must be to confer a benefit on the third party nor does it matter that the term also confers a benefit on someone other than the third party.
All that the court must decide is whether the sense of the provision is to confer a benefit. In the present case, there was no doubt that the agreement conferred a benefit – a cap on recoverability – on the previous tenants and that the defendants were therefore entitled in their own right to enforce it.
It seems most unlikely that the landlord in this case did not, at the time, realise the import of the non-recourse agreement. The risk was always a commercial one and, as this case illustrates, a properly drafted non-recourse agreement will necessarily leave that risk with the landlord rather than the previous tenant.
Sandi Murdoch, honorary fellow, Reading Univeristy
