Allyson Colby analyses a case of an insolvent tenant, a disclaimed lease and a decades-old guarantee
Under the law of privity of contract, which applies to leases granted before 1 January 1996, an original tenant remains liable to its landlord throughout the term, even though it has assigned its lease to someone else and has had nothing to do with the premises ever since. Furthermore, landlords invariably require assignees of such leases to enter into direct covenants assuming liability for the payment of rent and performance of covenants for the remainder of the term.
The Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) changed the law. It releases tenants from their covenants on the lawful assignment of leases made on or after 1 January 1996. The law in relation to “old” leases remains unchanged. However, section 17 of the 1995 Act requires landlords to serve warning notices in a prescribed form (or in a form substantially to the same effect) on former tenants and their guarantors if the current tenant falls into arrears. The section applies to “fixed charges” (which are defined as rent, service charges and any “liquidated sums” payable for breaches of covenant) and failure to serve notice within six months of such charges falling due will prevent a landlord from pursuing a claim.
Chain of assignments
K/S Habro-Gatwick v Scottish & Newcastle Ltd [2015] EWHC 2084 (Ch); [2015] PLSCS 237 concerned liability under the lease of a hotel. The lease was dated 6 May 1968 and was granted for a term of 99 years. The current tenant was insolvent and the lease had been disclaimed, which brought the House of Lords decision in Hindcastle v Barbara Attenborough Associates Ltd [1996] 1 EGLR 94 into play.
Hindcastle, which concerned the effect of section 178(4) of the Insolvency Act 1986, established that, although disclaimer by a liquidator terminates a lease, it has no effect on the contractual liabilities of third parties. Therefore, Scottish & Newcastle (“S&N”), which was the original tenant, remained liable to the landlord unless and until it took physical possession of the property – which it chose not to do.
The landlord served section 17 notices on S&N, which accepted that it remained liable under the lease, but denied liability for some of the sums that the landlord was claiming. Alternatively, it sought to pass liability along the chain. It had sold the property in 1989 and had ensured that the agreement for sale to the buyer included a guarantee from another group company. Fortunately, the guarantor was still solvent, although the buyer was not.
Section 17 notices
Certain of the notices served by the landlord failed to specify the dates on which the sums claimed had become payable, as is required by the Landlord and Tenant (Covenants) Act 1995 (Notices) Regulations 1995. S&N claimed that this information was critical because it enables a recipient to know if a notice has been served in time and whether it is liable to pay up. However, the dates were discernible from copies of the invoices referred to in, and enclosed with, the notices. Consequently, the judge decided that the notices were in a form that was substantially to the same effect as the prescribed form, and were valid.
Fixed charges
The landlord agreed that it needed to serve section 17 notices in relation to security expenses that it had had to incur to keep the property insured, and had done so. The lease required the tenant to insure and gave the landlord the right to do so, at the tenant’s cost, if the tenant failed to comply with its obligation. The landlord accepted that this made the tenant liable to pay a liquidated sum in the event of default.
Was it necessary to serve section 17 notices to recoup the amounts that the landlord had had to spend on business rates? The landlord contrasted the tenant’s covenant to insure with its covenant to pay rates and other outgoings, which did not include any self-help provision for the benefit of the landlord if the tenant failed to comply. Consequently, the landlord argued that it was seeking to recover damages for breach of covenant, which did not, of itself, turn the amounts claimed into liquidated sums for the purposes of section 17. Interestingly, the judge agreed and ruled that section 17 was not applicable.
Guarantee
S&N’s guarantor tried to escape liability to S&N on the ground that it was not a party to, and had not given any guarantee in, the transfer between S&N and its assignee. However, S&N reminded the guarantor that it had been a party to the business sale agreement that preceded the transfer. The agreement, which was a very substantial document dealing with the sale of a hotel division for £645m, required the assignee to pay and discharge all debts and liabilities of the business after completion, and the guarantor had guaranteed all the assignee’s “obligations, commitments, undertakings, warranties and indemnities under or pursuant to this agreement”.
The guarantor argued that the guarantee covered non-property liabilities only and that the property transfers were intended to be the only source of obligations in relation to the properties. However, the judge ruled that a reasonable person, with the relevant background knowledge and an understanding of the overall scheme of the agreement, would understand the guarantee to include the rents and other liabilities under the leases, as well as non-property liabilities. Therefore, the guarantor was liable to reimburse S&N for the rent and other sums that it was liable to pay the landlord under the leases.
Allyson Colby is a property law consultant
