Landlord and tenant — Disclaimer of lease — Whether surety to assignee of lease discharged upon disclaimer of lease
By a lease
dated March 1 1985 the plaintiff and his late wife granted a term of nine years
to H A Jackson Ltd of business premises in Mill Lane, Godalming, Surrey. In
1987 the lease was assigned to Mill Lane Engineering Ltd (‘the assignee’)
pursuant to a licence to assign dated April 23 1987 to which the second
defendant was a party as surety of the assignee’s obligations under the lease.
By clause 3(a) of the licence the second defendant covenanted to ‘pay the rent
reserved by the lease and . . . perform and observe all of the covenants on the
part of the tenant therein contained . . .’. On February 12 1991 the assignee
went into liquidation and on September 6 1991 the liquidator disclaimed the
lease. In accordance with clause 3(b) of the licence on October 15 1991 the
plaintiff required the second defendant to take a new lease of the premises.
The plaintiff obtained summary judgment under RSC
The second defendant appealed contending that: (1) he was not liable for the
arrears from the date of the disclaimer to the date he executes a new lease, in
accordance with his obligation under clause 3(b) of the licence, because the
effect of the disclaimer was to discharge the assignee’s liability, and with it
the second defendant’s liability as surety; and (2) the plaintiff was not
entitled to include a rent review clause designed to implement the 1991 rent
review in the original lease
and Warnford Investments Ltd v Duckworth make it plain that after
a disclaimer the assignee has no liability to pay the rent reserved by the
lease. If it had intended to impose a primary liability on the surety in these
circumstances much clearer language would be necessary than that used in clause
3(a) of the licence — The liability of the surety under clause 3(a) arose only
on a ‘default’ of the assignee to perform its contractual obligations under the
lease. After the date of the disclaimer there could, by operation of law, be no
such default so that as a matter of construction the surety had no liability.
The plaintiff was not allowed to include a rent review clause in the draft new
lease designed to enforce the 1991 rent review in the original lease
The following
cases are referred to in this report.
Katherine
et Cie Ltd, Re [1932] 1 Ch 70
Maurice
Tempany v Royal Liver Trustees Ltd [1984]
BCLC 568
Stacey v Hill [1901] 1 QB 660
Warnford
Investments Ltd v Duckworth [1979] Ch 127;
[1978] 2 WLR 741; [1978] 2 All ER 517; (1977) 36 P&CR 295
This is an
appeal from the judgment of Master Cholomondeley-Clarke, who on February 14
1992 gave summary judgment to the plaintiff for arrears of rent against the
defendants, Sawyer-Hoare and Adrian Hall, following the disclaimer of lease of,
premises in Mill Lane, Godalming, Surrey.
Philip Kremen
(instructed by Anthony Oberman & Co) appeared for the appellant second
defendant; Dirik Jackson (instructed by Hadfields) represented the respondent
plaintiff; the first defendant did not appear and was not represented.
Giving
judgment, MR A GRABINER QC said: This is an appeal by the second defendant,
Adrian Hall, against a judgment of Master Cholmondeley-Clarke on February 14
1992, who gave summary judgment in favour of the plaintiff on a claim which was
connected with the lease of certain business premises situated in Mill Lane,
Godalming, Surrey.
The lease was
originally granted by the plaintiff and his late wife on March 1 1985 to a
company called H A Jackson Ltd (‘the lessee’) for a term of nine years from
March 1 1985. In 1987 the lease was assigned to a company called Mill Lane
Engineering Ltd (‘the Assignee’) pursuant to a licence to assign dated April 23
1987 (‘the licence’) to which the second defendant was a party as surety of the
assignee’s obligations under the lease.
On February 12
1991 the assignee went into liquidation and on September 6 1991 the liquidator
of the assignee disclaimed the lease.
In this appeal
there are two issues. First, is the second defendant as surety liable because
of the non-payment of rent under the lease for the period from the date of
disclaimer until the date on which he executes a new lease under the provisions
of clause 3(b) of the licence? Second,
what are the terms which are to be included in the new lease?
First
issue
On behalf of
the second defendant, Mr Kremen’s submissions on the first issue were short and
to the point. He drew my attention to the Insolvency Act 1986, section 178(4)(a)
and (b) which provides:
(4) A disclaimer under this section —
(a) operates so as to determine, as from the date
of the disclaimer, the rights, interests and liabilities of the company in or
in respect of the property disclaimed; but
(b) does not, except so far as is necessary for
the purpose of releasing the company from any liability, affect the rights or
liabilities of any other person.
The principal
distinction between this provision and its predecessors over many years is that
the leave of the court is no longer required before the relevant contract is
disclaimed. This is an important development. Under the previous law, and since
the decision in Re Katherine et Cie Ltd [1932] 1 Ch 70, the practice
appears to have been for the court to refuse the liquidator’s application for
leave to disclaim if the disclaimer would have had the effect of destroying the
landlord’s remedy against the surety.
In Stacey
v Hill [1901] 1 QB 660 the Court of Appeal considered the effect on the
liability of the surety of the lessee in the event of the disclaimer of the
lease by the trustee in bankruptcy of the lessee. It was held that the lease
was determined as between the lessor and the lessee from the date of the
disclaimer, and that the liability of the surety arising from the non-payment
of rent in futuro was not maintainable. The decision is a good example
of the principle of coextensiveness in the law of guarantees under which the
liability of a surety is dependent upon the continuing existence of the
liability of the principal debtor. Stacey v Hill was considered
by Sir Robert Megarry V-C in Warnford Investments Ltd v Duckworth
[1979] Ch 127 and the coextensiveness point is discussed at p138D-G.
Whereas Stacey
v Hill was concerned with the effect of a disclaimer in the insolvency
of the lessee, Warnford Investments involved the insolvency of the
assignee of the lessee. In that case Sir Robert Megarry V-C held that, as
between the lessor and the lessee, the latter’s obligations survived the
liquidator’s disclaimer on behalf of the assignee company and that the lessee
was liable in respect of the unpaid rent.
Mr Kremen
submits that there is no material distinction between Stacey v Hill
and the present case and that as a matter of principle the assignee’s surety is
discharged notwithstanding the fact of the assignment. He says that this is the
logical consequence of Stacey v Hill and is entirely consistent
with the decision and reasoning in Warnford Investments.
On behalf of
the plaintiff, Mr Jackson makes two submissions. He says, first of all, that Stacey
v Hill is a case on its special facts, ie that it is applicable only to
the case of the lessee’s surety and that once the lease has been assigned the
principle does not apply. Alternatively, he says that Stacey v Hill
is wrong and for that reason the principle in that case should be strictly confined,
at least by me. He submits that it has been criticised in some of the books and
has been rejected in the Irish High Court by Keane J in Maurice Tempany
v Royal Liver Trustees Ltd [1984] BCLC 568.
I reject both
these submissions.
As to the
first it is true, as I have said, that there was no assignment in Stacey
v Hill. That merely produced the result that the lease when disclaimed
reverted to the lessor so that it ceased to exist. In the case of the insolvent
assignee (Warnford Investments) the lease continued to subsist as
between the lessor and the lessee. Mr Jackson relied in particular on the words
of section 178(4)(b) of the 1986 Act. He submitted that by statute the
disclaimer is not intended to ‘affect the . . . liabilities of any other person’
and that this expression includes the surety who therefore remains liable
notwithstanding the termination of the liabilities in futuro of the
principal debtor. Precisely the same argument was advanced and rejected in Stacey
v Hill: ibid, at pp661-662. Moreover, the statutory provision with which
the Court of Appeal was concerned in that case (the Bankruptcy Act 1883,
section 55(2)) was in similar terms to the one here. Indeed, the language of
section 55(2) of the 1883 Act is to be found in successive pieces of insolvency
and companies legislation throughout the 20th century in the Bankruptcy Act
1914 and the Companies Acts of 1929, 1948 and 1985.
This part of
Mr Jackson’s submissions also, I think, fails to take account of the earlier
words of section (4)(b):
. . . except
so far as is necessary for the purpose of releasing the company from any
liability . . .
If, on the
true construction of the covenant given by the surety, he would be discharged
if the principal debtor ceases to have any liability then, in my view, it is
necessary for the purpose of releasing the company from any liability that the
liability of the surety is affected. The same point was I think made by Sir A L
Smith MR in Stacey v Hill ibid at the foot of p664.
It also seems
to me that Parliament’s repeated use of the formula, which was first adopted in
section 55(2) of the 1883 Act, assumes the correctness of the decision in Stacey
v Hill and that if Parliament had intended to do so it could have
overruled it in subsequent legislation, but implicitly chose not to do so.
Thus, section 281 of the 1986 Act, which is concerned with the effect of a
bankrupt being discharged, specifically provides:
(7) Discharge does not release any person other
than the bankrupt from any liability . . . from which the bankrupt is released
by the discharge, or from any liability as surety for the bankrupt or as a
person in the nature of such a surety.
If Parliament
had intended to overrule the effect of Stacey v Hill I would have
expected to have found some similar provision with suitable modifications in
section 178 of the 1986 Act.
Mr Jackson
submits that it would be absurd if the surety were allowed to get off the hook
in the event of a disclaimer of the lease by the liquidator of the principal
debtor. He says that it is the very purpose of any guarantee given in these
circumstances that the lessor should be protected. The short answer to this point
is that the precise extent of the surety’s liabilities depends upon the true
construction of the covenant he has given. As a matter of contract the surety
is capable of undertaking the obligation of a primary obligor or indemnifier so
that notwithstanding the discharge of the principal debtor the surety would
continue to be liable. Indeed, there is no reason why the surety should not
undertake a liability to the lessor which in terms survives the disclaimer of
the lease. That this is simply a matter of agreement is plain from the licence
in this case: clause 3(a) is designed to protect the landlord in the event of
the assignee failing to pay the rent; clause 3(b) is designed to avoid the
consequences of the decision in Stacey v Hill.
Mr Jackson
also had an argument on the construction of clause 3(a) of the licence. He
submitted that the words:
. . . the
surety HEREBY COVENANTS with the landlord that:
(a) The Assignee will pay the rent reserved by
the lease and will perform and observe all of the covenants on the part of the
tenant therein contained . . .
amounted to an
independent or primary undertaking on the part of the surety that the rent
would be paid. I do not accept this submission. The decisions in Stacey v
Hill and Warnford Investments make it plain that after disclaimer
the assignee has no liability to pay the rent reserved by the lease. If it had
been intended to impose a primary liability on the surety in these
circumstances much clearer language would have been necessary. In any event it
seems to me that clause 3(a) must be read as a whole and that on its true
construction the liability of the surety arises only in the event of ‘default’,
ie failure on the part of the assignee to perform his contractual obligations
in the lease. After the date of disclaimer there could, by operation of law, be
no such default on the part of the assignee so that, in my view, as a matter of
construction the surety has no liability.
As to Mr
Jackson’s other submission on the first issue (that Stacey v Hill was
wrongly decided and that I should accordingly endeavour to confine its impact),
it has the doubtful merit of being an ambitious one to make to a deputy judge.
I am bound by Stacey v Hill which has been the law now for nearly
a century. In my view, it was, in any event, rightly decided.
Second
issue
The second
issue that arises in this appeal relates to clause 3(b) of the licence, and the
terms of the lease which the plaintiff is entitled to require the second
defendant to enter into in the events which have happened. The clause provides:
. . . the
surety HEREBY COVENANTS with the landlord that:
(b) In the event of the Assignee during the term
hereby granted . . . being a limited company entering into liquidation and . .
. the liquidator disclaiming the Lease the Surety will if required by the
Landlord within six months of such disclaimer accept from him a Lease of the
demised premises for a term equal in duration to the residue remaining
unexpired of the term thereby granted at the time of the grant of the Lease to
the surety such Lease to contain the like covenants on the part of the landlord
and the Tenants respectively and the like provisos and conditions in all
respects . . . as are contained in the Lease.
The plaintiff
invoked this clause on October 15 1991 by demanding that the second defendant
take up a new lease. Thereafter, the plaintiff put forward a draft lease in the
form exhibited as ‘RSG2’, but it is common ground between the parties that
amendments had to be made to that draft and a revised draft is exhibited as
‘RSG5’. The original lease was subject to a rent review as from March 25 1991.
In this connection I bear in mind the other two important dates. The assignee
went into liquidation on February 12 1991. The liquidator disclaimed the lease
on September 6 1991.
I would make
two preliminary observations about clause 3(b). First of all, it is obviously
designed to circumvent Stacey v Hill so that the limitations of a
simple form of guarantee clause do not prejudice the position of the landlord
in the event of the lease being disclaimed. The effect of the clause is that
the landlord is able to force the surety to enter into a new lease which will
create a direct contractual nexus between them. This also I think confirms the
basic point I have already made that these problems are capable of resolution
by means of the appropriate drafting. The second observation is that,
unusually, clause 3(b) does not oblige the surety to take a new lease with
effect from the date of the disclaimer but from the date of the grant of the
new lease.
In the exhibit
RSG5 the plaintiff put forward a draft lease which contains a redraft of the
rent review provisions contained in the original lease. The redraft is designed
to ensure enforcement of the final rent review under the original lease as
against the second defendant. It would not avail the plaintiff to incorporate a
rent review provision in RSG5 which was in the same or similar terms to that
found in the original lease because it could not be enforced against the second
defendant. Mr Kremen submits that the expressions ‘like covenants’ and ‘like
provisos’ in clause 3(b) of the licence mean ‘the same as’. He submits that
this is reinforced by the inclusion in the clause of the words ‘in all
respects’. Mr Jackson, on the other hand, submits that these expressions mean
‘having the same substantive effect as’ the original lease. I prefer Mr
Kremen’s construction. I do not think it is legitimate for the landlord to
tailor the drafting of RSG5 to his commercial needs in the face of the very
clear language of clause 3(b).
For the
reasons I have given I would, accordingly, allow this appeal.
Appeal
allowed.
