Landlord and tenant — Liability of original tenant following assignment — Whether term can be implied into lease that landlord should take care in consenting to assignment — Whether landlord should exhaust all other remedies before pursuing his remedy against original tenant
underlease dated February 6 1981 the respondent landlord granted the appellant
a term of 20 years from September 29 1980 of the first floor of Moray House,
23-31 Great Titchfield Street, W1, at an annual rent of £8,550 — From September
29 1985 the rent was increased to £10,000 pa — In addition to the rent the
appellant covenanted to pay a yearly sum of £1,350, representing a proportion
of insurance and service charges — The appellant covenanted not to assign the
premises without the written consent of the landlord, such consent not to be
unreasonably withheld with the proviso that the landlord may require the proposed
assignee to enter into direct covenants for the performance of the lessee’s
covenants — On February 12 1982 the appellant, with the consent of the
landlord, assigned the underlease to the first assignee and on July 13 1983 the
first assignee assigned the underlease to the second assignee, again with the
consent of the landlord — In each case Mr Ronald Swinson, the second defendant,
a director of the first and second assignees, acted as surety and entered into
direct covenants with the landlord — Following non-payment of the rent and
service charges on April 10 1987 the respondent issued proceedings against the
second assignee to recover rent and other payments due — On May 12 1988 the
second assignee assigned the underlease to a third assignee, with the
landlord’s consent, in consideration of the payment of a sum which discharged
in part the outstanding liability to the landlord — Following the compulsory
winding up of the second assignee in October 1988, the respondent claimed the
balance of arrears of rent of £27,351 from the appellant as original tenant —
On appeal from a decision of Mr Patrick Bennett QC (sitting as a deputy judge
of the Queen’s Bench Division), who had dismissed an appeal from an order of
deputy Master Foster giving judgment under Ord 14 of the Rules of the Supreme
Court for the respondent, the appellant contended: (1) that there should be
implied into the underlease the term that, in relation to its dealings with the
second or subsequent assignees of the lease, the landlord would take reasonable
care to ensure that such an assignee was financially able to meet the rental
and service payments due under the underlease; and (2) that, since the tenants’
continuing liability to the landlord arose from privity of contract, the court
should apply an equitable doctrine restraining the landlord from pursuing its
remedy against the tenant when, because of the existence of alternative
remedies against the second assignee
remedy against the tenant
for, the tenant was seeking to equate business efficacy with the elimination of
the hardship which could arise from its being called upon to comply with the express
covenants after it has parted with the lease — There was no ground for implying
such a term — In a rare case in which it can be shown that a contracting party
has no legitimate interest, financial or otherwise, in insisting that he has a
right to perform the contract rather than to claim damages, equity can
intervene if the ordinary rules requiring a party to mitigate his loss do not
protect the party in breach from having to pay more than the proper measure of
damage; but any such principle is of no relevance in the present case when the
remedies available to the landlord are against different persons and are
cumulative and not alternative
The following
cases are referred to in this report.
Baynton v Morgan (1888) 22 QB 74
Clea
Shipping Corp v Bulk Oil International Ltd (No
2) ‘the Alaskan Trader’ [1984] 1 All ER 129; [1983] 2 Lloyd’s Rep 645
Liverpool
City Council v Irwin [1977] AC 239; [1976] 2
WLR 562; [1976] 2 All ER 39; (1976) 74 LGR 392; [1976] EGD 282; 238 EG 879,
[1976] 1 EGLR 53, HL
White
& Carter (Councils) Ltd v McGregor
[1962] AC 413; [1962] 2 WLR 17; [1961] 3 All ER 1178, HL
This was an
appeal against a decision of Mr Patrick Bennett QC (sitting as a deputy judge
of the Queen’s Bench Division) on November 6 1990, who had dismissed the appellant’s
appeal against the order of deputy Master Foster of September 24 1990 that
judgment under Ord 14 of the Rules of the Supreme Court be entered for the
plaintiff respondent, Norwich Union Life Insurance Society, against the
appellant defendant, Low Profile Fashions Ltd.
Karen
Troy-Davies (instructed by Philip Ross & Co) appeared for the appellant;
Robert Pearce (instructed by the solicitor to Norwich Union Life Insurance
Society) represented the respondent.
Giving the
first judgment at the invitation of Glidewell LJ, BELDAM LJ said: The
appellant, the first defendant in the action, appeals from the judgment of Mr
Patrick Bennett QC, sitting as a deputy judge of the Queen’s Bench Division on
November 6 1990, dismissing the appellant’s appeal against the order of deputy
Master Foster of September 24 1990, that judgment under Ord 14 of the Rules of
the Supreme Court be entered for the plaintiff respondent against the
appellant, with damages to be assessed, and that the first defendant pay to the
plaintiff within 14 days the sum of £10,000 and from an order that the
appellant pay the respondent’s costs of the appeal and before the Master.
In this appeal
the appellant seeks unconditional leave to defend the action and an order that
its costs of appeal and below be paid by the respondent. The learned deputy
judge dismissed the appellant’s appeal on the ground that it had shown no
arguable defence to the respondent’s claim. That claim was for arrears of rent
and interest due under the terms of a lease entered into by the appellant on
February 6 1981.
The respondent
(to whom I shall refer as ‘the landlord’) was entitled to possession of the
first floor of Moray House, 23-31 Great Titchfield Street, W1, under the terms
of a lease dated May 1 1928. By an underlease of February 6 1981, the landlord
demised the premises to the appellant (to whom I shall refer as ‘the tenant’)
for the term of 20 years from September 29 1980 at an annual rent of £8,550.
From September 29 1985 the rent was to be increased to a sum of £10,000 pa. The
rent was payable by equal quarterly instalments in advance, on the usual
quarter days in every year. In addition, the tenant covenanted to pay
additional rent as and when demanded in the yearly sum of £1,350, plus VAT,
representing a proper proportion of insurance and service charges to the common
benefit of tenants in the building. Further, the tenant covenanted not to
assign the premises without the written consent of the landlord (such consent
not to be unreasonably withheld) with the proviso that the landlord ‘may
require the proposed assignee to enter into direct covenants with the landlord
to perform all the covenants herein contained and on the tenant’s part to be
performed and observed’.
The underlease
provided for a right of re-entry and forfeiture in the event of breach of
covenant by the tenant and, if the rent reserved was more than 14 days in
arrears, for the payment of interest at the rate of 5% above minimum lending
rate by the tenant.
On February 12
1982 the tenant, with the consent of the landlord, assigned the underlease to a
limited company, Al-Awad Swinson International Ltd, to whom I shall refer as
‘the first assignee’.
On July 13
1983 the first assignee, again with the consent of the landlord, assigned the
underlease to a second assignee, Al-Mehry Swinson International Ltd. Mr Ronald
Swinson, the second defendant in the action, was a director of both the
assignee companies and acted as surety on the assignments to them, entering
into direct covenants with the landlord. I shall refer to Mr Swinson as ‘the
surety’.
After July
1983 the second assignee continued to pay the rent and other outgoings until
March 25 1986, when the rent due of £2,500 on that quarter day was unpaid. On
September 10 1987 the landlord made a demand for the additional rent, the
proportion of insurance and other charges in respect of earlier periods.
Neither these nor any further payments of rent were made by the second
assignees. Accordingly, on April 10 1987 the landlord issued proceedings
against the second assignee to recover the rent and other payments due.
By May 1988
the second assignee had apparently found a purchaser for the residue of the
term of the sublease and on May 12 1988, with the landlord’s consent, it
assigned the lease to a third assignee in consideration of a payment of
£22,500. That payment enabled the second assignee to discharge part of its
outstanding liability to the landlord by a payment of £20,000, thus reducing
the amount of the rent and other payments outstanding. It is not clear whether
the proceedings against the second assignee were thus compromised or were
simply not further pursued. Nor is it clear whether the surety was thereby
relieved of further liability, but for the purpose of these proceedings I
assume that any payments made by the second assignee did not affect the
outstanding liability either of the second assignee or of the surety.
On October 5
1988 the second assignee was wound up compulsorily and on November 7 the
landlord, by letter, claimed the balance of arrears of £27,351 from the tenant.
The writ in the action against the tenant was issued on August 7 1989 and the
pleadings closed in December 1989. The tenant delivered further and better
particulars of its defence in April 1990. On May 14 the landlord issued its
summons seeking judgment under Ord 14.
By its defence
the tenant contended that the landlord, when granting the licence to the first
assignee to assign to the second, owed the tenant a duty of care properly to
assess the credit-worthiness of the second assignee and to take proper and
timely measures to enforce the covenants of the underlease against the second
assignee. The tenant alleged that the landlord had failed to do so and
therefore the tenant had suffered damage. It was pleaded that to allow the
landlord’s action to proceed would be to permit circuity of action. It was
conceded before us that the form of the defence was inadequate and, further,
that the grounds upon which the tenant sought leave to defend were not properly
reflected in its defence. The court was asked to consider the grounds of
defence now put forward on their merits and if, as was contended, an arguable
defence in law was disclosed, to grant leave to the tenant to amend the
defence.
Before us the
tenant argued:
(1) That there should be implied in the
underlease a term that, in relation to its dealings with the second or
subsequent assignees of the lease, the landlord would take reasonable care to
ensure that such an assignee was financially able to meet the rental and
service payments due under the underlease.
(2) That, since the tenant’s continuing liability
to the landlord arose from privity of contract, the court should apply an
equitable doctrine restraining the landlord from pursuing its remedy against
the tenant when, because of the existence of alternative remedies against the
second assignee and the surety, it was wholly unreasonable for the landlord to
pursue its remedy against the tenant.
It was
conceded by the tenant that there was no decided case in which either of these
defences had been held to be available to a tenant who, it was accepted, would
otherwise be liable on the covenants in the lease.
In support of
the first ground, Mrs Troy-Davies, counsel for the appellant, referred us to
the well-known passage in the judgment of
at p 253. In that case the agreement between the parties had only partially
been stated in writing and it was necessary to complete the agreement and in
particular to give it a bi-lateral character to imply some terms. As Lord
Wilberforce stated at p 254A:
The court
here is simply concerned to establish what the contract is, the parties not
having themselves fully stated the terms. In this sense the court is searching
for what must be implied.
By contrast,
the lease in the present case was a comprehensive document clearly intended by
the parties to include all the terms agreed and to constitute the entire
agreement. The term the appellant seeks to imply is one said to be necessary to
give business efficacy to the contract. But, quite apart from the difficulty of
implying any term into this detailed lease, it is not, in my view, established
that the term proposed is in any way necessary for that purpose. Leases in
similar form have for many years been created and their covenants performed
notwithstanding the absence of such a term, which would operate in only very
limited circumstances. It would not serve to modify the tenant’s obligations in
any way but at best would give the tenant the opportunity to intervene on the
granting of licence to assign or subsequently when an assignee had defaulted.
In practice, no steps have been suggested which it would be open to the
landlord to take that he would not already have taken in his own interest. To
avoid subsequent criticism of his steps a landlord might feel constrained to
seek the consent of the tenant for any subsequent assignment and this would
clearly lead to greater delay in the granting of consent. It would be likely to
undermine the purpose of the Landlord and Tenant Act 1988, which was to speed
up transactions of this kind. In the case of long leases when several
assignments may have taken place, including some of the landlord’s right to the
reversion, even further difficulties can be envisaged in the operation of such
a term.
It was argued
in Baynton v Morgan (1888) 22 QB 74 that the contingent liability
of the tenant on his personal covenant should be construed as a contract of
suretyship, but in the light of the terms in which the obligation in that case
was expressed, Lord Esher said it could be contended to be only a contract of
suretyship by virtue of some implication, and he added at p 77:
I see nothing
that authorises us to make any such implication. It was suggested that, unless
the contract were treated as one of suretyship, some hardship might arise. I do
not think that such considerations afford any ground for altering the effect of
the plain words of the covenant. If there were any hardship, it would be one
arising out of the terms of the contract which the parties have chosen to make.
The same is
equally true of the term we are asked to imply into the lease in the present
case and I see no more reason to do so than did Lord Esher. It is to be
observed that, in the proviso to the covenant against assignment, the tenant
agreed to leave it to the discretion of the landlord whether to require that an
assignee should enter into a direct covenant with the landlord, whereas the
tenant could have stipulated for a requirement that the landlord must do so and
thus have ensured at least the continuing liability of the first assignee whose
financial strength the tenant had itself been able to verify. In truth the
tenant seeks to equate business efficacy with the elimination of the hardship
which could arise from its being called upon to comply with the expressed
covenants after it has parted with the lease — no doubt for a suitable
consideration. The hardship, if any, is considerably less than in the instances
given by the Law Commission in 1986 in their Working Paper no 95, para 2.18. I
would therefore reject the implication of the term suggested.
The second
arguable defence for which the tenant contended was based upon the observations
of Lord Reid in White & Carter (Councils) Ltd v McGregor
[1962] AC 413, at pp 427-431. After stating the general rule that an innocent
party to a contract is not bound in law to accept a repudiation of it and sue
for damages for breach (whether or not the time for performance had arrived)
Lord Reid considered a case in which the innocent party could completely fulfil
the contract without any co-operation from the party in breach. At p 431 he
said:
It may well
be that, if it can be shown that a person has no legitimate interest, financial
or otherwise, in performing the contract rather than claiming damages, he ought
not to be allowed to saddle the other party with an additional burden with no
benefit to himself.
We were referred
to the decision of Lloyd LJ in The ‘Alaskan Trader’ [1984] 1 All ER 129
in which he reviewed the way in which the principle referred to by Lord Reid
has on occasion been applied and we are asked to say that in the present case
the landlord ought not in equity to be allowed to pursue his remedy against the
tenant before he has exhausted other remedies available to him.
No doubt in
the rare case in which it can be shown that a contracting party has no
legitimate interest, financial or otherwise, in insisting that he has a right
to perform the contract rather than to claim damages, equity can intervene if
the ordinary rules requiring a party to mitigate his loss do not protect the
party in breach from having to pay more than the proper measure of damage. I cannot
myself see that any such principle is of relevance in the present case, when
the remedies available to the landlord are against different persons and are
cumulative and not alternative. I can see no equity in requiring the landlord
to pursue one rather than another means of seeking to recover his loss or
requiring him to run the risk that by pursuing one party he may jeopardise his
chances of recovering against another. It has long been the law that the
landlord may sue either the original lessee or the assignee, or both at the
same time. I can see no justification for trying to import into the law of
landlord and tenant long-since-settled concepts developed to meet a specific
difficulty in a different class of case altogether.
I would thus
hold that neither defence is arguable in law and that it is unnecessary to
consider the evidence before the court. I would say, however, that after
reading the evidence I entertained no doubt that on the facts disclosed there
was no conceivable basis for saying that the respondents had either failed to
exercise proper care in granting a licence to assign to the first or any
subsequent assignee or that they failed to take all proper steps to mitigate
the amount for which the tenant might be liable under its covenants.
The answer to
the tenant’s complaint of perceived injustice lies, in my view, in reform by
legislation. The manner in which that should be done was recommended by the Law
Commission in their report, Landlord and Tenant Law, Privity of Contract and
Estate (Law Com no 174). The first principle on which the recommendations
were based was that a landlord or a tenant of property should not continue to
enjoy rights, or be under any obligation arising from a lease, once he has
parted with all interest in the property. A considered recommendation has the
advantage over attempted development on a case-by-case basis, that it is made
after widespread consultation with parties who may be affected by changes in
the law concerned — an advantage which is denied to this or any other court.
Implementation of the commission’s recommendation in this field would certainly
obviate the need for the kind of elaborate argument developed in the present
case for seeking to avoid a tenant’s continuing liability.
I hope the
present case will provide added impetus for the implementation of the
recommendation for reform.
I would
dismiss the appeal.
BALCOMBE and GLIDEWELL LJJ agreed and did not add anything.
Appeal
dismissed with costs. Leave to appeal to the House of Lords refused.