Landlord taking rent deposit – Deed entitling landlord to recoup unpaid rent out of deposit – Deed creating charge over deposit account – Tenant entitled to balance of deposit at end of lease – Lease disclaimed by liquidator of tenant company – Charge not registered under Companies Act 1985 – Large amount of rent unpaid – Liquidator claiming all moneys in deposit account – Whether landlord seeking to enforce a void charge – Whether insolvency set-off rules applicable
In June 1999 Gateway (London) Ltd (the landlord) granted a 10-year lease of premises on a trading estate to Greenport Ltd (the tenant), at an initial rent of £53,500 pa, payable quarterly in advance. At the same time, the tenant provided the landlord with a deposit of £26,750, to be held on the terms of a deed bearing the same date as the lease. The deed provided, inter alia, for the money to be held in a separate deposit account until such time as the landlord, having obtained possession following expiry of the lease, certified in writing that it had no outstanding claims (the closure date). Clause 3.2 required the release of the “deposit balance” to the tenant as soon as practicable after the closure date, “after first being applied by payment to the Landlord in satisfaction of all claims… arising out of default by the Tenant”. By clause 4, the tenant charged its interest in the deposit account as security for the performance of its obligations, such charge to be registered by the tenant pursuant to section 395 of the Companies Act 1985. Clause 5.1 entitled the landlord to appropriate from the deposit account any rent that was more than 14 days overdue. Clause 9.1 declared “The Deposit Balance belongs to the Tenant but is to be treated on the terms of this Deed.”
In March 2000 the tenant was placed into creditors’ voluntary liquidation and Mohammed Obaray was appointed liquidator. No charge relating to the lease or the deed had been registered. In April 2000 the liquidator disclaimed the lease, at which time arrears of rent amounted to £22,975. The landlord claimed to be entitled to deduct the arrears from the deposit. The liquidator demanded the return of all moneys held in the deposit account. The instant case was an appeal by the liquidator from a judgment of the Chancery master in favour of the landlord.
Before the High Court judge, the liquidator contended that the alleged right to deduct could not: (i) subsist independently of the charge or charges, which had been rendered void for non-registration under the Companies Act 1985; or (ii) be asserted by way of set-off under r 4.90 of the Insolvency Rules 1986, as there was no mutuality between the proprietary claim of the company and the contractual claim of the landlord.
Held: Judgment was given for the landlord.
1. The right, under clause 5, to appropriate during the currency of the lease might, if considered alone, be seen as no more than a mechanism for giving effect to the charge created by clause 4. However, the same could not be said of clause 3.2, which was obviously wider in scope. Given the wide definition of “default” provided elsewhere in the deed, the landlord’s right to deduct upon closure of the account was not confined to breaches of the lease, but also included damage suffered as a result of premature termination by disclaimer on insolvency. On that basis, the clause indicated that the intention of the deed was not simply the creation of the (now invalid) charge under clause 4. Accordingly, the remaining terms of the deed were intended to have a contractual effect beyond the scope of the clause 4 charge. The effect of those remaining terms was that a sum of money was held by the landlord subject to a right to return only the balance after relevant deductions. Although that right was itself a charge, such a charge fell outside the categories of registrable charges to be found in section 396 of the 1985 Act. In particular, it could not be categorised as “a charge on the book debts of a company”: Re Brightlife Ltd [1987] Ch 200 considered.
2. Because the tenant was never contractually entitled to more than the balance of the moneyss in the account (after deductions), the question of an insolvency set-off (and hence the considerations of mutuality raised by r 4.90 of the Insolvency Rules 1986) had simply not arisen. The position was unaffected by clause 9.1, as the trust thereby constituted was not a bare trust but a trust to deal with the balance according to the terms of the deed.
David Allison (instructed by Alan Taylor & Co) appeared for the appellant; Christopher Cutting (instructed by Ivor Levy & Co) appeared for the respondent.
Alan Cooklin, barrister
