As is well,
and for many painfully, known, an original tenant remains contractually liable
on the terms of his lease for the whole of the term, even where he transfers
the lease to another. An important question which has arisen on numerous
occasions is whether, and to what extent, an original tenant’s contractual
liability is affected by lease variations agreed to by an assignee.
The matter
was first considered in Baynton v Morgan (1888) 22 QB 74. Here,
an assignee had surrendered a small part of the demised premises to the landlord.
When a subsequent assignee became bankrupt and the landlord sought to sue the
original tenant, the latter argued that this alteration to the estate had
released him from his contractual liabilities. The Court of Appeal disagreed.
It ruled that an original tenant, unlike a guarantor, is primarily liable;
furthermore, this primary contractual liability remained unaffected by a
subsequent alteration to the estate.
A century
later this unexceptional principle was controversially extended by two first-instance
decisions. In Centrovincial Estates
plc v Bulk Storage Ltd [1983] 2 EGLR 45, it was decided that an
original tenant was liable for a reviewed rent which had been agreed by its
assignee. In coming to this conclusion Harman LJ did not, as he could readily
have done, base the defendant’s liability on the fact that it had contractually
agreed to a provision in the original lease under which the rent could be
reviewed: he took the view that Baynton v Morgan was authority
for the proposition that an original tenant is bound by any alterations to the
lease made by an assignee. This was accepted by Hutchison J in Selous Street
Properties Ltd v Oronel Fabrics Ltd [1984] 1 EGLR 50, a case where
an original tenant was also denying liability for a reviewed rent agreed by an
assignee. Again the original tenant was held liable, but here this occurred
even though the reviewed rent might have reflected the value of improvements
made by the assignee in breach of covenant. Thus, it is arguable that the Selous
case is a much clearer authority that subsequent alterations to a lease bind
the original tenant.
Although
these decisions were lucidly criticised at the time (see Patrick McLoughlin in
[1984] Conv 443), they were applied in GUS Property Management Ltd v Texas
Homecare Ltd [1993] 2 EGLR 63 and have been widely accepted as representing
the law. Indeed, so much so that section 18 of the Landlord and Tenant
(Covenants) Act 1995, acknowledging the unfairness of the position, amends the
law for variations entered into after the commencement date of that Act (which
is expected to be January 1 1996). The 1995 Act provides that neither a former
tenant nor a guarantor can be liable for any amount which is referable to a
variation effected by an assignee. The variations to which section 18 applies
are those which the landlord had an absolute right to refuse either at the time
the variation was entered into, or which he would have had an absolute right to
refuse under the terms of the lease as they stood when the former tenant
assigned the lease.
revisited
However, in
the meantime, the Court of Appeal has had cause to reconsider the present law.
In Friends’ Provident Life Office v British Railways Board [1995]
EGCS 140 (shortly to be reported in Estates Gazette) the defendants, as
original tenants, were being sued for arrears accrued by an assignee. They were
resisting liability on the basis that the lease had been substantially varied
by the assignee and that this released them from their obligations. At first
instance the defendants were successful, since the judge accepted their
argument that the variations to the lease had effected a deemed surrender and
regrant and that the original tenants’ lease had thus come to an end. This
ruling was now being challenged by the landlords.
The first
question examined by the Court of Appeal was whether the variations brought
about a surrender and regrant. The changes which had been agreed by the
landlords and the assignees were unquestionably substantial. The terms of the
original letting were appropriate for the use of the premises for its own
purposes by a single occupying tenant company. The assignees wished to sublet
the property in parts to short-term occupiers. Accordingly, both the level of
the base for calculating the rent were altered; furthermore, the alienation and
user clauses were also redrafted in order to accommodate the assignees’ needs.
Despite
their magnitude, the Court of Appeal agreed with the landlords that these
changes did not trigger a deemed surrender and regrant. Having examined the
authorities, Beldam LJ was quite satisfied that these supported the view that
only changes to the estate had this effect. Thus, a variation which
extends the term, or one which increases the physical extent of the demised
premises will always bring about a surrender and regrant irrespective of the
intention of the parties. Other changes, such as those in the present case,
can be regarded merely as variations to an existing lease, if this is what the
parties intend. In particular, the court specifically rejected the tenants’
argument that an alteration to the rent amounts to a change to the estate,
noting that it had just come to a similar conclusion in JW Childers Trustees
v Anker [1995] EGCS 116 (shortly to be reported in Estates Gazette).
The court
then turned to the vital question of whether the variations agreed by the
assignees bound the original tenants. Noting Patrick McLoughlin’s criticisms of
the judgment in Centrovincial, the court agreed that Harman
misunderstood the decision in Baynton. The earlier case had not decided
that an original tenant is bound by alterations agreed by an assignee; it had
decided that an original tenant remained bound by his contract despite the
subsequent variations. The conventional distinction between the contractual
obligations created by a lease and the estate to which it also gives rise has
been reasserted by the House of Lords in City of London Corporation v
Fell [1993] 2 EGLR 131 and, on this basis, the Court of Appeal had little
difficulty in concluding that the obligations accepted by an original tenant in
his contract cannot be varied by a subsequent agreement made by the
landlord with an assignee.
This
conclusion meant that the original tenants must necessarily be released from
that old liability as well. This was rejected by the court; in the absence of a
clear intention to release the assignees, the variation must be taken merely to
substitute a new figure. Accordingly, the original tenants were liable to the
landlords for arrears calculated at the original level.
The Friends’
Provident case is of obvious important for two reasons. First, it confirms
that the circumstances in which the law will deem a surrender and regrant are
few (an area of the law which will be carefully scrutinised by tenants wishing
to take advantage of the new privity regime), Second, it brings about, for
leases which have already been varied, much the same changes wrought by section
18 of the 1995 Act for post-1995 variations.
