The Contracts (Rights of Third Parties) Act 1999 makes substantial inroads into the doctrine of privity of contract. It gives a party that is not a party to a contract the right to enforce that contract, in specified circumstances. The property industry’s reaction to this unknown provision has generally been to play safe by inserting a clause stating that the contract does not confer rights on third parties. The decision in Prudential Assurance Co Ltd v Ayres [2007] EWHC 775 (Ch)’ [2007] PLSCS 71 concerned the effect of a document that made no mention of the Act at all.
The document sought to limit a landlord’s ability to recover sums due under a lease to the partnership assets of the current tenant, to the exclusion of the personal assets of the individual partners. The document was thorough. The non-recourse clause extended to the tenant and “any previous tenant under the lease”. The partnership inserted these words to ensure that the landlord was unable to recover sums due under the lease from the previous tenant, which had entered into an authorised guarantee agreement (AGA) with the landlord on the assignment of the lease to the partnership. In the absence of this provision, the previous tenant would have been able to pursue a claim (which went beyond partnership assets) against the current tenant under the indemnity covenants extracted from it on the assignment of the lease.
Was the previous tenant entitled to take advantage of the non-recourse provision when pursued by the landlord for arrears of rent after the partnership collapsed, even though it was not a party to the arrangement? The judge decided that it was.
The 1999 Act applies to terms that purport to confer a benefit on third parties if they are specifically named or described in a contract. The parties could have excluded the operation of the Act, if that was their intention, but that would have exposed the partnership to the very risk that it was trying to avoid. The phrase “any previous tenant”, used in the document, was sufficient to identify the former tenant and it is not a requirement of the Act that the parties to a document must actually intend to confer a benefit on someone else: Laemthong International Lines Company Ltd v Artis (The Laemthong Glory) (No 2) [2005] EWCA Civ 519.
The landlord argued that the previous tenant remained liable for the arrears of rent because the AGA required it to discharge them, even though the landlord allowed the partnership time to pay, or granted it any indulgence, or forbore to enforce, or varied, any terms of the lease. The judge rejected the landlord’s arguments. If the non-recourse agreement was an indulgence granted to the current tenant, it was therefore an indulgence that was also granted to “the previous tenant”.
The 199 Act is clearly a trump card that should never be forgotten.
Allyson Colby is a property law consultant