Disclaimers by liquidators have no effect on the leasehold liabilities of third parties. As a result, former tenants and any current or former guarantors remain liable on their covenants with the landlord: Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70.
In RVB Investments Ltd v Bibby [2013] EWHC 65 (Ch), a guarantor tried to persuade court that he was no longer liable on guarantees of leases of two industrial units in Coventry because he was liable only until “the lessee ceases to be bound by the covenants in this lease”. The judge ruled that the guarantor’s interpretation of the guarantee would fly in the face of s178(4)(b) of the Insolvency Act 1986. In his view, these words were included to cater for the possibility that the tenant might be released from liability on the assignment of the leases as a result of s5 of the Landlord and Tenant (Covenants) Act 1995.
However, the tenant’s liquidator had disclaimed only one of the leases. The other had vested in, and was disclaimed by, the Crown following the dissolution of the tenant. Nonetheless, s1015 of the Companies Act 2006 – which applies in such cases – is, in all material respects, identical to s178(4). Consequently, the law derived from Hindcastle applied with equal force to the disclaimer by the Crown.
The guarantor turned next to s17 of the Landlord and Tenant (Covenants) Act 1995, which requires landlords to serve warning notices on former tenants and their guarantors within six months of any arrears accruing under a lease. He claimed to be a guarantor of the former tenant in the case of the lease that had been assigned by operation of law to the Crown.
The judge dismissed the tenant’s argument. S17 requires landlords to notify former tenants and their guarantors of arrears of fixed charges. It does not prevent them from requiring guarantors to accept a new lease for the residue of the term, or from seeking damages for breach, or in lieu, of an order for specific performance of a covenant requiring a guarantor to enter into such a lease. In addition, tenants remain liable on their covenants following assignments by operation of law under the 1995 Act.
The guarantor did not have the means to pay the sums that were due to the landlord, or to pay damages for his failure to execute new leases. Nonetheless, the court granted the landlord an order requiring the guarantor to accept new leases – even though the terms to be granted by the new leases expired before the order could be made. The council was pursuing the landlord for rates and the grant of the leases would enable the landlord to direct the council to the guarantor instead.
The judge refused to accept that the landlord had taken possession of the premises, which would have terminated the guarantor’s liability under the leases. The landlord had read the meter and checked for disrepairs and, on finding the premises unsecured, had fitted padlocks on the doors. It had also advertised for new tenants, but had done nothing more than was necessary to protect its interests while preserving its rights until new tenants were found.
Allyson Colby is a property law consultant.
