Assignment of lease — Payment of rent — Present tenant insolvent — Landlord seeking indemnity from original tenant — Whether original tenant entitled to benefit of covenant regarding future payment of rent made by subsequent assignee of lease — Application by original tenant refused
The case arose when a landlord of a property sought payment of rent from the original tenant because the present tenant was insolvent. The property in question was Orbit House, New Fetter Lane, London EC4. The present landlord was a company in the Maxwell Group (RMEL), which was in administrative receivership. On August 6 1970 a long underlease of the property was granted to RPH Ltd, a non-trading subsidiary of Reed International plc. The lease was subject to three successive assignments. In February 1972 it was assigned by RPH to MGH, which was now insolvent and in respect of which an administration order was in force. In March 1979, MGH assigned the lease to MGN. In June 1987 MGN assigned the lease to MCC, the present tenant. The annual rent payable under the lease was £2.65m. MCC failed to pay the rent in June 1991 and no rent had been paid since then.
As MCC was insolvent, the landlord turned to RPH as the original tenant, which had covenanted to pay the rent throughout the whole term of the lease. When RPH refused to pay the landlord issued a writ on September 21 1992 claiming £1,548,750 rent due for the three quarters to June 1992, together with interest.
Section 24(1)(b) of the Land Registration Act 1925 provided: “(1) On the transfer, otherwise than by way of underlease, of any leasehold interest in land under this Act, unless there be an entry on the register negativing such implication, there shall be implied — … (b) on the part of the transferee, a covenant with the transferor, that during the residue of the term the transferee and the persons deriving title under him will pay, perform, and observe the rent, covenants, and conditions by and in the registered lease reserved and contained, and on the part of the lessee to be paid, performed, and observed, and will keep the transferor and the persons deriving title under him indemnified against all actions, expenses, and claims on account of the non-payment of the said rent or any part thereof, or the breach of the said covenants or conditions, or any of them.”
The landlord argued that as the title to the lease was registered and there was no entry on the register negativing the implication of the covenant set out in section 24, it was entitled to look to RPH for indemnity, RPH in turn was entitled to look to MGH and so on to the insolvent present tenant. MGH was itself in financial difficulties and therefore any claim against it would be likely to yield little if anything for RPH as an unsecured creditor. If RPH could only look to MGH for an indemnity, the loss flowing from MCC’s inability to pay rent fell on RPH if the landlord could look to it. Since RPH’s own rights of indemnity were of doubtful value, if RPH could reach MGN (a company which was solvent), RPH would not be out of profit. The loss would fall on MGN, which would have a right to be indemnified by MCC. RPH applied to the court for an order: (1) that the administrators of MGH should assign to RPH the benefit of MGN’s covenant with MGH as to the payment of future rent; (2) alternatively an order directing the administrators of MGH to bring proceedings against MGN requiring it to pay rent to the landlord (RPH agreeing to indemnify MGH against the costs of the proceedings); or (3) RPH sought the leave of the court under section 11 of the Insolvency Act 1986 to commence proceedings against MGH claiming an order that MGH institute proceedings against MGN.
Held The application was refused.
1. Even on the most favourable construction of section 24(1)(b), MGH’s obligation to RPH was no more than a positive obligation to pay rent for the rest of the term of the lease. However, that was not a tenable construction in respect of rent falling due after RPH assigned the lease.
2. RPH was not entitled to compel MGH to enforce the benefit of its covenant with MGN. There was no direct legal nexus between the two covenants. There was no basis on which the court, as part and parcel of RPH’s rights against MGH, could compel MGH to sue MGN nor could the court order MGH to assign the benefit of MGN’s covenant to RPH. RPH had unsecured claims against MGH and nothing more and it could not lay claim on its own account to the benefit of the MGN covenant.
3. The fundamental difficulty was that the court was being asked to make an order requiring MGH to take steps vis-a-vis MGN which it was under no legal obligation to take. It could not be right to make it pay rent and indemnify RPH thus compelling MGH to take that step. On the other hand it would be unconscionable for MGH to enforce its right of indemnity against MGN and hold on to the money rather than repay it to RPH.
4. The benefit of the MGN covenant was an asset of MGH for whatever it was worth. Though MGH was not compelled to assign the benefit of the covenant to RPH, the administrators were at liberty to make such assignment if it was for the benefit of MGH and its creditors. The administrators had not themselves sought directions from the court as to whether they should do so or regarding the terms on which such assignment should be made. That being so, it was not for the court to interfere with the exercise by them of discretions entrusted to them.
Robin Dicker (instructed by Freshfields) appeared for RPH; Anthony Trace (instructed by Lovell White Durrant) for MGN Ltd; Susan Prevezer (instructed by Allen & Overy) appeared for MGN.
