Lease of commercial premises – Liquidation of tenant – Guarantee – Tenant dissolved by liquidators – Whether claimant landlord entitled to order for specific performance requiring defendant as guarantor of tenant to enter into new lease – Whether defendant’s liability under guarantee continuing following dissolution of tenant – Whether assignment of leases occurring by operation of law so as to require service of notice on defendant under section 17(3) of the Landlord and Tenant (Covenants) Act 1995 in order to enforce guarantee – Whether leases surrendered by operation of law – Claim allowed
The defendant guaranteed the liabilities of the tenant to the claimant landlord under leases of units 2 and 4 on an industrial estate in Coventry. The lease of unit 2 was for a term of five years from December 2007 at an initial rent of £78,000 pa. The lease of unit 4 was for five years from November 2005 at a rent of £48,000 pa. The defendant’s obligations as guarantor were stated to apply until the expiry of the tenancy created by the lease “or (if earlier) the date on which the Lessee ceases to be bound by the covenants in this lease”. In the event that the lease were disclaimed or forfeited during the guarantee period, the claimant was entitled to require the defendant to accept a new lease of the premises for a term equivalent to the residue of the original lease, at the same rent as had applied immediately before disclaimer. The lease of unit 2 provided for a rent review after the first three years of the term, with the rent to be determined by an independent valuer if not agreed.
The tenant went into liquidation and, in March 2008, the liquidator disclaimed the lease of unit 4 pursuant to section 178 of the Insolvency Act 1986. The tenant was dissolved in March 2009. In May 2011, the Treasury Solicitor filed a notice of disclaimer in respect of the lease of unit 2 pursuant to section 1013 of the Companies Act 2006.
In August 2011, the claimant requested that the defendant take a new lease of unit 2, pursuant to its obligations as guarantor, for the residue of the term but at a higher rent than before; the defendant refused. The claimant brought a claim for specific performance; it also claimed outstanding rent and service charge in respect of both units in the sum of £528,002.
The defendant contended that he was no longer liable under the guarantee since: (i) on the proper construction of the lease, his obligations as surety came to an end on the dissolution of the tenant in March 2009; (ii) the vesting of unit 2 in the Crown amounted to an assignment by operation of law within the meaning of the Landlord and Tenant (Covenants) Act 1995, such that the defendant, as the guarantor of the “former tenant”, was not thereafter liable in the absence of a notice served on it by the claimant under section 17(3); and (iii) the claimant had accepted surrender of the leases by its conduct in, inter alia, entering on the premises to carry out inspections and beginning to market the premises. He further submitted that the court should refuse specific performance in any event since damages would be an adequate remedy.
Held: The claim was allowed.
(1) It was settled law that, by virtue of section 178(4) of the 1986 Act, the disclaimer of a lease by the liquidator of an insolvent tenant did not affect the liabilities of guarantors, whose rights and liabilities remained as though the lease had continued: Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70; [1996] 1 EGLR 94; [1996] 15 EG 103 applied. Accordingly, the liquidator’s disclaimer of the lease of unit 2 did not discharge the defendant as surety. It made no difference that the guarantee period was defined in such a way that it could end on “the date on which the Lessee ceases to be bound by the covenants in this lease”. On the proper construction of the lease, that provision was not intended to apply where the lessee ceased to be bound by reason of a disclaimer by its liquidator. It dealt instead with the situation that applied under section 5 of Landlord and Tenant (Covenants) Act 1995, where, if the tenant assigned the whole of the demised premises, the tenant was released from the covenants of the tenancy. It lent no support for a construction that would release the surety on a disclaimer following liquidation of the tenant since that would be contrary to the express words of section 178(4)(b) of the 1986 Act and a reasonable person would not have understood the parties to intend such a result. The same applied to the disclaimer of the lease of unit 2 by the Treasury Solicitor, following the vesting of that lease in the Crown as bona vacantia under section 1012 of the 2006 Act. The Treasury Solicitor had executed a valid notice of disclaimer under section 1013. The provisions of section 1015, prescribing the effects of such a notice, were in all material respects identical to those in section 178(4) of the Insolvency Act 1986 and the law applicable to that section applied with equal force to a disclaimer under section 1013 of the Companies Act 2006.
(2) The claimant did not need to serve a notice on the defendant under section 17(3) of the 1995 Act. First, section 17(3) could have no application to the claims in respect of unit 4 since the lease of that unit had remained vested in the tenant until it was disclaimed by the liquidator. Second, such a notice was required only in respect of payment by the guarantor of a “fixed charge payable under the covenant” and did not prevent a landlord from seeking to enforce a covenant requiring a surety to accept a new lease for the residue of the term following disclaimer or forfeiture; likewise it would not prevent a claim for damages for breach of, or in lieu of an order for specific performance of such a covenant. Further, although the definition of assignment in section 28 of the 1995 Act included assignments by operation of law, such an assignment was an “excluded assignment” within section 11, and as such did not release the tenant from its covenants under the lease: see section 11(2)(a). The obligation under section 17(3) did not arise where the tenant was dissolved following liquidation.
(3) The claimant had not accepted a surrender of the lease so as to bar it from enforcing the defendant’s obligations as guarantor. For surrender to occur by operation of law, the parties had to have acted towards each other in a way that was inconsistent with the continuation of the tenancy. A high threshold had to be crossed before the tenant would be held to have surrendered and the landlord to have accepted the surrender. The effective re-delivery of possession by the tenant and its acceptance by the landlord were vital: Bellcourt Estates v Adesina [2005] EWCA Civ 208; [2005] 2 EGLR 33; [2005] 18 EG 150 and Relvok Properties Ltd v Dixon (1972) 25 P&CR 1 applied. None of the matters relied on by the defendant amounted to an unequivocal act of taking possession by the claimant so as to prevent it from denying that the leases were at an end. As regards the marketing of the premises, in circumstances where there were substantial arrears of rent, the claimant was entitled to look for a new tenant and yet maintain its rights for rent against the old tenant and surety until a new tenant was found.
(4) Damages in lieu of an order for specific performance would not be an adequate remedy, notwithstanding that the term to be granted by the new lease would have expired in December 2012, before the order was made. In the absence of a lease, the claimant would incur liability for non-domestic rates on both units as unoccupied properties. Although the claimant would be entitled to an indemnity from the defendant, that indemnity would be valueless since the defendant was insolvent. If the lease were granted, then the claimant could argue that the defendant was entitled to possession for the period of the new lease, such that he and not the claimant was liable for rates. An order for specific performance would be made accordingly.
(5) The rent payable under the new lease should be £78,000 pa, namely the rent payable immediately before the date of the disclaimer. The claimant was not entitled to specify a higher rent, as the minimum that that would have been determined on a review, where no review had in fact taken place. The claimant could not simply ignore the rent review provisions in the lease. Although it might still be entitled to have the rent reviewed, it was not entitled to insert into the new lease a rent based on a review that had not occurred.
Stephanie Jarron (instructed by FBC Manby Bowdler LLP, of Wolverhampton) appeared for the claimant; the defendant appeared in person.
Sally Dobson, barrister
Lease of commercial premises – Liquidation of tenant – Guarantee – Tenant dissolved by liquidators – Whether claimant landlord entitled to order for specific performance requiring defendant as guarantor of tenant to enter into new lease – Whether defendant’s liability under guarantee continuing following dissolution of tenant – Whether assignment of leases occurring by operation of law so as to require service of notice on defendant under section 17(3) of the Landlord and Tenant (Covenants) Act 1995 in order to enforce guarantee – Whether leases surrendered by operation of law – Claim allowedThe defendant guaranteed the liabilities of the tenant to the claimant landlord under leases of units 2 and 4 on an industrial estate in Coventry. The lease of unit 2 was for a term of five years from December 2007 at an initial rent of £78,000 pa. The lease of unit 4 was for five years from November 2005 at a rent of £48,000 pa. The defendant’s obligations as guarantor were stated to apply until the expiry of the tenancy created by the lease “or (if earlier) the date on which the Lessee ceases to be bound by the covenants in this lease”. In the event that the lease were disclaimed or forfeited during the guarantee period, the claimant was entitled to require the defendant to accept a new lease of the premises for a term equivalent to the residue of the original lease, at the same rent as had applied immediately before disclaimer. The lease of unit 2 provided for a rent review after the first three years of the term, with the rent to be determined by an independent valuer if not agreed.The tenant went into liquidation and, in March 2008, the liquidator disclaimed the lease of unit 4 pursuant to section 178 of the Insolvency Act 1986. The tenant was dissolved in March 2009. In May 2011, the Treasury Solicitor filed a notice of disclaimer in respect of the lease of unit 2 pursuant to section 1013 of the Companies Act 2006.In August 2011, the claimant requested that the defendant take a new lease of unit 2, pursuant to its obligations as guarantor, for the residue of the term but at a higher rent than before; the defendant refused. The claimant brought a claim for specific performance; it also claimed outstanding rent and service charge in respect of both units in the sum of £528,002.The defendant contended that he was no longer liable under the guarantee since: (i) on the proper construction of the lease, his obligations as surety came to an end on the dissolution of the tenant in March 2009; (ii) the vesting of unit 2 in the Crown amounted to an assignment by operation of law within the meaning of the Landlord and Tenant (Covenants) Act 1995, such that the defendant, as the guarantor of the “former tenant”, was not thereafter liable in the absence of a notice served on it by the claimant under section 17(3); and (iii) the claimant had accepted surrender of the leases by its conduct in, inter alia, entering on the premises to carry out inspections and beginning to market the premises. He further submitted that the court should refuse specific performance in any event since damages would be an adequate remedy.Held: The claim was allowed.(1) It was settled law that, by virtue of section 178(4) of the 1986 Act, the disclaimer of a lease by the liquidator of an insolvent tenant did not affect the liabilities of guarantors, whose rights and liabilities remained as though the lease had continued: Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70; [1996] 1 EGLR 94; [1996] 15 EG 103 applied. Accordingly, the liquidator’s disclaimer of the lease of unit 2 did not discharge the defendant as surety. It made no difference that the guarantee period was defined in such a way that it could end on “the date on which the Lessee ceases to be bound by the covenants in this lease”. On the proper construction of the lease, that provision was not intended to apply where the lessee ceased to be bound by reason of a disclaimer by its liquidator. It dealt instead with the situation that applied under section 5 of Landlord and Tenant (Covenants) Act 1995, where, if the tenant assigned the whole of the demised premises, the tenant was released from the covenants of the tenancy. It lent no support for a construction that would release the surety on a disclaimer following liquidation of the tenant since that would be contrary to the express words of section 178(4)(b) of the 1986 Act and a reasonable person would not have understood the parties to intend such a result. The same applied to the disclaimer of the lease of unit 2 by the Treasury Solicitor, following the vesting of that lease in the Crown as bona vacantia under section 1012 of the 2006 Act. The Treasury Solicitor had executed a valid notice of disclaimer under section 1013. The provisions of section 1015, prescribing the effects of such a notice, were in all material respects identical to those in section 178(4) of the Insolvency Act 1986 and the law applicable to that section applied with equal force to a disclaimer under section 1013 of the Companies Act 2006.(2) The claimant did not need to serve a notice on the defendant under section 17(3) of the 1995 Act. First, section 17(3) could have no application to the claims in respect of unit 4 since the lease of that unit had remained vested in the tenant until it was disclaimed by the liquidator. Second, such a notice was required only in respect of payment by the guarantor of a “fixed charge payable under the covenant” and did not prevent a landlord from seeking to enforce a covenant requiring a surety to accept a new lease for the residue of the term following disclaimer or forfeiture; likewise it would not prevent a claim for damages for breach of, or in lieu of an order for specific performance of such a covenant. Further, although the definition of assignment in section 28 of the 1995 Act included assignments by operation of law, such an assignment was an “excluded assignment” within section 11, and as such did not release the tenant from its covenants under the lease: see section 11(2)(a). The obligation under section 17(3) did not arise where the tenant was dissolved following liquidation.(3) The claimant had not accepted a surrender of the lease so as to bar it from enforcing the defendant’s obligations as guarantor. For surrender to occur by operation of law, the parties had to have acted towards each other in a way that was inconsistent with the continuation of the tenancy. A high threshold had to be crossed before the tenant would be held to have surrendered and the landlord to have accepted the surrender. The effective re-delivery of possession by the tenant and its acceptance by the landlord were vital: Bellcourt Estates v Adesina [2005] EWCA Civ 208; [2005] 2 EGLR 33; [2005] 18 EG 150 and Relvok Properties Ltd v Dixon (1972) 25 P&CR 1 applied. None of the matters relied on by the defendant amounted to an unequivocal act of taking possession by the claimant so as to prevent it from denying that the leases were at an end. As regards the marketing of the premises, in circumstances where there were substantial arrears of rent, the claimant was entitled to look for a new tenant and yet maintain its rights for rent against the old tenant and surety until a new tenant was found.(4) Damages in lieu of an order for specific performance would not be an adequate remedy, notwithstanding that the term to be granted by the new lease would have expired in December 2012, before the order was made. In the absence of a lease, the claimant would incur liability for non-domestic rates on both units as unoccupied properties. Although the claimant would be entitled to an indemnity from the defendant, that indemnity would be valueless since the defendant was insolvent. If the lease were granted, then the claimant could argue that the defendant was entitled to possession for the period of the new lease, such that he and not the claimant was liable for rates. An order for specific performance would be made accordingly.(5) The rent payable under the new lease should be £78,000 pa, namely the rent payable immediately before the date of the disclaimer. The claimant was not entitled to specify a higher rent, as the minimum that that would have been determined on a review, where no review had in fact taken place. The claimant could not simply ignore the rent review provisions in the lease. Although it might still be entitled to have the rent reviewed, it was not entitled to insert into the new lease a rent based on a review that had not occurred.Stephanie Jarron (instructed by FBC Manby Bowdler LLP, of Wolverhampton) appeared for the claimant; the defendant appeared in person.Sally Dobson, barrister
