Respondent assigning lease to appellant — Appellant assigning lease to tenant — Tenant defaulting on rent — Respondent underwriting tenant’s rent — Whether respondent’s action increasing losses to appellant — Appellant’s obligation under covenant implied by section 24(1)(b) of Land Registration Act 1925 — Appeal dismissed
The respondent assigned to the appellant the residue of terms that it held on underleases. The appellant disposed of his interest in the underleases to a tenant, which subsequently went into receivership and stopped paying its rent.
In November 1999, the lessor served the respondent with notices, under section 17 of the Landlord and Tenant (Covenants) Act 1995, together with statutory demands in respect of the outstanding rent. In August 2000, the respondent entered into an agreement with the tenant to underwrite the latter’s trading losses. It accordingly paid a sum to the lessor in July 2001, and commenced proceedings to recover the amount from the appellant, pursuant to the covenant implied by section 24(1)(b) of the Land Registration Act 1925.
The appellant maintained that the respondent’s actions had served to procure or prolong the default of the occupying tenant, thereby increasing the losses that were the subject of the indemnity. He argued that he should not be liable for losses incurred by the tenant as a result of actions on the part of the respondent.
The judge held, inter alia, that: (i) the covenant implied by section 24(1)(b) was a contract by way of indemnity, and could not be discharged following the respondent’s misconduct; (ii) summary judgment should be entered for the rent that was outstanding prior to the August 2000 agreement; and (iii) the respondent could also recover VAT on the outstanding rent. The appellant appealed.
Held: The appeal was dismissed.
1. The appellant had claimed that he was a guarantor of the obligations of subsequent assignees only, which meant that, in the event of any breach by the principal debtor, his liability would be discharged. That could not be the case. No authority existed to support the argument that the common form of covenant imposed a secondary or ancillary obligation of guarantee only. The obligations under the covenant were those of indemnity, and were not capable of being discharged following an accommodation reached between the landlord and a subsequent holder of the term.
2. The respondent’s actions prior to the date upon which it had entered into the agreement with the tenant could have no bearing on the appellant’s liability for rent arrears, which had accrued prior to that date.
3. The appellant had argued that VAT was a tax on supply. The “supply” in the instant case had been to the defaulting tenant, which had not paid VAT because it had not paid rent, and, since the respondent’s liability was that of original covenantor, it was therefore not liable to pay VAT. The appellant had maintained that, because there was no liability for VAT from the respondent assignor to the original lessor, he could not be liable to indemnify the respondent. That was incorrect. The original lease constituted a contract for a relevant supply by the landlord to the tenant for which the rent covenanted to be paid was consideration. Under section 83 of the Value Added Tax Act 1994, VAT was to be added to the rent as part of the consideration for the supply by the lessor to the tenant. The VAT was therefore an integral part of the rent and was covered by the terms of the implied covenant. Accordingly, the appellant was liable.
Edward Bannister QC and Marion Lonsdale (instructed by LHP Law, of Bath) appeared for the appellant; Christopher Stoner (instructed by Eversheds, of Newcastle upon Tyne) appeared for the respondent.
Vivienne Lane, barrister
