Landlord and tenant — Assignment — Assignee covenanting to perform covenants of lease — Further assignment — Landlord releasing first assignee from covenant — Whether original tenant released from covenants under lease
On 25 March 1980 the plaintiff landlord let
commercial premises to the defendant for a term of 25 years. On 26 November
1982 the landlord granted a licence to the defendant to assign the term to A
Ltd, the assignee covenanting to perform and observe the covenants of the
lessee under the lease. On 18 November 1985 the landlord granted a licence to A
Ltd to assign the term to four individuals trading as Lamda Business Services.
The licence contained a clause that provided that ‘the Lessor hereby releases
the Lessee and the Surety as from the assignment date from their respective
covenants… of the licence’. Lamda fell into arrears of rent and other sums due
under the lease, and the landlord issued proceedings against the defendant as
original tenant to recover the same. A Ltd was joined as third party, as the
defendant relied on an indemnity provision in the 1982 assignment. In summary
proceedings under RSC Ords 14 and 14A, the master decided that, by the terms of
the release in the 1985 licence, the defendant, as original tenant, was not
released from its covenants. The defendant and the third party, which had the
same interest in asserting that it was released by the effect of the 1985
licence, appealed.
dismissed. The decision in Deanplan Ltd v Mahmoud [1993] Ch 151
could not be applied. It was not possible to go beyond the reasons advanced in
the Deanplan case to assert that a release without payment (or deemed
payment) discharges all other covenantors for the following reasons. First, it
was unsafe to place much reliance upon the justification in Deanplan for
the application of the rule that the release of one of two joint debtors
releases all jointly liable because of the doubt expressed by the Court of
Appeal in Watts v Lord Aldington The Times 16 December 1993.
Second, there was no justification for extending the rule to a situation where
there was no element of joint liability whatever, simply several liability.
Third, if the rule applied to release previous assignees, it would be logical
that it should apply down the chain to any tenant of the premises thereafter.
Fourth, beyond the circumstances in Deanplan, where the obligation was
discharged by performance, or something that amounted to performance, one must
have regard to the surrounding circumstances and the express and implied terms
of the documents; the terms of the release in the 1985 licence were limited to
the contractual obligation between the landlord and the third party, and did
not affect the liabilities of the original tenant.
The following cases are
referred to in this report.
Deanplan Ltd v Mahmoud
[1993] Ch 151; [1992] 3 WLR 467; [1992] 3 All ER 945; (1992) 64 P&CR 409;
[1992] 1 EGLR 79; [1992] 16 EG 100
Johnson v Davies
[1998] 3 WLR 1299; [1998] 2 All ER 649; [1998] 3 EGLR 72; [1998] 49 EG 153
Matthey v Curling
[1922] 2 AC 180
North v Wakefield
(1849) 13 QB 536
Watts v Aldington
(Lord) The Times 16 December 1993
This was an appeal by the
defendant and the third party, Tantofex (Engineers) Ltd and Alpha Office Ltd,
from a decision of Master Moncaster giving summary judgment under RSC Ords 14
and 14A in proceedings by the plaintiff, Sun Life Assurance Society plc, for
arrears of rent and other sums.
Mark Wonnacott (instructed by Dibb Lupton Alsop)
appeared for the plaintiff; Edward Cole (instructed by Rollit Farrell Bladon,
of Hull, for the defendant, and Donne Mileham Haddock, of Brighton, for the
third party) represented the defendant and third party.
Giving judgment, MR JV MARTIN QC said: A landlord grants his tenant
licence to assign a lease on terms that the assignee covenants with the
landlord to perform the covenants in the lease. When the assignee himself comes
to assign the lease, the landlord releases him from the covenant. Does he
thereby release not only the assignee but also the original tenant? The master
thought the answer to that question was no, and this is an appeal against his
conclusion.
The relevant facts are not in dispute.
On 25 March 1980 the plaintiff, Sun Life Assurance
Society plc (Sun Life), let commercial premises at unit 14A Birches Industrial
Estate, East Grinstead, to the defendant, Tantofex (Engineers) Ltd (Tantofex),
for a term of 25 years at a starting rent of £7,000 pa with reviews. There were
the usual covenants for payment of rent, and a tenant’s covenant to pay a fair
proportion of expenses in relation to common services and to pay VAT.
On 26 November 1982 Sun Life granted a licence to
Tantofex to assign the term to the third party, then called Alpha Stationers
Ltd, now known as Alpha Office Ltd (Alpha). Clause 3 of that licence to assign
was in the following terms:
The Assignee hereby covenants with the Lessor
that so soon as the said premises have been assigned as aforesaid the Assignee
will pay the rent or rents and other payments reserved by, and will perform and
observe the covenants and conditions contained in, the Lease, and on the part
of the Lessee to be performed and observed.
That is all I need quote. Clause 4 of the licence
was a covenant by a Mr Alan Crump to act as surety in relation to Alpha’s
obligations under the lease.
Alpha remained in occupation of the premises for a
period of some three years. On 18 November 1985, however, Sun Life gave to
Alpha licence to assign the term to four individuals, all of them with the
surname Day, who were trading in partnership under the name of Lamda Business
Services. Clause 4 of that licence to assign was in these terms:
The Lessor hereby releases the Lessee and the
Surety as from the assignment date from their respective covenants set out in
clauses 3 and 4 of the Licence.
Lamda ultimately fell into arrears of the payments
of rent and other sums due under the lease, and, on 19 August 1998, Sun Life
issued proceedings against Tantofex, as the original tenant, for those arrears.
On 9 September 1998 Tantofex served a third-party
notice on Alpha, relying on an express or implied indemnity contained in the
assignment from Tantofex to Alpha. That assignment cannot be found, but it is
not in dispute that it contained an indemnity provision, either express or
implied.
Five days later, on 14 September 1998, Sun Life
served a summons under Ords 14 and 14(A) of the Rules of the Supreme Court for
the relief claimed in its statement of claim, and it was that summons that came
before the master on 25 November 1998. On that occasion, as I have said, the
master, who was Master Moncaster, gave judgment for Sun Life for the full
amount of the arrears, which then amounted to something over £34,000, with a
further £8,500-odd interest accrued to that date.
On this appeal, both Tantofex and Alpha are
jointly represented by Mr Edward Cole, their interest being the same in
asserting that the effect of the release contained in the 1985 licence to
assign was to discharge both Alpha and Tantofex from further liability for
payment of rent.
The case on their behalf had two main limbs. The
first of them, which was propounded perhaps slightly more forcefully in the
skeleton argument than in Mr Cole’s oral submissions, was that, as a general
proposition of law, the release from liability of one covenantor will release
from liability all other covenantors undertaking the same obligation, whether
the covenant is joint or several. Second, it was said that, as a matter of
construction, the 1985 assignment had the effect of releasing Tantofex, either
by virtue of the implication of a term to that effect or by construing it as
not containing any reservation of a right to sue Tantofex, whichever way it is
put; the contention being that, otherwise, the release would be of no value,
since Sun Life could sue Tantofex, which would then be able to pass on the
liability to Alpha under the indemnity contained in the assignment. I deal with
these two limbs in turn.
The foundation of the first of them is the
decision in Deanplan Ltd v Mahmoud [1993] Ch 151*, a decision of
Judge Paul Baker QC, sitting as a High Court judge. In that case, the position
was that the original tenant had assigned to an assignee, who had covenanted
directly with the landlord to observe and perform the covenants and conditions
in the lease. Subsequently, that first assignee assigned to Mr Mahmoud, who
likewise gave a direct covenant to the landlord. He, however, fell into arrears
of rent, and the landlord, having obtained judgment, took out a distress warrant
for the arrears. Negotiations then ensued, which resulted in an agreement
between Mr Mahmoud and the landlord, under which he surrendered the lease in
consideration of the landlord accepting certain goods ‘in full and final
settlement of all claims and demands against me under the terms of the lease’.
The goods were subsequently sold for £309, leaving a substantial amount of the
arrears of £17,866 outstanding, and the landlord sued to recover the balance of
the arrears from the assignees. Judge Baker held that there was no right to
maintain that claim, there having been a release by accord and satisfaction,
which operated as a release of all other covenantors. At the outset of his
judgment, on p155F-G, the judge stated the issue that he had to decide in the
following way:
The issue in this case is whether an original
lessee, or an intermediate assignee of a lease, who has given a direct covenant
to pay the rent and observe the covenants, is released from liability following
an agreement between the lessor and the occupying assignee of the lease under
which the lessor takes a surrender of the lease and some of the assignee’s
goods in return for releasing the assignee from all claims under the lease? In
short, does the release by accord and satisfaction of one covenantor release
other covenantors undertaking the same obligation?
*Editor’s note: Also reported at [1992] 1 EGLR
79; [1992] 16 EG 100
The judge then conducted an extensive review of
the relevant authorities, but, since he conveniently summarised them in a
passage I shall refer to shortly, it is unnecessary for me to deal with them in
any detail. I note, however, two matters. The first of them is that, at p161F‑H
of the report, the judge quoted from the judgment of Younger
Court of Appeal decision of Matthey v Curling [1922] 2 AC 180.
The quotation was as follows:
The lessee is not a surety for the assignee, any
more than is the assignee the agent of the lessee. The lessee in a lease — the
defendant so covenanted in this case — covenants in effect that he or his
assignee will perform the covenants and observe the conditions contained in it;
and when, as in the present instance, the defendant sets up no performance by
himself of the covenants sued on, his defence must be either that his assignee
has performed them or that his assignee is in some way as between himself and
the lessor absolved from performance. Baynton v Morgan shows,
amongst other things, that this last contention may not always be relied on by
the lessee; and accordingly the position of the defendant is not put otherwise
than favourably to himself if it is said that the measure of his liability
here, that of a lessee after an assignment, is the performance or
non-performance of the covenants in question by his assignees when he cannot
and does not aver any performance by himself.
The second matter to which I draw attention is
this. In a section dealing with the principles applicable to the release of
joint debts, the judge referred (this time at p167F-H of the report) to the
case of North v Wakefield (1849) 13 QB 536, and quoted the
following passage from the judgment in that case of Patteson J at p540:
Now the deed contained an express clause that the
release to Goddard should not operate to discharge any one jointly or otherwise
liable to the plaintiff for the same debts. It is plain, therefore, that it did
not release the defendant. The reason why a release to one debtor releases all
jointly liable is, because, unless it was held to do so, the co-debtor, after
paying the debt, might sue him who was released for contribution, and so in
effect he would not be released; but that reason does not apply where the
debtor released agrees to such a qualification of the release as will leave him
liable to any rights of the co-debtor.
The judge’s summary, which I have already
mentioned, of the principles to be drawn from the cases he had dealt with
appears at p170B-H of the report:
From this long review of the cases, I draw the
following conclusions. First, a release of one joint contractor releases
the others. There is only one obligation. A release may be under seal or by
accord and satisfaction. A covenant not to sue is not a release. It is merely a
contract between the creditor and the joint debtor which does not affect the
liabilities of the other joint contractors or their rights of contribution or
indemnity against their co-contractor. It is a question of construction of the
contract between the creditor and joint debtor in the light of the surrounding
circumstances whether the contract amounts to a release or merely a contract
not to sue.
Secondly, the same principles apply to a contract
between the creditor and one of joint and several debtors. If one joint
and several covenantor is released by accord and satisfaction, all are
released. Some have seen this as illogical, and so it would be if the only
reason for the rule that the release of one joint contractor releases the other
is that there is only one obligation. Professor Glanville Williams sees the
reason for the extended rule to have been an early uncertainty as to the nature
of a joint and several obligation: see Joint Obligations, p135, para 63.
Two other reasons can be adduced. First, where the obligations are
non-cumulative, ie the obligation of each is to perform in so far as it has not
been performed by any other party, the acceptance of some other performance in
lieu of the promised performance relieves the others. The covenantee cannot
have both the promised performance and some other performance which he agrees
to accept. Secondly, unless the co-covenantors were released following an
accord and satisfaction, they could claim a right of contribution or indemnity.
Thus, by suing the co-contractor the creditor commits a breach of the contract
with the released covenantor, for such an action will inevitably lead to the
very claim from which the release has been purchased by accord and
satisfaction.
Thirdly, the reasoning in the preceding paragraph
applies equally to a number of separate covenantors each liable to perform the
same obligation as in the case before me. Indeed, the dictum of Younger LJ in Matthey
v Curling… already averted to is consistent with this.
In my view, the crucial point in Deanplan v
Mahmoud was that the bargain struck by the landlord with Mahmoud
amounted to a discharge of Mahmoud’s obligation to pay the rent. It was, in
effect, deemed performance of that obligation. Given that the nature of the
obligation
so far as the obligations are not performed by any other party liable to do so,
payment (or deemed payment) of the rent by any one of them prevents the
landlord from suing any of the others. In this sense, they are indeed released
from their liability to the landlord. This reason is most clearly expressed by
Judge Paul Baker in the passage I have already quoted from his summary, in
which he deals with the first of the two additional reasons to be adduced for
applying similar principles to cases of joint and several debtors. It does not,
however, seem to me permissible to go beyond this, to assert that a release
without payment (or deemed payment) discharges all other covenantors. To do so
involves applying the rules about joint debts to the several obligations
undertaken by a tenant and his assignees. For four reasons, it seems to me that
that is something that the court should not do.
The first reason is that the only justification
for making such an extension suggested by Judge Baker in Deanplan is the
second of the two additional reasons that he gave in the passage I have quoted.
It will be remembered that that reason was that unless the co-covenantors were
released following an accord and satisfaction, they could claim a right of
contribution or indemnity, and so, by suing the co-contractor, the creditor
commits a breach of contract with the released covenantor.
It appears to me that that suggestion is derived
from the passage from the judgment of Patteson J in North v Wakefield,
which I also quoted earlier, where the same reason was first suggested. It
does, however, appear that that suggested justification is wrong. In the Court
of Appeal decision in the case of Watts v Lord Aldington,
reported only in The Times on 16 December 1993 but available in a Lexis
transcript, two members of the Court of Appeal expressly disapproved that
reasoning. The first member of the court to do so was Neill LJ, and he said:
I should also mention that the judgment of
Patteson J in North v Wakefield was cited to us in support of the
proposition that the impact on rights of contribution between joint debtors was
the reason for the rule as to the effect of the release of one joint debtor.
Patteson J said that the reason why a release to one debtor releases all
jointly liable is because, unless it was held to do so, the co-debtor, after
paying the debt, might sue him that was released for a contribution and so in
effect he would not be released. But that reason does not apply where the
debtor released agrees to such a qualification of the release as will leave him
liable to any rights of the co-debtor. With respect, it is doubtful whether
this is the true reason. The rule is based on the unity of the cause of action.
The second member of the Court of Appeal to deal
with the point was Steyn LJ, and he said merely that:
These appeals illustrate the absurdity of the
rule that the release of one of two joint and several tortfeasors operates as a
release of the other. In Victorian times judges of great distinction reasoned
that in a case involving joint and several liability of joint tortfeasors there
is only a single cause of action and accordingly a release of one of two joint
tortfeasors extinguishes that single cause of action or, as it was usually put,
releases the other joint tortfeasors. The rule has been relaxed by statute. The
fact that joint tortfeasors can be sued successively heavily compromised the
procedural logic but the old rule apparently still survives.
In those circumstances, it seems to me that, to
put it no higher, doubt is cast upon the justification for applying the rule to
joint and several debtors that was advanced by Judge Baker as his second
reason, and it seems to me unsafe to place much reliance upon that reason,
taken on its own.
Second, the rule, even in its application to joint
debtors and joint and several debtors, is illogical and anomalous, as the
quotation I have just supplied from Steyn LJ makes clear. Despite its lack of
logic, it remains a rule that applies to the established situations of joint
debts and joint and several debts, and that fact appears most clearly from
another Court of Appeal decision in Johnson v Davies [1998] 3 WLR
1299*, to which I will revert in a moment. But, given the current judicial
attitude to the rule, there seems to me to be no justification for extending it
to a situation where there is no element of joint liability whatever, simply
several liability. That is particularly so because, if the justification for
the rule in the first place is that there is only one obligation, then it self‑evidently
can have no application to a situation where there are only several
liabilities.
*Editor’s note: Also reported at [1998] 3 EGLR
72; [1998] 49 EG 153
The third reason is that, if it really were the
case that the release without performance (or deemed performance) of any tenant
or assignee had the effect of discharging the others as a matter of law, that
would apply not only, as one might say, up the chain to previous assignees but
also, logically, down the chain to any tenant of the premises thereafter. The
sole justification for applying the rule has to be that there is only the one
obligation owed to the landlord, and if that is right and the effect of a release
is to discharge that obligation, it is discharged for all time; and it produces
the result, which is self-evidently absurd, that the effect of releasing one
assignee in circumstances such as those that exist in the present case would be
to discharge future tenants from liability to pay the rent. It is fair to say
that that, in fact, might not be the consequence in the present case, given
that there was an express covenant taken in the 1985 licence to assign, which
made it clear that Lamda, at least, was to continue to pay the rent and observe
the covenants in the lease. But that is a matter of coincidence, and, if the
principle is as it is stated to be, in many cases where there was no such
direct imposition of a covenant the consequence would appear to be as I have
suggested.
The fourth and final reason is one that provides a
bridge from this line of argument into Mr Cole’s second argument based upon
construction. It derives from the case that I have already briefly mentioned, Johnson
v Davies, and, in particular, from the summary contained in Chadwick
LJ’s judgment in that case of the position as it now is following Watts
v Lord Aldington. The relevant passage is at p1306D-G of the report:
In Watts v Aldington the liability
of Mr Watts and Count Tolstoy as judgment debtors was, plainly, several as well
as joint. In such a case, for the reasons explained in the judgments in this
court, the relevant question is not whether the agreement between the creditor,
A, and one of the co-debtors, B, releases the debt which B owes to A. Even if
it did, that would in logic have no effect on the several debt owed to A by the
other co-debtor, C. The relevant question is whether the agreement between A
and B precludes A from enforcing the debt owed by C. It is in B’s interest that
the agreement should have that effect — because, if it does not, C will be in a
position (if he pays the debt which he owes to A) to seek contribution from B.
It is in A’s interest that the agreement should not have that effect — because,
prima facie, A will wish to recover from C the balance of the
indebtedness. Given the opposing interests of A and B, the question is what
they have agreed. As Neill LJ pointed out, that has to be determined having
regard to the surrounding circumstances and taking into account not only the
express words used in the document, but also any terms which can properly be
implied.
In the light of that passage, it seems to me that,
whatever the position may have been at the time that Deanplan v Mahmoud
was decided, the investigation now is one into the true construction of the
document said to give rise to a release.
I would, in any event, have taken the view that it
was unsafe to extend the principle of Deanplan beyond the situation that
it was itself dealing with, namely a situation where the obligation was
discharged by performance or something that amounted to performance, and, in
that respect, it seems to me, with respect to Judge Baker, that the answer is
plainly correct. Beyond that, however, it seems to me to provide an uncertain
guide to the question I have to consider, and I find the passage I have just
quoted from Johnson v Davies a better guiding light. As I have
said, it does provide a bridge to the construction argument that was Mr Cole’s
second line of attack.
In order to deal with that argument, I must
mention one other circumstance that was put forward as being capable of
affecting the construction. That circumstance, which appears from an affidavit
of Mr
liability, is that, as part of the deal that resulted in the release of the
direct covenant, Alpha agreed that it would take a lease of an adjacent unit,
unit 4B, when it gave up its tenure of unit 14A, which was the subject of the
lease. It is true that that shows that there was some
giving of the release, but it seems to me to provide little additional
information of assistance when it comes to considering the question of
construction.
On that, it seems to me, the starting point must
be to consider what the position was immediately before the release took
effect. At that point, Alpha was bound by the covenant that it had given in the
1982 licence to assign to perform the obligations in the lease, and that
covenant was not in terms limited to the period during which Alpha remained
tenant of the premises. It was at least arguable that, without a release from
the landlord, Alpha would have remained vulnerable to a direct suit by the
landlord if anyone else — not merely subsequent assignees but the original
tenant — failed to perform the obligations in the lease. Once Alpha had been
released from its covenant it would be no longer under any direct liability.
Any contractual liability would have ceased as a result of the release, and,
once it had ceased to be the tenant in occupation, there would be no privity of
estate between it and the landlord.
In those circumstances, it seems to me that the
release was something that was worth having. What I find it impossible to say
is that it was deprived of any value at all merely because the landlord
retained the right to sue the original tenant. I find it also impossible to say
that the officious bystander, if asked at the time of the 1985 licence to
assign whether the parties were to be taken to have intended that the original
tenant was released, would have said, ‘of course’: it would have been evident
to him that there were plainly different interests at work. So far as Sun Life
was concerned, it would have been highly unlikely that it was its intention to
give up its rights against the tenant. No doubt, so far as Alpha thought about
the matter at all, it would have wished, at least, such a release to have
occurred.
The fact of the matter, however, is that the terms
of the release that was obtained contain no express reference to anything other
than the contractual obligation then subsisting between the landlord and Alpha
itself and its surety. In my view, the defendant has failed to establish any
sufficient ground for making any implication into that release.
For those reasons, it seems to me that the master
reached the right conclusion, and I dismiss the appeal.
Appeal dismissed.
