Landlord and tenant — Lessors’ claim against guarantors of lessees’ obligations under lease — Amount claimed from guarantors resulted from determination of independent surveyor in pursuance of review clause in lease — Position complicated by liquidation of lessee company and by liquidator’s surrender of lease — Surrender took place after the first review date but before the open market rental value of the demised premises at the review date had been determined by independent surveyor — Question raised as to whether the surrender extinguished, released or discharged the lessees’ (and therefore the guarantors’) liability to pay two instalments of increased rent for which there would admittedly have been liability if the lease had not been surrendered — Held, upholding decision of John Mowbray QC (sitting as a deputy judge), that the guarantors were liable — Judge correct in holding that lessees’ duty to pay the difference between the old and new rent for the period after the review date was correlative to his right to possession during that period — Liability to pay rent determined in accordance with a rent review clause is a liability which is not destroyed by a surrender after the period for which it will ultimately be paid has started to run — Appeal dismissed
This was an
appeal from a decision of John Mowbray QC, sitting as a deputy judge of the
Chancery Division, in favour of Torminster Properties Ltd, the plaintiffs in
the action and present respondents, in a claim against the present appellants,
Clive Edward Green and Adrian Nicholas Kerridge, on their guarantee of the
obligations of Cadac (London) Ltd under a lease from the respondents. The lease
in question was of a factory unit at Harpenden, Hertfordshire.
R Wakefield
(instructed by Richard Southern) appeared on behalf of the appellants; V R
Chapman (instructed by Slowes) represented the respondents.
Giving
judgment, STEPHENSON LJ said: This appeal raises a novel point, the effect of a
surrender of a lease on a claim for increased rent fixed after the surrender.
The appeal arises out of a lease made on October 18 1973 between the
respondent, Torminster Properties Ltd (‘the lessor’) of the first part and
Cadac (London) Ltd (‘the lessee’) of the second part and the appellants Green
and Kerridge (‘the surety’) of the third part, by clause (1) demising unto the
lessee a factory unit in Harpenden for the term of 25 years from June 24 1973,
yielding and paying during that term the rents set out in the 4th Schedule.
By clause (2)
the lessee covenanted to perform the covenants set out in the 5th Schedule,
including a covenant to pay during the term the rent reserved on the day and in
the manner aforesaid.
By clause (4)
the surety covenanted to perform the covenants set out in the 7th Schedule,
including a covenant that the lessee would pay the rent reserved and in default
of such payment would pay and make good to the lessee all losses thereby
arising. There were further provisions for the surety taking over the lease in
the event of the lessee entering into liquidation and the liquidator
disclaiming the lease.
The 4th
Schedule provided as follows:
Rent
(A) For the first five years of the said term the
rent of £7,100.
(B) For the next five years of the said term and
for each successive period of five years of the said term thereafter either the
yearly rent reserved in subclause (A) hereof or the open market rental value of
the demised premises at the review date or the rental then under review
whichever is the higher and in any case the same shall remain constant during
the whole period referred to in each of such successive periods of five years.
AND the said
rents shall in all cases be paid by equal quarterly payments in advance from
the usual quarter days in every year without any deduction whatsoever the first
payment apportioned in respect of the period from the date hereof to the
quarter day next hereafter to be paid on the execution hereof.
PROVIDED THAT
for the purposes of subclause (B) hereof it is hereby agreed that the following
definitions and provisions shall apply namely:
(1) The expression ‘open market rental value’
means the annual rental value of the demised premises in the open market which
might reasonably be demanded by a willing landlord on a lease for a term of
years certain equivalent in length to the residue unexpired at the review date
of the term of years hereby granted with vacant possession at the commencement
of the term but upon the supposition (if not a fact) that the Lessee has
complied with all the obligations as to repair and decoration herein imposed on
the Lessee (but without prejudice to any rights or remedies of the Lessor in
regard thereto) and there being disregarded (if applicable) those matters set
out in paragraphs (a)(b) and (c) of Section 34 of the Landlord and Tenant Act
1954 and there being disregarded (so far as may be permitted by law) all
restrictions whatsoever relating to rent or to security of tenure contained in
any statute or orders rules or regulations thereunder and any directions
thereby given relating to any method of determination of rent such lease being
on the same terms and conditions (other than as to amount of rent and length of
term) as this present demise without the payment of any fine or premium.
(2) The expression ‘review date’ means the
expiration of the fifth year of the said term or the expiration of the tenth
year of the said term or the expiration of each successive period of five years
as the context requires for the purpose of ascertainment of the open market
value under subclause (B) hereof.
(3) The open market rental value shall be
determined in manner following that is to say it shall be such annual sum as
shall be
(a) specified in a notice in writing signed by
or on behalf of the Lessor and posted in a pre-paid envelope addressed to the
Lessee at the demised premises at any time after the beginning of a clear
period of six months immediately preceding the review date (and such notice
shall be conclusively deemed to have been received by the Lessee in due course
of post) or
(b) agreed between the parties before the
expiration of three months immediately after the date of posting of such notice
as aforesaid in substitution for the said sum or
(c) determined at the election of the Lessee (to
be made by counternotice in writing served by the Lessee upon the Lessor not
later than the expiration of the said three months) by an independent surveyor
appointed for that purpose by the parties jointly in writing or upon their
failure to agree upon such appointment within one month immediately after the
date of service of the said counternotice then by an independent surveyor
appointed for that purpose on the application of either party alone by the
President for the time being of the Royal Institution of Chartered Surveyors
and in either case in accordance with the provisions of the Arbitration Act
1950.
Delay in
rent determination
(4) In the event of failure to agree or of the
determination of such independent surveyor not having been published prior to
the review date for any reason whatever then in respect of the period of time
(hereinafter called the delay period) beginning with the review date or the
date of the Lessor’s notice under subclause 3(a) (whichever shall be the later)
and ending on the quarter day immediately following the date on which such
determination shall have been agreed or published the Lessee shall pay to the
Lessor in manner hereinbefore provided rent at the yearly rate payable
immediately before the review date PROVIDED that at the expiration of the delay
period there shall be due as a debt payable by the Lessee to the Lessor on
demand a sum of money equal to the amount whereby the yearly rent agreed or
determined by such independent surveyor shall exceed the yearly rent at the
yearly rate aforesaid but duly apportioned on a daily basis in respect of the
delay period–
I need not read
the rest of the 4th Schedule.
Paragraph
(B)(5) — that is the next paragraph, which I have not read — made time of the
essence; paragraph (C) provided for payment by way of further rent of a
proportion of (inter alia) insurance and service charges.
On March 10
1978 the lessor’s agents gave the lessee notice under clause (1) and the 4th
Schedule that they intended to increase the rent to £15,500 per annum. There
was no agreement and on July 13 1978 the lessor’s agents gave the lessee notice
under paragraph (A)(3)(c) of the 4th Schedule that it required the open market
rental value of the premises to be determined by an independent surveyor. But
the lessee was in financial difficulties, a receiver was appointed and on
October 25 1978 solicitors wrote to the surety on behalf of the lessor calling
on both the appellants to pay one quarter’s rent in advance, due date September
29 1978, amount payable £1,775, and insurance, but stating that the total
amount of the rent due as from the review date was not shown because it had not
been finalised.
On November 13
1978 a winding-up order was made. The liquidator appointed did not disclaim the
lease, but by an exchange of letters dated April 4 1979 between him and the
lessor’s solicitors
president of the Royal Institution of Chartered Surveyors had appointed an
independent surveyor under paragraph (B)(3)(c) of the 4th Schedule. On May 6
1979 the lessor’s solicitors wrote to both appellants that as a result of the
surrender the lessor was now able to finalise its claim against the appellants
and enclosed a statement claiming £2,947.82. That is the sum claimed in this
action against the appellants and awarded by Mr Mowbray QC sitting as a deputy
judge of the Chancery Division of the High Court on July 31 1981, from whose
decision (reported in [1982] 1 WLR 751)* this appeal is brought.
*Editor’s
note also reported at (1982) 263 EG 65, [1982] 2 EGLR 113.
The claim is
made up as follows:
|
Rent June 25 1978 to |
£3,375.00 |
|
Less amount paid |
£1,775.00 |
|
£1,600.00 |
|
|
Rent September 30 to |
£3,375.00 |
|
Insurance October 1 1978 to |
£207.50 |
|
Service charges for 1978 |
£265.32 |
|
£5,447.82 |
|
|
Less amount received on account |
£2,500.00 |
|
£2,947.82 |
That being the sum which is claimed.
Of the two
sums credited, the £1,775 was a quarter’s rent at the old rate of £7,100 per
annum paid by the appellants (apparently £25 short) and the £2,500 was an
occupation fee calculated on the basis of the proposed rent of £13,500 per
annum and paid by a company called Candystrope Ltd, which bought the lessee’s
assets (but not the lease) and occupied the factory unit in 1979.
Though the
lessor’s notice had specified the increased annual rent as £15,500, the lessor
sought from the independent surveyor ex parte a lower figure of £13,500, and
£13,500 per annum was the open market rental value on the review date
determined by the award of the independent surveyor on January 25 1980.
The question
raised by this appeal is whether the surrender of the lease has extinguished,
discharged or released the lessee’s liability (and thereby the appellants’
liability) to pay two quarterly payments of increased rent for which there
would have admittedly been liability if the lease had not been surrendered. The
surrender took place after the first review date and during the next five years
of the term of the lease, but before the open market rental value of the
demised premises at the review date had been determined by an independent
surveyor in accordance with the rent review clause in the lease. It is common
ground that the appellants are in the same position as the lessee and that
there was no reference to liability to pay the increased rent in the terms of
surrender and no express agreement as to that liability. The question is
therefore one of law depending upon the true construction of the terms of the
lease and the legal effect of its surrender in the light of authorities which
are not directly in point.
There are
cogent arguments for and against the judge’s view that the appellants are
liable to pay the increased rent and charges claimed and that their liability
is not extinguished by the surrender of the lease. And the arguments on both
sides have been very well put.
Mr Wakefield,
for the appellants, submits that the wording of paragraph (B)(4) of the 4th
Schedule is such as to show that the surrender put an end to liability for any
rent. The authority of decided cases shows that a surrender puts an end to the
lease itself, not merely to the term of years granted by the lease. All the
tenant’s liabilities are thereby extinguished except those which have already
accrued or have been expressly reserved. There was no reservation in the
letters exchanged on April 4 1979, and the language of paragraph (B)(4) does
not preserve an accrued liability or corresponding right to sue but negatives
it. Where, as here, there has been a ‘delay period’ because there has been a
failure to agree or the determination of the independent surveyor has not been
published prior to the review date, it is (I quote from the schedule) ‘at the
expiration of the delay period’ that ‘there shall be due as a debt payable by
the lessee to the lessor on demand a sum of money equal to the amount whereby
the yearly rent agreed or determined by such independent surveyor shall exceed’
the previous rent. That means that that excess is not due before the expiration
of the delay period, and until then there is no debt due or payable, there is
no yearly rent agreed or determined and nothing which can be (I quote again
from the schedule) ‘duly apportioned on a daily basis in respect of the delay
period’. The only accrued right is to have an arbitration, not to be owed or
paid a debt. There is no right of action vested in the lessor before the
surrender enabling the lessor to sue for the increase.
Mr Chapman,
for the lessor, emphasises the basic obligation of the lessee under clause (1)
and the 4th Schedule paragraph (B) to pay as rent for the next five years after
the review date the open market rental value of the demised premises at that
date by equal quarterly payments in advance; and he contrasts that with the
machinery for ascertaining that rent and open market rental value provided by
subparagraphs including subparagraph (4). That basic obligation exists at the
review date as an obligation to pay the increased rent when it is determined,
like the contractual obligation to pay the price of goods to be fixed by a
third party. The debt is due at the review date, though it waits to be payable
until the expiration of the delay period and the determination of its amount.
It is owed from the review date until surrender, and nothing in paragraph
(B)(4) indicates that it is not; after surrender it becomes payable
retrospectively and would be so payable without the provisions of paragraph
(B)(4). Mr Chapman might not be able to say that there was a debt before
January 25 1980; but he does say that there was a liability. Even if the debt
does not exist until quantified, the contractual obligation to pay it when
quantified does exist from the review date until surrender of the lease —
perhaps rather as on an interlocutory judgment for damages to be assessed the
judgment ‘debtor’ is under a present liability to pay unliquidated damages to
be assessed in the future. Or — another imperfect analogy — as a party ordered
to pay costs to be taxed if not agreed owes a duty to pay them but cannot be
sued for them until they are agreed or taxed.
There is
authority for the following propositions:
1. Rent
payable in arrear which has not accrued or become due at the date of surrender
of a lease is not recoverable in full; until the Apportionment Act 1870 it was
not recoverable pro rata for so long a time as the tenant occupied the premises
before surrender. Grimman v Legge (1828) 8 B & C 324; Slack
v Sharpe (1838) 8 A & E 366.
2. Rent which
has accrued or become due at the date of surrender is recoverable: Walker’s
Case (1587) 3 Co Rep 22a; A-G v Cox (1850) 3 HLC 240 at p
275.
3. A surrender
of a lease operates only to release the tenant from liability on covenants
taking effect after the date of the surrender, leaving him liable for past
breaches, eg of repairing covenants: Dalton v Pickard (1911)
reported in a note in [1926] 2 KB 545; Richmond v Savill [1926] 2
KB 530, in which the court followed Dalton’s case and Walker’s and
Cox’s cases. Statements in cases of disclaimer of the lease by a trustee
in bankruptcy that the whole lease is deemed to have been surrendered by
section 23 of the Bankruptcy Act 1869, which suggested that the surrender of a
lease destroys all its provisions and every liability under it (Ex parte
Glegg (1881) 19 ChD 7; Ex parte Allen (1882) 20 ChD 341; Ex Parte
Hart Dyke (1882) 22 ChD 410) are to be taken as limited to future breaches
and rights of action not yet accrued. The proposition derived from them that
the mere surrender of a tenancy precludes the landlord from further enforcing
against the tenant any of his obligations under the lease, whether those
obligations had already accrued before the date of the surrender or had not,
was stated to be wrong by this court in Richmond v Savill, and
does not appear to have been revived since it was laid to rest in 1926. Mr
Wakefield does not seek to revive it.
Now the rent
which the respondent has recovered from the appellants is rent payable in
advance in respect of two quarterly periods which had in fact expired before
the date of surrender. The amount would have been different had the independent
surveyor fixed a different open market rental value. If he had found that that
value was no higher than £7,100 a year, that would have been the rent for which
the lessee would have continued to be liable. And once the amount of the rent
payable for the second period of five years has been determined, it is payable
retrospectively from the review date and the start of that period: C H
Bailey Ltd v Memorial Enterprises Ltd [1974] 1 WLR 728; United
Scientific Holdings Ltd v Burnley Borough Council, Cheapside Land
Development Co Ltd v Messels Service Co [1978] AC 904.
In the second
of those two cases, Graham J had granted the landlords a declaration that the
market rent as determined by the valuer for the second and third periods of
seven years in a lease for a term of 21 years, if higher than the annual rent
payable in arrear on the usual quarter days for the first period of seven
years, would be recoverable with effect from the start of the second period at
the review date. The Court of Appeal reversed his decision, apparently on the
ground that the rent was not, and had to be, certain. The
rent had to be certain, that a contractual money payment made by a tenant to
his landlord in consideration for the use of the latter’s land was rent and
that it need not be certain at the date from which it became payable: see the
speeches of Lord Diplock at pp 930 and 934 to 935, Lord Simon of Glaisdale at p
947 and Lord Fraser of Tullybelton at p 964. (When Lord Fraser speaks of the
rent as the contractual sum due which ‘need not be certain at the date on which
it becomes payable’, I think he must mean ‘at the date from which it becomes
payable when ascertained’.) In the first
of these passages, Lord Diplock points out:
The
determination of the new rent under the procedure stipulated in the rent review
clause neither brings into existence a fresh contract between the landlord and
the tenant nor does it put an end to one that had existed previously. It is an
event upon the occurrence of which the tenant has in his existing contract
already accepted an obligation to pay to the landlord the rent so determined
for the period to which the rent review relates. The tenant’s acceptance of
that obligation was an inseverable part of the whole consideration of the
landlord’s grant of a term of years of the length agreed. Without it, in a
period during which inflation was anticipated, the landlord would either have
been unwilling to grant a lease for a longer period than up to the first review
date or would have demanded a higher rent to be paid throughout the term than that
payable before the first review date. By the time of each review of rent the
tenant will have already received a substantial part of the whole benefit which
it was intended that he should obtain in return for his acceptance of the
obligation to pay the higher rent for the succeeding period.
Mr Chapman
naturally relies upon what Lord Diplock there said as supporting his submission
that the obligation precedes the surrender and is therefore enforceable once
its extent has been determined. So did the learned deputy judge in support of
his statement [1982] 1 WLR 751 at p 755 F:
Here, at the
surrender, the landlord was entitled to be paid as a contract debt the
difference, if any, between the old rent and the review rent for the period
after the review date. It was a present right based on a partly executed
consideration.
He proceeded:
But it was a
present right, not yet actionable, to a future payment, because the difference
was not payable until the quarter day after the arbitrator fixed the new rent
and there might be no difference; but again, the landlord could, apart at least
from the surrender, compel the arbitration to be carried through.
He concluded
(at p 756 A):
It seems to
me that the lessee’s duty to pay the difference between the old and the review
rent for the period after the review date is correlative with the lessee’s
right to possession during that period and so it should be paid, even though
the surrender intervenes before its amount is fixed. As the lessee company here
continued in possession during the period after the rent review date, it ought
to pay the difference between the arbitrator’s rent and what the lessor has
received for that period.
He then gave
judgment for that rent and the undisputed service and insurance charges claim.
It may be said
that the tenant who pays rent in arrear will have already received when he pays
it a substantial part of the benefit of the occupation for which he has agreed
to pay it, yet his liability does not survive a surrender. But in my judgment
the liability to pay rent determined in accordance with a rent review clause is
a liability which is not destroyed or discharged by a surrender after the
period for which it will ultimately be paid has started to run. There is, when
that period has started, a right to sue, not for the as yet undetermined rent
but for a declaration that the tenant is liable to pay it when determined, as
the Cheapside Land Development Co case shows. There is no antecedent
breach of an obligation — indeed there could not be until the quarter day
immediately following January 25 1980; but there is an antecedent obligation
accruing before surrender puts an end to the lease. The lessee has no right to
occupy the premises after the review date rent-free; he owes a contractual duty
to pay at least the initial rent as long as he holds the lease, however long
the determination of the new rent may be delayed. It is the prior existence of
that contractual obligation, that covenanted liability, of the tenant which
differentiates such a claim as this from a landlord’s claim to recover rent
payable in arrear after the date of surrender, for there the tenant is under no
obligation or liability to pay any rent before that date.
I would
accordingly uphold the respondent’s submission, affirm the judgment of the
learned deputy judge and dismiss the appeal.
KERR LJ agreed
and did not wish to add anything.
The appeal
was dismissed with costs.
