by Mark Pawlowski
This article focuses on two related questions, namely whether the respective obligations of (a) the original tenant and (b) his surety under a lease of business premises continue, notwithstanding the expiry of the contractual term and its subsequent statutory continuation pursuant to the provisions of section 24 of the Landlord and Tenant Act 1954.
The foregoing questions will invariably arise in circumstances where the current tenant has acquired an interest in the subject premises by means of an assignment (or a series of assignments) from the original tenant and who (for reasons of bankruptcy or liquidation) is unable to meet his obligations in respect of rent due under the lease.
Can the landlord successfully seek recovery of the arrears from the surety under the terms of the guarantee covenant contained in the lease or, alternatively, from the original tenant of the premises under the doctrine of privity of contract, notwithstanding that the contractual term has expired and has subsequently continued pursuant to Part II of the 1954 Act?
It will be convenient to consider the liability of a surety first.
Liability of the surety
The cases on the liability of a tenant’s surety have consistently held that the same is not liable for breaches occurring during a statutory continuation unless the terms of the guarantee covenant clearly impose such liability. In Junction Estates Ltd v Cope (1974) 27 P&CR 482, the lease reserved a rent during the first three years of the term of £725 pa and during the remaining four years of £825 pa, payable in advance on the usual quarter days. By clause 2(1) of the lease, the tenant agreed to pay the rent reserved “at the time and in manner aforesaid”. Clause 3 of the lease contained a guarantor’s covenant in the following terms:
The guarantors … hereby jointly and severally. covenant…that the tenant will pay the rent hereby reserved on the days and in the manner aforesaid and will perform and observe all the tenant’s covenants hereinbefore contained and that in case of default in such payment of rent or in the performance or observance of such covenants as aforesaid the guarantors will pay and make good to the landlord on demand all losses damage costs and expenses thereby arising or incurred by the landlord.
The tenant subsequently assigned its tenancy to another company, which continued in possession of the premises after the expiry of the contractual term under the provisions of Part II of the 1954 Act.
When the company failed to pay the rent, the landlord brought proceedings against the guarantors under the lease claiming that they were liable for the unpaid rent. MacKenna J held that, on its true construction, clause 3 of the lease guaranteed the performance of the tenant’s obligation to pay the rent during the term reserved by the lease only and did not cover any obligation of the tenant to pay the rent during any statutory extension of that term. In the words of MacKenna J (at p 484):
In my opinion the question between the plaintiffs and the defendants depends on the true construction of clause 3. I construe it as guaranteeing the performance of the obligation created by clauses 1 and 2 of the lease, namely, in the case of rent, the payment of the rent reserved by the lease during its seven years’ term. I do not read clause 3 as covering any obligation of the tenant to pay his rent during any statutory extension of the term. If the plaintiffs had wanted a guarantee which would impose that indefinite liability on the defendants, that is, a liability continuing until either the plaintiffs had served a notice of termination, or the tenants had served a notice to quit, or a new tenancy had been applied for by the tenant and granted by the court, or the landlord had forfeited the tenancy, they should have made that intention clear in the language of the guarantee. They have not done so.
In the later case of Associated Dairies Ltd v Pierce (1982) 265 EG 127, the approach adopted by the courts in ascertaining the extent of a surety’s liability was neatly summed up by May LJ (at p 129):
… it is first necessary to determine the amount and nature of the principal debtor’s debt to the creditor and the circumstances in which it has arisen. Having done so, one must then construe the contract of guarantee strictly and see whether it covers the nature, extent and circumstances of the principal debt sought to be recovered from the surety. If it does, then the surety is liable …
In the present context, therefore, the question of liability has resolved itself into one of construction of the particular covenant in question and application (if necessary) of the contra proferentem rule to resolve any ambiguity in wording in favour of the surety. In the more recent case of A Plesser & Co Ltd v Davis (1983) 267 EG 1039, an identical approach to that taken in the Junction Estates case was adopted by French J, who held that if the landlord desired that the guarantor’s obligations should extend to the statutory continuation of the tenancy, he must expressly say so by the inclusion of appropriate words such as “or any statutory continuation thereof” in the guarantee covenant: see, for example, clause 31 of each of the leases under consideration in the case of Associated Dairies Ltd v Pierce.
The reasoning behind this approach is that a surety must be aware of the precise risks he will run should he accept such liability. Not only may a continuation tenancy run for a considerable period of time but also the landlord may apply for an increased interim rent for which the surety could find himself liable: per French J in the Plesser case, at p 1040.
Although this approach has clearly attracted considerable judicial support, it may be questioned whether the same accords with strict legal theory. It is beyond doubt that a current tenant is liable on the covenants contained in the lease both during the contractual term and its statutory continuation.
In so far as the respective obligations of principal and surety are largely coextensive, one would expect the current tenant’s surety to be unambiguously liable to the same extent, leaving no scope for the application of the contra proferentem rule. Indeed, the example cited by French J in the Plesser case in which a surety would be liable during a statutory continuation (where the terms of the lease expressly make the tenant so liable) appears to suggest that the liability of the surety is simply dependent on that of his principal.
Liability of the original tenant
There is no direct authority establishing the liability of an original tenant for the obligations arising after the end of a contractual term where the relevant tenancy is continued pursuant to section 24 of the 1954 Act. However, there are a number of indirect authorities which clearly bear upon this point and call for consideration.
In the first place, it is important to observe from the outset that a tenancy continued by the operation of section 24 is the contractual tenancy subsisting with only a statutory variation as to the modes of its termination: see H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [7] 1 QB 159, per Denning LJ at p 168; Weinbergs Weatherproofs Ltd v Radcliffe Paper Mill Co Ltd [1958] Ch 437 per Harman J at p 445; Cornish v Brook Green Laundry Ltd [1959] 1 QB 394 per Romer LJ at p 409; Bowes-Lyon v Green [1963] AC 420 per Lord Reid at p 434; and William Skelton & Son Ltd v Harrison & Pinder Ltd [1975] QB 361 per Judge Edgar Fay QC at p 367.
Where, therefore, at the end of a contractual term of business premises the tenancy is continued by virtue of the operation of section 24 of the 1954 Act, common law notions of “holding over” and tenancies implied by reference to the period of the payment of rent are clearly inappropriate. For example, in Thorne (Sandown Lodge) Ltd v New Sherwood School Ltd (1962) 181 EG 859, McNair J held that, under a continuation tenancy, the old contractual tenancy had not come to an end but had been continued with all its obligations as to payment and receipt of rent. In GMS Syndicate Ltd v Gary Elliott Ltd (1980) 258 EG 251, Nourse J put the matter succinctly in this way (at p 254):
It is now well established that … the term granted by the tenancy continues by way of a statutory extension and with a statutory variation as to the mode of determination: see, for example, Cornish v Brook Green Laundry Ltd [9] 1 QB 394, at p 409. In the circumstances, it seems to me that the term granted by the first agreement as extended by the second is still subsisting, albeit that it has been further extended by the 1954 Act. It is still the same term. On that footing, it seems to me that the better reading of the material words in the direct covenant is to construe the obligation as continuing so long as Mr and Mrs Ruparel hold over under Part II of the 1954 Act.
In the GMS Syndicate case, the plaintiff landlord, the freehold owner of a building, demised the ground floor and basement to the first defendant for the purpose of a retail clothing business. The lease contained covenants against nuisance or using the premises for any illegal or immoral purpose, with a proviso for re-entry if there was failure to observe any of the covenants. The first defendant, with the consent of the landlord, sublet the basement to two sublessees for use as a sauna bath, gymnasium and health club, the sublessees entering into covenants identical with those contained in the headlease. The term, which originally expired in September 1972, was extended by a supplemental tenancy agreement to June 1977.
In 1974 the sublessees assigned the benefit of the subtenancy to the second and third defendants, who covenanted with the first defendant and the landlord to observe the covenants “during the residue of the term granted by the underlease as extended by the supplemental tenancy agreement”. After the expiration of the contractual term, the second and third defendants continued in occupation of the basement under Part II of the 1954 Act. The premises were used by them for immoral purposes and the landlord brought an action claiming forfeiture in respect of the ground floor and basement against all the defendants and damages for breach of covenant against the second and third defendants.
The primary question before Nourse J was whether the landlord was entitled to damages against the second and third defendants for breach of covenant after the expiration of the contractual term. Nourse J took the view that the effect of section 24(1) of the 1954 Act was further to extend the duration of the term so that the expression “during the residue of the term granted by the underlease” fell to be construed as the residue of the term as extended by section 24(1). In this respect, his reasoning (supported by previous well-established authority referred to earlier) is significant since, on a literal reading of the covenant, the second and third defendants committed themselves only for a period equivalent to the residue of the term granted by the underlease (as extended only by the supplemental tenancy agreement) and no more. Nourse J rejected this literal construction holding that the expression signified the whole period during the continuation of the leasehold estate held by the subtenants and did not refer only to the period of time expressed by the parties as being the contractual duration of the tenancy.
It is noteworthy, in this connection, that reliance was placed by counsel for the second and third defendants upon the decision in the Junction Estates case as authority for the proposition that, in the instant case, the liability of the second and third defendants, under their direct covenant with the plaintiff landlord, did not extend beyond the date of the expiration of the contractual term granted by the underlease as extended by the supplemental tenancy agreement. Nourse J, however, distinguished this case from the facts before him on the basis that the former was concerned with a contract of guarantee rather than a direct covenant between subtenant and headlandlord.
The position of the original tenant is, in the author’s view, also to be contrasted with that of a surety guaranteeing the performance of the original tenant’s obligations. Whereas the extent of the liability of the latter is determined exclusively by reference to the particular wording of the guarantee covenant, the liability of the former is founded upon the legal doctrine of privity of contract which may subsist between landlord and tenant irrespective of express provision in the lease.
An original tenant will, as a matter of course, covenant with his landlord on behalf of himself and his successors in title and thus he will be legally liable on all the tenant’s covenants in the lease for the duration of the term even where his interest is subsequently assigned. Even where this practice is not adhered to, the original tenant is deemed to have expressly covenanted on behalf of himself and his successors in title (in respect of those covenants which relate to land) by virtue of section 79 of the Law of Property Act 1925 unless a contrary intention appears in the lease. To all intents and purposes, therefore, the original tenant undertakes, as a matter of law, the ultimate legal responsibility for the due performance of the tenant’s obligations contained in the lease and the question of his liability resolves itself primarily into one of the application of a strict legal doctrine as opposed to the construction of a specific covenant exclusively governing the rights and obligations of the parties.
While the original tenant’s liability will continue for the duration of the term under the doctrine of privity of contract, his obligations will clearly not extend to a renewal of the lease whether that renewal is exercised by virtue of an option to renew contained in the lease or under the provisions of Part II of the 1954 Act. However, there is direct authority for the proposition that if the contractual term of the lease is extended (as opposed to renewed), by means of the exercise of an option, the original tenant’s liability will continue notwithstanding the expiry of the original term of the lease.
In Baker v Merckel [0] 1 QB 657, the landlord demised to the tenant a dwelling-house for a term of seven years from November 1 1946, with the usual tenant’s covenants as to rent and repair. By a supplemental deed, the landlord agreed with the tenant that “if the tenant shall give notice in writing to the landlord before November 1 1952, of such his desire, the within-written lease shall thereupon be read, construed and take effect as though the term thereby granted was for a period of 11 years from November 1 1946”.
The option to extend was subsequently validly exercised by an assignee of the tenant on March 21 1952. The assignee later assigned the premises to his wife, who left the same leaving rent unpaid. The landlord, having failed to recover judgment against the wife for the arrears, instituted proceedings against the original tenant, who contended that his liability terminated at the expiry date of the original seven-year lease. The Court of Appeal held that the original tenant remained liable by virtue of privity of contract because the effect in law of the supplemental deed was to vary at its date the seven-year lease by building into it an option which, when exercised, would enlarge the term retrospectively to one of 11 years. In the words of Pearce LJ (at pp 667-668):
By a consensual variation embodied in the supplemental deed endorsed on the lease there was built into the original lease of seven years an option that changed the demise from one of seven years to one which might extend to 11 years on the exercise of the option. It was at that stage that the variation was made. Owing to the clause which was so built into the lease the happening of an event (namely, the exercise of the option), was to have a retrospective effect and to cause the deed to be read and construed as though it had originally been a lease for 11 years …From the wording of that document, I do not find it possible to regard it as a mere collateral option which did not affect the demise until it was exercised. It is plain that when the supplemental deed was endorsed on the lease the parties regarded the transaction as one demise which might be for seven years or might, on a certain event, continue for 11 years … The extension caused by the exercise of the option was not dependent on the landlord’s consent. It was not in conflict with the lease as altered in 1949, but arose out of and in accordance with its terms.
Similar reasoning may be adopted in the context of a business tenancy in that the original parties to the lease must be taken to be aware that the term of years expressly granted by the lease would be subject to the provisions of Part II of the 1954 Act. In the writer’s view, therefore, the provisions of Part II relating to continuance must be seen as affecting the demise from its inception and the original tenant thereto must be regarded as fully appreciating that his liabilities might enure for the duration of the contractual term or might, assuming the continued occupation of the current tenant, continue for a much longer period subject only to the modes of termination (both common law and statutory) expressly provided for by Part II of the 1954 Act.
Section 24(1) of the 1954 Act provides, inter alia, that a tenancy to which it applies shall not come to an end unless terminated in accordance with its provisions. While the precise effect of this provision is not entirely clear, nevertheless there is no doubt that Part II of the Act itself envisages the prolongation of the parties’ liabilities under the lease beyond the term date and until such time as the continuation tenancy is effectively determined in accordance with one or more of the recognised methods prescribed in section 24(2). It is, of course, possible that a lease may limit a party’s liability thereunder to the period during which he owns the lease or reversion (see, for example, Bath v Bowles (1905) 93 LT 801) but, in the absence of appropriate wording in the lease expressly limiting or restricting the original tenant’s liability to the contractual expiry date, the expectation that his leasehold interest might (upon fulfilment of certain statutory prerequisites) continue beyond the term date by virtue of the operation of Part II of the 1954 Act should prevail.
In this respect, it may be consistent with principle to equate statutory continuance with the effect of the exercise of an option to extend as illustrated by the Baker case. When an option to extend is exercised, it is done by the current tenant who may be an assignee of the original tenant (as in the Baker case) and the notice exercising the option is addressed to the current landlord. The original parties will, of course, in these circumstances, have nothing to do with the procedure once they have parted with their respective interests and, indeed, it is more than likely that they will know nothing about it.
Despite this considerable uncertainty, it is noteworthy that in the Baker case the original tenant was held to assume the ultimate legal responsibility for the due performance of the tenant’s obligations contained in the lease. It is, perhaps, also significant to mention that a variation of the lease terms after the original tenant has assigned, if in accordance with the lease, for example, under a rent review clause (see Centrovincial Estates plc v Bulk Storage Ltd (1983) 268 EG 59) or under a statutory power (for example, under Section 39(1) of the Landlord and Tenant Act 1987) will bind the original tenant. Moreover, this will be the case even if the extent of the variation is influenced by factors wholly outside the original tenant’s control, such as improvements carried out by an assignee: see Selous Street Properties Ltd v Oronel Fabrics Ltd (1984) 270 EG 643.
Contrast, however, the position of a surety who is relieved of liability beyond the term date by the very fact that his liability is inherently uncertain (in that a continuation tenancy may run for a considerable period of time and be subject to an interim rent increase) and who, it is considered, must be aware of the risks he is to run should he accept such liability. This judicial attitude in relation to the liability of a surety is exemplified by the judgment of French J in the Plesser case (at p 1040):
At the time the [guarantor] in this case executed the license agreement the contractual term had about half its course yet to run. Any statutory continuation might, for all he knew, have continued for years, even for decades. The [landlords] might have got an order for a swingeing interim rent, depending upon the ravages of inflation [or] possibly an increase in property values…If the [landlords] are right, the [guarantor] was binding himself for an indefinite period and, on one view at least, in respect of unascertainable sums. I cannot construe the relevant words so as to produce this result.
It is, therefore, not surprising that French J had little difficulty in applying the reasoning of MacKenna J in the Junction Estates case (supra) which on the facts and wording of the relevant covenant he found indistinguishable from the case before him. However, it is also noteworthy that French J, in considering the GMS Syndicate case (supra) did not doubt the correctness of that decision but simply refused to accept its applicability as persuasive authority in the very different circumstances of determining the liability of a surety under a specific covenant of guarantee.
We have seen that the original tenant’s surety can be liable for breaches occurring during a statutory continuation, provided, of course, that, upon a true construction, the terms of his guarantee covenant are sufficiently wide to include such a liability. Moreover, it is a general principle of the law of suretyship that the liability of a surety will not generally exceed that of the principal debtor, since the former is guaranteeing that the latter’s obligations will be performed and not (as under a contract of indemnity) that the creditor will be covered against all losses arising from his contract with the principal: see Associated Dairies Ltd v Pierce (supra) in the context of a surety’s liability arising under a lease. Given this principle, this again tends to favour the view that an original tenant would be held liable for breaches committed by a subsequent assignee during a statutory continuation of the term under Part II of the 1954 Act: see further Sandi Murdoch, “Tenants, assignees and sureties” (1984) 272 EG 857.
