Good Harvest Partnership LLP v Centaur Services Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Newey |
| Judgment Date | 23 February 2010 |
| Neutral Citation | [2010] EWHC 330 (Ch) |
| Docket Number | Case No: HC09C01928 |
| Court | Chancery Division |
| Date | 23 February 2010 |
[2010] EWHC 330 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before: Mr Justice Newey
Case No: HC09C01928
Mr Romie Tager QC and Mr Philip Kremen (instructed by Brecher) for the Claimant
Mr David Holland (instructed by Osborne Clarke) for the Defendant
Hearing dates: 19 and 20 January 2010
Mr Justice Newey:
This case raises the question whether the Landlord and Tenant (Covenants) Act 1995 (“the Covenants Act”) precludes a person who has guaranteed a tenant's obligations under a lease from being required to give a further guarantee in respect of an assignee of the lease.
Basic facts
The basic facts can be stated quite shortly.
By an underlease dated 5 October 2001 (“the Underlease”), David Gladman, Karen Gladman and Jonathan Shepherd, trading together as “Gladman Homes”, demised to Chiron CS Limited (“Chiron”) for a term of 10 years from 16 July 2001 the premises comprising Unit G, Lymedale Business Park, Newcastle-under-Lyme, Staffordshire (“the Premises”). The rent was initially £206,387 annually, but subsequently rose to £245,000 per year. The defendant, Centaur Services Limited (“Centaur”), was also a party to the Underlease, as guarantor for Chiron.
The Underlease contained, among others, the following provisions:
i) Clause 5.9.3
By clause 5.9.3, the tenant covenanted “Not to assign … the whole of the Premises … without the prior consent of the Landlord such consent not to be unreasonably withheld or delayed.”
ii) Clause 5.9.6
Clause 5.9.6 stated that the landlord was entitled to impose any or all of certain conditions on giving any licence for an assignment of the whole premises. Those conditions included these:
a) Clause 5.9.6.1
“upon or before any assignment … the Tenant making the application for licence to assign and its guarantor (if any but not someone who has already given an authorised guarantee agreement) shall enter into an authorised guarantee agreement in a form permitted by Law and agreed between the parties”
b) Clause 5.9.6.3
“prior to any permitted assignment to procure that the assignee enters into direct covenants with the Landlord to perform and observe all the Tenant's covenants and all other provisions during the residue of the Term so far as permitted by law”
c) Clause 5.9.6.5
“the Tenant to procure that any … security for the Tenant's obligations under this Lease which the Landlord holds immediately before the assignment is continued or renewed in each case on terms as the Landlord may reasonably require in respect of the Tenant's liability under the authorised guarantee agreement referred to in clause 5.9.6.1”
d) Clause 5.9.6.6
“the prospective assignee to provide a guarantor or guarantors approved by the Landlord (such approval not to be unreasonably withheld or delayed) where having regard to the financial standing of the prospective assignee it is reasonable for the Landlord to require its obligations under this Lease to be guaranteed”
Chiron assigned the Underlease to Total Home Entertainment Distribution Limited (“THED”) on 1 September 2004. On the same day, Gladman Homes, Chiron and Centaur entered into a document described as an “authorised guarantee agreement” (“the Guarantee Agreement”). This recited that Gladman Homes had agreed to grant Chiron a licence to effect the assignment to THED subject to Chiron and THED entering into a formal licence (as happened) and to Chiron and Centaur entering into the Guarantee Agreement. The Guarantee Agreement proceeded to state, in clause 3.1, that Chiron and Centaur each covenanted with Gladman Homes (and their successors) that THED would pay rent, and otherwise perform the lessee covenants, “from the date of the Assignment [to THED] until the next lawful assignment of the Underlease”.
On 12 January 2005 the headlease out of which the Underlease was carved was surrendered, and on 24 February 2005 the Claimant, Good Harvest Partnership LLP (“Good Harvest”), became the registered freehold proprietor. Good Harvest thus became THED's direct landlord.
The present proceedings, commenced on 9 June 2009, are to recover from Centaur, pursuant to the Guarantee Agreement, rent due under the Underlease on 25 December 2008 and 25 March 2009. The outcome of the claim can be expected to determine Centaur's liability for rent and other liabilities up to the expiry of the term in July 2011.
The application now before me was issued on 1 September 2009. By it, Good Harvest seeks summary judgment in its favour.
Centaur disputes the application on two grounds. First, it contends that the Guarantee Agreement is void and unenforceable as against it by reason of section 25 of the Covenants Act. Secondly, it argues that there is a triable issue as to whether the Underlease was surrendered or further assigned.
I shall take these points in turn.
The Covenants Act point
The Covenants Act
As its long title indicates, the Covenants Act makes provision “for persons bound by covenants of a tenancy to be released from such covenants on the assignment of the tenancy”. Among other things, the Covenants Act serves to curtail the extent to which an original tenant can be liable to the landlord after he has assigned the lease.
The Covenants Act implements, albeit with significant alterations, recommendations made by the Law Commission in its report Landlord and Tenant Law: Privity of Contract and Estate (Law Com. No. 174, 1988). In Avonridge Property Co Ltd v Mashru [2005] UKHL 70, Baroness Hale said (in paragraph 39):
“The mischief at which the Commission's recommendations were aimed was the continuation of a liability long after the parties had parted with their interests in the property to which it related.”
The Covenants Act represents a major change in the law. Neuberger J observed in Wallis Fashion Group Ltd v CGU Life Insurance (2001) P&CR 28, at paragraph 21, that the Act “represents a sea change in the law relating to a tenant's liability after he assigns the lease”.
In keeping with its purpose, the Covenants Act provides for tenants and others to be released from their obligations when a lease is assigned. The relevant provisions include these:
i) Section 5
“(1) This section applies where a tenant assigns premises demised to him under a tenancy.
(2) If the tenant assigns the whole of the premises demised to him, he–
(a) is released from the tenant covenants of the tenancy, and
(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy,
as from the assignment….”
ii) Section 24
“(1) Any release of a person from a covenant by virtue of this Act does not affect any liability of his arising from a breach of the covenant occurring before the release.
(2) Where–
(a) by virtue of this Act a tenant is released from a tenant covenant of a tenancy, and
(b) immediately before the release another person is bound by a covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant,
then, as from the release of the tenant, that other person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant ….”
The expression “tenant covenant”, which appears in both section 5 and section 24, is defined in section 28(1) as follows:
“a covenant falling to be complied with by the tenant of premises demised by the tenancy”
A covenant on the part of a tenant to pay rent will thus be a “tenant covenant”.
Section 25 of the Act is, as Lord Nicholls noted in the Avonridge case (at paragraph 14), “a comprehensive anti-avoidance provision”. It states as follows:
“(1) Any agreement relating to a tenancy is void to the extent that–
(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act, or
(b) it provides for–
(i) the termination or surrender of the tenancy, or
(ii) the imposition on the tenant of any penalty, disability or liability,
in the event of the operation of any provision of this Act, or
(c) it provides for any of the matters referred to in paragraph (b)(i) or (ii) and does so (whether expressly or otherwise) in connection with, or in consequence of, the operation of any provision of this Act.
(2) To the extent that an agreement relating to a tenancy constitutes a covenant (whether absolute or qualified) against the assignment, or parting with the possession, of the premises demised by the tenancy or any part of them–
(a) the agreement is not void by virtue of subsection (1) by reason only of the fact that as such the covenant prohibits or restricts any such assignment or parting with possession; but
(b) paragraph (a) does not otherwise affect the operation of that subsection in relation to the agreement (and in particular does not preclude its application to the agreement to the extent that it purports to regulate the giving of, or the making of any application for, consent to any such assignment or parting with possession).
(3) In accordance with section 16(1) nothing in this section applies to any agreement to the extent that it is an authorised guarantee agreement; but (without prejudice to the generality of subsection (1) above) an agreement is void to the extent that it is one falling within section 16(4)(a) or (b).
(4) This section applies to an agreement relating to a tenancy whether or not the agreement is–
(a) contained in the instrument creating the tenancy; or
(b) made before the creation of the tenancy.”
In Avonridge, Lord Nicholls (with whom Lord Hoffmann and Lord Scott expressed agreement) said, in paragraph 18, that section 25 is “to be interpreted generously, so as to ensure that the operation of the 1995 Act is not frustrated,...
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