Shaw v Doleman
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Stanley Burnton,Lord Justice Elias |
| Judgment Date | 01 April 2009 |
| Neutral Citation | [2009] EWCA Civ 279 |
| Date | 01 April 2009 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: B2/2008/2207 |
[2009] EWCA Civ 279
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHICHESTER COUNTY COURT
HHJ BARRATT QC
8C100173
Before : Lord Justice Mummery
Lord Justice Stanley Burnton
Lord Justice Elias
Case No: B2/2008/2207
MR PHILIP GLEN (instructed by Horsey Lightly Fynn) for the Appellant
MR TIMOTHY FANCOURT QC and MR EDWARD PETERS (instructed by MacDonald Oates) for the Respondent
Hearing date: 5 th March 2009
Lord Justice Mummery :
Introductory
This appeal is about the grant of a lease, the assignment of it to a company, the tenant's guarantee of the assignee's performance of the tenant covenants, the assignee's insolvency and the effect of the liquidator's disclaimer of the lease on the guarantee liability to the landlord – in that order. Like the leading authority Hindcastle Ltd v. Barbara Attenborough Ltd [1997] AC 70 ( Hindcastle) (per Lord Nicholls at page 83B) this case “arises out of the recession in the property market.” There is now a new recession in the property market. The dispute is where the loss lies on the insolvency of the corporate assignee. That is nothing new.
Where does the loss lie when a liquidator disclaims a lease? Does it fall on the landlord or on the guarantor? In Hindcastle Lord Nicholls discussed the case where the landlord protected himself against the risk of the insolvency of the tenant or of the assignee by requiring a guarantee and looking to the guarantor, as well as to the original tenant, when the assignee does not comply with the tenant covenants (page 83E-G):
“When the rent payable under the lease is higher than the rental value of the property at the time of the tenant's default, the landlord's financial interests may be better served by looking to the guarantor than by taking possession of the property and reletting it. Similarly, if the impecunious tenant is not the original tenant but a person to whom the lease has been assigned, the landlord may look to the original tenant for payment. When the lease was granted the original tenant covenanted with the landlord to pay the rent and to do so throughout the whole term of the lease. This included any increased rent payable under the rent review provisions. In these cases the loss falls on the guarantor or the original tenant, not the landlord.”
In this case the landlord required the original tenant to enter into a guarantee of the performance of the tenant covenants by the corporate assignee. The landlord insisted on that requirement when granting the tenant a licence to assign the residue of the lease to the assignee company. The assignee company has gone into liquidation. The liquidator has disclaimed the lease. The landlord has sued the original tenant on the guarantee for the performance of the covenant to pay rent and other sums not paid by the assignee.
In Hindcastle Lord Nicholls discussed the position in post-assignment cases and the steps taken by Parliament in legislation in 1995 to improve the lot of the original tenant (page 83F-84A):
“Sometimes, in post-assignment cases, the landlord's protection may be achieved at an unreasonably high price to others. The insolvency may occur many years after the lease was granted, long after the original tenant parted with his interest in the lease. He paid the rent until he left, and then took on the responsibility of other premises. A person of modest means is understandably shocked when out of the blue he receives a rent demand from the landlord of the property he once leased. Unlike the landlord, he had no control over the identity of the assignees down the line. He had no opportunity to reject them as financially unsound. He is even more horrified when he discovers that the rent demanded exceeds the current market rental value of the property.
Mounting public concern at this post-assignment state of affairs led to the enactment of the Landlord and Tenant (Covenants) Act 1995. In future, where a tenant lawfully assigns premises demised to him he will be released from the covenants falling to be complied with by the tenant of the premises.”
The principal provisions of the 1995 Act did not apply to tenancies granted before the Act came into force on 1 January 1996. Hindcastle was concerned with such a tenancy. The lease in this case (which I will refer to as “the Lease”) was granted on 5 May 2004. It is subject to the 1995 Act, so that the original tenant ceased, on the assignment of the Lease, to be liable on the covenants qua tenant.
HHJ Barratt QC held that the terms of the 1995 Act and the disclaimer of the lease by the liquidator of the assignee did not affect the liability of the tenant to the landlord under the guarantee. The judge entered judgment on 20 August 2008 for the landlord in the sum of £16,921.87 and costs. On 13 October 2008 Jacob LJ granted the tenant permission to appeal.
This appeal turns on the construction of a document called “the Authorised Guarantee Agreement” (the AGA). It was made on 9 August 2005 when the original tenant, Ms Gabriella Shaw, assigned the Lease to Ceramic Café Limited (CCL). Section 178(4) of the Insolvency Act 1986 (the 1986 Act) relating to the consequences of the disclaimer of a lease in an insolvency and various provisions in the 1995 Act are part of the legal picture.
The court is grateful for the excellent arguments of each side on the construction issue, which is of some general interest and importance in the current condition of the property market.
Background
The Lease of a small retail unit consisting of a ground floor lock-up shop and basement at 15 Chapel Street, Petersfield, Hampshire (the Premises) to Ms Shaw was for a term of 10 years from 12 March 2004 at an annual rent of £16,000, subject to review. The covenants covered liability to pay insurance rent, costs incurred by the landlord in securing payment and interest on any monies outstanding. There was a common form qualified covenant against alienation.
On 9 August 2005 Ms Shaw entered into the AGA with the then landlord, Mrs Sarion Rees. She was the mother of the claimant/respondent Mrs Doleman. The terms of the licence to assign granted by Mrs Rees were that Ms Shaw would covenant with her in the form of the AGA set out in the Sixth Schedule to the Lease. The covenant was to be “throughout the period during which the Assignee is bound by the tenant covenants of the Lease.” That language is reflected in the terms of the AGA itself.
The AGA details can be left till later. I would, however, note at this stage that the licence to assign also contained covenants by a Mr & Mrs Foster as “Guarantor.” They guaranteed to Mrs Rees that CCL would pay the rents reserved by the Lease and perform and observe the tenant covenants in the Lease. That guarantee was expressed differently from the tenant's guarantee covenant in the AGA. According to clause 6.1.2 “the Guarantor's” covenant was linked to the vesting in CCL of the term created by the Lease. It was to remain in force “for the Term whilst the Lease remains vested in the Assignee.”
Mrs Doleman became entitled to the freehold reversion on her mother's death in 2007 and she was registered as freehold proprietor of the premises.
By 2007 CCL was in financial difficulties: it fell into arrears with the rent, had a judgment against it, vacated the Premises and eventually went into liquidation on the making of a winding up order on 22 August 2007. The liquidator disclaimed the Lease on 31 October 2007. There was then a dispute between the parties about liability for the rent and other payments under tenant covenants in the Lease.
Mrs Doleman sought to make Ms Shaw liable under the AGA. Ms Shaw contested liability. In brief, her defence was that her guarantee liability under the AGA terminated with the disclaimer, which terminated the Lease. The 1995 Act released her from liability as a tenant following the assignment of the residue of the Lease to CCL. Her liability under the AGA is limited to the period during which CCL is bound by the covenants. She said that CCL ceased to be bound by the covenants in the Lease on the disclaimer and termination of the Lease.
Mrs Doleman's case was that Ms Shaw's guarantee liability continued by virtue of the express terms of the AGA construed in the context of the deeming effect of section 178(4) of the 1986 Act explained in Hindcastle. Ms Shaw had agreed with the landlord to pay the rents which remained unpaid by CCL. In accordance with the express terms of section 178(4)(b) (see below) her liability as guarantor was unaffected by the liquidator's disclaimer.
On 29 January 2008 Mrs Doleman began proceedings in the Chichester County Court for arrears of rent and of insurance rent, together with costs and fees and interest. The judge found for her.
I turn to the detail of the AGA and of the legislation before summarising the judge's reasons and the criticisms of his judgment.
The Lease and AGA
Under clause 5 of the Lease the tenant covenanted to pay the rents, which included insurance rent and various costs and fees. Clause 5.11.3 permitted the landlord to require the tenant, on an assignment of the Lease, to enter into a guarantee in the form of the AGA in the terms set out in the Sixth Schedule.
Clause 3 of the AGA provided that-
“3.1 The Guarantor guarantees to the Landlord that the Assignee will pay the rents reserved by, and perform and observe the tenant's covenants in the Lease and the Guarantor will pay and...
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