England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHICHESTER COUNTY COURT
HHJ BARRATT QC
8C100173

		Royal Courts of Justice Strand, London, WC2A 2LL
		01/04/2009

Lord Justice Mummery :

Introductory

1. 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.
2. 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."

3. 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.
4. 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."

5. 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.
6. 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.
7. 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.
8. 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

9. 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.
10. 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.
11. 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."
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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

18. 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.
19. 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 make good to the Landlord on demand any losses, damages, costs and expenses suffered or incurred by the Landlord if the Assignee fails to do so."

20. Under clause 3.2 of the AGA the guarantee in clause 3.3 remained in force for "the Liability Period", which was defined in clause 1.4 as "the period during which the Assignee is bound by the tenant covenants of the Lease."
21. Clause 5 of the AGA permitted the Landlord, "if the Lease is terminated by disclaimer," to require the guarantor to take a new lease of the premises for the residue of the term and to assume the liability of the assignee, provided that notice was given to the guarantor within 3 months after the date of termination. Mrs Doleman did not in fact take any steps to require Ms Shaw to take a lease of the premises in accordance with the provisions of the AGA. The clause is, however, relied on by Ms Shaw to support her contention that clause 5 rather than clause 3 of the AGA was to apply in the event of a disclaimer.
22. The key provisions of the AGA are probably in common use. It was pointed out that Precedent Form 217 in volume 22(1) of the Encyclopaedia of Forms and Precedents (5^th edition-1996 re-issue) shows that the draftsman of the AGA in this case either closely followed that precedent or by coincidence produced a very similar draft moulded by the same statutory materials.

The legislation

23. Section 178(4) of the 1986 Act (Power to disclaim onerous property) states the effect of a disclaimer-

"A disclaimer under this section-

(a) operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but

(b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights and liabilities of any other person."

24. In Hindcastle the House of Lords construed those provisions. The facts were that the landlord claimed arrears of rent due after the disclaimer of a 20 year lease in an insolvency from (a) the first assignee of a lease (CIT Developments Ltd), which had placed itself in the same position as the original tenant by covenanting with the landlord to pay the rent for the reminder of the term of years; and (b) the surety (Mr Whitten, a director of CIT)) on his guarantee of the performance of the first assignee's obligations for a period of 10 years from the date of the lease. The original lessee (Hindcastle) was also sued, but had gone onto liquidation and took no part in the proceedings on appeal. The proceedings arose from the liquidator's disclaimer of the lease in the liquidation of a company (Prest Ltd) to which the first assignee had sold the lease. Both the defendant first assignee and the surety argued that the disclaimer of the lease operated to terminate their liability.
25. The House of Lords rejected their contention. It held that section 178(4) meant that the disclaimer determined the lease and accelerated the reversion as between the landlord and the assignee; but, as regards the liability of third parties, including the original tenant under the pre-1995 law, as well as the first assignee in the position of that tenant and the surety, the lease was deemed to continue and their liability was not affected by the disclaimer. As Lord Nicholls said at p88G-H:

" …the best answer seems to be that the statute takes effect as a deeming provision so far as other persons' preserved rights and obligations are concerned. A deeming provision is a commonplace statutory technique. The statute provides that a disclaimer operates to determine the interest of the tenant in the disclaimed property but not so as to affect the rights or liabilities of any other person. Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined. In this way the determination of the lease is not permitted to affect the rights or liabilities of other persons. Statute has so provided."

26. In reaching the conclusion that the secondary liability of the surety is not affected by the disclaimer of the tenant's interest and the release of the principal liability, Lord Nicholls noted that the 1986 Act clearly contemplated that a person may be liable to perform the tenant's covenants, even after the lease has been disclaimed and that a vesting order may be made in favour of such a person under section 182(3). The interpretation of s 178(4) had to accommodate that conclusion.
27. It is argued on behalf Mrs Doleman that section 178(4), as so construed, applies to a guarantor under a separate document, such as the AGA. Thus, in this case, immediately before the disclaimer Ms Shaw was liable under the AGA guarantee for the payment of rent to Mrs Doleman. That liability was not affected by the disclaimer, as it only determined the rights and liabilities of the assignee CCL. When considering the surety liabilities the deeming effect of section 178(4) is that Ms Shaw's liability under the AGA continued as though her liability under the Lease were notionally still continuing. Otherwise her liability would be affected. That would run contrary to the express wording of s 178(4) (b).
28. It is common ground that, in consequence of the 1995 Act, Ms Shaw was released from any liability qua tenant when she assigned the residue of the Lease to CCL. As for the continuation of her liability under the AGA beyond the date of disclaimer, Ms Shaw contends that that depends on whether CCL was bound by the covenant to pay rent. She says that CCL was not so bound after the disclaimer. Its liability came to an end with the disclaimer by the liquidator. As CCL was no longer bound by the tenant covenants, "the Liability Period" of her guarantee in the AGA came to an end and she was no longer bound by the AGA guarantee.
29. The 1995 Act is material in two main respects: first, for the change in the law mentioned by Lord Nicholls in Hindcastle by releasing a tenant from covenants on the assignment of the premises demised to him under a tenancy (section 5); and, secondly, for providing that where, on an assignment, a tenant is to any extent released from a tenant covenant by virtue of the Act, nothing in the Act precludes the tenant from entering into an "authorised guarantee agreement" with respect to the performance of that covenant by the assignee, though not by any person other than the assignee (section 16). The AGA is a creature of the 1995 Act. It constitutes an exception to the general principle that the original tenant is released from liability on the assignment of his interest. That liability is, however, a guarantee liability limited by the terms of the AGA into which the tenant may enter. The AGA cannot impose on him liability beyond any period of liability of the first assignee from him: section 16(2),(4).

The judgment

30. The judge found Mrs Doleman's case more convincing. He said-

"23…..This authorised guarantee agreement was drawn up in the context of the decision of the House of Lords in relation to the construction of the Insolvency Act, particularly section 178(4) of that Act, in terms of the way and the extent and degree to which existing liabilities they continued by operation of law in the event that there was a disclaimer via liquidator of the original terms of the tenancy. That is the principle of law which I accept , as contended for by Counsel for the Claimant, applies; that is the statutory context within which this authorised guarantee agreement falls to be construed and applied, and the meaning, in my judgment, to be given to the liability period. It is to be understood to be subject to those principles and the operation of law as provided for in section 178(4) of the Insolvency Act."

Tenant's submissions on appeal

31. The essence of Ms Shaw's case on appeal is short and simple. Her guarantee liability under the terms of the AGA was limited to "the Liability Period." The judge misconstrued the definition of that expression in clause 1.4 of the AGA. "The Liability Period" expired when CCL ceased to be bound by the covenants in the Lease. CCL ceased to be bound when the liquidator disclaimed the Lease. Section 178(4)(a) determined the liability of CCL under the Lease. The parties had chosen that as the contractual event which would bring "the Liability Period" to an end. There was no liability on Ms Shaw under the guarantee terms of the AGA anymore than there was under the tenant covenants in the Lease.
32. That result was submitted to be consistent with the other terms of the AGA, in particular clause 5, with its machinery for what should happen in the event of a disclaimer, namely a put-option to require the original lessee to take a new lease. The option was not exercised in this case.
33. In brief, the natural and ordinary meaning of the AGA provisions was neither expressly overridden nor impliedly qualified by section 178(4) of the 1986 Act.

Discussion and conclusions

34. The impact of the disclaimer on guarantee liability was settled by the House of Lords in Hindcastle. The disclaimer terminated the Lease and the liability of the assignee company CCL, but that did not affect the liabilities of any other person. Section 178(4)(b) stated that the rights and liabilities of third parties, such as a guarantor, were not to be affected. The liabilities remained, as though the Lease had not come to an end, but had continued after the disclaimer.
35. That is the legal landscape in which the crucial question has to be decided: has "the Liability Period", as defined in clause 1.4 of the AGA, come to an end? If it has not, Ms Shaw remained liable under the AGA guarantee and Mrs Doleman was entitled to the judgment under appeal.
36. The duration of "the Liability Period" of Ms Shaw's guarantee under the AGA was linked to whether CCL was bound by the tenant covenants of the Lease. On the disclaimer the determination, by virtue of s178(4)(a), of CCL's liability under the Lease was subject to the qualification in s178(4)(b) that, except for the purpose of releasing CCL from liability, the disclaimer did not affect the liability of any other person. In my judgment, Ms Shaw was such a person with a guarantor liability. She remained liable as guarantor, if CCL was bound by the tenant covenants. It is clear from Hindcastle that, although the Lease was determined and CCL ceased to be liable to Mrs Doleman under the tenant covenants, CCL was, so far as other parties such as Ms Shaw were concerned, still bound by the tenant covenants as though the Lease had not determined. "The Liability Period" of Ms Shaw's guarantee and her liability to Mrs Doleman has not therefore terminated.
37. Mr Glen, in his submissions on behalf of Ms Shaw, stressed that the issue in this case was one of contractual construction (i.e. of the AGA), and, in particular, of its defined term "the Liability Period." The issue was not one of statutory construction (i.e. of section 178(4) of the 1986 Act) as in Hindcastle.
38. In my judgment, however, a careful reading of the facts and detailed reasoning in Hindcastle demonstrates that the meaning and effect of the guarantee obligation, of which the defined "The Liability Period" is part, falls to be determined in the context of section 178(4). In Hindcastle the obligation of the original tenant under the lease was to run "during the continuance of the lease" and that of the surety was to run for 10 years from the date of the lease. In order to determine whether the liability of the assignee of the lease and the liability of the surety were affected by the disclaimer the House of Lords had to determine the statutory effect of the disclaimer in accordance with both (a) and (b) of section 178(4). The House of Lords held that, although the lease was terminated so far as the insolvent assignee company was concerned, the liability of the third parties - the assignee and the surety- had to be determined as though the lease had not been terminated.
39. The basis on which the House of Lords overruled the contrary decision of the Court of Appeal in Stacey v. Hill [1901] 1 KB 660 is specially instructive. The Court of Appeal in that case held that the surety for the performance of the tenant covenants was released by the disclaimer. Lord Nicholls in Hindcastle said that it ought to have been held in Stacey v. Hill that the surety was not released. Mr Fancourt pointed out that the period of the guarantee given by the surety in Stacey v. Hill was that it was "to remain in force concurrently with the lease for a period of five years…." The Court of Appeal decided that the lease was determined from the date of the disclaimer, that the surety liability was also determined and that the action on the guarantee was not maintainable. In holding Stacey v. Hill should be overruled Lord Nicholls explained that the disclaimer did not affect the obligations of a guarantor, or discharge the original tenant from his obligations, which, before the 1995 Act, were for, all practical purposes, a guarantee that the tenant for the time being will perform his obligations.
40. It is necessary in the instant case, in order to answer the question under clause 1.4 of the AGA whether CCL is bound by the tenant covenants in a disclaimer situation, to determine the legal effect of the disclaimer. The statutory consequences are spelt out in section 178(4). It is impossible to determine the full meaning of "the Liability Period" in clause 1.4 of the AGA without regard to the statutory provision which deals with the effect of disclaimer on liabilities for the performance of the tenant covenants. The statutory provision supplies the answer to the question whether CCL was still bound by the tenant covenants after the disclaimer. It was not bound so far as its own obligations were concerned, but it was treated as still bound, so far as third party obligations were concerned. Surprising though it may be to Ms Shaw and others in a similar situation, the guarantee liability to the landlord under the AGA survived the disclaimer.
41. That is the clear effect of the authorities on the consequences of disclaimer. I do not think that the position is altered by other provisions in the AGA or by the 1995 Act. Mr Glen relied on the existence and terms of clause 5 of the AGA which refers to the Lease being "terminated by disclaimer." In my judgment, that does not mean that the surety liability is terminated by disclaimer. Further, the landlord's option of requiring the tenant/guarantor to enter into a new lease is neither inconsistent with the continuation of the surety liability after the disclaimer of the Lease nor does it indicate that the parties intended the liability under the guarantee to come to an end on disclaimer.

Result

42. Accordingly I would dismiss the appeal.

Lord Justice Stanley Burnton:

43. I agree.
44. There was some debate before us whether the issue before the court is one of the interpretation of the Authorised Guarantee Agreement or of the interpretation and effect of section 178(4) of the Insolvency Act 1986. Of course, both have to be construed. It is common ground that an AGA may expressly provide for the liability of the guarantor to be determined on a disclaimer by the liquidator of the tenant. That is not the case here. If a guarantee may provide expressly for the determination of the liability of the guarantor, it may also do so implicitly or by general words.
45. In my judgment, however, the meaning of the AGA in this case is clear. It is in part for this reason that it is unnecessary to consider the Appellant's contention that it is to be construed contra proferentem. The real issue is as to the effect of section 178(4)(b). If its effect is that in relation to the Appellant as guarantor, the Assignee is deemed to continue to be bound by the tenant covenants of the Lease, her liability under the guarantee continues notwithstanding the disclaimer by the liquidator of the Assignee. If that is not its effect, her liability has come to an end, because in fact by virtue of section 178(4)(a) the Assignee has ceased to be so bound.
46. On this issue section 178(4)(b) is I think clear. The determination of the rights, interests and liabilities of the company in the property disclaimed does not affect the rights or liabilities of the guarantor. The Appellant's case, on analysis, is that the determination by the disclaimer of the liabilities of the company (or, to use the words of the guarantee, the determination of the period during which the Assignee is bound by the tenant covenants in the Lease) has determined her liability. But that is precisely what is precluded by section 178(4)(b).
47. This result seems to me to be the result of the clear words of the statute and of Lord Nicholl's explanation of its effect in Hindcastle, as cited by Lord Justice Mummery in paragraph 25 above. Chadwick LJ's exegesis in Basch v Stekel [2001] L.&T.R. 1 (2001) 81 P. & C.R. DG1 is relevant:

22 Lord Nicholls explained in Hindcastle v. Barbara Attenborough why the former practice [of including a put option in a guarantee] was unnecessary. He pointed out that the operation of section 178 of the Insolvency Act 1986 is limited by the provisions in paragraph (b) of subsection (4). The disclaimer takes effect under the section only in so far as is necessary for the purpose of releasing the insolvent company from liability. The disclaimer does not affect the rights and liabilities of other persons, in particular persons such as a surety or an original tenant. Nevertheless, the tenancy, itself, does cease to exist as an estate in the land demised by the lease. The relationship of landlord and tenant is preserved notionally for the purposes only of giving rise to an obligation on the surety or other third parties.

It is because the relationship of landlord and tenant is preserved notionally for the purpose of the liabilities of the Appellant that for that purpose the Assignee notionally continues to be bound by the tenant covenants in the lease.

48. True it is that section 178(4)(b), by referring to "the rights and liabilities" of a persons such as a guarantor, refers on to the provisions of a guarantee in order to ascertain what are those rights and liabilities. But if the guarantee provides only that the liability of the guarantor comes to an end with the determination of "the rights, interests and liabilities of the company in or in respect of the property disclaimed", the liability of the guarantor continues, because as against her the rights, interests and liabilities of the company in or in respect of the property are deemed not to have determined. In Hindcastle, the covenant of the second defendant, which had assigned the lease to the company in liquidation, with the lessor was as follows:

"that as from the date when the lessee's estate and interest in the lease shall be assigned to the assignee pursuant to the licence hereinbefore contained and thenceforth during the residue of the term created by the lease the assignee will pay the rents thereby reserved . . ."

(See the judgment of Millett LJ in the Court of Appeal at [1995] QB 95, 106.) The argument that the liability of the second defendant was determined by the disclaimer of the lease because the term created by the lease then came to an end failed. Similarly, the argument that the surety's liability, which was to run "during the continuance of the lease", had been terminated because disclaimer resulted in the termination of the lease, failed. This was because, as against them, the effect of section 178(4)(b) was that the term and the lease were deemed to continue. I see no distinction between the provisions of these instruments and that of the AGA in the present case.

49. Like Mummery LJ, I see no inconsistency between this conclusion and the inclusion in the AGA of the put option in clause 5. In any event, quite apart from the decision of the House of Lords in Hindcastle, the decision of this court in Basch v Stekel is binding authority that there is no such inconsistency.
50. For these reasons, which are in substance the same as those given by Mummery LJ and Elias LJ (whose judgments I have read in draft), I would dismiss this appeal.

Lord Justice Elias:

51. This appeal raises a very short point. It is accepted that following Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70, the effect of section 178(4) of the Insolvency Act is that whilst the tenant (or an assignee) ceases to be liable for any of the tenant's covenants following disclaimer, the guarantor remains liable on the guarantee. The way in which this objective is achieved, lucidly explained by Lord Nicholls in that case, is by deeming the tenant's obligations to continue in so far as the guarantee agreement is concerned. The rights and liabilities of landlord and guarantor continue as though the lease has continued. The effect of section 178(4)(b) is that the rights and obligations under the guarantee agreement remain as they were.
52. Equally, however, the section is not intended to alter those rights and liabilities. Accordingly, if the parties in terms state that the guarantee is to terminate on disclaimer, effect must be given to that agreement. That would be a clear example of a case where, even if it may be said that the obligations of the tenant would be deemed to continue so far as the guarantor is concerned, the guarantor has no continuing obligations with respect to them. The guarantee no longer bites because the parties have said that it should not.
53. Mr Glen, counsel for the appellant guarantor, submits that this is in essence the situation here. Clause 1.4 of the guarantee agreement provides that the guarantor's obligations are limited to the period during which the assignee is bound by the tenant covenants. It follows that the guarantor's obligations cease once the assignee is no longer bound. One of the circumstances which will cause the assignee to cease to be bound is when the lease is disclaimed. Accordingly, the parties have chosen to draft the contract in a way which causes the guarantee to cease on disclaimer. They could have drafted it in numerous other ways which would have kept the liability on foot notwithstanding the disclaimer, but they have not done so. The court should give effect to the clear and simple words of the agreement. The landlord accepts that as a result of the disclaimer the assignee is no longer bound by the agreement and it necessarily follows that the guarantee must fall away. It is not the legal effect of the disclaimer itself which brings the guarantor's liability to an end, but the terms of the contract which define the parties' rights and obligations.
54. Furthermore, the landlord is able to protect himself on a disclaimer by exercising his rights under the put option in clause 5 of the Agreement which enables him to require the guarantor, if certain conditions are met, to enter into a tenancy agreement. That is the way in which the parties have chosen to deal with the consequences of a disclaimer. It is neither necessary nor just to give an artificial meaning to clause 1.4 to extend the protection afforded to the landlord in the event of a disclaimer.
55. Mr Fancourt QC, counsel for the landlord, contends that in the context of the guarantee agreement, the assignee must be deemed still to be bound by the tenant's covenants even though he is not so bound in fact. The guarantor is liable as though the assignee were bound. That is the effect of section 178(4) as construed in the Hindcastle case by Lord Nicholls (p.88G). It is of course open to the parties to limit the guarantor's liability so as to terminate on disclaimer, but very clear words are necessary to achieve that objective. Insolvency or bankruptcy are precisely the circumstances when the guarantee is likely to become operative.
56. When construing the guarantee agreement, the words used must be read in the context of the common law and statutory background with the consequence that the liabilities of the assignee are deemed to continue even though they do not continue in fact. The guarantee agreement must, therefore, be read on that premise. So when clause 1.4 provides that the liability period continues only whilst the assignee remains bound, this naturally means whilst he is deemed to be bound.
57. Mr Fancourt relies upon the terms of the guarantee agreement in the Hindcastle case itself, and the Court of Appeal decision which it overruled, Stacey v Hill [1901] 1 KB 660. In Hindcastle their Lordships held that the guarantor was bound by a clause which provided that the guarantee should run "during the continuance of the lease." Lord Nicholls expressly rejected a construction argument (admittedly not in quite the form advanced here) to the effect that the obligations came to an end on disclaimer. Yet read literally, as Mr Glen would have the court read clause 1.4 in this case, the lease did not continue on disclaimer and therefore the guarantee should have ceased. That is not what their Lordships held.
58. In Stacey v Hill the surety undertook to guarantee "so much rent as may be from time to time in arrear for twenty one days…". The Court of Appeal held that this obligation came to an end on disclaimer on the grounds that the obligation only ran with the lease. Once that was determined the obligations of the guarantor came to an end. The House of Lords in Hindcastle overruled this decision. Lord Lloyd said in terms that the Court of Appeal in that case ought to have held that the surety was not released (p.83A) and Lord Nicholls also held that the case should be overruled (p 96D).
59. Mr Fancourt submits that if the argument advanced by Mr Glen were correct, there could have been no continuing obligation on the surety in that case either. Following disclaimer, the tenant was under no obligation to pay any rent and therefore there was no in fact no rent in arrears. However, liability could properly have been imposed –and their Lordship in Hindcastle said should have been imposed- on the basis that there was deemed to be a tenancy agreement still in place, and since the tenant had paid no rent, there were deemed to be arrears for which the guarantor was liable. The reference to rent arrears included, in the context of this agreement, deemed rent arrears.
60. I have no hesitation in preferring the argument of Mr Fancourt. The effect of Hindcastle is that the lease is deemed to continue and the obligations of the assignee are deemed to remain in place. This fiction permeates the whole of the agreement. The assignee must be treated as if he were bound by the tenant's covenants even though he is not in fact so bound. He remains bound for the purposes of determining the rights and obligations arising out of the relationship between the landlord and the guarantor. Accordingly, a clause in the agreement which limits the term of the guarantee to the period during which the assignee is bound does not, read in the context of section 178(4) as interpreted by their Lordships in Hindcastle, operate so as to terminate the guarantee on the basis that the assignee is no longer bound in fact following the disclaimer. He is deemed still to be bound. I agree with Mr Fancourt that it liability in Hindcastle and Stacey could only be imposed by carrying the deeming principle through to the construction of the agreement itself. In Hindcastle the guarantor's obligation ran "during the continuation of the lease" which after disclaimer could only refer to the fictional or deemed lease. So here; the obligation lasts whilst the assignee is bound, which must refer to his being deemed to be bound. In substance Mr Glen's argument involves restoring the now discredited approach adopted by the court in Stacey v Hill.
61. Nor do I think that any different meaning should be given to the meaning of clause 1.4 because of the existence of the put option in clause 5. That provides an additional remedy for the landlord. Until Stacey v Hill was overruled it was apparently the way in which landlords sought to protect themselves from the consequences of that decision. However, it is not always a satisfactory way of protecting the landlord's interests. Once a new tenancy agreement is made, any guarantee of the old tenant's or assignee's liabilities comes to an end. Moreover, the landlord may have good reason for not wanting the guarantor to take over the tenancy agreement. It is also pertinent to note that in Hindcastle itself the guarantor remained liable on the lease notwithstanding the existence of a clause of a similar nature to clause 5.
62. Accordingly, for these reasons I would dismiss the appeal.