England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
HH JUDGE HODGE QC sitting as a Judge of the High Court
HC 07 C00302

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/02/2009

Lord Justice Stanley Burnton :

Introduction

1. This appeal raises short but not straightforward questions as to the construction and effect, and thus of the reasonableness, of a condition required by the landlord in relation to the proposed assignment of a lease. The Appellant was the buyer under a contract entered into with the Respondent to purchase the unexpired residue of the term created by the lease. The Appellant rescinded the contract on the ground that the condition was unreasonable. HH Judge Hodge QC, sitting as a judge of the Chancery Division, held that the landlord's requirement of the condition had been reasonable and dismissed the Appellant's claim for return of the deposit paid under the contract.

The facts

2. At an auction on 13 July 2006, the Appellant contracted to purchase the Respondent's head leasehold interest in a block of 26 residential flats at 13 to 17 Clarges Street, London W1. The agreed price was £1,050,000. The Appellant paid a deposit of £105,000. The head lease was dated 29 October 1964 and was for a term of 99 years from 29 September 1964. By clause 2(s) of the lease, the head landlord's consent was required to the assignment of the lease to the Appellant. It was a covenant on the part of the lessee:

"not to assign part or parts only of the demised premises and not to underlet or part with possession or assign the whole of the demised premises without the consent in writing of the Landlord first had and obtained but such consent shall not be unreasonably withheld in the case of a respectable and responsible assignee or sub-tenant being offered."

3. The sale contract incorporated the 1st May 2002 edition of the Common Auction Conditions published by the RICS. General Condition 9 contained provisions relating to obtaining of the head landlord's consent to the assignment and was therefore applicable:

"9.1 Where the Lot is leasehold land and licence to assign is required

(a) the Contract is conditional on it being obtained by way of formal licence if that is what the landlord or the relevant lease requires

(b) the Agreed Completion Date is if necessary postponed to the date five Business Days after the Seller has given notice to the Buyer that licence has been obtained.

9.2 The Seller must

(a) use all reasonable endeavours to obtain each licence required; and

(b) enter into any authorised guarantee agreement properly required under the Lease.

9.3 The Buyer must

(a) promptly provide references and other relevant information,

(b) if properly required under the terms of the Lease execute such licence or other direct deed of covenant as may be required and provide guarantees, a rent deposit or other security.

9.4 If within 3 months of the Contract Date (or such longer period as the Seller and Buyer agree) all required licences have not been obtained the Seller or the Buyer may by notice to the other rescind the Contract at any time before all licences are obtained. Rescission is without prejudice to the claims of either Seller or Buyer for breach of this condition 9."

4. Clause 8 of the General Conditions provided:

"8. If the Contract is rescinded or otherwise brought to an end

…

(b) the Seller must return the deposit and any interest on it to the Buyer."

5. The 3 month period specified in clause 9.4 was extended by agreement between the Appellant and the Respondent until close of business on 27 October 2006.
6. Relevant events after the contract can be taken from the judgment of HH Judge Hodge QC. The Appellant was a dormant company which had never traded. It therefore had no accounts and could provide no accountant or bank references. The head landlord, through its solicitors, Wedlake Bell, was only prepared to give its licence to the proposed assignment if the Appellant's sole director, Andrew Reid, a partner in the firm of Reid Minty and (with his family) the principal ultimate shareholder in the Appellant, was prepared to guarantee the Appellant's performance of its obligations as assignee of the head lease; but Mr Reid was only willing to offer a guarantee if it was limited in duration for a period of 3 years. This was unacceptable to the head landlord. The Appellant therefore issued proceedings in the Central London County Court against the head landlord claiming declarations that it had unreasonably refused its consent to the assignment and/or had imposed unreasonable conditions for the giving of its consent. Specifically, the Appellant sought a declaration that it was unreasonable for the head landlord to impose a requirement for Mr Reid to provide a guarantee more extensive than that which had previously been offered.
7. The proceedings were expedited and came on for trial before His Honour Judge Cowell on 10 October 2006. On 13 October 2006, he gave judgment dismissing the claim, holding that, in all the circumstances of the case, the head landlord had not been acting unreasonably in rejecting the offer of a guarantee limited in duration to a period of only 3 years. There was discussion following the judgment between counsel for the Appellant and counsel for the head landlord and the judge on what provision relating to the guarantee would be reasonable, but it is not relied upon in the present proceedings.
8. Following this judgment, the dispute over the precise terms of the guarantee continued. On 19 October 2006 Wedlake Bell submitted a draft licence to assign. As before, it included a covenant by the Appellant to pay the rents and to comply with the lessee's covenants in the lease from the date of the proposed assignment and at all times during the residue of the term. As before, it included a guarantee to be provided by Mr Reid. By Clause 6.6, the guarantee was to be released on a subsequent assignment with the head landlord's consent "provided that a reasonable alternative guarantor is provided by the purchaser".
9. On 20 October, the Appellant's solicitors amended this draft, deleting the proviso so that Mr Reid would automatically be released on an assignment with the head landlord's consent. Thus it read:

"In the event of a subsequent assignment with the consent of the Landlord in accordance with the provisions of the Lease the Guarantor shall be released from his liability pursuant to the covenants on the Guarantor's part in this deed."

10. Wedlake Bell reinstated the proviso, but amended it so as to provide for Mr Reid to be released on a subsequent assignment with the landlord's consent "provided that a reasonable alternative security is provided by the assignee pursuant to such subsequent assignment". In its final form it read:

"In the event of a subsequent assignment of the lease effected with the consent of the Landlord the Guarantor shall be released from his liability pursuant to the covenants on the Guarantor's part in this deed provided that a reasonable alternative security is provided by the assignee pursuant to such subsequent assignment."

The italics are mine.

11. This alternative formulation was unacceptable to the Appellant. In a letter to Wedlake Bell of 27 October 2006, Reid Minty, then acting on behalf of the Appellant, expressed their view that what the head landlord was seeking was protection to which it was not entitled under the terms of the head lease which, on the authority of Mount Eden Land Limited v Straudley Investments Limited (1996) 74 P & CR 306, would be unreasonable. Reid Minty's expressed reasons for saying this were as follows:

(a) The head landlord had the ability to refuse consent to any assignment if they were not satisfied with the strength of the covenant or any security being offered. Accordingly, the clause proffered by the Appellant was said to provide the head landlord with the protection they had under the terms of the head lease.

(b) The requirement that Mr Reid should only be released from his guarantee if the head landlord consented and a reasonable alternative security was provided by the assignee was a "recipe for future disputes", which is what the Appellant was seeking to avoid. It was suggested that the requirement of a "reasonable alternative security", in addition to the head landlord's right to refuse consent, might arguably require a guarantee of equal strength to the guarantee provided by Mr Reid.

12. As mentioned above, the Appellant and the Respondent had agreed that the period after which either of them could give notice to rescind the sale contract if the head landlord's licence had not by then been obtained expired at the close of business on 27 October 2006. A few minutes after 5.30 pm that day, the Appellant gave notice to the Respondent rescinding the sale contract and requiring the return of its deposit, on the ground that the head landlord's requirement as to the terms of the guarantee to be provided by Mr Reid had been unreasonable. The Respondent did not accept that the sale contract had been validly rescinded. It asserted that the Appellant had been in breach of its obligations under the sale contract by refusing to complete a licence to assign containing a guarantee in the form proposed by the head landlord. On 5 December 2006, the Respondent served on the Appellant a notice to complete; and, when it refused to comply, on 2 January 2007 the Respondent treated the Appellant as in repudiatory breach of its obligations under the sale contract and proceeded to forfeit its deposit.

The contentions of the parties

13. For the Appellant, Mr Furber QC submitted that condition 6.6 of the draft licence in its final form involved a two-stage process. The proviso came into effect only after an authorised assignment, and, notwithstanding that the landlord had given consent to the assignment, gave the landlord the right to refuse to release the guarantor if the landlord considered that there was no reasonable alternative security for the performance of the covenants of the new lessee. That was unreasonable. Secondly, even if that submission were wrong, under the proviso the guarantor would not be released unless the new assignee provided some security, such as a third party guarantee, in addition to its own covenant, even if it was entirely creditworthy; and this too was unreasonable.
14. For the Respondent, Mr Rodger QC submitted that the head landlord had reasonably required the duration of the guarantee to be as set out in the final version of clause 6.6. He accepted that the proviso added to the rights of the landlord, but submitted that it had been reasonable for the landlord to require it. The requirement of security referred to in the proviso could be satisfied by the covenant of a credit-worthy assignee: "security" should be given a wide, and not a technical meaning. Furthermore, Mr Reid, the sole director of the Appellant, would be able to ensure that any assignee from the Appellant was creditworthy and so provided "reasonable alternative security".

Discussion

15. There was little, if any, difference between counsel as to the legal principles applicable to this appeal. The ultimate question was whether the guarantee with a provision for its release in the form set out in paragraph 10 above was "properly required [by the head landlord] under the terms of the lease" for the purposes of condition 9.3(b) of the General Conditions of the contract of sale. By reason of the terms of clause 2(s) of the lease, the guarantee was properly required if it was reasonable for the landlord to require it as a condition for its consent to the assignment of the lease to the Appellant. "Release" in clause 6.6 would result in the guarantor having no liability for any breach of covenant by a lessee committed after the date of the release.
16. By section 1(6)(b) of the Landlord and Tenant Act 1988, it is for the landlord to show that his refusal of consent was reasonable. Whether a requirement of the landlord is reasonable or not is a mixed question of fact and law. In the present case, in which there was no dispute that the landlord was entitled to require a guarantee of the Appellant's liabilities, the issue is more one of law rather than fact: what is the true interpretation and effect of the landlord's requirement, and was its requirement reasonable in the circumstances?
17. The principles applicable to the reasonableness of a landlord's requirement for his consent to an assignment were authoritatively stated by this Court in International Drilling Ltd v Louisville Investments [1986] 1 Ch 513 and in the Mount Eden Land Ltd case. For present purposes, it is sufficient to refer to the judgment of Phillips LJ (with whom Mummery LJ, the only other member of the Court, agreed) in Mount Eden at 310:

"The principles which apply to the present case may be extracted from a rather longer list in the judgment of Balcombe LJ in International Drilling Ltd v Louisville Investments CA [1986] 1 Ch 513 at p 519:

'(1) The purpose of a covenant against assignment without the consent of the landlord, such consent not to be unreasonably withheld, is to protect the lessor from having his premises used or occupied in an undesirable way, or by an undesirable tenant or assignee: per A L Smith LJ in Bates v Donaldson [1896] 2 QB 241, 247 approved by all the members of the Court of Appeal in Houlder Bros & Co Ltd v Gibbs [1925] Ch 575.

2. As a corollary to the first proposition, a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease: see Houlder Bros & Co Ltd v Gibbs, a decision which (despite some criticism) is binding on this court: Bickel v Duke of Westminster [1977] QB 517. A recent example of a case where the landlord's consent was unreasonably withheld because the refusal was designed to achieve a collateral purpose unconnected with the terms of the lease is Bromley Park Garden Estates Ltd v Moss [1982] 1 WLR 1019.

....

4. It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances. Pimms Ltd v Tallow Chandlers Company [1964] 2 QB 547, 564.'

From the cases cited, and from these principles, I believe that it is possible to formulate two further propositions:

1. It will normally be reasonable for a landlord to refuse consent or impose a condition if this is necessary to prevent his contractual rights under the headlease from being prejudiced by the proposed assignment or sublease.

2. It will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the headlease."

18. The rights created by the headlease in the present case were:

(a) as against the original lessee, under the contract contained in the lease, to have the rents paid and the covenants on the part of the lessee performed throughout the term. The liability of the original lessee arises out of its privity of contract with the landlord. (The lease was an "old" lease, entered into before the Landlord and Tenant (Covenants) Act 1995 came into force.)

(b) as against an assignee of the term of the lease, to have the rents paid and the lessee's covenants performed while the term is vested in that assignee. The liability of the assignee arose out of its privity of estate with the lessor.

19. In my judgment it follows that a lessor cannot normally reasonably require a guarantor of the liabilities of an assignee to undertake a liability extending beyond the period during which the term is vested in the assignee. Such a requirement increases or enhances the rights the lessor enjoys under the lease.
20. In the present case, the Appellant as assignee was willing to covenant in the licence to be liable to the landlord for the performance of the lessee's covenants throughout the remainder of the term, i.e., even after a permitted further assignment. But in my judgment that does not affect the question whether the landlord's requirement of the guarantor is or is not reasonable, and Mr Rodger did not suggest that it did.
21. I accept Mr Furber's submission that the consequence of clause 6.6 of the draft licence as finally required by the landlord was that the liability of the guarantor might continue after a subsequent permitted assignment by the Appellant. The words "In the event of a subsequent assignment with the consent of the Landlord" refer to an assignment that has taken place before the proviso comes into effect; and the words "pursuant to such subsequent assignment" point in the same direction. There would thus be two requirements for the release of the guarantor: a subsequent assignment with consent and the provision of reasonable alternative security. Any other reading of the clause gives no effect to the proviso or to the landlord's insistence on it. In my judgment, the landlord was not reasonably entitled to add this second requirement for the release of the guarantor.
22. In the course of correspondence, Wedlake Bell, the solicitors for the head landlord, accepted that this was the effect of clause 6.6. In their letter to Reid Minty of 30 October 2006 they said:

"Our clients do indeed have the ability to refuse consent if they are not satisfied with the strength of the covenant or any security offered by the proposed assignee. However, if for whatever reason (probably more likely in theory that (sic) in practice) our client were to permit an assignment without obtaining sufficient security, then the guarantor would not be released. In the more likely scenario of our client obtaining a sufficiently strong covenant or other security from the proposed assignee, then the guarantor would automatically be released."

23. The head landlord's position was unreasonable because it would always be entitled to refuse to consent to a further assignment if the proposed assignee was not of sufficient substance, or was unable or unwilling to provide adequate security for the payment of rent and the performance of the lessee's covenants. The head landlord is thus entirely protected against an assignment to an insubstantial assignee. Its protection is the right to refuse consent, not the right to refuse to accept the discharge of the assignor's guarantor.
24. Mr Rodger accepted that clause 6.6 as required by the landlord might involve the continuation of the liability of the guarantor after the Appellant had assigned the lease. But he submitted that that was unlikely, and that the guarantor, Mr Reid, as the sole director of the Appellant, could protect himself from that unlikely eventuality by ensuring that any assignment was to a lessee of substance or that an insubstantial lessee offered reasonable alternative security.
25. I do not think this is right as a matter of law or as a matter of fact. As a matter of law, as I have already stated, it is in general unreasonable for a landlord to require a guarantee of the liabilities of an assignee to extend beyond the period during which the assignee is liable to the landlord by privity of estate. As a matter of fact, Mr Rodger's submission does not take into account reasonable possibilities that the parties should have in mind. The guarantor cannot and should not have to rely on the landlord acting sensibly and refusing to consent to an assignment to an insubstantial assignee. It is important to bear in mind that the landlord owes no duty to a lessee not to consent to an assignment to an insubstantial assignee. He is legally free to do so. The present head landlord, no matter how reasonable, may sell the reversion to someone whose reliability is less certain. Mr Reid may be unable to extract from a purchaser of the shares of the Appellant a suitable indemnity for his liability under his guarantee. Moreover, questions could arise as to his liability under the guarantee in the event of one or more further assignments of the term.
26. Clause 6.6 has the further defect that it exposes the guarantor to a dispute as to whether the landlord has reasonable alternative security. Without the proviso, the effect of the clause is that the head landlord decides whether a proposed assignee is a suitable lessee; if it decides that he is, it gives consent to the assignment, and the guarantor is automatically discharged from further liability. As a result of the proviso, the guarantor may be exposed to a dispute as to whether a permitted assignee has provided or is itself reasonable alternative security.
27. For these reasons, I would hold that the landlord's requirement of a personal guarantee, the discharge of which would be subject to clause 6.6 of its draft of the licence to assign, was unreasonable under the terms of the lease and was not properly made for the purposes of clause 9.3(c) of the General Conditions of the contract of sale, and I would allow the appeal. The Appellant was entitled to rescind the contract and is entitled to the return of its deposit.
28. In these circumstances, it is strictly unnecessary for me to consider Mr Furber's further submission that correctly construed the requirement in clause 6.6 for "reasonable alternative security" was for security for the performance by an assignee of the lessee's covenants, i.e., for something in addition to the covenant of the assignee itself. Mr Rodger accepted that the technical meaning of "security" is something additional to the personal liability of the primary or sole obligor: a guarantee or a financial deposit or the like; but he submitted that a sensible commercial interpretation was that "security" in this context included the value of the personal liability of an assignee.
29. I have found this issue less easy to resolve. But I have come to the conclusion that objectively construed the proviso does require something in addition to the assignee's personal liability. I do so not only because of the normal technical meaning of "security" in what is, after all, a conveyancing document, but also because what is required is "a reasonable alternative security", not simply "reasonable alternative security", and because it is to be provided "pursuant to" the subsequent assignment, i.e. it is to be required by its terms, and is therefore something in addition to the assignee's liability under the assignment itself. For these reasons too, therefore, the head landlord was not reasonably entitled to require a guarantee that would be discharged in accordance with clause 6.6 of the final draft of the licence to assign.

Lord Justice Wilson

30. Although I prefer to leave open the construction of "reasonable alternative security" discussed in [28] and [29] above, I agree that the appeal should be allowed for the reasons given by Stanley Burnton LJ in the earlier paragraphs of his judgment.

Lord Justice Waller

31. I agree that the appeal should be allowed for the reasons given by Stanley Burnton LJ.