England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BIRMINGHAM DISTRICT REGISTRY
CHANCERY DIVISION
(HIS HONOUR JUDGE SIMON BROWN QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		14 June 2011

Lord Justice Lloyd:

1. This appeal is against an order of HHJ Simon Brown QC made on 26 November 2010 giving judgment for the claimant against the second and third defendants (to whom I will refer simply as "the defendants") for £158,682.09 plus interest amounting to £15,089.58 and costs, with £25,000 being payable on account of the costs. The defendants contend that they are not liable to the claimant for any sum or, as a fallback, that they are liable for no more than £15,500 by way of a principal sum on which there would no doubt be interest. The liability, if any, of the defendants arises from their having executed a lease dated 18 July 2007 of premises in Birmingham as guarantors for the original tenant (who was the first defendant in the proceedings) to the landlord (who is the claimant). The lease was for a term of 15 years from 25 March 2007 at an initial rent of £120,000 per annum with provisions for service charge and insurance rent as well. The premises were to be used as a licensed restaurant. There were rent review provisions applying after five and ten years. The defendants are defined in the identification of the parties at the outset of the lease as "the Guarantors" and the first defendant is identified in the same context as "the Original Tenant". Clause 1.21 (which is part of a long series of definitions) says:

"The 'Guarantor' includes any person who enters into covenants with the Landlord, pursuant to para (b) of clause 3.9.5 or clause 3.23."

Those are provisions with which we do not need to be concerned in detail.

2. Clause 6 of the lease is headed "GUARANTEE PROVISIONS". Clause 6.1 (although in fact there is not a 6.2) is headed "THE GUARANTOR'S COVENANTS". Clause 6.1.1 deals with Nature and Duration. Clause 6.1.2 sets out the covenants in detail in its paragraphs (a), (b) and (c). We do not need to be concerned with clause 6.1.3. Clause 6.1.2 contains an extensive prescription of the obligations of the tenant which are the subject of the guarantee. For the most part the details of this provision do not matter on the appeal. What does matter is clause 6.1.1, headed "NATURE AND DURATION" which is as follows:

"The Guarantors' covenants with the Landlord are given as sole or principal debtor or covenantor, with the landlord for the time being and with all his successors in title without the need for any express assignment, and the Guarantors' obligations to the Landlord will last throughout the Liability Period until the Tenant has paid to the Landlord rent in the sum of £210,000 and the said rent has been received by the Landlord in cleared funds."

3. Thus there are two apparent limitations to the liability of the guarantor. It lasts throughout the Liability Period, but only, within that period, until the tenant has paid and the landlord has received £210,000 by way of rent. Consistently with this, in clause 6.1.2(a) one of the obligations to be guaranteed is that if, during the Liability Period, the tenant defaults in paying rent or in observing or performing any covenant under the term of the lease, the Guarantor must pay the rent, observe or perform the other obligation (whatever it may be) and indemnify the landlord from or against any losses resulting from the tenant's breach. Similarly under clause 6.1.2(b), if at any time during the Liability Period while the tenant is bound by the tenant's covenants in the lease, any trustee in bankruptcy or liquidator of the tenant disclaims the lease the Guarantor must, if so required by notice from the landlord, take a lease for the rest of the term in corresponding terms.
4. The definition of "Liability Period" is in clause 1.28. It is common ground that something has gone wrong in its drafting. It is as follows:

"'The Liability Period' means -

(i) in the case of any guarantor required pursuant to para (b) of clause 3.9.5, the period during which the relevant assignee is bound by the tenant covenants of this Lease together with any additional period during which that assignee is liable under an authorised guarantee agreement,

(ii) in the case of any guarantor under an authorised guarantee agreement, the period during which the relevant assignee is bound by the tenant covenants of this Lease, and

(iii) in the cases of any guarantor required pursuant to para (g) of clause 3.9.8, the period during which the relevant assignee of the sublease is bound by the tenant covenants of that sublease."

5. The reference in sub-paragraph (i) to clause 3.9.5(b) is clear enough. It is to a situation in which the landlord requires guarantors for the liability of a limited company as assignee as provided for in that paragraph of clause 3.9.5. Paragraph (ii) referring to authorised guarantee agreements would arise primarily under clause 3.9.5(a) where the assigning tenant is required to enter into such an agreement on the assignment to counteract the effect of the Landlord and Tenant (Covenants) Act 1995. Sub-paragraph (iii) does not make sense because neither paragraph (g) or any other part of clause 3.9.8 provides for a guarantor to be required on any assignment of any sub-lease. However, the main problem is that there is nothing in clause 1.28 which defines the Liability Period in relation to the original Guarantors. On the face of it, therefore, clause 6, as it applies to the original Guarantors, lacks any definition which could result in their being liable at all.
6. As I said, it is not in dispute that this is the result of an error, an inadvertent omission. The issue on the appeal is whether the court can be sufficiently certain as to what should have been in clause 1.28 to deal with this aspect of the matter, as the judge held and the respondent argues, or whether there is such an element of doubt, as the appellants argue, that the court cannot construe the clause as including what was omitted by mistake, not being sufficiently sure what it was. In that case the defendants, as original guarantors, would not be liable at all and the claim against them should be dismissed.
7. The essential facts are not in dispute. The lease was granted under a prior agreement under which the landlord contributed £150,000 to the cost of works of fitting out or adapting the premises for use as a restaurant. The claimant required personal guarantees from the defendants because the first defendant had had a very short prior trading history, giving rise to uncertainty as to its financial viability and credit worthiness. The defendants knew that this was the reason for the requirement of personal guarantees and no doubt expected it. The claimants' doubts proved to be justified. By 2008 the tenant was in default in payment under the lease. Indeed, so far as I can see from a schedule annexed to the amended particulars of claim the tenant never paid punctually and in full the sums due under the lease. These proceedings were issued in late 2008. During 2009 the tenant went into administration and later the lease was forfeited by way of peaceable re-entry. By then the tenant had paid a total of £194,500 to the landlord which, subject to any issue of appropriation, was due by way of rent, service charges, VAT and possibly to some extent interest on late payment. It is not clear from the schedule that anything was due during that period by way of insurance rent but it may have been.
8. The claimant says that a term should be read into clause 1.28 by way of construction or implication to the effect that the Liability Period in relation to the original Guarantors means the period during which the Original Tenant – that is to say the first defendant – is bound by the tenant's covenants in the lease. Alternatively it claimed that the lease should be rectified to have that effect. It sought to rely on things said in the course of the negotiations for the lease. Indeed, it alleged such matters in support of the argument of construction in the amended particulars of claim. Such communications could be admissible only in relation to the rectification claim, not as regards construction. The claimant also relied on a widely available precedent for a commercial lease which, according to clear signs, is likely to have been the direct or indirect source of the drafting of the present lease.
9. The defendants, who acted without legal representation until shortly before the trial, took a variety of points in their defences. At trial, with the benefit of representation by Counsel, they concentrated on clause 6.1, contending that because the tenant had paid the sum of £194,500, as mentioned, their guarantee liability under clause 6.1 was limited to the difference between that sum and £210,000. The judge addressed that argument but first he considered the problem of the lacuna in clause 1.28. He held in favour of the claimant both on supplying the omission and on the effect of clause 6.1.1. Before this court the appellants, represented now by Mr Stephen Howd who did not appear below, argue that clauses 6.1 and 1.28 have to be taken together and that the judge was wrong principally in his reading into clause 1.28 that which the claimant had argued for. As I say, the latter point may not have been argued before the judge but it was in issue and there is no reason not to allow it to be argued before us. Mr Howd in his clear and economical submissions focussed on clause 1.28 and its effect by reference to clause 6.1.1 rather than on the effect of clause 6.1.1 by itself, if the point on clause 1.28 was resolved in favour of the claimant. By a respondent's notice the claimant sought to rely on rectification if necessary as a fallback. This had been pleaded and accordingly evidence was adduced as to the negotiations between the parties. The oral evidence was limited, not including, for example, that of the solicitor on either side. The judge did not need to deal with that issue since, without opposition, as I say, on behalf of the defendants, he had found the answer by way of construction. For my part I think he was right to do so for reasons which I will explain.
10. As I say, the claimant relied in its pleading on communications passing between the parties on construction as well as on rectification. That seems to me to have been an error on their part and correspondingly an error for the judge insofar as he made reference to and relied on any such matter. The danger of running construction and rectification arguments in parallel is that evidence admissible on the latter but inadmissible on the former may taint the court's consideration on the former. I therefore propose to consider the issue of construction without reference to the communications passing between the parties in the course of the negotiation, let alone any communications between a party and its lawyers which were not divulged to any person or party.
11. The judge relied not only on the communications between the parties but also on the precedent to which I have referred. Its admissibility was not, so far as we can see, questioned below and the judge held that it was admissible by reference to a number of cases of which the most important is The Starsin [2003] UKHL 12; [2004] 1 AC 715. That case was concerned, so far as relevant, with an inadvertent omission of words in the middle of a Himalaya clause drawn from a standard form in very wide use in the relevant market. There was no doubt that the correct form of the clause was a matter of common knowledge to all parties and there was therefore no possible issue as to the admissibility of the full form of the clause in the process of working out how the actual clause should be read. There could be such an issue in relation to a conveyancing or commercial precedent. We know in fact that Butterworths precedent provided, directly or indirectly, the basis for the drafting of the lease, so it may be possible to infer that the landlord's solicitors, who will have prepared the first draft, are likely to have used either the draft precedent itself or their own office adaptation of it or a previous lease derived directly or indirectly from it as the basis for working out and formulating the draft lease to be put to the tenant in this case. Which of those possibilities applied we do not know. Equally we do not know whether the tenant's solicitor was equally familiar with this precedent. It is possible that both solicitors knew that this was the source. It is equally possible that neither of them did or that only one of them did. It does not seem to me that we can properly assume, without evidence on the point – and there was none – that the provenance of the draft from this precedent and therefore the provenance of the actual lease from this precedent was a fact known to both parties. Accordingly, despite the judge's understandable reference to it in the absence of any objection before him and despite the known direct or indirect derivation from the precedent, for my part I would disregard it in construing the lease.
12. However, even without reference to the precedent, the context of clauses 6.1.1 and 6.1.2 provides an adequate basis for construing clause 1.28 as if it had included a provision defining the Liability Period in relation to the Original Tenant as the period during which the Original Tenant is liable on the tenant's covenants in the lease. That would therefore extend until the date of any assignment by the Original Tenant when, under the 1995 Act, it would be released unless it were required at that stage to enter into an authorised guarantee agreement as guarantor for the assignee. Since there has been no assignment it is unnecessary to consider whether the Liability Period should also cover a period after an assignment when the original tenant is liable under an authorised guarantee agreement. There is material in clause 6.1.2 from which such an extension could be thought appropriate but we do no need to decide that.
13. Mr Howd seeks to challenge not only the judge's conclusion but also the alternative basis that I have just described on the ground that, although it is clear that there is an inadvertent omission from clause 1.28, the court cannot be sufficiently sure what it is that was omitted. It is not in dispute that it must be clear not only that words have been omitted but also what those omitted words were. (See, for example, The Starsin, per Lord Bingham at paragraph 23.) This does not mean that there must be only one possible set of words that could fill the gap. To take an older example, in the case of Re Whitrick (deceased) [1957] 1 WLR 884, a lady had left her estate to her husband and had also made provision for the case of their dying at the same time as each other, but not for the much more likely event, which happened, of his dying before her. The Court of Appeal, reversing Harman J, held that her will should be construed so that the alternative gift applied either if they died at the same time or if he died before her. Romer LJ said that it was not necessary to know the precise language which the lady would have used so long as the substantive effect was clear. Mr Howd's argument is that if the parties had addressed their mind to the omission whilst the lease was still in draft, some other provision with a more limited effect than that which I have posited might have been inserted, for example limiting the Liability Period to only part of the contractual term.
14. I would accept that one must look at clause 1.28 for this purpose in the context of the lease as a whole and in particular of clause 6, which is the provision for which the definition of Liability Period is relevant. I do not, however, accept that it follows that there is any reasonable doubt as to how the Liability Period should be defined in relation to the defendants as original guarantors. Indeed, it seems to me that the formula used in clause 6.1.1 supports the claimant's argument and the judge's reasoning as regards clause 1.28. There is of course a limitation on the liability of the original guarantors, especially negotiated and agreed, and set out as a qualification to clause 6.1.1. Leaving aside any arguments as to the effect of that limitation, it seems to me plain that this is the point in the lease at which a limitation was to be - and was - imposed and that clause 1.28 was not the place for such an exercise. In turn, the formulation of the limitation in clause 6.1.1 shows that the Liability Period in relation to the original guarantors was to run while the original tenant was bound by the tenant's covenants of the lease until the proviso to clause 6.1.1 came into play. Mr Howd also relied on references in clause 6.1.2 to the duration of the liability as showing some surplus wording in relation to the liability for the original tenant's acts and defaults if the Liability Period was to be defined in the way that the claimant contended and that the judge found. For my part I do not regard that as a significant point since the clause does not only apply to the original tenant but also to assignees and on Mr Howd's argument it would be a case of at most some modest surplusage, not of any contradiction.
15. Mr Howd's argument in its most forceful aspect is that the hypothetical definition of the Liability Period has to be considered by reference to the effect of clause 6.1.1 with its limitation by reference to the liability for, and payment of, £210,000 rent by the tenant. It is fair to say that this is a rather unusual formula. It is clear that there was to be a limitation and that it was to have effect by reference to the payment of the stipulated amount of rent by the tenant. As read by the judge it could operate in a somewhat haphazard way which Mr Howd characterised as capricious. If the tenant has paid £210,000 rent which the landlord has received, then the guarantors are under no further liability at all under clause 6.1.2, whereas if the tenant has paid £209,000 rent the guarantors remain under unlimited liability for the tenant's acts and defaults for the rest of the period. Moreover, Mr Howd pointed out that the guarantors, if they had acted in time, could have lent the tenant £16,000 to be paid towards the arrears of rent over and above the £194,500 already paid, with the result that once the landlord had received that £16,000 paid by the tenant, the tenant would have paid more than £210,000 by way of rent and the guarantors would be off the hook. However, if the guarantors had paid that £16,000 direct to the landlord in their capacity as guarantors they would not be let off the hook but would remain liable because the tenant itself had only paid the lesser sum. Now of course it is too late because the tenant is in administration and the lease has been disclaimed. Even before the administration there might have been a problem with such a process, if the guarantors had been alert to it, because if the tenant had paid rent in that way it might possibly have been a preference as against other creditors. However, so far as it goes, the point is a fair one. It would have made more sense for the guarantors if the limit had been expressed so that their liability was for the difference between £210,000 and the sum, if less, that the tenant had paid by way of rent. On the facts, subject to any argument as to whether all of the £194,500 counts as paid by way of rent for this purpose, this would leave the guarantors liable for £15,500 only. Other approaches would have been possible, such as limiting the guarantor's liability to rent falling due and other obligations falling to be performed within a given period after the beginning of the lease. However, none of these fits at all easily with the approach actually adopted of imposing a termination point on the Liability Period in the words of clause 6.1.1. Those words were plainly the subject of specific negotiation. I have not paid any attention to the terms of the negotiations since, as I say, these are not admissible.
16. To that extent I would accept Mr Howd's criticism of the judge's reasoning in which he did make some reference to some of those communications, but as regards his substantive conclusion, however capable of anomaly, I agree that the words of clause 6.1.1 are clear; they are to be taken as having been deliberately chosen and they should have effect in accordance with their terms. Nor is the result so anomalous or arbitrary that it can be rejected on the basis that the parties cannot have intended it. It may be that the guarantors did not appreciate how it might work and equally that the landlord did not suppose that the guarantors might manage to bring their liability to an end by funding the tenant to bring its rent payments up to £210,000. Neither of those points seems to me to be anywhere near strong enough to allow the court to do other than give effect to the agreed words in accordance with their ordinary meaning. Ultimately Mr Howd did not submit otherwise.
17. He did submit that the guarantors should not be made liable because the lease should be strictly construed in favour of the guarantors. As to that, subject to his argument by reference to the combined effect of the two clauses (to which I shall shortly revert), the reading of clause 1.28 seems to me to meet that test. The words of clause 6.1.1 are clear and that is so even if their result is capable of being rather odd in some possible circumstances.
18. Taking on board all those points about the anomalous operation or the haphazard operation of clause 6.1.1 as it stands, Mr Howd argues that the anomalous and potentially very narrow effect of the limited proviso to clause 6.1.1 should lead the court to the conclusion that it is at least sufficiently possible that the words which ought to have been inserted into clause 1.28 by way of construction might have imposed an additional limitation on the guarantors' liability by shortening the Liability Period, for example to the first seven quarters of the term during which the ordinary rent accruing would amount to the sum of £210,000. He put forward a number of possibilities by way of such a limitation and submitted that the only one which could be excluded with any confidence is the adoption of a period during which less than £210,000 by way of rent would accrue due.
19. For all Mr Howd's ingenuity, it seems to me clear as a matter of construction not only that a provision defining the Liability Period by reference to the original tenant and the original guarantor has been omitted by mistake, but also that what should have been included is at least a definition of the Liability Period as the period during which the Original Tenant, defined as such in the statement of parties in the lease, is bound by the tenant's covenants in the lease. The contention that there might have been a special definition limiting the Liability Period not only in this way but also in some other way, for example as a shorter period of, say, one and three quarter or two years, seems to me entirely implausible. There was to be a limit on the guarantor's liability in 6.1.1; I see no reason to infer that the parties might have agreed a different and additional limit to be given effect by way of the definition in clause 1.28.
20. Accordingly, although for partly different reasons, I consider that the judge's conclusion on construction is right, that the guarantors were liable and are liable for the full amount claimed as ordered and I would therefore dismiss the appeal.

Lord Justice Tomlinson:

21. I agree. There is nothing I wish to add.

Lady Justice Arden:

22. I also agree.

Order: Appeal dismissed