England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		7th May 2004

The Hon. Mr. Justice Evans-Lombe:
1. This is an appeal, with permission of the Master, from the order of Master Bragge of the 13^th January of this year by which he gave summary judgment to the Claimant, Eurodis Electron PLC against the Defendant Unicomp Inc for the sum of £365,303.84 together with interest and costs.
2. Before February 1997 Fortwilliam Estates Ltd ("Fortwilliam") had let to a company, CEM Computers Ltd ("CEM") certain commercial premises at units 1-4 Victoria Business Park Belfast by a lease ("the lease") dated the 1^st March 1993. The lease was for a period of 20 years from the 1^st November 1992 and contained a covenant by the tenant "not to assign charge, transfer or part with or share possession or occupation of the premises" without (amongst other things) the landlord's prior written consent which was not to be unreasonably withheld (see clause 2(20) of the lease). The lease contained the usual proviso for re-entry in the event of non-payment of rent or breach of covenant.
3. CEM was a subsidiary of the Claimant and the Claimant guaranteed to Fortwilliam due payment by CEM of the rent becoming due under the lease and performance and observance of the covenants and conditions contained in it. The guarantee contained a proviso in the following terms:-

"It is hereby agreed that any neglect or forbearance of the Landlord in endeavouring to obtain payment of the said several rents when the same become payable to enforce performance or observance of the said covenants or conditions and any time which may be given by the Landlord to the tenant shall not release or exonerate or in any way affect out liability hereunder."

4. The Claimant's liability under the guarantee was, by its terms, to continue:-

"Until the expiration of the demise created by the above written Indenture or earlier the date of completion of assignment of the Lease with the Landlord's consent either without guarantor or with such guarantor as the Landlord shall be entitled to require pursuant to the Lease."

5. On the 20^th February 1997 the Claimant entered into a share sale agreement with Unicomp Holdings (UK) Ltd (Holdings") and the Defendant whereby Holdings purchased all the issued shares of CEM. By clause 4.11 of the share sale agreement Holdings covenanted that it would:-

"Use reasonable endeavours to procure as soon as reasonably practical and in any event within three months of completion [of the share purchase] the Vendor [the Claimant] and each member of the Eurodis Group shall be released from the guarantees and indemnities given by them or any of them in respect of the obligations of the Company [CEM] as at the Completion Date and pending such release the Purchaser [Holdings] shall with effect from the Completion Date indemnify the Vendor and each member of the Eurodis Group and keep each of them fully and effectively indemnified from and against all liabilities in connection therewith… ."

6. By clause 7.1 of the share sale agreement it was provided that:-

"In consideration of the Vendor [the Claimant] entering into this agreement Unicomp [the Defendant] unconditionally and irrevocably guarantees to the Vendor as primary obligor and not merely as surety, that the Purchaser [Holdings] will fully and promptly perform and discharge all of its present and future obligations and liabilities (together referred to in this clause 7 as the "purchaser's obligations") under the agreement and undertakes that, if the Purchaser fails so to do, it will itself perform and discharge such obligations and liabilities and indemnify the Vendor against all costs, losses, damages expenses and claims suffered or incurred by the Vendor as a result of or arising out of any failure by the Purchaser promptly to perform and discharge any of the Purchaser's obligations."

7. Subsequently CEM got into financial difficulty and the 1^st December 1998 entered into creditors voluntary liquidation. On the 30th October 1998 a Mr Moore, Holdings finance director, wrote to Fortwilliam's agents in the following terms:-

"Further to our conversation, I enclose audited accounts for the year ended February 1997 for Unibol Ltd… . The final audited accounts for Unibol Ltd for February 1998 are not available yet but should be available within the next two weeks; they show a profit before tax of £700,000.

We are seeking the consent of the Landlord to assign the lease from CEM Computers Ltd to Unibol Ltd as CEM no longer trades and Unibol are the main occupiers of the building. We also need to release Eurodis Plc [the Claimant] from their guarantee. The ultimate holding company of Unibol, Uni Comp Inc, [the Defendant] would be prepared to guarantee the lease in place of Eurodis."

8. This letter, accordingly, put Fortwilliam on notice that a related company of CEM was in occupation of the premises, the subject matter of the lease in place of CEM which had ceased trading, and was paying the rent. It seems that no prior written consent had by the date of this letter been obtained from Fortwilliam or was thereafter obtained and, accordingly, CEM was in breach of its covenant not to assign or part with or share possession or occupation of the premises let under the lease. After receiving this letter Fortwilliam's agents continued to issue rent demands to CEM until November 1999 when the rent demands started to be addressed to "CEM Computers Ltd/Unibol". Following the letter of the 30^th October 1998 negotiations started between Fortwilliam through their agents and Holdings so as to obtain the consent of Fortwilliam for the assignment of the lease from CEM to Unibol. In evidence was correspondence recording those negotiations. The negotiations appear to have failed in or about April 1999. On the 29^th April 1999 Fortwilliam's solicitors wrote to solicitors for Holdings as follows:-

"As you know Fortwilliam were prepared to agree to an assignment to Unibol despite enquiries demonstrating that both Unibol and Unicomp had made losses in the 12 months prior to November 1998. In order to compensate in one way our client not unreasonably decided to retain the existing Guarantor as a condition of consent. Enquiries have shown the proposed substitute guarantor to be less financially strong than Eurodis… ."

9. The letter of the 30^th October 1998 was the first occasion upon which Holdings made any attempt to procure the release of the Claimant and its associated companies from their obligations under the lease pursuant to clause 4.11 of the share sale agreement. Such a release has never been obtained. Rent payments continued to be made in accordance with the lease until August 2000. On the 21^st February 2001 Fortwilliam commenced proceedings in the Courts of Northern Ireland against, inter alia, the Claimants to recover unpaid rent and interest pursuant to the guarantee. The share sale agreement contained a provision, clause 12.7, for the English Courts to have exclusive jurisdiction in relation to disputes arising under it. After the commencement of Fortwilliam's proceedings the Claimants attempted unsuccessfully to persuade the Defendants and Holdings to waive this provision so that they could be joined as parties to those proceedings ultimately liable to recoup any judgment obtained by Fortwilliam against the Claimants pursuant to clauses 4.11 and 7.1 of the share sale agreement. In May 2002 Fortwilliam's proceedings were compromised, the terms of the compromise being incorporated in a consent order of the judge in Tomlin form pursuant to which the Claimants agreed to pay to Fortwilliam £290,000:-

"In consideration of the irrevocable and unconditional release by the plaintiff [Fortwilliam] of the first Defendant [the Claimant] as guarantor of the liabilities of CEM Computers Ltd under an indenture of lease dated 1^st November 1992 made between the plaintiff of the one part and CEM Computers Ltd of the other part… ."

10. The present proceedings were commenced on the 22^nd January 2003.
11. I do not understand the facts, as I have outlined them above, to be seriously in dispute.
12. It is the Defendant's submission that, notwithstanding the words used in them, clauses 4.11 and 7.1 of the share sale agreement constituted Holdings, by clause 4.11, and the Defendant, by clause 7.1, guarantors, as opposed to indemnifiers in respect of the obligations of CEM as tenant under the lease to Fortwilliam. On this basis the Defendant contends that it is entitled to deploy against the Claimant any defences which were capable of being deployed by the Claimant against Fortwilliam in the course of the Northern Irish proceedings. The Defendant point to three defences which it says were available:-

A. That by tolerating breach of the covenant against assignment and parting with possession of the premises, contained in the lease, by taking no steps to forfeit the lease on discovering that Unibol was in possession of the premises and paying rent, Fortwilliam materially altered the risk borne by the surety and, pursuant to the rule in Holme v Brunskill [1878] 3 QBD page 495 the surety was discharged from its liability to guarantee the lease as a result.

B. Alternatively Fortwilliam's conduct, by accepting rent from Unibol in respect of its occupation of the premises let between October 1998 and August 2000 constituted Unibol a periodic tenant of Fortwilliam of those premises inconsistently with the continuation in force of the lease. Thus the lease was surrendered by operation of law which surrender carried with it the release of the Claimant from its guarantee of the obligations of CEM under the lease.

C. Holdings obligation under clause 4.11 of the share sale agreement was confined to using its best endeavours to obtain a release of the Claimant from that guarantee. The evidence before the Master did not justify a summary conclusion that Holdings had failed to do so albeit the guarantee was never released by Fortwilliam.

13. I will consider each of these arguments A-C in turn. As to argument A the Claimant concedes that the effect of the rule in Holme v Brunskill ibid is that "a surety is discharged from liability by any variation of the principal contract the performance of which he has guaranteed which may be agreed between the principal debtor and the creditor without his consent unless the variation is clearly insubstantial or it is self evident without enquiry one which cannot prejudice him."
14. I accept Mr Harpum's submission on behalf of the Claimant that the conduct of Fortwilliam in failing to take action to enforce the covenants contained in the lease, when it became clear to them that Unibol had taken possession of the premises and was the actual payer of the rent becoming due, falls within the proviso to the Claimants guarantee of the lease and, in particular, the words "forbearance…to enforce performance or observance of the said covenants or conditions", citing as authority paragraph 5.154 in the most recent edition of Woodfall on Landlord and Tenant and the decision of Morland J in Howard deWalden Estates Ltd v Pasta Place Ltd & ors [1995] 1 EGLR79. Morland J, in that case based his decision on the judgment of Hutchinson J in Selous Street Properties Ltd v Oronel Fabrics Ltd [1984] 1EGLR50.
15. What occurred here, as a result of Fortwilliam's failure to take any steps to enforce the covenant, was that Fortwilliam may have become estopped by waiver from forfeiting the lease as a result of that breach. By contrast with the circumstances of the Howard deWalden and Selous cases and of Holme v Brunskill, Fortwilliam did not take the initiative to vary the terms of the lease. There was no agreement between Fortwilliam and Holdings on behalf of CEM to vary its terms, simply an acceptance of payment of the rent coming due under the lease by another company in the same group as Holdings and CEM pending negotiations to assign the lease to that company which situation was allowed to continue after those negotiations had broken down.
16. It follows that in my judgment, even if it could be established that Fortwilliam's conduct had prejudiced the Claimant's position under its guarantee in a way which was not clearly insubstantial, that prejudice resulted from a "forbearance" to enforce a covenant in the lease covered by the proviso in the Claimant's guarantee and so did not operate to release the Claimant under the rule in Holme v Brunskill.
17. I turn to consider defence B. In Megarry & Wade's Law of Property 6^th edition at paragraph 14/174 the following passage appears:-

"Surrender by operation of law requires some act by the parties that is inconsistent with the continuation of the lease, in circumstances such that it would be inequitable for them to rely on the fact that there has been no surrender by deed. The matter is determined objectively. The conduct of the parties must point unequivocally to the termination of the tenancy, but their intentions are irrelevant. The basis of this doctrine is the law of estoppel, which operates at the determination of a tenancy much as at the creation of one."

18. The Master had no evidence before him of conduct by the parties to the lease inconsistent with its continuation. Much emphasis was placed by Mr Ferris for the Defendant on the fact that CEM entered creditors voluntary liquidation on the 1^st December 1998. However the fact of liquidation of a tenant is not inconsistent with the continuation of the relevant lease which remains an asset in the liquidation until terminated by forfeiture or disclaimer. In the present case the parties, by continuing to negotiate terms of an assignment of the lease to Unibol after the commencement of the liquidation of CEM clearly treated the lease as continuing notwithstanding that liquidation. As the Master pointed out the decision of the Court of Appeal affirming Bracewell J in Mattey Securities Ltd v Ervin [1998] EDLR 66 is authority for the proposition that payment of rent by a non-tenant is not inconsistent with the continuation of a lease as a Landlord may accept rent due under a lease from any person who offers it. There does not seem to me to be anything necessarily inconsistent with the continuation of the lease resulting from the continued payment of rent in accordance with its terms after those negotiations broke down in April 1999 in response in demands for rent addressed to "CEM/Unibol". Furthermore the Defendant was unable to point to any detriment to CEM, Holdings, or the Defendant resulting from the continued payment of rent in those circumstances. Unibol's occupation of the premises let seems to have continued for the purposes of the commercial operations of the group of companies of which it formed part with the Defendant.
19. As to defence C this seems to me to be entirely without merit or substance. Clause 4.11 of the sale agreement placed upon Holdings two obligations the first to use its best endeavours to obtain the release of the Claimant from its obligations as a guarantor of the lease. The second an obligation to indemnify the Claimant form all liabilities in connection with the lease "pending such release". It seems to me that, whether or not Holdings discharged its duties under the first obligation is irrelevant to its liability under the indemnity where the release of the Claimant from the guarantee was never procured.
20. In my judgment the defences advanced to the Master and to me on behalf of the Defendant stand no reasonable prospect of success and accordingly this appeal should be dismissed. I do not, therefore have to deal with the further argument advanced by Mr Harpum based on the fact, as the terms of clauses 4.11 and 7.1 of the share sale agreement show, the obligation of the Defendant is properly categorised as one arising under a contract of indemnity.