England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Rolls Building, Fetter Lane, London, EC4A 1NL
		30/01/2014

Mr Justice Morgan :

Introduction

1. This judgment deals with a claim to declaratory relief and, more particularly, with an interim application for declarations by consent. The declarations which are sought concern the meaning and effect of a poorly drafted guarantee in relation to the liability of a lessee under a lease and the effect on that guarantee of the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act"). This judgment deals with two separate questions. The first question is whether the court should make any declaration at all and the second question arises if the court is prepared to grant declaratory relief, in which case the second question is as to what declarations are appropriate. It is appropriate to set out the material relevant to both these questions before discussing them further.

Background matters

2. By an underlease dated 10 July 2008 (which I will hereafter describe as "a lease") made between GE Capital Corporation (Estates) Ltd as the Landlord and Permira Advisers LLP (the First Defendant) as the Tenant, the premises at 80 Pall Mall, London, SW1 were demised for a term of 16 years from and including 24 June 2008. The lease created a "new tenancy" as defined in section 1 of the 1995 Act. The reversion on the lease was assigned to the Claimants (under earlier names) on 27 August 2008.
3. Clause 5.16 of the lease was a tenant's covenant which, amongst other things, permitted the tenant to assign the term of the lease, provided that the tenant complied with certain conditions and obtained the landlord's consent, which was not to be unreasonably withheld or delayed. The specified conditions allowed the landlord to require the assigning tenant to enter into an "authorised guarantee agreement" in accordance with a form of guarantee set out in Schedule 3 to the lease. The form as set out in Schedule 3 defined "authorised guarantee agreement" as defined in the 1995 Act and that form appeared apt as a draft authorised guarantee agreement. The conditions specified in clause 5.16 also referred to a possible requirement by the landlord that there be other guarantees in relation to performance of the tenant's covenants tenant, such guarantees to be in accordance with a form of guarantee set out in Schedule 4 to the lease. It is not necessary to comment on the provisions relating to such guarantees.
4. On 30 April 2009, by a formal licence to which the Claimants, the First Defendant and Permira Advisers (London) Ltd (the Second Defendant) were parties, the Claimants granted to the First Defendant licence to assign the term of the lease to the Second Defendant. In that licence, the Second Defendant covenanted with the landlord that it would pay the rent and perform the tenant's covenants in the lease during "the Relevant Period", which was defined to be a period from the date of the assignment of the term until the date on which the Second Defendant assigned the term of the lease except by an excluded assignment as defined by section 11 of the 1995 Act.

The guarantee

5. Also on 30 April 2009, the Claimants (described as "the Landlord") and the Second Defendant (described as "the Guarantor") entered into a further document. This document was described as a "guarantee" on the cover sheet but as a "licence" at the top of the first page. The reference to a "licence" was simply wrong and I will refer to it as a guarantee. The guarantee did not follow the form of guarantee set out in either Schedule 3 or Schedule 4 to the lease. The guarantee defined various terms including "Assignee", "Licence" and "Next Assignee". "Assignee" was defined to mean the Second Defendant. The "Licence" was the licence dated 30 April 2009. "Next Assignee" was defined to mean: "the assignee to whom the Assignee lawfully assigns the Lease in accordance with the provisions of clause 5.17 (Dealings with this Lease) of the Lease". The reference to clause 5.17 was a mistake for clause 5.16; the same mistake is made in clause 14 of the guarantee.
6. The guarantee contained the following further provisions:

"2 RECITALS

By the Licence, the Landlord consented to an assignment of the Lease to the Assignee.

It was a condition of the Landlord's consent that the Guarantor guarantee the Assignee's obligation and that this extended to the obligations of the Next Assignee.

3 GUARANTEE

If the Assignee fails to comply with any of the Lease Provisions, the Guarantor guarantees that it shall, on demand by the Landlord, immediately perform and discharge the obligations of the Assignee under them.

4 CONTINUING GUARANTEE

The guarantee set out in clause 3(Guarantee) is a continuing guarantee and is additional to, and not in substitution for, any other security or guarantee which is or may be held by the landlord from time to time in respect of the obligations of the Assignee under the Lease.

5 FORBEARANCE AND DELAY

The Guarantor's liability under clause 3 (Guarantee) shall not be affected by any concession, time, indulgence or release granted by the Landlord to the Assignee or by any other dealing or variation of the Lease, subject to s18 Landlord and Tenant (Covenants) Act 1995, or anything else, whether relating to the Assignee, any co-guarantor or any other person, which would, but for this clause 5, operate to discharge or reduce that liability.

6 PRIMARY OBLIGATION

If anything, including any legal limitation, disability, liquidation or other incapacity on the part of the Assignee or any disclaimer by a liquidator or trustees in bankruptcy, causes any of the Assignee's obligations under the Lease and/or the guarantee set out in clause 3 (Guarantee) to be or become invalid or unenforceable, the Guarantor shall perform and discharge all of the Assignee's obligations under the lease as if they were the primary obligations of the Guarantor.

7 INDEMNITY

The Guarantor shall indemnify and keep indemnified the Landlord against any losses, liabilities, costs and expenses resulting from the failure of the Assignee to observe any of the Lease Provisions.

8 SET OFF AND COUNTERCLAIMS

The Guarantor shall make any payments due from it under this Guarantee in full, without out any deduction or withholding in respect of any claim, whether by way of set-off, counterclaim or otherwise, asserted from time to time by the Assignee or the Guarantor against the Landlord under the Lease or in respect of anything else.

9 RIGHTS AGAINST THE TENANT

The Guarantor shall not exercise any rights which it may have against the Assignee arising from or otherwise relating to its guarantee under clause 3 (Guarantee) or its other obligations under this Guarantee unless and until all of the obligations of the Assignee and the Guarantor under this Lease have been performed and observed.

10 ENFORCEMENT OF THE GUARANTEE

The landlord may claim under the guarantee set out in clause 3 (Guarantee) without first making demand of the Assignee or taking any action to claim under or enforce the Assignee's obligations under the Lease or any other right, security or other guarantee which it may hold from time to time in respect of the Assignee's obligations under the Lease.

11 TO ACCEPT A NEW LEASE

11.1 In this clause 11, the following expressions mean –

'Event of Default' means the disclaimer of the Lease by either a trustee in bankruptcy of the Assignee, if the Assignee is an individual, a liquidator of the Assignee, if the Assignee is a company; the disclaimer of the lease by the Crown, if the Lease becomes bona vacantia, or the striking off of the Assignee from the register of companies pursuant to the provisions of the Companies Act 1985.

'Landlord's Notice' means a notice in writing requiring the Guarantor to take a New Lease or indemnify the landlord as provided in clause 11.4 of this Guarantee served by the Landlord on the Guarantor within three months of an Event of Default coming to the Landlord's knowledge.

'New Lease' means a lease of the Premises for a term commencing on the date of the Event of Default, expiring on the date the Term would have expired had there been no Event of Default, reserving rents equivalent to the Rents and containing terms identical to the Lease Provisions.

11.2 If, following an Event of Default, the Landlord serves a Landlord's Notice requiring the Guarantor to take a New Lease, the Guarantor shall accept a New Lease, execute a counterpart of the New Lease and pay the Landlord's solicitors' costs and disbursements of and incidental to the grant of the new lease.

11.3 If at the date of the Event of Default any review of the rent under the Lease has fallen due but the rent review shall not have been agreed or determined prior to the grant of the New Lease then the New Lease shall provide for a review of the rent upon the first day of the term of that New Lease.

11.4 If, following an Event of Default, the Landlord serves a Landlord's Notice requiring the Guarantor to indemnify the Landlord, the Guarantor shall pay to the Landlord on demand the Rents for the period commencing on the date of the Event of Default and ending on the earlier of –

(a) the date 12 months after the date of Event of Default; and

(b) the date, if any, upon which rent becomes payable after the Premises are re-let.

12 UNCONDITIONAL GUARANTEE

The Guarantor's obligations under this Guarantee, including its guarantee under clause 3 (Guarantee) are unconditional and irrevocable.

13 NO ASSIGNMENT OF BENEFITS NECESSARY

The benefit of the Guarantor's obligations under this Guarantee, including its guarantee under clause 3 (Guarantee)shall pass to the Landlord's successors in title to the lease without the need for any assignment of the same.

14 DURATION OF GUARANTEE

The guarantee in this Guarantee shall remain in full force and effect until the earlier of –

(a) the determination of the Term; or

(b) assignment of the Lease by the Next Assignee in accordance with the provisions of clause 5.17 (Dealings with this Lease) of the lease;

(c) the date upon which the Next Assignee is released from liability under the Lease by virtue of s11(2) Landlord and Tenant (Covenants) Act 1995,

but without prejudice to any accrued right of action or remedy of the Landlord."

The claim and the interim application

7. On 12 December 2013, the Claimants issued the present claim. They sought, first, a declaration that the word "Next" where it appears in clause 14(b) and (c) of the guarantee was severable from the remainder of the guarantee and, secondly, that the guarantee (following such severance) was valid and enforceable. The Claimants had obviously been in communication with the Defendants about this claim before the claim form was issued because on the same day as the claim form was issued the Defendants, acting through solicitors, admitted liability for the whole claim. On the next day, the Claimants issued an application to be heard in the interim applications court on 19 December 2013, seeking the same declarations as were set out in the claim form, on the basis that the Claimants' right to those declarations had been admitted. The application was supported by a witness statement which referred to the lease, the assignment and the guarantee and the fact that the Defendants admitted the claim.
8. At the hearing on 19 December 2013, the Claimants appeared through leading counsel. Her skeleton argument stated that the guarantee contained two guarantees, one in relation to the Assignee and one in relation to the Next Assignee. It was submitted that the guarantee in relation to the Next Assignee was void but that the provisions which were void could be severed from the remainder of the guarantee by removing the word "Next" where it appeared in clause 14(b) and (c). The Claimants sought declarations as claimed in the claim form on the basis of the Defendants' admissions.

Should the court grant declaratory relief?

9. There is no issue between the parties as regards the meaning and effect of the guarantee. It has been repeatedly said that the court will be cautious before it makes a declaration by consent. The most recent authority dealing with that topic appears to be Animatrix Ltd v O'Kelly [2008] EWCA Civ 1415 where the Court of Appeal upheld the judge's decision to grant declaratory relief because the case "was one of those rare cases where it is necessary to grant the declarations to do justice between the parties".
10. The earlier cases put forward various reasons why the court should not ordinarily grant a declaration by consent. The reasons vary somewhat depending on the nature of the matter being declared and whether it is a matter of fact or a matter as to the construction of a document or a matter of the general law. In a case like the present where there is no issue between the parties on a matter which concerns both the meaning of a document and a matter of the general law, the court should be cautious about granting declaratory relief for several reasons. The first is that there is no issue between the parties as to the legal position. The second is that the declaration sought relates in part to the operation and effect of the 1995 Act; the court should not ordinarily make a declaration as to the operation of a statute just because the parties consent to such a declaration. A third reason is that in this case the court would only be prepared to make a declaration as to the meaning of the guarantee and the effect of the 1995 Act if the court considered that the declaration was right. The court must be persuaded of that. Because the matter is being argued on one side only, the court will naturally be cautious about arguments put on one side only. The court will normally wish to see if there are rival arguments which need to be considered. The court would normally expect counsel acting for the only represented party, even in a case where the other party consents to the relief sought, to identify any possible rival arguments and to make submissions as to how and why the court can safely dismiss those rival arguments.
11. The approach adopted by the Claimants in this case did not begin to address the matters which ought to have been addressed. Neither the witness statement in support of the application nor the skeleton argument of counsel offered any reason why the court should exceptionally grant declaratory relief in a case where there was no dispute between the parties. There was no material put forward as to why it was necessary to grant declaratory relief in order to do justice between the parties. Further, on a preliminary read of the papers, it seemed to me that the declarations sought by the Claimants ought not to be granted because they involved a wrong analysis of the guarantee and of the 1995 Act. Furthermore, there was no attempt to identify the rival arguments which might be put forward and no analysis of why such rival arguments should not be accepted.
12. The wrong approach adopted by the Claimants was exacerbated by the way in which the Claimants sought to conduct the hearing of the interim application. The Claimants' time estimate for the hearing was unrealistically short. Further, when I suggested that the declarations sought by the Claimants were not appropriate, it was submitted that the Claimants' approach was "clearly right" but without any real supporting analysis.
13. At the hearing, I sought further help as to why the Claimants sought declaratory relief when there was no issue between the parties. I could foresee that the Claimants might wish to sell or deal with their interest and might wish to have certainty as to the legal position for the benefit of a successor in title. Even then, I asked why the matter could not be dealt with cheaply and quickly by a confirmatory deed, rather than by court proceedings. The Claimants' response to these questions was not satisfactory. The Claimants' counsel hinted that the Claimants might indeed want to sell or deal with their interest but she appeared to suggest that the Claimants were not in a position to be more forthcoming than that. She then suggested that the matter was urgent but was not free to explain that more fully. As to the possibility of a confirmatory deed, she suggested that a confirmatory deed would not be effective as it would not be an authorised guarantee agreement within section 16 of the 1995 Act and would be avoided by section 25 of the 1995 Act. I can understand the argument based on sections 16 and 25 but since the point was not argued I do not consider it prudent to comment on whether that argument is right or whether there are answers to that suggestion.
14. A conventional response to the above circumstances would have been simply to dismiss the interim application on the ground that the Claimants had not done enough to justify the grant of declaratory relief in this case. With considerable hesitation, I have decided not to take that course. In the course of considering my judgment, I have analysed the guarantee and the provisions of the 1995 Act and I have reached a conclusion as to those matters with reasonable confidence. Although the Claimants have done so little to justify this approach, my reaction to the very limited information I was given is that the Claimants do indeed need to have certainty as to the meaning and effect of the guarantee and it is possible that a confirmatory deed between the parties will not provide that certainty. I will therefore proceed to construe the guarantee and consider the operation of the 1995 Act in relation to it.

The meaning and effect of the guarantee

15. I have set out above the relevant provisions of the guarantee. The language of the guarantee is open to interpretation. One part of the language appears to identify the scope of the obligation taken on by the guarantor but another part of the language appears to suggest that the guarantee has a different or a wider scope. If one pays attention to the language of clauses 3 to 13, the guarantee appears to be in relation to the obligations of the Assignee. The word "Assignee" is used repeatedly throughout clauses 3 to 13 to identify the scope of the obligations being undertaken by the guarantor. In particular, the guarantee in clause 3 and the indemnity in clause 7 refer only to the position of the Assignee. Further, the other provisions in clauses 3 to 13 all relate to events affecting the Assignee. It would involve a significant extension of the scope of these clauses, standing alone, if one were to read them so that every reference to "the Assignee" was held to be a reference to "the Assignee and/or the Next Assignee".
16. The language which suggests that the guarantee has a wider scope appears in the second recital and in clause 14. The meaning of the second recital is reasonably clear in so far as it states that the parties had agreed that the guarantee would extend to cover the obligations of the Next Assignee. However, unless clause 14 of the guarantee imposes such a liability on the guarantor it is difficult to see anything in clause 3 to 13 which imposes a liability in relation to the obligations of the Next Assignee. Further, the recital is less clear as to whether all, or only some, of the references to "the Assignee" in clauses 3 to 13 should be read as "the Assignee and/or the next Assignee".
17. Clause 14 is itself open to interpretation. It provides that something is to continue for a defined period of time. But what is to continue? Clause 14 says that it is "the guarantee in this Guarantee". Taken literally, all that says is that the guarantee of the liabilities of the Assignee continues for the defined period. However, plainly, clause 14 (especially if taken together with the recital) is capable of being given a wider interpretation. It can certainly be argued that if the guarantee is to continue during the period when the term is vested in the Next Assignee, then the guarantee is not limited to the obligations of the Assignee but extends to the obligations of the Next Assignee.
18. A consideration of the language of the guarantee alone poses a not unfamiliar choice between taking the language literally, and holding that it is limited to the obligations of the Assignee, and taking its language more broadly, forming the view that the language of clauses 3 to 13 is not entirely apt but holding that the parties must have intended, by the inclusion of clause 14, to hold that the guarantee extended to the obligations of the Next Assignee and indeed while the term is vested in a further assignee where the further assignment is an excluded assignment as referred to in section 11 of the 1995 Act.
19. At this point it is relevant to introduce another consideration. If the guarantee is construed to be limited to the obligations of the Assignee then it is undoubtedly valid. However, if the guarantee is held to extend to the obligations of the Assignee and the Next Assignee, then the guarantee is either void in its entirety or void as to some part, if one can sever the provisions which impose a liability in relation to the obligations of the Next Assignee. The reason that the guarantee, or a part of it, will be void if it extends to the obligations of the Next Assignee is that this is the effect of sections 5, 24 and 25 of the 1995 Act.
20. In the light of the consideration in the last paragraph, it is next relevant to recall the Latin maxim verba ita sunt intelligenda ut res magis valeat quam pereat or, in English,"validate if possible". The operation of that maxim is summarised in Lewison on The Interpretation of Contracts, 5th ed., at para. 7.16. In the light of that summary, it seems to me that instead of construing the guarantee in a way which will produce the result that the guarantee, or a part of it is void, it is right to construe the guarantee in accordance with the clear wording of clauses 3 to 13 and to hold that the guarantee extends to the liability of the Assignee but not to the liability of the Next Assignee and to hold, further, that all of the references in clauses 3 to 13 to "the Assignee" mean what they say, and no more.
21. If, contrary to the above view, one were driven to the conclusion that the scope of the guarantee extended to the liabilities of the Assignee and the Next Assignee, then the question would arise as to whether it would be possible to save part of the guarantee so that it had more limited scope, in relation to the Assignee only, by severing the parts which cannot have effect by reason of the 1995 Act. It is clear that the 1995 Act contemplates severance in this way: section 25 of the 1995 Act uses the words "to the extent that" in a number of places. An example of such severance is provided by the decision at first instance in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2010] EWHC 3006 (Ch) where the judge applied the conventional "blue pencil" test: see at [49]. His conclusion as to severance was not challenged when that case went to the Court of Appeal: see [2012] Ch 497 at [11].
22. In my judgment, there is a way of severing the good from the bad in this guarantee and that is to hold that clause 14 is removed by severance. It is probably not necessary, even if it were possible, to sever the second part of the recital. Instead, one would hold that the expectations which are created by the second part of the recital are not fulfilled and the guarantee does not extend to the obligations of the Next Assignee.
23. Accordingly, I consider that by the process of reasoning in paragraphs [15] – [20] above or by the alternative process of reasoning in paragraphs [21] – [22] above, I ought to reach the conclusion that the guarantee is a valid and effective guarantee in relation to the obligations of the Assignee only and that when clauses 3 to 13 refer to "the Assignee" they are to be taken literally and are not to be taken to refer to the position of the Next Assignee.
24. The above reasoning was not put forward by the Claimants. Instead, they accepted that the guarantee did, as a matter of language, include a guarantee in relation to the obligations of the Next Assignee. The Claimants argued that it was possible to sever that part of the guarantee by removing the word "Next" from clause 14(b) and (c) of the guarantee. I do not agree that it would be possible to sever the good from the bad in that way. That mode of suggested severance would not satisfy the blue pencil test. That mode of suggested severance would be similar to "severing" the word "(London)" from a company's name "A B C (London) Ltd" so that it became "A B C Ltd", where there were two relevant companies, namely, A B C (London) Ltd and A B C Ltd. Similarly, if there were a covenant not to compete within a 15 mile radius for a period of 15 years, it would not be possible to blue pencil this restriction so that it referred to 5 miles and 5 years (by removing the figure "1" in each case). Both these suggested methods of severance go well beyond any application of the blue pencil test and involve redrafting of the relevant provision. The same applies here where the terms "Assignee" and "Next Assignee" are defined terms which are intended to refer to two different entities.

Disposal

25. The application notice seeks only the form of the declarations put forward by the Claimants. I have held that the Claimants are not entitled to those declarations and I will dismiss the interim application. With the consent of the parties, I can deal with the claim even on the hearing of this interim application. During the hearing, when I identified to counsel for the Claimants a possible analysis on the lines adopted in this judgment, the Claimants provided me with a draft amended Particulars of Claim which was somewhat closer to the declarations I consider to be appropriate. I will not make the declarations as drafted in that amended pleading as they seek to follow the model of clause 14 of the guarantee with revisions. I consider that what is called for is a declaration that the guarantee is a valid and effective guarantee in relation to the obligations of the Assignee only and that when clauses 3 to 13 refer to "the Assignee" they are to be taken literally and are not to be taken to refer to the position of the Next Assignee and that clause 14 is of no effect. Notwithstanding my hesitation about making any declarations and notwithstanding the further fact that my analysis of the guarantee was not the one contended for by the Claimants, I consider that this is (just) an appropriate case to make declarations to give effect to the reasoning in this judgment. I will ask counsel for the Claimants to prepare a draft Minute of Order to give effect to this judgment.