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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Legends Surf Shops Plc v Sun Life Assurance Society Plc [2005] EWHC 1438 (Ch) (14 July 2005) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2005/1438.html Cite as: [2005] EWHC 1438 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		14/07/2005

Mr Justice Laddie:

1. This is an appeal by the Defendant, Sun Life Assurance Society Plc, from a decision of Deputy Master Behrens given on 13 April 2005 in which he refused to strike out a claim for relief from forfeiture brought by the Claimant, Legends Surf Shops Plc. The Deputy Master gave permission to appeal. Before me the Defendant is represented by Mr Mark Wonnacott and the Claimant by Mr Timothy Morshead. The factual background is set out below. It is non-contentious and is derived in large part from Mr Morshead's skeleton argument.
2. The Claimant is the original tenant of a lease of a shop in Kingston upon Thames under an underlease dated 24 January 2001 ("the Lease"). The Defendant is the landlord by assignment. The Claimant went into administrative receivership. The Lease thereupon became liable to be forfeited. The Defendant physically re-entered the premises and forfeited the Lease. The Claimant commenced these proceedings for relief against forfeiture. The Claimant's interest in obtaining the relief it seeks is so that it can assign the benefit of the term to another tenant.
3. Recognising that the Claimant's application for relief is in order to assign the term, the Defendant says that it wants an authorised guarantee agreement ("AGA") from the Claimant in relation to the proposed assignee, There is no dispute that it is entitled to such a guarantee. The dispute which has arisen in these proceeding relates to the terms of the AGA. At its heart it turns on the issue of whether the Defendant can insist that the relevant guarantee is given not only by the Claimant, but by the Administrative Receivers personally as well. The Administrative Receivers are unlikely to wish to give such personal guarantees, although they have not yet determined one way or another whether to do so. Perhaps, if a sufficiently secure indemnity is offered to them by a third party, such as the creditor who had them appointed, they will. The Defendant argues that the AGA will not be effective unless· such a personal guarantee is provided. In the absence of the guarantee, the claim for relief from forfeiture is misconceived.
4. The Defendant has been offered a guarantee not only by the Claimant but also from a company, Aspen Capital Group Ltd ("Aspen"). There is no suggestion in the material before me that there are any grounds for doubting Aspen's financial standing or its ability to honour any guarantee it gives. The Defendant has also been offered a rent deposit. Mr Morshead suggests that the reason the Claimant has rejected this package of offers and is seeking to force the Administrative Receivers to give personal guarantees is that they are unlikely to do so and that will leave the Claimant free to relet the premises to a new tenant at a substantially higher rent than that reserved by the Lease.
5. Both Mr Wonnacott and Mr Morshead have explained to me the common law and legislative history behind the current law relating to effect of assignments on tenants' covenants. For present purposes, I do not think it necessary to go further than the provisions of the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act"). The latter makes provision for "old" and "new" leases, 1 January 1996 being the dividing line between the two. There is no dispute that the Lease here in issue is a new lease for the purposes of the 1995 Act.
6. S 5(1) and (2) of the 1995 Act provide:

"5 Tenant released from covenants on assignment of

tenancy

(1) This section applies where a tenant assigns premises

demised to him under a tenancy.

(2) If the tenant assigns the whole of the premises demised

to him, he -

(a) is released from the tenant covenants of the tenancy, and

(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy,

as from the assignment."

7. Thus the contractual liability to comply with covenants in the lease ends after a lawful assignment over by the tenant. However the 1995 Act contains provisions for the benefit of the landlord to compensate, at least to some extent, for the abrogation of the tenant's covenants under s 5. These provisions are contained in s 16 which, insofar as material, provides:

"16 Tenant guaranteeing performance of covenant by

assignee

(1) Where on an assignment a tenant is to any extent released from a tenant covenant of a tenancy by virtue of this Act (''the relevant covenant"), nothing in this Act (and in particular section 25) shall preclude him from entering into an authorised guarantee agreement with respect to the performance of that covenant by the assignee.

(2) For the purposes of this section an agreement IS an authorised guarantee agreement if -

(a) under it the tenant guarantees the performance of the relevant covenant to any extent by the assignee; ... "

8. The latter provisions do not deem an AGA to have come into existence. Rather they allow the parties to enter into an AGA if they so wish without falling foul of the other provisions of the 1995 Act. The reality is, of course, that in all or the majority of cases the landlord will insist on the inclusion in the lease of terms requiring the execution of an AGA in the event of the tenant assigning the lease.
9. The Lease here in issue contains such terms. In particular it provides:

"4.704 [The Tenant covenants with the Landlord] not to assign the whole of the Demised Premises without the consent of the Landlord (such consent not to be unreasonably withheld) provided that the Landlord shall be entitled (for the purposes of Section 19(1A) of the Landlord and Tenant Act 1927) as of right:

4.704.1 to withhold its consent III any of the circumstances set out in Clause 4.8 and

4.704.2 to impose all or any of the matters set out in Clause 4.9 as a condition of its consent and the provisos to this Clause 4.7.4 shall operate without prejudice to the right of the Landlord to withhold such consent on any other ground or grounds where such withholding of consent would be reasonable or to impose any further condition or conditions upon the grant of consent where the imposition of such consent or consents would be reasonable.

4.8 The circumstances referred to in Clause 4.704.1 are:

4.8.1 where in the reasonable opinion of the Lessor the Proposed Assignee is not of sufficient financial standing to enable it to. comply with the Lessee's covenants and the conditions contained in the Lease throughout the term ...

4.9 The conditions referred to in Clause 4.7.4.2 are:

4.9.1 the execution and delivery to the Lessor prior to completion of the Proposed Assignment of an Authorised Guarantee Agreement. ...

4.904 on a proposed Assignment to a Limited company the execution and delivery to the Lessor by the Proposed Guarantor prior to the Proposed Assignment of a deed of covenant guaranteeing the performance of the Proposed Assignee in such form as the Lessor reasonably requires."

10. The Lease also includes the following definition:

"4.7.1.2 'Authorised Guarantee Agreement' means a deed in such form as the Landlord reasonably requires and being an authorised guarantee as defined in the Landlord and Tenant (Covenant) Act 1995, section 16"

11. Thus the landlord can withhold consent to the assignment and forfeit the Lease where, for example, the assignee is not of sufficient financial standing. However it would be necessary to determine whether the landlord's opinion to that effect was "reasonable". Here, in effect, it is said that the Claimant is unwilling to execute and deliver an AGA.
12. At first sight this appears to be a difficult argument to advance. There is no dispute that the Claimant is willing to execute and deliver an agreement which, had it not been in administrative receivership, would have qualified as an AGA within the meaning both of the Lease and the 1995 Act. It includes the necessary covenant to guarantee the performance by the proposed assignee of the tenant's covenants in the Lease. However, Mr Wonnacott relies upon the provisions of s 44 of the Insolvency Act 1986 ("IA 86"):

"(1) The administrative receiver of a company -

(a) is deemed to be the company's agent, unless and until the company goes into liquidation;

(b) is personally liable on any contract entered into by him in the carrying out of his functions (except in so far as the contract otherwise provides) and [, to the extent of any qualifying liability,] on any contract of employment adopted by him in the carrying out of those functions.

( c) is entitled in respect of that liability to an indemnity out of the assets of the company."

13. Based on this, Mr Wonnacott runs the following argument. First, the 1995 Act gives the landlord an absolute right to two separate guarantees, namely an AGA from the outgoing tenant (in this case the Claimant) and a separate guarantee covering the incoming tenant. Second, if the outgoing tenant is in administrative receivership, s 44 of IA 86 imposes personal liability for the AGA on the receivers, unless specifically excluded by agreement. Third, IA 86 does not give the administrative receivers power to impose an exclusion from personal liability in a new contract. Although a third party may consent to such an exclusion, in the absence of it, personal liability is imposed by statute. Mr Wonnacott emphasises this point. The personal liability of the administrative receivers is imposed by operation of s 44 of IA 86, not by choice of Defendant. Fourth, nothing in the 1995 Act requires the exclusion of the administrative receivers' personal liability. Fifth, the definition of AGA in Clause 4.7.1.2 imposes a qualification that the terms of the AGA must be those that the landlord reasonably requires. However that does not over-ride the effect of s 44. It is a matter of form rather than substance. Sixth, if the landlord were to agree to the draft AGA supplied by the administrative receivers containing, as it does, an express exclusion of the receivers' personal liability, it would be' worthless. Seventh, the landlord· is entitled to two separate guarantees. It cannot be said that he must accept one of them in a form which renders it valueless. It cannot be unreasonable to reject an AGA with a exclusion which s 44 does not oblige the Landlord to accept and which, as noted, would render the guarantee valueless. Ninth, if it cannot be unreasonable to reject such an AGA, there are no real prospects of the Claimant obtaining relief from forfeiture at the trial and its claim should be struck out now.
14. I do not accept this argument. The starting point in analysing this dispute must be the Lease itself. By Clause 4.9.1, prior to assigning the lease the Claimant must execute and deliver to the Defendant an Authorised Guarantee Agreement. The latter is defined by Clause 4.7.1.2 as being both (i) an AGA within the meaning of s 16 of the 1995 Act and (ii) one in a form which the Landlord reasonably requires. Had the Claimant not gone into administrative receivership, the AGA it is willing to execute and deliver would fall within Clause 4.9.1 and would also be an AGA within the meaning of s 16 of the 1995 Act. If the Defendant could object at all, it could only be to the form of the agreement and, even then, only if such objection was reasonable. It follows that, in such circumstances, had the Defendant forfeited the Lease, the Claimant would have an arguable claim for relief against forfeiture.
15. I do not see how the administrative receivership alters this. The AGA, without personal guarantee from the administrative receivers, is still an AGA within the meaning of s 16 of the 1995 Act. It therefore falls within both the definition in Clause 4.7.1.2 of the Lease and meets the requirements of Clause 4.9.1. The only objection which can be taken to it is that it is not in "such form as the Landlord reasonably requires". Whether the Defendant's insistence on the provision of personal guarantees can be considered reasonable is a question of fact to be decided by the trial judge (see Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180). It is not an issue which, in normal circumstances, lends itself to resolution on a strike out application.
16. Here Mr Wonnacott argues that it is inconceivable that the trial judge would hold that it was unreasonable for the Defendant to insist on those personal guarantees to which s 44 of the IA 86 entitles it. Although it may well be that the trial judge will say that the Defendant is behaving reasonably in insisting on the personal guarantees, it is not inevitably so. It seems to me that the trial judge may conclude that, in the context of the Lease, those considerations which the Defendant can take into account in determining whether the form of the AGA is one which he reasonably requires do not include the possibility of requiring a third party, namely the administrative receivers, to offer personal guarantees. The Lease requires guarantees from the outgoing tenant and also on behalf of the incoming new tenant. It does not require any guarantees from the administrative receivers or any other third party. It is at least possible that the trial judge would consider that the Defendant's rejection of the AGA was not reasonable. In the circumstances, this is not a case in which it would be appropriate to strike out the Claimant's claim for relief from forfeiture. The appeal is dismissed accordingly.