Monthly Archives: January 2014

Leasehold guarantees – how not to let your surety off the hook

The recent case of Topland v Smiths [2014] EWCA Civ. 18 serves as a useful reminder of the rule in Holme v Brunskill (1878) LR 3 QBD 495. Landlords and their advisors should bear this case in mind when drafting leases and agreeing alterations. Failure to do so could allow the tenant’s guarantor off the hook.

Facts

In 1981 PAT, the landlord, let a commercial property to Payless, the tenant. Smiths were the tenant’s parent company and a guarantor under the lease. The Fifth Schedule to the lease set out Smiths’ covenants. In so far as is material it provided:

“The Lessee shall at all times pay the rent hereinbefore reserved… and that if the Lessee shall make default in the payment of the rent… the Surety will pay and make good to the Lessor on demand all loss damage costs and expenses thereby arising or incurred by the Lessor PROVIDED ALWAYS and it is agreed that notwithstanding any neglect or forbearance on the part of the Lessor to obtain payment of the rent herein reserved or any part thereof when the same shall become payable … shall not release or exonerate or in any way affect the liability of the Surety under this covenant”.

In 1987 the landlord granted the tenant a licence to alter the property. The permitted alterations included opening a wall, building a garden centre, altering a car park and erecting a boundary fence. Smiths were not a party to the licence. In 2001 Topland bought the reversion from PAT.

Payless went into administration and was subsequently dissolved. Topland brought a claim against Smiths, as surety, for unpaid rent in excess of £280,000. Smiths were prima facie liable under the lease but defended the claim relying on the rule in Holme v Brunskill.

The Rule

In Holme the claimant let a farm, together with a flock of sheep. The farm extended to 234 acres and there were 700 sheep. The surety guaranteed the tenant’s obligation to re-deliver the flock of sheep in good condition at the end of the lease. When the flock was re-delivered, however, the sheep were not in good condition. Earlier, in the course of the term, the tenant had made an agreement with the claimant that he would surrender a field of about 7 acres in exchange for a decrease in his rent of £10 a year. The surety had not consented to this variation. The Court of Appeal held the surety was released. The relevant rule was expressed in this way by Cotton LJ:

“if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration…if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration…but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable”

Common Ground in Topland v Smiths

It was common ground that the licence allowed work to be carried out which would increase the tenant’s obligation to repair under the lease. However, it was agreed there was no increase in the rental burden on the tenant. It was also agreed that if the alterations fell within the proviso to the Fifth Schedule to the lease, as set out above, then Smiths would not be released because they had expressly consented to remain bound in those circumstances.

The Arguments

First Topland argued the rule did not apply as the alteration did not increase the tenant’s obligations under the lease. The lease always envisaged that the tenant’s repairing obligations would be increased if a licence to alter were granted so the surety took this risk. Arnold J easily rejected this argument. The licence did have the clear potential to increase the tenant’s obligations. The lease did not envisage this would bind Smiths without their consent. Consequently the rule was potentially engaged unless the grating of the licence fell within the proviso.

In this regard Topland argued the circumstances fell within the proviso because the grant of the licence either amounted to “forbearance” or “time given” within the meaning of the clause. As to the first of these Arnold J accepted Smith’s arguments, there could only be forbearance where the tenant was in breach and the landlord refrained from enforcing its strict legal rights. The licence was not an example of this. Similarly the licence was not the grating of further time until the landlord could require the tenant to remove works. It was simply permission to carry out the works.

Consequently, the rule in Holme v Brunskill applied and Smiths were released entirely from their obligation under the lease.

Points to Note

Smiths were released from their obligation to pay rent arrears despite the fact the licence to alter did not increase the tenant’s obligation to pay the rent. The rule and the possibility of release is not limited to such narrow alterations.

Secondly, landlords and their advisors should bear in mind the following points when drafting leases or agreeing a licence to alter. Firstly, to avoid letting the surety off the hook landlords should consider excluding the rule in Holme v Brunskill altogether using express words. Secondly, in any event, they should ensure the surety consents expressly to any alteration to the lease and is a party to any licence to alter.

Christopher Kelleher

Christopher Kelleher is a barrister at 1 Essex Court practising in the commercial Chancery fields with a particular focus on property litigation. For more information visit www. 1ec.co.uk

No representation or warranty is given by the author or 1 Essex Court as to the accuracy of the information or opinions contained in this document and no liability is accepted for such information or opinions. This document does not and is not intended to amount to legal advice and is not intended to be relied upon.

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Pro Bono scheme established by Oliver Hyams

Pro Bono Community, a scheme that accredits law students and trainees to give advice at Law Centres and other advice agencies, has been launched by Oliver Hyams, a pupil barrister at 1 Essex Court, and David Dowling, a trainee solicitor at Baker & McKenzie.

Students who complete the first phase of training will be able to take a more detailed module in which they can specialise in a specific area of law such as welfare benefits.

The scheme has the support major law schools and firms including Ashurst, Baker & McKenzie, Bates Wells Braithwaite, CMS, Slaughter and May, Clifford Chance, Freshfields and Hogan Lovells. The Legal Education Foundation is also helping to fund the scheme.

Click here for more information.

or go to www.probonocommunity.org.uk

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Relief from sanctions in the post-Jackson CPR – a note by Andrew Wilson

In its recent decision in  Andrew Mitchell MP v News Group Newspapers Limited  [2013] EWCA Civ 1537 (27.11.13) (transcript at http://www.judiciary.gov.uk/Resources/JCO/Documents/Judgments/andrew-mitchell-mp-news-group-newspapers-ltd-27112013.pdf) the Court of Appeal delivered its much anticipated guidance on how the Courts should and will interpret the amended versions of CPRs 1.1 (2) (f) & 3.9 in the ‘post Jackson’ era. When it did, the message that it delivered was crystal clear; from now on, breaches of rules, practice directions and orders are unlikely to attract relief save in cases of trivial breaches when applications for relief are made promptly (para 40 of the judgment). Trivial can mean different things to different people but in this context it is likely to be interpreted as:

  • A failure of form rather than substance.
  • Where a party has narrowly missed a deadline but otherwise fully complied with its terms.

The Court anticipated that the question of whether a default is “insignificant” or “trivial” is likely to be a fertile battle ground for applications. However that is inevitable.

Other cases, presumably of what will become to be known as “significant’ breaches, will henceforth present applicants with a daunting test:

 

1.         The burden is on the defaulting party to persuade the court to grant relief.

2.         The court will want to consider why the default occurred.

3.         If there is a “good reason” then the court will be likely to decide that relief should be granted.

Again, the meaning of “good reason” is likely to entertain Masters and District Judges for years to come, but the Court of Appeal did offer some further guidance; If a document is not filed at court because the party or their solicitor suffered from a debilitating illness or was involved in an accident. Depending on the circumstances this may constitute a good reason. Also, later developments in the course of the litigation process are likely to be a good reason if they show that the period for compliance originally imposed was unreasonable, although the period appeared reasonable at the time and could not realistically have been the subject of an appeal.

The Court was keen to point out that a solicitor’s debilitating work load will not be a good reason and stressed that applications for an extension of time to meet a deadline will be viewed far more favourably than applications for relief post breach. It went on to say that “good reasons” are likely to be those which are outside the control of the defaulting party and that well intentioned incompetence on the part of the solicitor will not attract sympathy. An inadvertent mistake did attract relief in the pre Mitchell case of Wyche c Careforce, but it is unclear as to whether or not that excuse will survive Mitchell. Don’t count on it!

The Court encouraged the adoption of the same approach that the Courts take in assessing applications for extensions of time to serve claim forms. Hashtroodi v Hancock [2004] EWCA Civ 652 at para 19 offers perhaps the neatest expression of this test.

The decided cases on the new CPR 3.9 prior to the Mitchell decision (including Biffa Waste v Ali Dinler & Ors (2013) LTL 10/10/2013, Fred Perry (Holdings) Limited v Brands Plaza Trading Ltd (t/a Brands Plaza) [2012] EWCA Civ 224, Rayyan Al Iraq Co Ltd v Trans Victory Marine Inc QBD 23/08/13 and Wyche v Careforce Group Plc (2013)QBD (Comm) 25/07/2013) had nearly all contained discussion on the relevance of the old 3.9 criteria to applications. The Court of Appeal cleared all this up once and for all; the old criteria can be considered, but they are incidental to the new 3.9 criteria which are, of course, far simpler and intended to produce an far more robust test than was the case previously.

“We recognise that CPR 3.9 requires the court to consider “all the circumstances of the case, so as to enable it to deal justly with the application”.  The reference to dealing with the application “justly” is a reference back to the definition of the “overriding objective”.  This definition includes ensuring that the parties are on an equal footing and that a case is dealt with expeditiously and fairly as well as enforcing compliance with rules, practice directions and orders.   The reference to “all the circumstances of the case” in CPR 3.9 might suggest that a broad approach should be adopted.  We accept that regard should be had to all the circumstances of the case.  That is what the rule says.  But (subject to the guidance that we give below) the other circumstances should be given less weight than the two considerations which are specifically mentioned.”

Comparing this to the new wording of CPR 1.1 (2) (f) and 3.9:

1.1

(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly and at proportionate cost.

(2) Dealing with a case justly and at proportionate cost includes, so far as is practicable –

(a) ensuring that the parties are on an equal footing;

(b) saving expense;

(c) dealing with the case in ways which are proportionate –

(i) to the amount of money involved;

(ii) to the importance of the case;

(iii) to the complexity of the issues; and

(iv) to the financial position of each party;

(d) ensuring that it is dealt with expeditiously and fairly;

(e) allotting to it an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases; and

(f) enforcing compliance with rules, practice directions and orders.

And 3.9

“On an application for relief from any sanction imposed for a failure to comply with any rule, practice direction or court order, the court will consider all the circumstances of the case, so as to enable it to deal justly with the application, including the need—

(a) for litigation to be conducted efficiently and at proportionate cost; and

(b) to enforce compliance with rules, practice directions and orders.”

All this, together with the pre-reforms comments of Jackson LJ in Fred Perry and Lord Dyson MR in the 18th Implementation Lecture ‘The application of the amendments to The Civil Procedure Rules’ paras 25-27, suggest that the decision in Mitchell was inevitable and entirely consistent with the rationale behind the recent reforms.

In short, the message is clear; failure to comply with court rules is now likely to result in very serious consequences for solicitors and their clients.

This, and its wider implications are well illustrated by the outcome of an application to strike out a claimant’s claim that I appeared in early last week at Chichester County Court. My client applied to strike out the claimant’s claim as an abuse of process. In a previous action brought by my client against the claimant, the defence and counterclaim were struck out for failure to comply with an unless order. The defendant and his solicitors adopted a rather blasé attitude to this and simply issued a ‘fresh’ claim which they admitted was exactly the same claim as the struck out counterclaim. I advised that an application to strike out the ‘fresh’ claim as an abuse would be on even more fertile ground in the ‘post Jackson’ era as the ‘fresh’ claimant was using his ‘fresh’ claim in part to avoid the now much harder test to achieve relief from sanction, and that that could in itself amount to an abuse of process, in addition to the usual abuse criteria applied in these situations as set out in  Securum Finance v Ashton & Anor. [2001] Ch. 291. We made the application and the District Judge (who knew the Mitchell judgment almost off by heart) agreed, relying heavily on my arguments based on the  Mitchell decision in his judgment.

The message is simple; know your deadlines and meet them. If there is a chance that you will not, seek to obtain extra time. Otherwise, put your tin hat on because that ton of bricks will soon follow.

Andrew Wilson

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