Topland Portfolio No 1 Ltd v Smiths News Trading Ltd

The claimant (“Topland”) is the owner of a commercial property. The tenant of the property became insolvent. The defendant (“Smiths”), the tenant’s parent company, is a surety under the lease. Topland brought a claim against Smiths for the unpaid rent. Smiths contends that it was released from its obligations as surety as a result of a licence to alter the property granted by Topland’s predecessor in title to the tenant without Smiths’ consent. In a judgment dated 6 June 2013 ([2013] EWHC 1445 (Ch), [2014] 1 P & CR 2) Alison Foster QC sitting as a Deputy High Court Judge found in favour of Smiths and dismissed the claim. Topland now appeals with permission granted by Lewison LJ.

There is no dispute as to the facts, which can be shortly stated. Topland is the current freehold owner of land known as the Do It All Site, on the south side of Glentworth Road, Westgate, Morecambe (“the Property”). That freehold is subject to a 35 year lease dated 18 May 1981 between PAT (Pensions) Limited (“PAT”) as Lessor, WH Smith Do-It-All Ltd (later known as Payless DIY Ltd, “Payless”) as Lessee, and Smiths (then known as W.H. Smith & Son Ltd) as Surety (“the Lease”).

On 28 September 1987 PAT granted Payless a licence which authorised certain alterations to the Property (“the Licence”). Smiths was not a party to the Licence and did not consent to it.

Topland bought the reversion in 2001. By 2011 the annual rent was £310,000 plus VAT payable quarterly. Payless went into administration on 5 May 2011. Rent was paid up to 21 June 2011, but on that date the administrators disclaimed the Lease. By 8 February 2012, when Topland brought this claim, there were rent arrears under the Lease amounting to £281,038.36 plus interest. On 15 August 2012 Payless was dissolved. On 8 October 2012 Topland gave notice to Smiths requiring it to take a new lease for the remainder of the term of the Lease.

Clause 1(b)(v) of the Lease defines “the demised premises” as meaning:

“the land and premises described in Part 1 of the First Schedule hereto and each and every part thereof together with the appurtenances thereto belonging and together also with any buildings and each and every part thereof now or hereafter erected or in the course of erection thereon or on any part thereof together with all additions, alterations and improvements thereto which may be carried out by or on behalf of the Lessee prior to or during the term and shall also include any plate glass windows and doors and all Landlords fixtures and fittings now or hereafter in or about the same”.

Part 1 of the Second Schedule sets out a number of covenants by the Lessee, including the following:

The Fifth Schedule sets out a number of covenants by the Surety. The key provision for present purposes is clause 1:

“The Lessee shall at all times pay the rent hereinbefore reserved at the times and in manner hereinbefore contained and shall duly observe and perform all the covenants and conditions on the Lessee’s part hereinbefore contained to be observed and performed and that if the Lessee shall make default in the payment of the rent herein reserved or any part thereof or in observing and performing the said covenants and conditions or any of them 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 or to enforce observance or performance of any of the covenants or conditions on the Lessees part to be observed and performed or any time which may be given by the Lessor to the Lessee or that the Lessee may have ceased to exist shall not release or exonerate or in any way affect the liability of the Surety under this covenant”.

Clause 1(b)(iv) defines the “demised premises” as having the same meaning as in the Lease. Clause 1(b)(v) defines “the Works” as meaning the works shortly described in the Schedule, namely:

“The construction of an opening of the west wall of the warehouse forming part of the demised premises the construction of a new garden centre on the west side of the said warehouse and alterations to the layout of the existing car parking area

The erection of a high security boundary fence”.

By clause 2 the Lessor grants a Licence to the Lessee to execute the Works, but on terms that the Licence does not impose on the Lessee an obligation to carry out the Works for the purposes of clause 2(b) of the Third Schedule to the Lease (i.e. so that the Works when done would not have any effect upon the calculation of rent for the purposes of rent adjustment under clause 2 of the Lease).

Clause 3(g) of the Licence contains a covenant by the Lessee as follows:

“if the Lessor shall so reasonably require at the expiration or sooner determination of the term demised by the Lease to reinstate the demised premises to the same condition in which they were immediately prior to the commencement of the Works such reinstatement to be carried out with good quality materials and in a good and workmanlike manner to the reasonable satisfaction of the Lessors Surveyor”.

Clause 4(a) provides that it is agreed that:

“all the covenants conditions and obligations contained in the Lease shall be applicable to the Works and to the demised premises in their altered state”.

Smiths’ defence to Topland’s claim relies upon the rule in Holme v Brunskill (1878) LR 3 QBD 495. In that case the plaintiff let a farm in Cumberland to a tenant farmer, together with a flock of sheep. At the time when the farm was let, it 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 term of the lease. When the flock was re-delivered, however, the sheep were reduced in number and were not in good condition. Earlier, in the course of the term, the tenant had made an agreement with the plaintiff that he would surrender a field of about 7 acres in exchange for a decrease in his rent of £10 a year. The surety neither consented to, nor knew of, this variation to the original lease. A majority of the Court of Appeal held that the surety was discharged from his obligations by reason of the variation even though a jury had held that the variation had not substantially or materially altered the tenant’s obligations under the lease.

Cotton LJ, with whom Thesiger LJ agreed, stated the applicable principle at 505-506 in the following terms:

“The true rule in my opinion is, that 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, although in cases where it is without enquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that 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, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, 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 notwithstanding the alteration, and that if he has not so consented he will be discharged.”

A number of matters are common ground:

Smiths contends that the present case falls squarely within the rule in Holme v Brunskill since it is far from self-evident that the alteration to the Lease as a result of the Licence was insubstantial or that Smiths cannot suffer prejudice. On the contrary, the effect of the Works was to enlarge the burden of performing the Lessee’s covenants under the Lease, in particular those contained in clauses 5(a), 6(a), 7 and 8 of the Second Schedule.

Topland disputes that the rule in Holme v Brunskill applies to the present case for two main reasons. First, Topland contends that it is clear that the Licence did not increase the Lessee’s obligations under the Lease so as to prejudice the Surety. Secondly, Topland relies upon the proviso to paragraph 1 of the Fifth Schedule to the Lease, contending that the Licence amounts to either “forbearance” or “time … given” by the Lessor. The argument with respect to the giving of time was not advanced before the deputy judge, but was suggested by Lewison LJ when giving permission to appeal and has been adopted by Topland without objection from Smiths.

Smiths disputes that the Licence amounts to either forbearance or the giving of time by the Lessor.

So far as Topland’s first main contention was concerned, the deputy judge held the Licence amounted to a variation of the Lease which had the clear potential to increase the Lessee’s obligations, and accordingly the rule in Holme v Brunskill applied. As to the second main contention, she held that the grant of the Licence did not amount to forbearance on the part of the Lessor since the Lessee was not in breach of covenant when the Licence was granted.

On the appeal, Topland advances the essentially same contentions as it advanced before the deputy judge and argues that she was wrong not to accept them. In addition, as I have already noted, it advances a new argument on the proviso.

The first question under this heading is as to the incidence of the burden of proof. Is it for the lessor to prove that it is self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety? Or is it for the surety to prove that it is not self-evident that the alteration is unsubstantial or one which cannot be prejudicial to the surety? The deputy judge held at [45] that the burden lay on the lessor. In its grounds of appeal and skeleton argument, Topland submitted that she was in error, but counsel for Topland did not pursue this argument at the hearing. In those circumstances, I merely note that Mason ACJ, Wilson, Brennan and Dawson JJ of the High Court of Australia held in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 559 that (emphasis added):

“… to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety’s risk.”

Counsel for Topland argued that there was no increase in the Lessee’s obligations as a result of the Licence. Although he advanced four points in support of this argument in his skeleton argument, in his oral submissions he only pursued the first of these. This was that the definition of “the demised premises” in clause 1(b)(iv) of the Lease incorporated any additions, alterations and improvements to the Property. Furthermore, clauses 5(a), 6(a), 8 and 24 of the Second Schedule also referred to additions, alterations and improvements to the demised premises. Accordingly, he submitted, the Surety must be taken to have appreciated that all of the Lessee’s covenants relating to the Property, including those in clauses 5(a), 6(a), 7 and 8, would also apply to the Property as added to, altered or improved. Thus it was inherent in the Lease that the burden of performing the Lessee’s covenants would increase if the Property was added to, altered or improved. As he pointed out, there was no comparable provision in the lease in Holme v Brunskill. He accepted that, save to the limited extent provided by clause 16 of the Second Schedule, no additions, alterations or improvements were permitted under the Lease, but submitted that the Surety would have appreciated that additions, alterations and improvements would nevertheless be possible if the Lessor consented.

Counsel for Smiths accepted that the scheme of the Lease envisaged that the burden on the Lessee could be increased in certain respects (in particular, by virtue of the rent review clause), and that the Surety could not complain about that in the event of default by the Lessee and recourse by the Lessor to the Surety. So far as the burdens imposed on the Lessee by clauses 5(a), 6(a), 7 and 8 were concerned, however, he submitted that the Surety would have known at the time when it became party to the Lease that those burdens could not be increased as a result of additions, alterations or improvements to the demised premises, because no such additions, alterations or improvements could be made unless the Lessor consented outside the framework of the Lease. In that event, the Surety was entitled to expect that its consent would be sought as well.

I accept the submissions of counsel for Smiths. Accordingly, I consider that the deputy judge was right to conclude that the Licence had the clear potential, to put it at its lowest, to increase the obligations on the Lessee, and hence on the Surety in the event of the Lessee’s default. It follows that, subject to Topland’s second main contention, the rule in Holme v Brunskill applies.

Topland argues that the Licence was a forbearance within the proviso for the following reasons:

Smiths contends that forbearance occurs where A is in breach of an existing obligation to B (e.g. A is overdue in paying the rent) which B abstains from enforcing. In granting the Licence, however, the Lessor was not forbearing to enforce the covenant against alterations since there had been no breach of it and there was nothing to enforce. It was positively authorising the Works despite the covenant.

There have been three first instance decisions concerning provisos substantially in this form. I say “substantially in this form”, because in each case the proviso included the words “in endeavouring” after the words “any neglect or forbearance of the Lessor [or Landlord]”. Furthermore, the proviso did not include the words “or that the Lessee may have ceased to exist”. In my judgment these differences are not material to the issues on this appeal.

The first case in time was Selous Street Properties Ltd v Oronel Fabrics Ltd [1984] 1 EGLR 50. The tenant had made unauthorised alterations to the premises, consisting of the construction of some toilets, in breach of covenant. Subsequently the position was regularised by the grant of a licence by the landlord. The licence recited that the lessee had made alterations to the demised premises in contravention of the covenant against alterations and provided that the lessor authorised the retention of those alterations in consideration of certain covenants. Those covenants included a covenant at the expiration or sooner determination of the lease if required by the lessor and at the lessee’s expense to reinstate the demised premises by removing the works and making good.

Hutchinson J rejected the argument that the grant of the licence amounted to forbearance by the lessor for reasons which he expressed at 60J as follows:

“ … it is difficult see to how, even allowing that forbearance adds something to neglect, it can sensibly be said to envisage a binding agreement not to enforce the covenants. I should add, in any event, that I am not convinced by an argument that depends on importing to the word ‘forbearance’ some significantly different meaning to that connoted by the word ‘neglect’, because it is common experience to find that legal documents, like the Book of Common Prayer, use two words to convey the same meaning.”

The second case is Howard de Walden Estates Ltd v Pasta Place Ltd [1995] 1 EGLR 79. In that case the premises were originally used by the tenant as a delicatessen. The landlord granted the tenant successive licences permitting the installation of eight tables for the consumption of food and non-alcoholic beverages, permitting the service of Italian wine for consumption with food and permitting the off-licence sale of beers, ciders and wine as well as the use of adjoining premises as a fire escape.

Morland J rejected the argument that the grant of the licences amounted to forbearance by the lessor for reasons which he expressed at 81H-M as follows:

“The next question is can the plaintiff rely upon the proviso to override the general law? In my judgment, on a proper construction of the proviso, they clearly cannot. The proviso … does envisage a landlord having a wide discretion in dealing with a tenant, but, in my judgment, it is a wide discretion in dealing with a tenant who has broken his obligations under the lease. …

The proviso, in my judgment, has to be construed in a way to give purpose to the object of the proviso which is … to give a wide discretion to the lessor or landlord. On the other hand, the words of the proviso are clear, that they are designed for the situation where there is either a breach or an apprehended breach of covenant failure to pay the rent.

This case differs factually from the Selous case … where there had been a breach of covenant in the erection of toilets. …

In the present case, the three licences were granted before the date the rent review was agreed. There was no question here of any breach of covenant, or the giving of time to remedy the breach. … ”

Morland J went on to say that he agreed with Hutchinson J’s construction of “forbearance”, but not with what Hutchinson J had said about “neglect”. As Morland J explained at 82D-E:

“… in my judgment, with respect to Hutchinson J, the use of the two words does connote a different meaning. The different meaning, in my judgment, is: neglect indicates a passive non-mental approach, whereas forbearance connotes a deliberate decision to forebear; the purpose of the forbearance is in order to achieve later the fulfilment of the contractual obligations, either in the payment of rent, or of the covenants and obligations under the lease.”

The third case is Unicomp Inc v Eurodis Electron plc [2004] EWHC 979 (Ch). In that case the tenant (CEM) got into financial difficulties. In breach of covenant the premises were occupied by a related company (Unibol) which started paying the rent. The landlord (Fortwilliam) accepted the rent for nearly two years after having been put on notice of Unibol’s occupation and payment of the rent. During this period there were negotiations over an assignment of the lease which failed.

Evans-Lombe J held that the conduct of the landlord in failing to take action to enforce the covenants in the lease when it became clear to it that Unibol had taken possession of the premises and was paying the rent amounted to forbearance. As he explained at [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 de Walden 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.”

The word “forbearance” must be construed in its context and in accordance with the purpose of this provision of the Lease. The main part of clause 1 of the Fifth Schedule requires the Surety to pay all the Lessor’s damages, costs and expenses if the Lessee defaults in paying the rent or in observing or performing any of the Lessee’s covenants. As counsel for Smiths submitted, the proviso constitutes a qualification to the main part of clause 1 and must be interpreted accordingly. Furthermore, the wording of the proviso also refers to a default (or at least an apprehended default) by the Lessee in paying the rent or in observing or performing any of the Lessee’s covenants. Still further, the clear purpose of the proviso (ignoring the part which is concerned with the Lessee ceasing to exist) is to ensure that the Surety is not released by a mere failure on the part of the Lessor to enforce the covenants in the Lease, whether that failure occurs as a result of “neglect”, “forbearance” or “any time which may be given”.

I agree with Morland J that it appears that the draftsman intended “neglect”, “forbearance” and “time … given” to mean different things; but as Sullivan LJ pointed out in the course of argument, each of these expressions takes colour from the other two as well as from the overall context. Neglect shades into forbearance which shades into giving time. Having regard to the context and purpose of the proviso, I consider that “forbearance” connotes a decision by the landlord not immediately to enforce the observance or performance of a covenant against a tenant who is in breach of that covenant, but rather to tolerate the breach for the time being.

Counsel for Topland argued that it made no difference whether the Lessee agreed not to enforce a covenant in advance or after the event. I disagree, for two reasons. First, as I have explained, the context, purpose and wording of the proviso make it clear that it is concerned with failure to enforce in the event of breach, not with prior authorisation. Secondly, the distinction is a perfectly rational one to draw. If asked for authorisation, the Lessor can decide whether or not to consent and can negotiate over terms. After a breach, the Lessor is presented with a fait accompli and must decide whether or not to enforce.

Counsel for Topland also argued that the proviso was an anti-Holme v Brunskill measure. I agree that, as is common ground, where the proviso applies, the rule in Holme v Brunskill will not apply. I do not accept that the proviso goes any further than that. If it had been the draftsman’s intention to stipulate that the rule in Holme v Brunskill did not apply at all, it would have perfectly easy for him to say so in a variety of ways. The wording of the proviso discloses no such intention.

In the present case I agree with the deputy judge that there was no forbearance by PAT. Payless was not in breach of the covenant against alteration, and accordingly PAT did not decide not to enforce the observance of the covenant. On the contrary, PAT positively authorised Payless to construct the Works.

Topland contends that, even if the Licence did not amount to forbearance, it amounted to the giving of time by the Lessor to the Lessee, since it postponed the date on which the covenant against alterations was enforced. Smiths disputes this.

Prompted by the observations of Lewison LJ when giving permission to appeal, counsel for Topland relied upon the reasoning of Hutchinson J in Selous at 60M:

“In so far as [the licence] legitimised the toilets while imposing an obligation to remove them if required at the end of the tenancy, can it properly be said that all it was doing was postponing until the latter date the time at which the landlord was entitled to call upon the tenants to remove them? It seems to me that it can …”.

In my judgment this reasoning is not applicable to the present case even assuming that it was correct on the facts of that case (as to which I express no view). Again, the essential point is that the Lessee was not in breach of the covenant against alterations when the Licence was agreed. Accordingly, the Licence did not postpone until a later date the time at which the Lessor was entitled to call upon the Lessee to remove the Works. Rather, it granted the Lessee permission to construct the Works. Furthermore, the covenant in clause 3(g) of the Licence does not give the Lessor an absolute right to require reinstatement of the premises, but only to do so if this is reasonable.

For the reasons set out above, I would dismiss this appeal.

I agree.

I too agree.