Scottish & Newcastle Plc v Raguz

This action concerns two underleases dated respectively 17^th March 1967 (“the 1967 Lease”) and 7^th March 1969 (“the 1969 Lease”) whereby Colston Property Holdings Ltd demised to the claimant hotel premises in Leicester for a term of years expiring on 22^nd March 2062. By each underlease the claimant covenanted to pay rent in advance on the usual quarter days, the rent being reviewable every 14 years of the term.

The claimant assigned the underleases to the defendant on 29^th September 1982 for a consideration of £1.00. At the same time the hotel business then carried on at the premises by the claimant was assigned to a company in which the defendant was interested, Impney Hotel Properties Ltd. The assignments of the underleases contained, by virtue of section 24 of the Land Registration Act 1925, a covenant by the defendant that he and his successors would pay the rent reserved by, and comply with the covenants and conditions contained in, the underleases and would indemnify the claimant in the event of breach (“the s.24 indemnity”). The precise terms of that covenant are examined in more detail below.

Not long afterwards, it would seem in about March 1983 but the defendant remembers it somewhat differently, the defendant assigned the underleases to a company called Villafield Ltd, which in turn gave covenants for indemnity to the defendant guaranteed by two gentlemen, apparently brothers, called Virani.

By March 1992 the underleases had become vested in a company called Hotel St. James Limited (“HSJ”). HSJ defaulted on payment of rent in June 1999 and its mortgagees appointed administrative receivers on 6^th October 1999, the administrative receivers being a Mr Kinlan and Mr Dattani, partners in the well-known firm of BDO Haywood.

By that time the reversioner to the underleases was National Car Parks Limited (“NCP”). Its inability to recover rent from HSJ meant that the claimant, as original underlessees, became a potential target of a claim by NCP for the rent under the lease so long as it remained unpaid. Subject to the provisions of the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) the claimant had no answer to that claim.

The amount of NCP’s potential claim against the claimant suffered from uncertainty in two respects. First, as regards the past, the accrued liability of HSJ in respect of rent was not known: the level of the passing rent had been the subject of an unresolved process of review since 1995 in the case of the 1967 Lease and 1996 in the case of the 1969 Lease. The amount of accrued liability in respect of the reviewed rent would only be known when that review process was completed. Secondly, so far as the future was concerned, there was potential liability for the claimant until 2062. The only way of mitigating that potential liability was to find someone who was prepared to take on the liability under the two underleases.

The defendant was similarly on the hook. To the extent that the claimant was made liable for the rents, it could prima facie pass on the liability to him.

An additional feature of this situation, horrid for both claimant and defendant, was that it was in the highest degree unlikely that NCP would resolve matters for both of them by forfeiting the lease. The claimant is a major quoted public company and, from the point of view of any landlord, a “blue chip” covenant. There are also peculiarities about the premises which can usefully be described at this stage.

The premises demised by the 1967 and 1969 leases comprise the top storey or two of a late 1960s multi-storey car park in what was once, but has ceased to be, the commercial heart of Leicester. Access to the premises under those underleases was by virtue of an easement from ground floor level by lift. There were, in addition, reserved parking spaces for the hotel in the upper storeys of the car park. From an aesthetic, planning or commercial point of view, the vision behind the development, clear and bright eyed as it may have been in the late 1960s, is difficult to re-capture through 21^st century spectacles which see only the multi-storey car park with, at street level, some down-market commercial premises (a sauna and massage parlour giving some indication of the overall tone). The original conception had no doubt been the creation of a high class hotel (as required by the user covenants) offering easy city centre parking with commanding views over the city. It was originally badged as The Abbey Motor Hotel.

At some point in the history of the premises the access arrangements had been improved by the acquisition of an alternative access at street level through a lobby. The lease of this access (“the Lobby Lease”) post-dated the involvement of either the claimant or the defendant but had, by 1999, become integral to the way in which the hotel actually operated. The Lobby lease had also expired by that date, and HSJ had only the benefit of a continuing lease under the Landlord and Tenant Act 1954.

What has given rise to the dispute between the parties to this action is the steps which the claimant took in order to protect its own position in the unpleasant situation with which it was faced. In very summary form the claimant’s approach was as follows:

That policy had some merit. The decision to support the administrative receivers was taken in May 2000 (although not formalised until August 2000) and by October 2000, a purchaser had been found at a premium of £200,000 who appeared anxious to complete quickly. This was a company (Skymede Enterprises Limited) of whom the moving force was a Mr Rizvi. As a result, however, of a chapter of unforeseen events, the sale to Mr Rizvi’s company was not completed until 28^th February 2003. In the meantime HSJ had paid no rent. On 13^th June 2001 NCP had served statutory demands on the claimant for sums totalling £346,313.32 (£323,515.96 under the 1967 Lease and £22,797.36 under the 1969 Lease) which it claimed then to be owing in respect of rent. The claimant paid that sum to NCP on 5^th July 2001.

By 28^th February 2003 further rent (and other sums) had accrued due under the leases (including the Lobby lease). NCP made it a condition of the assignment that those sums (which included £245,714.55 in respect of rent arrears under the 1967 Lease and the 1969 Lease) should be paid off. The claimant took steps to ensure that this happened, providing the necessary sums from its own resources.

Those proceedings were commenced on 17^th September 2001. As originally formulated they sought payment of the sum of £346,313.32 and declaratory relief as regards future liabilities. By amendment made on 30^th January 2006 they were amended by the addition of a claim to the £245,714.55.

A summary judgment application made by the claimants in November 2001 and not determined at first instance until 9^th December 2002 yielded the claimant only a limited success. In his judgment dated 9^th December 2002, HHJ Norris held that a distinction had to be drawn between rent for which the claimant had become liable prior to 3^rd August 2000 and that which had accrued subsequent to that date. The significance of the date was that it was the date on which the claimant (or more accurately its subsidiary S&N Pubs and Restaurants Ltd (“Pubs”)) formally entered into the agreement with the administrative receivers which was intended to enable the latter to continue trading the hotel business while the purchaser was being sought (“the Maintenance Agreement”). The judge held that the question whether the defendant should be liable to the claimant in respect of rental demanded after that date had to go to trial. But he held that the defendant had no answer to the claim for rent demanded before that date, a sum claimed to be £39,978.08. He rejected the defendant’s argument that the s.24 indemnity was in the nature of a guarantee and therefore discharged altogether as a result of the arrangements entered into between the claimant and the administrative receivers. Judgment was therefore given for the £39,978.08 and interest, and directions given for trial of the balance of the claim. That judgment was upheld on appeal: see Scottish & Newcastle v. Raguz [2004] L&TR 11 (Sir Andrew Morritt V-C, May and Sedley LJJ.).

The principal points taken by the defendant are as follows:

In addition to those points, some detailed points on the quantum of the claim are raised, turning on the way in which NCP had (or had not) credited HSJ with certain rent deposits which it held. I deal with these at the end of my judgment.

It is convenient to take this first since it is a stand-alone legal point which requires little further by way of detailed factual narrative.

At common law the claimant retained a primary liability to pay the rent under the 1967 Lease and the 1969 Lease until 2062. The fact that it had assigned the leases as long ago as 1982 matters, as Walton J. put it in Allied London Investments Ltd v. Hambro Life Assurance Ltd (No. 2) [1984] 1 EGLR 62 at 63E, “not one jot or tittle” as regards its contractual liability to the reversioner for the time being.

In relation to tenancies granted after 1^st January 1996 that situation no longer obtains: see section 1(1) and 5 of the 1995 Act. So far as concerns tenancies granted before that date, the matter is governed by section 17 of the 1995 Act which, so far as material, is in the following terms:

“(1)

This section applies where a person (“the former tenant”) is as a result of an assignment no longer a tenant under a tenancy but —

(b)

(in the case of any tenancy) he remains bound by such a covenant.

(2)

The former tenant shall not be liable under … the covenant to pay any amount in respect of any fixed charge payable under the covenant unless, within the period of six months beginning with the date when the charge becomes due, the landlord serves on the former tenant a notice informing him —

(a)

that the charge is now due; and

(b)

that in respect of the charge the landlord intends to recover from the former tenant such amount as is specified in the notice and (where payable) interest calculated on such basis as is so specified.

…

(4)

Where the landlord has duly served a notice under subsection (2)… , the amount (exclusive of interest) which the former tenant ……is liable to pay in respect of the fixed charge in question shall not exceed the amount specified in the notice unless —

(a)

his liability in respect of the charge is subsequently determined to be for a greater amount,

(b)

the notice informed him of the possibility that that liability would be so determined, and

(c)

within the period of three months beginning with the date of the determination, the landlord serves on him a further notice informing him that the landlord intends to recover that greater amount from him (plus interest, where payable)

… .

(6)

In this section —

“fixed charge”, in relation to tenancy, means —

(a)

rent,

(b)

any service charge as defined by section 18 of the Landlord and Tenant Act 1985 (the words “of a dwelling” being disregarded for this purpose), and

(c)

any amount payable under a tenant covenant of the tenancy providing for the payment of a liquidated sum in the event of a failure to comply with any such covenant;

…”

Section 27 of the 1995 Act provides for the form of any notice for the purpose of, inter alia, section 17 to be prescribed by regulations: see section 27(1). Section 27(3) and (4) provide as follows:

“(3)

The regulations shall require any notice served for the purposes of section 17 to include an explanation of the significance of the notice.

(4)

If any notice purporting to be served for the purposes of … section 17 is not in the prescribed form, or in a form substantially to the same effect, the notice shall not be effective for the purposes of section .. 17.”

The Landlord and Tenant (Covenants) Act 1995 (Notices) Regulations 1995 (SI No. 1995/2964) prescribe two relevant forms of notice, one (Form 1) for use under section 17(2) and the other (Form 2) for use under section 17(4).

Form 1 contains the following substantive paragraphs:

“3.

I/we as landlord³ hereby give you notice that the fixed charge(s) of which details are set out in the attached Schedule⁴ is/are now due and unpaid, and that I/we intend to recover from you the amount(s) specified in the Schedule [and interest from the date and calculated on the basis specified in the Schedule]⁵. (see Notes 2 and 3 overleaf)

4.

⁶ There is a possibility that your liability in respect of the fixed charge(s) detailed in the Schedule will subsequently be determined to be for a greater amount. (see Note 4 below)”

Paragraph 3 is footnoted (footnote 4) as follows:

“The Schedule must be in writing, and must indicate in relation to each item the date on which it became payable, the amount payable and whether it is rent, service charge or a fixed charge of some other kind (in which case particulars of the nature of the charge should be given). Charges due before 1 January 1996 are deemed to have become due on that date, but the actual date on which they became due should also be stated.”

Paragraph 4 is footnoted (footnote 6) as follows:

“Delete this paragraph if not applicable. If applicable (for example, where there is an outstanding rent review or service charge collected on account) a further notice must be served on the former tenant or guarantor within three (3) months beginning with the date on which the greater amount is determined. If only applicable to one or more charge of several, the Schedule should specify which.”

In addition Note 4, as referred to in the text of paragraph 4, is in the following terms:

“Change in amount due

4.

Apart from interest, the landlord is not entitled to recover an amount which is more than he has specified in the notice, with one exception. This is where the amount cannot be finally determined within six months after it is due (for example, if there is dispute concerning an outstanding rent review or if the charge is a service charge collected on account and adjusted following final determination). In such a case, if the amount due is eventually determined to be more than originally notified, the landlord may claim the larger amount if and only if he completes the paragraph giving notice of the possibility that the amount may change, and gives further notice specifying the larger amount within three months of the final determination.”

The problem to which those provisions give rise is, shortly stated, this. Under a typical upwards only rent review provision such as obtained in the present case, the rent capable of being demanded by the landlord will be limited to the unreviewed rent so long as the review process has not been completed. Once, however, that process has been completed the reviewed rent will become payable retrospectively with effect from the review date and can be demanded by the landlord as from the rent day next following the completion of the review process: see South Tottenham Land Securities Ltd v. R&A Millett (Shops) Ltd & others [1984] 1WLR 710 at 715 and United Scientific Holdings Ltd v. Burnley Borough Council [1978] AC 904, per Lord Diplock at 935. The question is as to what if anything the landlord needs to do to preserve his ability to claim the reviewed rent retrospectively as against the original tenant. Can he wait until the reviewed rent becomes demandable and then serve a notice in Form 1 within 6 months of that date identifying the amount of the reviewed rent which has become demandable? Or must he serve a Form 1 notice within 6 months of the rent day on which the reviewed rent first accrues, and then serve a Form 2 notice within 3 months of the date on which, having been determined, the reviewed rent becomes demandable?

In posing the question in that way I have used the word “demandable” in order to avoid the slipperiness of the words “due” or “payable”. For this purpose the time at which it is “demandable” is the time at which the tenant could not resist an immediate claim for its payment as a liquidated sum.

The notices served by NCP in the present case for the most part proceeded on the view that the first of the answers was the correct one. Thus, taking first the notices given under the 1967 Lease, the following notices were given to the claimant:

In all these cases save for (3)* the notice was in Form 1 with paragraph 4 struck out. Notice number (3) did, however, contain paragraph 4 and thus preserved the possibility of claiming a subsequent increase in the rent for the quarter commencing on 24/6/00 by the mechanism of a s.17(4) notice served within three months of 29^th September 2000 (that increased rent having become payable on the quarter day next following its determination). That mechanism was not in fact employed. Instead the increased rent for that quarter was simply included in the overall lump of additional rent claimed in notice number (4).

A similar, although not identical, pattern appears in the notices given under the 1969 Lease:

The general submissions made on behalf of the defendant may be summarised as follows: (1) where a notice which has been served in respect of rent due for any quarter has, by striking out paragraph 4 in the statutory form, not preserved the possibility of the original tenant being liable in a greater sum than that specified in the notice, the original tenant can never be made liable for a greater sum in respect of that quarter; (2) where such a notice has been served it is implicit, not only that there will be no such liability asserted in respect of that quarter, but also that no such increased sum will be sought in respect of any earlier period; (3) since in relation to the 1967 Lease and the 1969 Lease the respective notices of 11^th November 1999 and 16^th June 2000 struck out paragraph 4, it follows that the tenant could not be liable for increased rent in respect of the quarters covered by those notices, but also that there could be no liability for increased rent in relation to any of the preceding quarters.

The claimant challenges both the first and the second steps in this argument. On its behalf Mr Stoner submitted that the critical words were those in s.17(2) which refer to “… the date when the charge becomes due…”, to the notice informing the tenant that “the charge is now due”, and to the fact that “the landlord intends to recover from the former tenant such amount as is specified in the notice…”. All those expressions point to the charge in question having become “demandable”. Accordingly, where rent has not become demandable because, being subject to an unresolved process of review, its amount has not been determined, a landlord does not need to serve any notice under s.17(2) in order to preserve the original tenant’s liability in respect of such sum. Moreover if no notice has been served under s.17(2), no question of having to serve a notice under s.17(4) can arise.

If s.17(2) stood alone there would be much to be said for the claimant’s submissions. However s.17(4) assumes that there may be a case in which the amount of the fixed charge (which is “now due” under s.17(2)) may subsequently be determined to be in a greater amount. The concept of the fixed charge being “now due” under s.17(2) is thus distinct from the amount in respect of that fixed charge for which the original tenant is potentially liable. If a fixed charge can be “now due” but in an amount which has not yet been determined, “now due” cannot mean “demandable”, but must mean “in respect of which a liability has now arisen”.

Note 4 to Form 1 shows that the draftsman of the 1995 Regulations adopted this interpretation of the statutory provisions, treating s.17(4) as dealing with the case where “the amount cannot finally be determined within six months after it is due (for example, if there is dispute concerning an outstanding rent review…” (emphasis supplied)). The same view of s.17(2) is, for what it is worth, taken by the editors of Halsbury’s Statutes in their general note on the section (Vol. 23 p. 738) where they state:

“Under sub-s(2), the landlord would be unable to recover the difference between the sum in the notice and the higher sum to which he was entitled by the subsequent determination (because he would not have served on the former tenant notice that the sum representing that difference was due within the requisite six-month period), and this would be unfair on the landlord. Sub-s(4) therefore enables…”

Such an approach does, however, lead to an apparent oddity. It means that in a case such as the present, where the rent review process spread over a number of years, the landlord would only be entitled to claim the subsequently determined rent from the original tenant if he had served notices throughout the period, even though there was no default whatsoever by the current tenant in paying the demandable rent and no reason to suppose that the current tenant would default in paying the subsequently determined rent. On this scenario the landlord would not within the 6 month period have any intention of claiming the demandable rent from the original tenant (because it had been paid). His s.17(2) notice would therefore have to specify “the amount” which he intends to claim either as “nil” or as “nothing at the moment, but wait and see”.

I do not think that there is any way of resolving this difficulty. It does not appear to me that the solution can lie in construing s.17(2) and (4) differently depending on whether or not a s.17(2) notice has been served. Either the subsequently determined rent is “due” at the date of its accrual as a liability or at the date of its demandability. I have (somewhat to my own surprise) come to the conclusion that the former is the correct construction.

That conclusion does, in my judgment, fit with the policy underlying the section. Sub-s.(2) is designed to relieve the former tenant of liability in respect of any fixed charge unless the landlord has taken a purely formal step of notification to preserve the former tenant’s liability. If the law is as I think it is no hardship to the landlord results. In the case of a long drawn out process of rent review he can protect himself against the possibility of the current tenant proving in due course unable to meet his liability by serving protective notices on the original tenant. The original tenant then gets the requisite early warning of what the future may hold. By contrast if the law is as the claimant contends, considerable hardship may result for the original tenant. Years after a particular rental period has passed the original tenant may be faced with a claim in respect of that rental period whereas the statute appears designed to allow the original tenant to be free from claims if he has not received a notice within the period of 6 months of a particular rent payment date. The facts of the present case dramatically illustrate how severely that can impact on the original tenant. A construction of the section which permits an original tenant to sleep easily in respect of a rental period once six months has elapsed without having received a protective notice from the landlord seems to me entirely consistent with Parliament’s intention.

Accordingly, in my judgment, NCP’s notice dated 8.3.01 which specified the additional rent of £279,849.00 under the 1967 Lease and its notice dated 20.7.01 which specified the additional rent of £53,998.61 under the 1969 Lease were not effective to render the claimant liable in respect of those sums.

The defendant contended that those notices were also ineffective to render the claimant liable in respect of (in the case of the 1967 Lease) the £19,975.00 claimed for the quarter commencing 29^th September 2000 and (in the case of the 1969 Lease) the two sums of £1,857.97 for the quarters 25^th March 2001 and 24^th June 2001. This was on the basis that, although effective notices could have been given at those dates in respect of those amounts, the inclusion in each case of the additional invalid claims for the additional rent rendered the whole notice “hybrid” and therefore non-compliant with the statute. I do not accept that contention: the inclusion of identifiable “out of time” amounts in a notice does not render the notice ineffective in relation to properly identified amounts with respect to which it is timeous.

I turn therefore to consider the wider arguments relied on by the defendant. These arguments proceed on the assumption that the claimant was liable to NCP for all the sums in respect of which it seeks an indemnity from the defendant, and seek to provide a reason why, notwithstanding that liability and the terms of the indemnity, the claimant ought not to succeed.

The effect of s.24(1) is to imply a covenant in each of the relevant transfers in the following terms:

“(b)

on the part of the transferee, a covenant with the transferor, that during the residue of the term the transferee and the persons deriving title under him will pay, perform, and observe the rent, covenants, and conditions by and in the registered lease reserved and contained and on the part of the lessee to be paid, performed and observed, and will keep the transferor and the persons deriving title under him indemnified against all actions, expenses, and claims on account of the non-payment of the said rent or any part thereof, or the breach of the said covenants or conditions or any of them.”

The covenant therefore has two limbs, the first consisting of the covenant that the rent will be paid, and the second consisting of the covenant to indemnify against “actions expenses and claims on account of the non-payment of the said rent”. One question which I canvassed with counsel in argument was whether the second limb added anything to the first or was simply an expression of the legal consequences of a breach of the first? The thought behind my question was that if the latter was correct then the question of whether the defendant was liable to the claimant in the particular sums claimed could be answered by applying tests appropriate to any other claim for damages for breach of contract, namely whether the particular damage suffered fell within the scope of the duty created by the contractual promise, whether it was caused by the breach complained of, whether it was too remote in law to be recovered, and whether the claimant had fallen short in its duty to mitigate. These questions, while by no means free from difficulty in themselves, at least presented a familiar terrain. As matters stood the defendant’s pleaded case in relation to its more general arguments appeared to rely rather on some suggested principle of law, or implied term, applicable to contractual indemnities which precludes recovery by the indemnified:

Those formulations are taken from paragraphs 13 and 13A of the Re-re-amended defence. In addition the defendant pleaded in paragraph 14 duties owed by the claimant to the defendant not to pay to NCP sums not lawfully due from the claimant to NCP and/or to challenge the amounts due where they were arguable.

In argument Mr Bannister QC did not seek to argue that my suggestion (that the question could be approached as if the second limb of the covenant could be approached on the basis that it simply set out the legal consequences of a breach of the first limb) was wrong. Nor, however, did he in terms adopt it. For his part, Mr Stoner submitted that it was wrong. He argued that the distinction between the two limbs was that breach of the first gave rise to a claim for unliquidated damages, whereas the second creates a claim in debt. A person who has a claim in debt:

“need not prove anything beyond the occurrence of the event or condition on the occurrence of which the debt become due. He need prove no less; the rules as to remoteness of damage and mitigation of loss are irrelevant…”

see per Millett L.J. in Jervis v. Harris [1996] Ch. 195, CA, at 202.

I record these matters at this stage in my judgment in order to provide a context for identifying the nature of the factual issues upon which I have heard evidence and been addressed. The area of disputed fact is relatively limited, and does not require an elaborate narrative of all the events which took place between November 1999 (when the first s.17 notice was served on the claimant) and 28^th February 2003 (when HSJ completed the assignment to Mr Rizvi). Apart from the existence and effect of the Maintenance Agreement no pleaded allegation by the defendant complains that any act of the claimant caused or contributed to the lengthy period of time which it took to complete that transaction which, from as early as October 2000 almost continually looked as if it was likely to be completed within a period of weeks from whatever date one cares to look at. The various difficulties which arose, and which conspired at every point to dash what was a reasonable expectation at the time, are catalogued in the lengthy witness statement of Mr Anderson of Eversheds who acted throughout on behalf of the claimant, and who also acted on behalf of HSJ (on the instructions of the administrative receivers) in the sale to Mr Rizvi. I found him to be a careful and conscientious witness whose evidence on these matters could be accepted.

I focus therefore only on those parts of the narrative which throw up issues of potential legal relevance

The story can be taken up from April 2000. Prior to that date consideration had been given by the claimant to its position in the light of the s.17 notices which had been served on it, and notification of the position had been given by the claimant to the defendant. It had appeared, however, that matters were quite likely to resolve themselves. Eversheds (acting by Miss Martin) had understood from the administrative receivers that they were paying current rent and had every expectation of being able to achieve an early sale. The premises had in fact been on the market prior to the administrative receivers’ appointment at an asking price of £995,000, and it appeared entirely possible that a premium might be obtained on sale which would both enable any arrears of rent to be discharged and produce a result satisfactory to HSJ’s mortgagees (at whose instance the administrative receivers had been appointed).

A letter from the administrative receivers to Miss Martin dated 4^th April 2000 read as follows:

“The issue of rent review is at an advanced stage, having not apparently been addressed to any great degree by the parties prior to our appointment on 6 October 1999. The landlords have proposed on a without prejudice basis a rental of £53,00 p.a. on the main lease (due from about April 1995) and £16,000 p.a. on the extension, due from December 1996. An independent expert was appointed in March 1996 and he issued further revised directions in February 2000 proposing a timetable for submissions by the parties and the tenant must respond by 7^th April 2000.

Prior to our appointment, the company had been marketing the hotel through Christie & Co at an asking price of £995,000 but no firm offers had been received, largely we surmise because of the price and the unresolved rent reviews.

Following our appointment,, Christie & Co informally advised that the proposed rent increases were not unreasonable. We decided to seek further specialist advice from the hotel and licensed property valuers Messrs Fleurets and their detailed report suggests that, on balance, the proposed rent is reasonable, although there has been some difficulty in view of the length of time since the review date and the lack of information on certain matters e.g. the extent of the works carried out by the original tenant. (Your client may be able to assist in this respect).

If the tenant agrees the rent as proposed, this will crystallise rent in arrears at the March 2000 quarter day of some £200,000 (exc. any interest which may be payable) against which there is a rent deposit of about £45,000. It appears that your client as original tenant is liable to the landlord for the arrears and any ongoing liability for the remaining term of the lease, up to 2062.

The position of the tenant is that trading at best has been break-even but there are outstanding professional costs in the Receivership. In order for trading to continue, the Receivers need to be satisfied that all trading and professional costs can be met pending a sale and we will be asking the mortgagees whether they are prepared to put us in funds so as to enable trading to continue up to a sale of the business as a going concern.

So far as concerns the prospects for a sale, it is difficult to be confident. Christie & Co suggest a marketing guide of £550,000 but that consideration be given to any offers in the region of £400,000. Fleurets informal view is that although the rack rent for the hotel could be of the order of £100/£125,000, the current poor trade may mitigate against a party paying a material premium to obtaining the business. Therefore, the mortgagees may be reluctant to invest any more money into the business.

In summary, urgent discussions need to be taken on several issues:

•

The rent reviews

•

Continuation of trade

•

Selling the business

It seems to us that as original tenants, your clients are most at risk and I would invite your early considerations of the position. In particular, I am proposing to instruct Fleurets not to object to the proposed rent by the landlords by the deadline of 7 April. I would be happy to meet with your clients to discuss these matters.”

Miss Martin’s immediate response, so far as the rent review was concerned, was that the claimant had insufficient information on which to offer a view. In the meantime the administrative receivers, on the instructions of the mortgagees, made a counter-offer to NCP, which NCP appears almost immediately to have rejected. By virtue of the stage which the rent review had by then reached the consequence was that the matter then became one for the determination of the independent expert. He had already set a timetable for submissions by the parties’ respective experts.

In hindsight it is easy to see that a mistake was made by the administrative receivers in not having accepted NCP’s offer since in due course the independent expert proceeded, having received submissions from NCP that the rent should be £102,000 and from HSJ that it should not be increased at all above the 1995 level of £24,000, to determine that the rent should be £68,000.

The mistake was an expensive one. It meant that by 28^th February 2003 the arrears were some £138,000 greater than they would have been had NCP’s offer been accepted. The accuracy of that calculation was not the subject of argument before me and I have not checked it. But on any view the increase (of £15,000 per annum over a period of 6 years) was a large one.

The issue here is as to why NCP’s offer was not accepted. A letter from the administrative receivers to Eversheds dated 12^th April 2000 asserts that Eversheds had instructed the administrative receivers to make no concessions. The defendant relied on this as evidence of the fact stated. Mr Kinlan, in whose name the letter was written and who was called as a witness on behalf of the defendant, could not recall why this assertion had been made, but conceded that nothing in Miss Martin’s written communications to the administrative receivers had justified the assertion. At the same time, when re-examined on the point, he observed that Eversheds had never taken the opportunity to deny the assertion. Miss Martin, although available to be called as a witness by the claimant in the sense that it was able to proffer a very limited witness statement from her despite the fact that she had ceased to be an employee of Eversheds since the autumn of 2002, was not called to give evidence.

I think it extremely improbable that there was any relevant communication between Eversheds and the administrative receivers prior to 12^th April 2000 which justified the assertion made in the letter of that date. The fact is, as the contemporary letters show, that the claimant did not feel able to say one way or the other whether NCP’s offer should be accepted and that Miss Martin was concerned that her client should not be seen as having any responsibility for whatever decision was taken, at least until her client was better informed. The tenor of the written communications was that the claimant was not in a position to instruct the administrative receivers to make what might be a concession. That is not the same thing as relaying instructions from her client to the administrative receivers that they should not make concessions. I do not attach significance to the fact that, in subsequent correspondence, she did not pick up and quarrel with the way in which the administrative receivers had chosen to interpret her response. In any event expression of the view that the administrative receivers should not make concessions, made from a position of total ignorance, could not amount to an “instruction” to the administrative receivers not to accept NCP’s offer. The claimant was not in a position to give the administrative receivers instructions.

The issue is, in any case, academic in the light of the fact that the administrative receivers in fact proceeded not merely to not accept NCP’s offer but to reject it by making a counter-offer at the suggestion of the mortgagees. The claimant was not consulted at all about this step and cannot be blamed for its having been taken. If the administrative receivers were acting on anyone’s instructions in not accepting the offer it appears to have been instructions given by the mortgagees.

What the written record gives no clue about is whether NCP’s offer could at any stage have been revived. What subsequently happened was that an extension of time was obtained for Fleurets (the valuers retained by the administrative receivers) to put in their submission to the joint expert and that in the interval the claimant obtained the assistance of Messrs. Humberts to advise it generally about the prospects for the premises, including the rent review process. Messrs. Humberts (in the person of Mr Haigh who gave evidence before me) in due course considered and approved the submission eventually made by Fleurets to the joint expert. He could not recall the question having been raised of seeking to revive NCP’s offer rather than proceeding to the expert determination. Nor could Mr Kinlan recall having given consideration to the point. So far as the claimant itself was concerned, the relevant evidence was given by Mr Hime who was at that time the claimant’s Group Estate Manager and Miss Martin’s principal source of instructions. He too could not recall having had an attitude that the rent should be settled by the review process rather than by negotiation with NCP and settlement by agreement. So far as he was concerned the question of review was fundamentally a matter for the administrative receivers, and he had not himself tried to evaluate what the likely outcome of the review process would be.

On all the evidence I am not satisfied that the absence of any attempt by the administrative receivers to revive NCP’s offer was caused by any intervention on the part of the claimant. On the contrary the conduct of all concerned seems to me consistent rather with a recognition that, having missed the opportunity to settle on NCP’s terms by 7^th April, the only game in town was to do the best that could be done in relation to the independent expert’s determination. That might either have been because the view was taken that the independent expert’s determination would probably come out closer to the Fleurets’ submission than NCP’s, or (which I think more likely) that the reality was that NCP’s offer was no longer on the table and was most unlikely to be resurrected. Given the previous delays in the rent review process (the independent expert had been appointed as long ago as 29^th March 1996) it is hardly surprising that NCP’s offer should have been a final one.

Accordingly I reject the submission that the claimant was in any relevant sense responsible for the fact that the NCP offer was not accepted.

The second strand in the letter dated 4^th April 2000 was the administrative receivers’ desire to get the claimant financially involved in the project of keeping the hotel operating pending its sale. Given the claimant’s unenviable position, it is not in the least surprising that it came to the conclusion that its best option was to accept in principle the concept of supporting that project financially. This it had done by 18^th May 2000. The choices available to it were limited to the following:

The defendant does not complain that the claimant was in any sense at fault in not taking the first course. Its claim is based on the proposition that if the third course had been taken, the eventual outcome would have been more favourable. It is implicit in this proposition that “more favourable” means for this purpose more favourable both to the claimant and to the defendant. What the defendant contends is that, had the third course been taken, the consequence would have been that HSJ would have gone into insolvent liquidation and that then one of two things would probably have happened. Either the defendant or some other person would have obtained an assignment of the leases for a negligible premium on a forced sale, or, had the liquidator disclaimed the leases, the defendant or some other person within s.118(2) of the Insolvency Act 1986 would have obtained a vesting order. In either case, the claimant’s liability for the continuing rent would have been determined and any liability of the defendant to the claimant would have determined at the same time.

By 17^th May 2000 Mr Hime had come to the view that the claimant’s interests were best served by supporting the administrative receivers’ project of trying to sell the business as a going concern and for that purpose to enter into a conditional and temporary arrangement with the administrative receivers. At that stage the possibility of the claimant being able to claim against the defendant was known but not relied on in any way in choosing the course adopted, Mr Hime’s memorandum to his director (Mr Izatt) merely noting that:

“The original individual to whom S&N made the assignment is believed to still be running/owning a number of hotels and there might be a chance (albeit small) that the indemnity that he provided following the assignment could be called upon by S&N to cover any losses for the property. Again, this aspect is being looked into.”

Miss Martin seems to have taken the view that entering into a voluntary arrangement with the administrative receivers might impair the claimant’s ability to claim against the defendant and she so advised Mr Hime by letter dated 19^th May 2000. The claimant’s decision to proceed despite that advice shows that it was concerned to do what was perceived to be in its own commercial best interests irrespective of its ability to claim against the defendant. On the same day she wrote to the defendant’s solicitors (Harefield) advising them in general terms of the position as at that date and inviting proposals from the defendant. No effective response was received to that letter.

The claimant and the administrative receivers then proceeded, through their respective solicitors, to hammer out the terms of what became the Maintenance Agreement, dated 3^rd August 2000. Mr Anderson from Eversheds did the drafting on behalf of the claimant. It took the form of an agreement between (1) Pubs (Footnote: ¹) (2) the claimant and (3) the administrative receivers. After reciting inter alia that Pubs had agreed to indemnify the claimant against the claimant’s liabilities to NCP, the operative provisions of the agreement provided for Pubs to pay the administrative receivers up to £6,000 per month in respect of “Trading Losses” as defined. That sum was calculated on the footing that the administrative receivers would be paying rent to NCP at the current level but the agreement recognised that once the rent review was finalised the sum of £6,000 would need to be revised upwards. Either party could terminate the agreement on 14 days’ notice. There were provisions to ensure that sale proceeds were used to pay down expenses incurred by Pubs under the agreement and to make provision for outstanding liabilities under the leases which might fall on Pubs. There was also provision for the administrative receivers not to issue a contract for sale without Pubs’ prior written approval.

The Maintenance Agreement was never in fact operated according to its terms. In the first place there never was any indemnity between the claimant and Pubs. The insertion of Pubs as a party seems to have been the result of Mr Hime’s view that, since this was hotel trade, the appropriate division within the claimant’s group was that represented (in corporate terms) by Pubs. Having been so instructed Mr Anderson thought it logical for the indemnity (a draft of which he supplied) to be in place as between Pubs and the claimant. No such indemnity was however ever executed. Moreover, when the administrative receivers did in due course call for support, it was the claimant (and not Pubs) which gave it. In the second place, although the Maintenance Agreement contemplated that the Trading Losses would be calculated after payment of the rent, the administrative receivers in fact never did pay any rent. In practice this meant that they were able to continue trading the hotel without making any call on the claimant for a considerable period of time. It was not until October 2001 that they first looked to the claimant for direct financial assistance. The claimant then gave the assistance requested, not because the Maintenance Agreement obliged it to (which it did not), but for the purely pragmatic reason (what Mr Fenwick in his evidence called a “simple commercial approach”) that by doing so the hotel could be kept trading and the contemplated transaction with Mr Rizvi kept alive.

Both these features of the practical operation of the arrangements have given rise to substantial controversy in the course of these proceedings. The possibility of the existence of an indemnity provoked a suspicion on the part of the defendant and his advisers that the claimant itself had not in fact suffered the liability in respect of which it was claiming. Further, the fact that the administrative receivers had been permitted and/or encouraged by the claimant to continue trading without paying the rent due to NCP prompted a suspicion that this course of conduct had been deliberately pursued by the claimant in the knowledge that the resulting liability for rent could be passed on to the defendant.

So far as the first point is concerned it was accepted by the defendant by the end of the trial that there was no indemnity in place between Pubs and the claimant and, moreover, that it was the claimant, rather than Pubs, which had made all the payments in respect of which it was claiming indemnity from the defendant.

So far as concerns the second point, I am quite satisfied (and this was I think largely accepted by Mr Bannister in his closing speech) that the reason for the administrative receivers’ non-payment of rent, and the claimant’s acquiescence in that, had a much simpler explanation than that suspected by the defendant. Regardless of whether or not it had an effective claim over against the defendant, the claimant’s motivation at all times was to see that the leases were assigned as soon as practicable to an assignee who would then be responsible for future rent. It was assumed throughout that NCP would make it a condition of any such assignment that all arrears of rent would be discharged. Accordingly it did not matter whether the rent was paid when it was due or not. If it was to be paid when it was due the only source of funds with which it could be paid would have been the claimant. If not paid until the completion of the assignment to the new tenant, it would again have to be funded by the claimant except to the extent that any premium paid by the assignee went to reduce it. Since at all material times it appeared both to the claimant and to the administrative receivers that the best chance of obtaining a purchaser was to keep the hotel trading it made sense for the claimant not to require the administrative receivers to keep the rent up to date.

The contemplation of both the claimant and the defendant, at the date of the Maintenance Agreement, was that the arrangements which it envisaged would be in place for only a relatively short time. It was expected that the hoped for purchaser would appear on the scene in the relatively near future. This happened in October 2000 when agreement was reached in principle for the sale to Mr Rizvi. It is the defendant’s case, however, that by this time the claimant’s “interventions” had already critically damaged what would otherwise have been the prospects of a speedy assignment to a new tenant. Three such interventions are relied on.

First, it is said that the claimant’s actions over the rent review caused a delay in the determination of the rent, and that the resulting uncertainty over the rent impaired the marketing process. I have already concluded that responsibility for NCP’s offer not having been accepted by HSJ cannot be laid at the door of the claimant.

Secondly, it was said that the hotel was being marketed at too high a premium. Christie’s were marketing it at £500,000. The defendant called expert evidence that it was unrealistic to have expected to achieve offers in relation to such a figure. That evidence, given with the benefit of hindsight, was plainly correct. There is however not a scrap of evidence to suggest that marketing the hotel in this way deterred anyone at all from making offers at a realistic level, or that any such offers were made and rejected in the hope of attracting higher ones. There is in my judgment nothing in this point.

Thirdly, it was said that the claimant had unrealistically pursued the idea of selling the hotel to a purchaser for use as an asylum-seekers’ hostel, and that this had resulted in the rejection of an offer from Mr Rizvi in May 2000 to purchase for £200,000. The highest at which this point can be put is that the claimant knew by 6^th July 2000 that NCP’s position was that it would not countenance a change of the user covenants to permit such a use. Despite this the possibility of sale to a company controlled by a Mr Jivraj (who came with excellent references) was explored and continued to be explored until the end of August 2000, by which time it had become clear both that the Jivraj proposal did involve such a change of use and that NCP’s attitude was unbending. During August, Miss Martin did legal research on the planning implications of the proposed user and on the concept of seeking to challenge any refusal of NCP to consent to an assignment on grounds of unreasonableness.

The whole of the defendant’s case on this point rests on two false premises. One was that Mr Rizvi had made an offer of £200,000 in May 2000 which would have resulted in a contract with him had the Jivraj proposal not been pursued. The other was that the nature of Mr Jivraj’s interest was known from the outset of his arrival on the scene. In fact Mr Rizvi had not made such an offer. The most that can be said on the evidence is that some other person had approached Christies in May 2000 with a “tentative bid” of £200,000 and that this potential purchaser had not been followed up at the time. The fact that Mr Jivraj wanted to use the hotel as an asylum-seekers hostel was only made clear in a letter from his solicitors dated 4^th August 2000 to the administrative receivers which sought to make a case that the proposed user could continue to be described as a hotel user, and that if Mr Jivraj could present his case to NCP the latter’s fears would be allayed. Notwithstanding NCP’s earlier indication of its attitude it was entirely reasonable, in my judgment, for further consideration to have been given to the possibilities contemplated by that letter. In the event the further approach which was then made to NCP’s agents resulted in a disappointing response from them dated 24^th August 2000 and one which Miss Martin’s legal research could not overcome. Nothing had been lost by the possibility of a sale to Mr Jivraj having been explored.

As previously indicated Mr Rizvi made his offer to buy HSJ’s interests in the hotel for £200,000 on 18^th October 2000. This was subject to the maximum rental under all the leases not exceeding £100,000 per annum. By that time the rent under the 1967 Lease had been reviewed, but the position under the 1969 Lease and the Lobby Lease was subject to some uncertainty. Eversheds was instructed by the administrative receivers to act in the sale, and did so by Mr Anderson. Subsequently during the course of the autumn Mr Rizvi withdrew that offer and offered instead to purchase at a nil premium, later revising his offer to £100,000. By the end of the year the administrative receivers, with the claimant’s concurrence, had agreed to proceed on this basis. It was at that stage contemplated that the sale was likely to take place within a reasonably short time scale: Mr Rizvi (who by this stage was making the offer not in his own name but that of his company (“Skymede”)) was pressing for an early completion, and the problems which were subsequently to emerge (of which the principal one concerned the Lobby Lease) had not fully presented themselves.

A £100,000 premium meant that there was no prospect of any of the arrears of rent being discharged out of the premium. All would be swallowed up in the administrative receivers’ costs and expenses.

The prospect of that sale then caused consideration to be given within Eversheds to the claimant’s position in relation to the arrears of rent which NCP would expect to be paid at completion as a condition of its consent to the assignments. Both Miss Martin and Mr Anderson took the view that there would be difficulty in asserting any claim for indemnity against the defendant (who by that time had been ascertained to be worth suing) except to the extent that the claimant funded the payment of those arrears as a consequence of being liable for them under valid s.17 notices. At that stage, however, no such notices had been served in respect of the arrears of the reviewed rents under the 1967 Lease. These represented by far the largest proportion of the rent which would have to be paid at completion. Consideration was therefore given to whether or not to “prompt” NCP into serving such notices. Consideration was also given to the question whether the claimant could take advantage of the non-service of s.17 notices by paying up under the existing s.17 notices, claiming an overriding lease, and then dealing with the overriding lease free from arrears of reviewed rent.

Mr Anderson’s thinking on these matters is set out in a characteristically careful memorandum to Miss Martin dated 20^th March 2001. His conclusion was that it would be necessary for s. 17 notices to have been served if the claimant was to be able to recover from the defendant, that the device of claiming an overriding lease would not work, and that it might therefore be necessary to remind NCP to serve s.17 notices in order “to perfect the cause of action” against the defendant. This seems to have accorded with Miss Martin’s own view: she had advised Mr Fenwick (Mr Hime’s successor) in early January of the need, if necessary, to prompt service of s.17 notices before completion.

In fact Mr Anderson’s ruminations in his 20^th March memorandum were academic since by that time the notices dated 8^th March 2001 had in any event been given (a footnote to his memorandum indicates that he must have learned of this fact as he was composing it). He was clear in his evidence that neither he, nor so far as he knew anyone else, had prompted the service of the s.17 notices. Mr Bannister persisted, however, in seeking to argue that the claimant had in fact prompted the notices. He based that submission primarily on a letter dated 7^th February 2001 from Mr Anderson to NCP’s agents Nelson Bakewell. That letter includes the sentence “… we must accept the liability of Scottish & Newcastle plc in respect of s.17 Notices properly served upon them”. Mr Bannister sought to argue that this was a covert nudge to NCP to get on with service of s.17 notices.

Apart from Mr Anderson’s denial that this was his intention, there are a number of reasons why I wholly reject this thesis. Chief among them is the fact that the letter has to be read in the context of the letter to which it was a reply which implicitly sought an admission that the claimant accepted liability under the s.17 notices which had been served. Other reasons include the fact that, if a nudge was intended, giving it to Nelson Bakewell, as opposed to NCP’s solicitors, was an extremely oblique method of signalling the request, and the fact that when the same issue later arose (in 2003) Mr Anderson had no hesitation in tackling the matter entirely openly.

Mr Bannister alternatively argued that Miss Martin might have covertly prompted the service of the notices dated 8^th March 2001. There is no evidence of this at all, and (in the light of the communications passing between her and Mr Anderson during this period) it seems to me highly unlikely that she did so.

Accordingly, I accept the claimant’s evidence that it did not prompt the service of these s.17 notices.

For reasons which I have already indicated it is unnecessary for me to dwell on the many difficulties which subsequently arose in the course of the transaction and which were in the event to defer its completion until 28^th February 2003. For present purposes the story can be picked up again in early February 2003 by which time the Rizvi transaction was, at last, ready to complete.

NCP’s solicitors (Hamlins) sent a completion statement to Eversheds on 10^th February 2003. This showed that a total of £381,300.21 had to be paid on completion. Part of this consisted of rent deposits payable by Skymede. Once allowance was made for that, the amount which was going to have to be funded by the claimant was £306,771.99. Of that sum only part consisted of rent arrears under the 1967 and 1969 Leases, namely £245,714.55, and that sum had only been made the subject of s. 17 notices to the extent of notices which had been given on 4^th March 2002 (£39,950 in respect of the 1967 Lease and £9,400 in respect of the 1969 Lease), and 3^rd September 2002 (the same figures). No notices had, however, been given in respect of the rent due for the quarters 29/9/02 and 25/12/02 (again £39,950 and £9,400 respectively).

Mr Anderson was unsure what the up-to-date position with regard to s.17 notices was, and wrote to Hamlins asking for a complete set of notices. Hamlins’ response was that this was irrelevant. Mr Anderson replied saying that he was not suggesting that supply of s.17 notices was a pre-condition of completion, accepted that “however the arrears are funded, they are being funded in the name of the [HSJ]” but nevertheless repeated his request. By letter dated 20^th February 2003, Hamlins repeated their position. Mr Anderson replied on 21^st February in the following terms:

“As to that dealing with the question of Section 17 Notices, we reiterate that we do understand the point that you make but do not understand your client’s reluctance to serve Section 17 Notices in respect of any part of the currently demanded arrears which are not the subject of such a notice in any event.

As, from your client’s point of view, this is a purely administrative step but, from our client’s point of view, is a step which if untaken will prejudice its ability to recover from its immediate assignee, why not issue the notices?”

Finally by letter dated 27^th February 2003 Hamlins replied as follows:

“We note that Scottish & Newcastle are funding the discharge of the sums due from the existing tenant. However, you will please note that there are sums shown on the Completion Statement which relate to the Ground Floor Lobby Lease for which Scottish & Newcastle have no liability. Accordingly, that element relating to the Ground Floor Lobby Lease can only be accepted by our client if they are tendered by Scottish & Newcastle as agent for and on behalf of Hotel St. James Limited (In Administrative Receivership). We will require your written confirmation to this effect.

With regard to the September 2002 and December 2002 quarters, we confirm that our client is prepared to serve Section 17 Notices but as a result, our client can only accept the monies from Scottish & Newcastle once those notices have been served unless Scottish & Newcastle confirm that all the monies are in fact tendered as agents for and on behalf of Hotel St. James (In Administrative Receivership).”

Mr Anderson’s answer on 28^th February 2003 (the day of completion) was in the following terms:

“We confirm that the element of the completion statement relating to the Ground Floor Lobby Lease is tendered by Scottish & Newcastle Plc as agent for and on behalf of Hotel Saint James Limited (in administrative receivership).

As to the September 2002 quarters, we confirm that the monies due by reference to these quarter dates are tendered by Scottish & Newcastle Plc as agent for and on behalf of Hotel Saint James Limited (in administrative receivership).

Clearly, it would be of assistance to us if the Section 17 Notices could be served today (in which case those payments will be made by Scottish & Newcastle Plc in discharge of its own liability) but if, for whatever reason, this is not possible, it is more important that the matter should be completed today than that it should be deferred pending the service of those Notices.

Accordingly, if notices are served (by fax) today, the relative liabilities are discharged by Scottish & Newcastle Plc in discharge of its own liability.”

To add to the complication of this part of the story, unknown to Mr Anderson, Hamlins had in fact posted two s.17 notices to the claimant’s head office in Edinburgh the previous day under cover of a letter (headed By Recorded Delivery) which also demanded payment of the sums claimed within 14 days. That letter was received in Edinburgh at some time on 28^th February.

This episode therefore raises the issues:

It is convenient to defer consideration of the second and third issues until later in my judgment. As to the first, however, I will state my conclusions at this stage. First, I infer as a fact that the notices were sent by recorded delivery. That has not been strictly proved but is more probable than not. The significance of that is that the date of postage is then the date on which the notices were deemed to have been served by section 23 of the Landlord and Tenant Act 1927 (which applies for the purposes of s.17 notices by virtue of section 27(5) of the 1995 Act: see Beanby Estates Ltd v. Egg Stores (Stamford Hill) Ltd [2003] EWHC 1252 (Ch), [2003] 1 WLR 2064, and CA Webber (Transport) Ltd v. Railtrack plc [2003] EWCA Civ 1167, [2004] 1 WLR 320).

On that footing the claimant’s payment of the relevant monies was in my judgment in respect of its liabilities. This is a question of construction of the correspondence. Hamlins’ letter to Mr Anderson of 27^th February 2003 is not easy to construe, but Mr Anderson’s letter of 28^th February, while giving Hamlins the assurance they sought also made it clear that payments made by the claimant after notices had been served would be discharging its own liabilities. Since a payment by HSJ would discharge the claimant’s liabilities it does not appear to me to matter whether the payment, being one which was made by the claimant, was being notionally routed through HSJ or being made direct. Another formula that might, I suppose, have been used would have been for HSJ to tender it both for itself and on behalf of the claimant. It seems to me little short of bizarre to treat the claimant’s ability to recover from the defendant as turning on the magic of a particular verbal formula used at completion.

The remaining issue of fact to which I now turn concerns the criticism which is made of the claimant for having embarked on the project of assisting the administrative receivers in keeping the hotel open with a view to improving the prospects of a sale. As to this there can be no doubt that the prospects of an early sale were improved by the fact that the hotel continued to operate. The time which it in fact took to achieve the sale to Mr Rizvi was not prolonged in any way by the fact that the hotel continued to be operated. It seems, on the contrary, much more likely than not that had the hotel ceased to operate at any point in the process that sale would have gone off. There is no reason to suppose in that event that some earlier sale would have been achieved than that in fact concluded with Mr Rizvi. It is true that many of the difficulties which had to be overcome in the course of the Rizvi sale had to do with the fact that the hotel was being sold as a going concern, but the principal component of the delay which occurred was in the event the difficulty of resolving the issues which arose out of the unwillingness of NCP to grant a new Lobby Lease for a term co-extensive with the 1967 and 1969 Leases and the purchaser’s unwillingness to accept anything less (a problem ultimately resolved by the claimant giving Mr Rizvi an indemnity). That problem would have had to be resolved whether or not the hotel had been kept in operation.

Accordingly the only question, as it seems to me, is whether the claimant’s conduct in some way deprived the defendant of an opportunity which he would otherwise have taken himself to take an assignment. The following paragraphs address that question.

The claimant (by Eversheds) made early contact with the defendant in December 1999 informing him of the s.17 notices which had by then been served and that the claimant would be relying on its indemnity against him. His initial response was to deny that any such indemnity had been given, asserting the existence of some agreement with NCP which had negated it. By January 2000, however, the defendant had put the matter in the hands of Harefield, solicitors, and the position was carefully explained to them by Eversheds. Harefield responded that they were investigating Mr Raguz’s own guarantors, a reference to the Virani brothers.

Following the request from the administrative receivers for, and the claimant’s agreement in principle to, support to keep the hotel operating, Eversheds wrote to Harefield on 19^th May 2000 in the following terms:

“We refer to previous correspondence.

Our clients have now been contacted by the Administrative Receivers of Hotel St. James Limited the current tenants of the above-mentioned premises. The Administrative Receivers have informed our clients that they have been trading at the premises but that they are now trading at a loss, and are considering pulling out of the premises and selling the Fixtures and Fittings.

The Administrative Receivers have also informed our clients that they are in the process of finalising the on-going negotiations for the standing rent review and have informed us that there are arrears of rent somewhere in the region of £150,000 and that currently no rent is being paid at the premises.

The Administrative Receivers have approached our clients to ascertain whether our clients would be prepared to indemnify the Administrative Receiver for trading losses at the premises to keep the premises open and we are writing to ascertain whether your client would also be prepared to become involved and underwrite the trading losses at the premises with the view that the Administrative Receivers could sell the premises as a going concern. The Administrative Receivers has indicated to us that they would anticipate that it would be possible to then pay off the current arrears of rent.

We are aware that your client was in the hotel business previously and may still be in the business and we are also interested as to whether or not your client might be prepared to take on these premises.

Can you please contact your client as a matter of urgency and revert to us within the next few days.”

No substantive response was received to that letter until 15^th June 2000 when Harefield advised that they would be discussing the matter with their client, and queried how the rent arrears had grown to £150,000. That query was answered by Eversheds, who continued by letters dated 26^th July and 17^th August 2000 to press for a substantive response to their letter of 19^th May 2000. In a telephone call made by Miss Martin to Harefield on 22^nd August 2000 Miss Martin elicited the information that the defendant was still in the hotel business and was interested in the premises. Eversheds sent two further chasers and were met with the response on 20^th September 2000 that Harefield had understood from the earlier telephone conversation that the claimant had been going to put some concrete proposals on the table. This resulted in a suggestion (by letter dated 3^rd October) that the defendant should take an assignment of the premises, a premium of £100,000 being likely to be sought.

Following receipt of the independent expert’s determination of the 1967 Lease rent review, Eversheds wrote again on 18^th October 2000 to advise that the arrears were now £240,000 and suggesting a meeting. No response was received. They wrote again on 27^th October to advise that Mr Rizvi was expressing interest. By 7^th November 2000 LHP Law (as Harefield had by then become) themselves wrote suggesting an early meeting. By 9^th November the claimants had themselves begun to doubt the value of a meeting, particularly in light of the acceptance of Mr Rizvi’s offer. By letter of that date Eversheds invited the defendant instead to make an offer for the premises. This elicited the response that the defendant was indeed interested, and a request for further information in connection with the leases which Eversheds sought to supply.

The defendant was interested. He and his advisers visited the hotel on 12^th December 2000. For the defendant, who takes an obvious pride in his trade as an hotelier, it was a depressing sight. The hotel appeared to have suffered from years of neglect and looked very run down. He could see that it needed a very large sum of money spending on it. At his time of life he had no appetite at all for taking it on, but recognised that it might prove to be the only way in which he could mitigate his liability to the claimant and protect himself in relation to future liabilities. But at that stage his “prayer” was that the sale to Mr Rizvi would proceed.

Eversheds continued to press LHP Law for the defendant to make an offer if he was going to. They also continued to advise as to the mounting level of arrears and to supply LHP Law with such further information as they sought. On 23^rd March 2001 Eversheds advised of the service on the claimant of the statutory demand (in the sum of £31,011.36) and of the claimant’s intention to pay it, and asking for a response within 14 days. That had to be chased. A telephone conversation between Miss Martin and Mr James at LHP Law on 2^nd May 2001 appeared to indicate that liability in principle was accepted but that the defendant was thinking of putting together some deal under which the freehold might be acquired. Eversheds found themselves once again having to write chasing letters (11^th May, 4^th June, 12^th June, 25^th June, 13^th July and 30^th July) to which they received no response whatsoever until 6^th August 2001 when they were told that LHP Law did have authority to accept service.

These proceedings were then served on the defendant on 18^th September 2001. They pleaded the claimant’s liability under the s.17 notices served up to and including those of 20^th July 2001, and the payment by the claimant to date of £346,313.05 in respect of its liabilities to NCP. They do not plead that the payment had been made against any demand by NCP, but statutory demands dated 13^th June 2001, had in fact been made in respect of that sum, and payment had been made pursuant to those demands on 5^th July 2001.

The litigation proceeded to an application for summary judgment fixed for hearing in February 2002. Before that happened there was, however, an important meeting on 9^th January 2002 between the claimant’s Mr Fenwick, the defendant and a Mr Fairweather, who was an accountant and financial adviser to the defendant. There are two written records of this meeting, one Mr Fenwick’s own file note and the other a note made by Miss Martin recording Mr Fenwick’s oral account to her of what had transpired at the meeting. It is clear from these that the impression received by Mr Fenwick was that, while the defendant was not seeking to deny his liability, he was anxious to impress on Mr Fenwick that he might not be worth suing and that, so far as concrete proposals were concerned, what he was looking for was, if anything, to have an overriding lease in the name of his company. Mr Fenwick was puzzled as to why this route was being proposed as opposed to simply taking an assignment, and suspected that the answer lay in some intention to expunge once and for all the defendant’s liability under the indemnities.

The meeting ended unhappily so far as the defendant was concerned. He is a gentleman of courtly manners, modest about his abilities as a businessman but proud (and justly so) of his long years of experience as an hotelier. At the end of the meeting he expressed his gratitude to Mr Fenwick for his time and the hope that some gentlemanly agreement could be reached satisfactory to all concerned. According to him (the matter had not been put to Mr Fenwick) Mr Fenwick had replied with some such words as “Pull the other one Mr Raguz”. The defendant told me with some feeling (which I judged to be entirely genuine) that he had been deeply offended by this remark. Whether or not Mr Fenwick actually said it, it is reasonably clear from his conversation with Miss Martin (as recorded by her) that he did have suspicions as to the genuineness of the defendant’s proposals.

In fact the defendant’s proposals were, in my judgment, a genuine attempt by him, with Mr Fairweather’s assistance, to construct a solution which would be acceptable to the claimant and at the same time free the defendant and in due course his estate from the prospect of a contingent liability stretching to 2062. The proposals were subsequently elaborated with clarity in a letter written by Mr Fairweather to Mr Fenwick dated 15^th January 2002 to which the latter replied on 12^th February saying that the proposals were unacceptable, that the claimant wished to retain the right to pursue the defendant on his indemnities, that the claimant had rejected the solution of its applying for an overriding lease, but that the claimant was happy for either the defendant or one of his companies to take an assignment of the leases. That letter crossed with one from Mr Fairweather which withdrew the proposals. The defendant at no time thereafter expressed any interest in taking an assignment.

Mr Fenwick had told Mr Fairweather and the defendant at the meeting on 9^th January 2002 that the claimant had an agreement with the administrative receivers concerning the running of the hotel. Indeed Mr Fairweather’s letter of 15^th January had expressed his understanding that in addition to the claimant having paid off the arrears of £346,313.05 and paying the current passing rent, it was paying:

“(b)

approximately £100,000 per annum to the receiver of the insolvent lessee company – presumably that the payment is being made with a view to avoiding the debtor company being placed in liquidation with the consequential risk of a disclaimer and/or forfeiture thereby crystallising very much greater liabilities.”

Mr Fenwick had also invited the defendant to communicate, if he wished, with the administrative receivers. Miss Martin was dismayed to hear from Mr Fenwick that he had divulged this information. Consistently with her belief (expressed in May 2000) that entry into the Maintenance Agreement would prejudice the claimant’s rights under the indemnity, she now recorded that she had deliberately not given the defendant details about that agreement and she feared that it might complicate matters. She advised that a tight rein be kept on what further information was given to the defendant either by the claimant or the administrative receivers.

Intelligible as this approach of Miss Martin’s was, it had some unfortunate consequences for the way in which she conducted the subsequent litigation on the claimant’s behalf until her (abrupt) departure from Eversheds in October 2002. In particular she made a witness statement in the course of the summary judgment application in September 2002 in which she sought to give the impression that the claimant had “no knowledge” concerning the trading activity of HSJ, and “no role to play” in looking at potential assignees, assertions which were simply unsustainable as matters of fact. There was also a dragging of heels in disclosure relating to the Maintenance Agreement in the initial disclosure process, a fact which was later to embarrass Mr Anderson who took over the matter from Miss Martin following her departure.

These matters, relevant though they may be to the spirit in which this litigation has been conducted (which has been highly contentious at some of its interlocutory stages), are irrelevant in answering the question whether the claimant’s conduct deprived the defendant of an opportunity which he would otherwise have taken himself to take an assignment. I think that his position all along was that he was (as he put it himself) “praying” that the Rizvi transaction would complete as soon as possible, and hoping at the same time that his professional advisers would be able to construct arguments which would reduce or extinguish what on their face appeared to be unavoidable liabilities to the claimant.

In support of what I have called its wider arguments, which I have summarised at paragraph 40 above, the defendant relied on two lines of authority. The first is a line of authority relating to guarantees which recognises that a surety may be discharged where the creditor can be said to have “caused or connived” at the default by the principal debtor. The main modern authority is Bank of India v. Trans Continental Commodity Merchants Ltd and Patel [1983] 2 Lloyds LR 298 at p302. The origins of the principle (and in particular the use of the word “connive”) can be traced back to the speech of Lord Brougham in McTaggart v. Watson (1835) 3 Cl & F 525 where he said

“…it cannot avail to discharge a surety who has expressly bound himself for a person’s doing certain things unless it can be shown that the party taking the security has, by his conduct, either prevented the things from being done, or connived at their omission, or enabled the person to do what he ought not to have done or leave undone what he ought to have done, and that but for such conduct the omission or commission would not have happened.”

In Dawson v. Lawes (1854) 13 LJ Ch (NS) 434 at 438 Wood V-C commented on this passage that

“All that pointed to active connivance, amounting as it would do in such a case, almost if not entirely to a fraud on the part of the person and particular officers who were so conducting themselves.”

I do not myself find this analogy from the law of guarantees helpful. The question in what circumstances a surety may be discharged from his obligations turns primarily on equitable considerations: see per Mance J in Socomex Ltd v. BBL [1996] 1 Lloyds LR 156 at 198. No question here arises of there having been conduct on behalf of the claimant which discharges altogether the defendant’s liability to indemnify the claimant. The question is, rather, whether the indemnity extends on its true construction to the loss in respect of which the claimant claims.

The second line of authority relied on was that supporting the proposition that an indemnified may not sue in respect of a loss which he has himself caused. Here Mr Bannister invoked the decision of Hobhouse J in Ikerigi Compania Naviera SA v Palmer and Others (“The Wondrous”) [1991] 1 Lloyds LR 400. In that case, where a loss of hire insurance indemnified the owners of the vessel against, inter alia, “restraint or detainment”, and, where the relevant restraint or detainment had taken place as the result of the non-payment of harbour dues by the charterer, the owners were held unable to recover. Hobhouse J said:

“..it was still necessary for the plaintiffs to show that the detention was fortuitous….[W]here a situation comes about as a result of the voluntary conduct of the assured, it would not normally be described as fortuitous. It did not happen by chance but by the choice of the assured. Put another way, it would be in the ordinary course that, if the owners of a vessel do not pay the port dues for which they are liable to the port authority in respect of the stay of the vessel in that port (or provide acceptable security), the vessel will not be cleared. For the purposes of the law of insurance, in the absence of an express agreement to the contrary, a policy should not be construed as covering the ordinary consequences of voluntary conduct of the assured arising out of the ordinary incidents of trading; it is not a risk.”

In my judgment the principle illustrated by that case has nothing to do with the present. The indemnity implied by s. 24 of the 1925 Act is not an indemnity by way of insurance against the “fortuity” of the defendant or some successor of his not paying the rent: it is a promise to keep the claimant harmless if for any reason the defendant or his successor does not pay the rent.

That does not mean that I reject the general proposition that, if the actual reason for the non-payment was action taken by the claimant but for which the payment would have been made, that might have fallen outside the scope of the covenant. However, the reason for that would be that the second (indemnity) limb of the covenant should not be construed as imposing a wider and more extensive liability than that attaching to the liability for common law damages for breach of the first limb. If therefore the claimant has suffered a loss which its own action could reasonably be expected to have mitigated or avoided altogether, the indemnity covenant should not be construed as covering that loss. In that respect I do not agree with Mr Stoner’s submission that there is any analogy to be drawn here with Jervis v. Harris [1996] Ch. 195 (see paragraph 42 above).

On the facts, however, there seems to me to be no question of the claimant having failed to mitigate in this way. HSJ’s failure or inability to pay the rent was at no material time caused by the claimant. The period during which that failure continued was doomed to last until an assignee could be found who would assume the liability. On the facts as I have found them, nothing which the claimant did prolonged that period. Indeed had the claimant not taken the steps which it did that period might well have been longer unless the defendant had in the meantime stepped in and taken an assignment, a course of action which he was anxious to avoid if possible.

The issue before me thus resolves into the questions

Standing back from the way in which the claimant has actually pleaded its claim, I would have little hesitation in coming to the conclusion that the answer to both questions is negative, for essentially the same reason in each case. In each case the payment falls within the description of a payment in respect of an “ expense” or a “claim” which was “on account of the non-payment of the said rent”, that is to say which arose as a direct result of the fact that HSJ was not only failing to meet its current liabilities in respect of rent but was plainly going to be unable to discharge any future liabilities, that NCP was not going to give its consent to an assignment unless HSJ paid all arrears of rent, that unless the claimant funded the payment of those arrears no-one else was going to do so, and that if no assignment took place the claimant would continue to accrue liabilities in respect of future rent to NCP. The claimant thus found itself in a position where, in order to stem the onslaught of future liabilities, it had to incur the expense of meeting the arrears irrespective of its strict liability to NCP to pay the same. If that is the correct analysis, the fact that it paid sums in respect of rent in 2001 which were not the subject of valid s.17 notices, and the fact that it procured the service in 2003 of s.17 notices which would not otherwise have been served, are irrelevant to the question of its being able to recover those sums from the defendant.

Consideration of the way in which the case has actually been put does, however, raise a difficulty. The claim from the outset has been, and remains, that because the claimant was liable to NCP it follows that the defendant was liable to the claimant. If I am right on the s.17 argument (as to which plainly two views are possible) the premise fails in relation to the rent paid by the claimant in response to the 2001 demand; and if the premise is good in relation to part of the 2003 payment, it was only because, by its own act, the claimant procured the service of the relevant notices.

In relation to the 2003 payment my decision is that the fact that the claimant procured the service of the notices does not deprive it of its right to be indemnified against the consequent liability. That is simply because the claimant’s actions in procuring the services of the notices did not materially affect the defendant’s liability. The matter may be quite simply tested by asking what would have happened had the claimant simply said that it was not going to fund the payment of the arrears. The consequence would have been to alert NCP to the fact that, unless it served s.17 notices, the Rizvi transaction would not complete. If the Rizvi transaction had not completed, the inevitable result would have been that the “missing” s.17 notices would have been served. The defendant therefore lost nothing as a result of the claimant having invited the service of those notices.

I find the question of the payment in response to the 2001 statutory demands more difficult. If I am right about the s.17 notices, those demands could have been, if not ignored, defeated. It would, however, still have been in the claimant’s interest to have paid those sums if they continued to be demanded (as they would have been) by NCP from HSJ as a condition of consenting to an assignment. It was likewise in the defendant’s interest that those sums should be paid. Payment of those sums by the claimant in those circumstances would have been a foreseeable “expense” recoverable by the claimant against the defendant under the s.24 covenant for indemnity. The question which I have found of some difficulty is whether the claimant has sufficiently pleaded this way of putting its case for recovery. Nothing to this effect is to be found in the Particulars of Claim. There is simply the denial, in paragraph 24 of the re-amended reply that the consequence of the invalidity of the s.17 notices is to relieve the defendant of his liability to indemnify the claimant. I have been in much doubt as to whether this is enough. I have, however, narrowly concluded that, if there is a lacuna in the claimant’s pleading in this respect, it should not deprive it of its remedy. This alternative way of putting the case was fully addressed by Mr Stoner in paragraphs 163 to 167 of his opening skeleton argument. Moreover the points raised by the defendant in his defence permitted, indeed necessitated, a full investigation of the facts relevant to this way of putting the case, in particular an investigation of the issue as to whether or not, and if so why, the claimant would have paid the sums in question even if no valid s.17 notices had been served. Further the pleading point to which I have referred was not in terms taken by Mr Bannister.

There are two further minor points of quantum. One, which is uncontroversial, is that so far as the rent under the 1967 and 1969 leases for the quarter commencing 25^th December 2002 is concerned, liability for that was assumed by Skymede in respect of the apportioned period commencing on 1^st March 2003 and ought therefore not to have been included in the claim (since it should have come from Skymede). I understood this to be accepted on behalf of the claimant. The second is a more difficult point and relates to a sum of £10,072.21 which NCP had apparently taken from rent deposits held by it in respect of rental due for the period from 24^th June 1999 to 5^th October 1999. The claimant conceded that, if it could be shown that this sum of £10,072.21 had indeed been taken by NCP in satisfaction of the rent due for the relevant period, it would give credit to the defendant for that sum against the amount of any judgment given by me. The defendant, however, argued that it was entitled as a matter of right to a judgment in this sum.

So far as the facts are concerned I was satisfied on a balance of probabilities that the defendant’s premise was correct. Without sight of the rent deposit deed it is not possible to be sure that the sum was not taken in satisfaction of sums other than rent in the strict sense of the word. The accounting information supplied by NCP made this seem unlikely.

The difficulty, however, with the defendant’s case is that the sum concerned relates to a period in respect of which judgment was obtained on 9^th December 2002. I was not persuaded by Mr Bannister that it was open to me to go behind that judgment. Given, however, the fact that this judgment will result in an order for payment against the defendant, and that the claimant has conceded that in that event it would give credit for the sum, the point is academic.

For those reasons, subject to the claimant giving credit for the sum £10,072.21, the claimant is entitled to judgment in the sums claimed.