Landlord Protect Ltd. v St Anselm Development Company Ltd.

This is the trial of a purchaser’s claim for the return of a deposit of £105,000, together with accrued interest, paid by the claimant to the defendant upon exchange of contracts for the purchase of the defendant’s head leasehold interest in a block of 26 residential flats at 13 – 17 Clarges Street, London W1. The issue of law which arises is whether the head landlords were acting reasonably in requiring, as a condition of their consent to the assignment of the head lease to the claimant, that the guarantee which was to be provided by the claimant’s sole director should be released upon any future assignment of the head-lease only if “reasonable alternative security” was provided by the future assignee.

The claimant’s evidence is principally contained in the witness statement, dated 12^th December 2007, of Christine Gillian Minty, a partner in Reid Minty LLP, the claimant’s solicitors, who is also the claimant’s company secretary. She exhibits most of the relevant documents as Exhibit CGM 1. Her evidence is now supplemented by a witness statement, dated 26^th June 2008, of another solicitor in the firm of Reid Minty LLP, Alan John Sheeley, who exhibits the licence to assign proposed by the head landlords in its final form. The defendant’s evidence consists of two witness statements: from Andrew Martin Kennard, a director of the defendant, dated 4^th December 2007; and from Guy Richard Crichton Clapham, the senior partner in the firm of Guy Clapham & Co, the defendant’s solicitors, dated 18^th December 2007. Both firms of solicitors acted for their respective clients in the conveyancing transaction; and they now act for them in this litigation. None of the witnesses was required to attend for cross-examination; and there was no live evidence before me.

The relevant facts are not in dispute and are summarised in the chronology prepared on behalf of the claimant, which has been agreed on behalf of the defendant. At an auction sale held on 13^th July 2006, the claimant contracted to purchase the defendant’s head leasehold interest in the property for £1,050,000, and it paid a deposit of £105,000. The head lease was for a term of 99 years from 29^th September 1964. By Clause 2 (s) of the head lease, the head landlords’ consent was required to the assignment to the claimant “but such consent shall not be unreasonably withheld in the case of a respectable and responsible assignee or sub-tenant being offered”. The sale contract incorporated the 1^st May 2002 edition of the Common Auction Conditions published by the RICS. These contained (in General Condition 9) detailed provisions relating to the obtaining of the head landlords’ consent to the agreed assignment. In summary: (1) the contract was conditional upon the landlords’ licence to the assignment being obtained by way of formal licence if that was what the landlords or the relevant lease properly required; (2) the defendant was obliged to use all reasonable endeavours to obtain the licence; (3) “if properly required under the terms of the lease”, the claimant was obliged to “execute such licence or other deed of covenant as may be required and provide guarantees, a rent deposit or other security”; and (4) if within 3 months of the date of the contract (or such longer period as the parties might agree) all required licences had not been obtained, then either party was entitled to rescind the contract by notice to the other at any time before all licences were obtained. Such rescission was expressed to be “without prejudice to the claims of either SELLER or BUYER for breach of this Condition 9”. In the event of rescission, by Condition 8 of the General Conditions, the deposit was to be returned to the claimant, together with the interest that had accrued on it, unless the defendant was entitled to forfeit the deposit following the claimant’s failure to comply with a notice to complete under General Condition 7.3.

A problem arose in relation to the proposed sale. The claimant was a dormant company which had never traded. It therefore had no accounts and could provide no accountants or bank references. The head landlords, through their solicitors, Wedlake Bell, were only prepared to give their licence to the proposed assignment if the claimant’s sole director, Andrew Reid, another partner in the firm of Reid Minty LLP and (with his family) the principal ultimate shareholder in the claimant, was prepared to guarantee the claimant’s obligations as assignee of the head lease; but Mr Reid was only willing to offer a guarantee if it was limited in duration for a period of only 3 years. This was unacceptable to the head landlords. The claimant therefore issued proceedings in the Central London County Court (initially under Case No 6CL53469, later changed to Case No CHY 06344) claiming declarations that the head landlords had unreasonably refused their consent to the assignment and/or had imposed unreasonable conditions for the giving of their consent. Specifically, the claimant sought a declaration that it was unreasonable for the head landlords to impose a requirement for Mr Reid to provide a guarantee more extensive than that which had previously been offered. This was a guarantee for a duration of 3 years from the date of the contract to purchase the head lease, but limited to the passing rent from time to time. At the end of this 3 year period, Mr Reid was to be automatically released from this guarantee. Should Mr Reid wish to sell the head lease during this 3 year period, the head landlords were to release him from the guarantee “provided that reasonable alternative security is provided by the purchaser”. (This was the formulation proposed in a letter from Reid Minty LLP to Wedlake Bell dated 11^th September 2006; and it was repeated in the details of the claim contained in the claimant’s Part 8 Claim Form.) For the claimant, Mr Furber accepts that this formulation originated with this proposal from its solicitors; but he emphasises that this was in the context of a guarantee limited to a duration of 3 years from the date of the sale contract.

The proceedings were expedited and came on for trial before His Honour Judge Cowell on 10^th October 2006. On 13^th October 2006, he gave judgment dismissing the claim, holding that, in all the circumstances of the case, the head landlords had not been acting unreasonably in rejecting the offer of a guarantee limited in duration to a period of only 3 years. He did not decide what alternative guarantee terms might be reasonable; but the claimant relies upon observations (at paragraphs 20 and 32 of the judgment, and in the dialogue between counsel and the judge after he had delivered judgment at pages 78-9 of Exhibit CGM 1), to the effect that “broadly speaking”, and “normally”, a guarantee should be expected to last during the period of the assignee’s ownership of the relevant lease. Mr Furber accepts that Judge Cowell’s observations are not conclusive of the issue; they merely anticipated, without doing anything to resolve, the dispute that then arose.

Following the judgment, the dispute over the precise terms of the guarantee continued. On 19^th October 2006 the head landlords’ solicitors submitted a draft licence to assign which included a guarantee to be provided by Mr Reid. By Clause 6.6, this was to be released on a subsequent assignment with the head landlords’ consent “provided that a reasonable alternative guarantor is provided by the purchaser”.

On 20^th October, the claimant’s solicitors amended this draft, deleting the proviso so that Mr Reid would automatically be released on an assignment with the head landlords’ consent. The head landlords’ solicitors reinstated the proviso, but amended it so as to provide for Mr Reid to be released on a subsequent assignment with the head landlords’ consent “provided that a reasonable alternative security is provided by the assignee pursuant to such subsequent assignment”. This alternative formulation was unacceptable to the claimant. In a letter to Wedlake Bell of 27^th October 2006, (at page 99 of Exhibit CGM 1) Reid Minty LLP expressed their view that what the head landlords were seeking was protection to which they were not entitled under the terms of the head lease which, on the authority of Mount Eden Land Limited v Straudley Investments Limited, would be unreasonable. Reid Minty LLP’s expressed reasons for saying this were as follows: (1) The head landlords had the ability to refuse consent to any assignment if they were not satisfied with the strength of the covenant or any security being offered. Accordingly, the clause proffered by the claimant was said to provide the head landlords with the protection they had under the terms of the head lease. (2) The requirement that Mr Reid should only be released from his guarantee if the head landlords consented and a reasonable alternative security was provided by the assignee was a “recipe for future disputes”, which is what the claimant was seeking to avoid. It was suggested that the requirement of “a reasonable alternative security”, in addition to the head landlords’ right to refuse consent, might arguably require a guarantee of equal strength to the guarantee provided by Mr Reid.

By agreement between the parties, the period after which either of them could give notice to rescind the sale contract if the head landlords’ licence had not by then been obtained expired at the close of business on 27^th October 2006. A few minutes after 5.30 pm, the claimant gave notice to the defendant rescinding the sale contract and requiring the return of its deposit, on the footing that the head landlords’ requirements as to the form of the guarantee to be provided by Mr Reid had been unreasonable. The defendant did not accept that the sale contract had been validly rescinded, asserting that the claimant had been in breach of its obligations under the sale contract by refusing to complete a licence to assign containing a guarantee in the form proposed by the head landlords. On 5^th December 2006, the defendant served a notice to complete upon the claimant; and, when it refused to comply, on 2^nd January 2007, the defendant treated the claimant as in repudiatory breach of its obligations under the sale contract and proceeded to forfeit its deposit. This led the claimant to issue the claim form in these proceedings on 13^th February 2007.

At the trial, the claimant was represented by Mr John Furber QC and the defendant by Mr Martin Rodger QC. Both counsel had submitted detailed written skeleton arguments. I am indebted to both counsel for their written and oral submissions. It is common ground between the parties that the only live issue in this litigation is whether the requirement imposed by the head landlords, as a condition of the proposed assignment, that, on a subsequent assignment of the head lease effected with the consent of the head landlords, Mr Reid should only be released from his liability as guarantor if “a reasonable alternative security is provided by the assignee pursuant to such subsequent assignment” was properly made. If it was, it is common ground that it had to be accepted by the claimant, which could not validly rescind the sale contract; and the defendant is entitled to forfeit the deposit. Conversely, if it was not a proper requirement, then the claimant was entitled to reject it, and to give notice rescinding the sale contract, whereupon it became entitled to the return of its deposit. There is no claim for the return of the deposit under section 49 (2) of the Law of Property Act 1925. On instructions,
Mr Rodger for the defendant does not pursue its counterclaim for damages for breach of contract.

I have been referred to a number of authorities. Mr Furber took me to section 1, subsections (3), (4), and (6) of the Landlord & Tenant Act 1988; to paragraphs 11.140 and 11.143 of Woodfall’s Law of Landlord and Tenant; and to the leading judgment of Phillips LJ in the case of Mount Eden Land Limited v Straudley Investments Ltd (1996) 74 P & CR 306 at 310-311. The latter authority was cited in support of the proposition (which is reproduced at the end of paragraph 11.140 of Woodfall, and which I readily accept) that “it will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the headlease”.

Mr Rodger took me to the decision of the Court of Appeal in the case of Kened Ltd & Den Norske Bank Plc v Connie Investments Ltd (1995) 70 P & CR 370. He cited that authority for two reasons: First, to demonstrate (by reference to the provision in the licence to assign quoted at p 372) that a provision qualifying the continuing liability of a surety for the assignee of a lease along the lines proposed by the head landlords in the present case is neither a novel, nor an unusual, provision. Secondly, for the penultimate paragraph at p 379 of the leading judgment of Millett LJ. Considering the meaning of a provision whereby the liabilities of a surety for the assignee of a lease were to determine on a subsequent permitted assignment subject to the provision of “an acceptable replacement surety”, Millett LJ said that there was no merit in the submission that the word “replacement” meant that the substitute surety should be in every respect as good as, or better than, the existing surety. “The word merely means that it should be reasonably acceptable as a substitute for the Bank [the existing surety]. If the landlord had intended to insist that the substitute surety should be in every respect as good as, or better than, the Bank there would have been nothing easier than to include such a requirement in the Licence to Assign.” Mr Rodger submits that this reasoning applies in the present case: Contrary to Mr Furber’s argument that the phrase “a reasonable alternative security” invites a comparison between the security provided by Mr Reid and that offered by the alternative security, Mr Rodger submits that the phrase merely means that it should be reasonably acceptable as an alternative security for Mr Reid. I accept Mr Rodger’s submission. The phrase used in Clause 6.6 of the draft Licence to Assign is “a reasonable alternative security”, not “equivalent alternative security” or “corresponding alternative security”. I reject the claimant’s contention that the phrase imports a requirement of a security of equivalent strength to that provided by Mr Reid.

Mr Rodger also referred me to the proposition at paragraph 7.11 of the 4^th edition of Lewison: The Interpretration of Contracts to the effect that “Where the words of a contract are capable of two meanings, one of which is lawful and the other unlawful, the former construction should be preferred”. He submitted that where the words of a contract are capable of two meanings, one of which would appear to permit unlawful behaviour, and the other conduct which is lawful, a court of construction should prefer the latter construction. I accept this submission, which accords with the general principle that a court should seek to uphold, rather than to defeat, the parties’ contract.

For the claimant, Mr Furber submits that the head landlords plainly have no entitlement to a guarantor, or other continuing security, throughout the term of the head lease. From this, he argues that it was plainly unreasonable for them to require Mr Reid to remain a guarantor, following an assignment with consent, unless a reasonable alternative security was provided. This, it is submitted, is an illegitimate attempt by the head landlords to improve their position under the head lease (as in Mount Eden v Straudley). Once the landlord has consented to an assignment, and thereby acknowledged the acceptability of the assignee, he cannot insist upon holding Mr Reid to his guarantee until the assignee has passed through the further hoop of providing a reasonable alternative security. Mr Furber therefore submits that, following this unreasonable, and improper, requirement, the claimant was entitled to refuse to enter into the licence proffered by the head landlords, and was entitled accordingly to rescind the sale contract and to recover its deposit.

For the defendant, Mr Rodger submits that the requirement of “a reasonable alternative security” should be construed against the background of section 1 of the Landlord & Tenant Act 1988: If the head landlords sought to insist on the provision of a guarantor, or any other form of security, where it was not reasonable to do so, they would commit a breach of statutory duty, and would be liable to the claimant in damages. The alternative security which could reasonably be requested would depend on the facts, and circumstances, at the time of the proposed assignment, and on the status of the proposed assignee. If the assignee's own covenant was sufficiently strong, it would, in itself, provide a reasonable alternative security for the payment of the rent and the performance of the covenants on the part of the lessee under the head lease. The “reasonable alternative security” referred to in clause 6.6 was capable of being provided by the covenant of a future assignee itself; the sub-clause did not entitle the head landlords to insist on a guarantee or rent deposit, or on some other additional form of security, irrespective of the covenant strength of the proposed assignee. On this view, clause 6.6 secured for the head landlords, no additional rights than those which they already enjoyed under the lessee’s covenant not to assign without consent.

Although irrelevant to my decision, Mr Rodger points out that the final form of the qualifying condition originated in a proposal by the claimant itself (in Reid Minty LLP’s letter to Wedlake Bell of 11^th September 2006); and its effect was debated by Counsel before Judge Cowell after he had delivered his formal judgment in the County Court proceedings. From the dialogue recorded at pages 78-80 of Exhibit CGM 1, it would appear that both counsel were agreed that the formulation proposed by the claimant’s solicitors meant that if the proposed assignee was of sufficient standing – BP was the example given - no further guarantee could be required. Both parties thought that it was obvious that no guarantee could be insisted upon if the facts did not warrant it. That position was confirmed in a letter from the head landlords’ solicitors of 30^th October 2006 in which they stated that “the release of the guarantor is automatic on the provision of reasonable alternative security by the proposed assignee, by way of a sufficiently strong covenant, or otherwise”.

Developing his submission that clause 6.6 secured to the head landlords no additional rights than those which they already enjoy under the lessee’s covenant not to assign without consent, Mr Rodger submits that if an assignee of doubtful covenant strength were proposed, the head landlords would be entitled to insist on the provision of some form of security. If the proposed assignee was unable to provide such security, the head landlords would be entitled to refuse their consent to the assignment. Mr Reid’s position under Clause 6.6 would be unaffected. If, on the other hand, an assignee of sufficient strength were proffered, the head landlords would be required to give consent without insisting on any guarantee or other forms of additional security. In this event, on the assignment, Mr Reid would automatically be released under clause 6.6. Mr Rodger points out that the suggestion that the head landlords could permit an assignment to a proposed assignee of no means, and so retain the benefit of Mr Reid's guarantee, is unlikely to happen; but if it did, it would not be unreasonable: the claimant is a family company controlled by Mr Reid. The identity of any proposed assignee is entirely a matter for the claimant. If it wishes to assign to someone with a weak covenant, who is unable or unwilling to provide a guarantee or other security, there is nothing unreasonable in the head landlords retaining Mr Reid's guarantee since it is for the claimant’s benefit, and at the claimant’s request, that the assignment is permitted to proceed. For all of these reasons, Mr Rodger submits that the head landlords’ requirement was reasonable; and that the claimant’s refusal to comply with it was a breach of contract.

I accept the submissions, and the reasoning, of Mr Rodger in preference to those of Mr Furber. In my judgment, the head landlords’ requirement that “a reasonable alternative security” should be provided by the assignee before Mr Reid should be released from liability on any subsequent assignment of the lease effected with the head landlords’ consent was a reasonable, and proper, one; and the claimant’s refusal to comply with it was a breach of the sale contract. Had the head landlords persisted in their requirement that a reasonable alternative guarantor should be provided by any purchaser of the head lease before Mr Reid should be released on a subsequent assignment effected with the head landlords’ consent, then I would have accepted Mr Furber's submission that such a requirement would have amounted to a collateral advantage falling outside the purview of the head lease. As such, it would have fallen foul of the principle that it will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the lease: the head landlords plainly have no entitlement to a guarantor throughout the term of the head lease. But this requirement was abandoned in favour of the provision of “a reasonable alternative security”. In my judgment, the starting point must be to identify what is meant by this phrase.

I accept Mr Rodger’s submissions that the “ reasonable alternative security” referred to in clause 6.6 is capable of being provided by the covenant of the proposed assignee itself; and that, on this construction, clause 6.6 secures for the head landlords no additional rights than those which they already enjoy under the lessee’s covenant not to assign without consent. Although, to a commercial lawyer, references to “a…security” may immediately bring to mind the notion of property deposited or charged by a third-party as a guarantee for the performance of a primary obligor’s obligations, or a person who undertakes to fulfil a primary obligor’s obligations in the event of his default, the dictionaries also define a “security” in terms of “the condition of being protected from or not exposed to danger” or “safety”: compare The Shorter Oxford English Dictionary, 6^th ed (2007). I am satisfied that it is in this latter sense that the phrase is being used in the present context. As Mr Rodger pointed out, the “reasonable alternative security” is to be provided by “the assignee pursuant to [the relevant] subsequent assignment”. It is to be provided as part and parcel of the relevant assignment; and there is no requirement that it should necessarily be provided by a third-party. The parties must reasonably have contemplated that the subsequent assignee's covenant might itself constitute “reasonable alternative security”. Indeed, it is worth noting that there was no guarantor of the original lessee's covenants under the head lease. In my judgment, and on its natural reading, clause 6.6, in its final form, falls to be construed in the manner proposed by Mr Rodger. But if there is any ambiguity in the matter, in my judgment that ambiguity falls to be resolved in favour of Mr Rodger’s proposed construction for two reasons.

First, as submitted by Mr Rodger, clause 6.6 should be construed in a manner which is consistent with the provisions, and scheme, created by section 1 of the Landlord & Tenant Act 1988. In my judgment, Mr Rodger's construction better accords with those provisions and that scheme. Secondly, and very much as a last resort, in the event of any ambiguity, clause 6.6 falls to be construed against the head landlords as the parties who drafted the licence to assign and proffered it for execution. In my judgment, the contra proferentem principle of construction points to a less restrictive construction of clause 6.6 than that which the claimant would seek to impose upon it.

Once it is concluded that the “reasonable alternative security” referred to in clause 6.6 is capable of being provided by the covenant of the proposed assignee itself, then, in my judgment, it follows that clause 6.6 secures for the head landlords no additional rights than those which they already enjoy under the lessee’s covenant not to assign without consent. I reject Mr Furber's argument that clause 6.6 contemplates a two-stage process involving, first, the granting of consent to assign, and, secondly, the provision of “a reasonable alternative security”. I accept Mr Rodger's submission that clause 6.6 operates to release Mr Reid automatically if on any future assignment “reasonable alternative security” is provided. I find support for my view in the approach of Millett LJ in the ante-penultimate paragraph on page 379 of his judgment in the Kened case: the requirement of “a reasonable alternative security” means one which is objectively reasonable, whether or not it is perceived to be such by the head landlords. Once they have given their consent to an assignment to a person whose covenant provides them with reasonable alternative security to that afforded to them by Mr Reid’s guarantee, then that guarantee will automatically fall away.

For these reasons, the claim is dismissed; and I make no order on the counterclaim.