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Disclaimer

This page deals with two issues;
  • The position of a guarantor under an AGA where there is a disclaimer;
  • The obligation of a guarantor to take a new lease on disclaimer, and
  • Lease held on trust not part of bankrupt's estate

Authorised guarantee agreement

Liability of guarantor on disclaimer

Shaw v Doleman
[2009] EWCA Civ 279

Summary

A guarantor under an authorised guarantee agreement ("AGA") was bound to perform the covenants in the lease following disclaimer by the tenant’s liquidator even where the AGA was expressed to be limited to the period during which the insolvent tenant was bound by the lease covenants.

Facts

The defendant was originally the tenant of a small retail unit under the terms of a lease for 10 years from March 2004. The lease contained the usual qualified covenant against alienation. It further provided that on assignment the landlord could require the assignor to enter into an AGA in the form set out in the lease.

The defendant ("the guarantor") assigned her lease to a company and entered into an AGA with the landlord. Under the AGA, she guaranteed payment of rent and performance of the tenant’s covenants (and to make good any loss where the company failed to do so). The guarantee was expressed to remain in force for “the period during which [the company] is bound by the tenant covenants in the Lease” (“the liability period”).

The company encountered financial difficulties, became unable to pay its rent and subsequently went into liquidation in August 2007. The liquidator disclaimed the lease under s178(4) of the Insolvency Act 1986 in October 2007.

By this time, the claimant was the landlord under the terms of the lease and sought to recover the arrears of rent from the guarantor in the sum of £16,921.87. She maintained that as the lease had been disclaimed, she had no further liability to the landlord under the terms of the AGA.

Decision

The question before the court was whether the ‘liability period’ defined in the AGA had come to an end on the disclaimer, thus releasing the guarantor from her liability under the AGA? The court held that, in order to determine whether or not the ‘liability period’ had expired it was not possible to look at the AGA without also looking at the statutory provisions.

Section 178(4) of the Insolvency Act 1986 sets out the effect of a disclaimer and says that it:
    “(a) operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed;
    but
    (b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights and liabilities of any other person."
This, the court held, meant that whilst the company was not bound by its own covenants, post disclaimer, it remained bound as far as third party obligations were concerned. Stanley Bunton LJ at paras 45 and 46:
    "45. The real issue is as to the effect of s178(4)(b). If its effect is that in relation to the Appellant as guarantor, the Assignee is deemed to continue to be bound by the tenant covenants of the Lease, her liability under the guarantee continues notwithstanding the disclaimer by the liquidator of the Assignee. If that is not its effect, her liability has come to an end, because in fact by virtue of section 178(4)(a) the Assignee has ceased to be so bound.

    46. On this issue section 178(4)(b) is I think clear. The determination of the rights, interests and liabilities of [the company] in the property disclaimed does not affect the rights or liabilities of the guarantor. The Appellant's case, on analysis, is that the determination by the disclaimer of the liabilities of the company (or, to use the words of the guarantee, the determination of the period during which the Assignee is bound by the tenant covenants in the Lease) has determined her liability. But that is precisely what is precluded by section 178(4)(b)."
Both he and Mummery LJ referred with approval to the judgment of Lord Nicholls in Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70 that even though disclaimer ended the rights and liabilities of the insolvent tenant, the rights and liabilities of all third parties remained:
    "…the best answer seems to be that the statute takes effect as a deeming provision so far as other persons' preserved rights and obligations are concerned. A deeming provision is a commonplace statutory technique. The statute provides that a disclaimer operates to determine the interest of the tenant in the disclaimed property but not so as to affect the rights or liabilities of any other person. Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined. In this way the determination of the lease is not permitted to affect the rights or liabilities of other persons. Statute has so provided" (Lord Nicholls, p88G-H)
The guarantor remained liable under the terms of the AGA to the landlord, the wording of the AGA notwithstanding. That was the direct effect of the wording of the statute.


Guarantor's obligation to take new lease

Relevance of s2 of 1989 Act

Active Estates Ltd v Parness
[2002] EWHC 893; [2002] 36 EG 147
Ch D, Neuberger J

Facts

The lease contained a clause giving the landlord the right, should the lease be disclaimed, to require the guarantor to take a new lease of the demised premises. The guarantor tried to get out of the obligation by arguing that the notice requiring the guarantor to take the new lease fell foul of s2 of the Law of Property (Miscellaneous) Provisions Act 1989.

Held

The judge rejected this argument applying Spiro v Glencrown Properties Ltd[1991] Ch 537. Section 2 applies to the contract (in the lease) containing the option but it does not apply to the exercise of that option. The fact that this was a put option (i.e. exercised by the grantor/lessor) and not a call option (i.e. where the option is exercised by the grantee/purchaser as in Spiro) was irrelevant.

The guarantor also tried to get out of taking the new lease by arguing that the landlord had forfeited or taken a surrender by granting a tenancy to another company. The judge held on the facts that there had been no intention to grant a new tenancy. This argument therefore also failed.


Construction of lease - s17 of 1985 Act - Surrender?

Damages in lieu of specific performance?

RVB Investments Ltd v Bibby
[2013] EWHC 65 (Ch)

Summary

Disclaimer of the tenant’s rights and obligations under a lease did not release the tenant’s guarantor, notwithstanding the wording of the guarantee. The guarantor was therefore obliged to take a new lease pursuant to the terms of the guarantee. The finding enabled the landlord to avoid liability for rates in respect of unoccupied building.

Facts

B guaranteed the liabilities of the tenant (T) to the landlord (L) under two leases. His obligations as guarantor were stated to apply until the expiry of the tenancy created by the lease “or (if earlier) the date on which the Lessee ceases to be bound by the covenants in this lease”. In the event that the leases were disclaimed or forfeited during the guarantee period, by the terms of the lease L was entitled to require B to accept a new lease of the premises for a term equivalent to the residue of the original lease, at the same rent as had applied immediately before disclaimer.

T went into liquidation and the liquidator disclaimed the lease of one of the units pursuant to s178 of the Insolvency Act 1986. T was then dissolved and the Treasury Solicitor filed a notice of disclaimer in respect of the lease of the second unit pursuant to s1013 of the Companies Act 2006.

Following this L requested B to take a new lease of the second unit, pursuant to his obligations as guarantor, for the residue of the term but at a higher rent than before; B refused. L then brought a claim for specific performance. L also claimed the outstanding rent and service charge payments in respect of both units.

Issues

B contended that he was no longer liable under the guarantee since:
  • On the proper construction of the lease, his obligations as surety came to an end on the dissolution of T;
  • The vesting of the second unit in the Crown amounted to an assignment by operation of law within the meaning of the Landlord and Tenant (Covenants) Act 1995, such that B, as the guarantor of the “former tenant”, was not thereafter liable in the absence of a notice served on him by L under s17(3); and
  • L had accepted a surrender of the leases by its conduct in, inter alia, entering on the premises to carry out inspections and beginning to market the premises.
B further submitted that the court should refuse specific performance in any event since damages would be an adequate remedy.

Decision

The High court awarded L a decree of specific performance ordering B to enter into a new lease at the old rent.

Issue: obligations ending on dissolution of T

As to the first argument of B, it was settled law that, by virtue of s178(4) of the Insolvency Act 1986, the disclaimer of a lease by the liquidator of an insolvent tenant did not affect the liabilities of guarantors, whose rights and liabilities remained as though the lease had continued (Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] A.C. 70 applied). Accordingly, the liquidator’s disclaimer of the lease of the first unit did not discharge the defendant as surety.

It made no difference that the guarantee period was defined in such a way that it could end on “the date on which the Lessee ceases to be bound by the covenants in this lease”. On the proper construction of the lease, that provision was not intended to apply where the lessee ceased to be bound by reason of a disclaimer by its liquidator. It dealt instead with the situation that applied under s5 of Landlord and Tenant (Covenants) Act 1995, where, if the tenant assigned the whole of the demised premises, the tenant was released from the covenants of the tenancy.

The same applied to the disclaimer of the lease of the second unit by the Treasury Solicitor, following the vesting of that lease in the Crown as bona vacantia under s1012 of the Companies Act 2006. The Treasury Solicitor had executed a valid notice of disclaimer under s1013. The provisions of s1015, prescribing the effects of such a notice, were in all material respects identical to those in s178(4) of the Insolvency Act 1986 and the law applicable to that section applied with equal force to a disclaimer under s1013 of the Companies Act 2006.

Issue: section 17 notice

As to B’s second point, L did not need to serve a notice on the defendant under s17(3) of the Landlord and Tenant (Covenants) Act 1995. First, s17(3) could have no application to the claims in respect of the first unit since the lease of that unit had remained vested in the tenant until it was disclaimed by the liquidator. Second, such a notice was required only in respect of payment by the guarantor of a "fixed charge payable under the covenant" and did not prevent a landlord from seeking to enforce a covenant requiring a surety to accept a new lease for the residue of the term following disclaimer or forfeiture; likewise it would not prevent a claim for damages for breach of, or in lieu of an order for specific performance of such a covenant.

Further, although the definition of assignment in s28 of the Landlord and Tenant (Covenants) Act 1995 included assignments by operation of law, such an assignment was an “excluded assignment” within s11 of the Landlord and Tenant (Covenants) Act 1995, and as such did not release the tenant from its covenants under the lease: see section 11(2)(a). The obligation under section 17(3) did not arise where the tenant was dissolved following liquidation.

Issue: surrender

L had not accepted a surrender of the lease so as to bar it from enforcing B’s obligations as guarantor. For surrender to occur by operation of law, the parties had to have acted towards each other in a way that was inconsistent with the continuation of the tenancy. A high threshold had to be crossed before the tenant would be held to have surrendered and the landlord to have accepted a surrender. The effective re–delivery of possession by a tenant and its acceptance by its landlord were vital. None of the matters relied on by B amounted to an unequivocal act of taking possession by L so as to prevent it from denying that the leases were at an end. As regards the marketing of the premises, in circumstances where there were substantial arrears of rent, L was entitled to look for a new tenant and yet maintain its rights for rent against the old tenant and surety until a new tenant was found.

Issue: damages being an adequate remedy

The court held that damages in lieu of an order for specific performance would not be an adequate remedy, notwithstanding that the term to be granted by the new lease would have expired before the order was made. In the absence of a lease, the claimant would incur liability for non–domestic rates on both units as unoccupied properties. Although the claimant would be entitled to an indemnity from B that indemnity would be valueless since B was insolvent. If the lease were granted, then L could argue that the defendant was entitled to possession for the period of the new lease, such that he, and not L, was liable for the rates. An order for specific performance would be made accordingly.

Finally, the rent payable under the new lease should be the rent payable immediately before the date of the disclaimer. L was not entitled to specify a higher rent, as no rent review had in fact taken place. L could not simply ignore the rent review provisions in the lease. Although it might still be entitled to have the rent reviewed, it was not entitled to insert into the new lease a rent based on a review that had not occurred.

Comment

Situations where landlords seek to force guarantors to take new leases under the terms of the lease are rare. This is perhaps because it is often sufficient to enforce payment of rent and other obligations under the lease against the guarantor where the tenant becomes insolvent. Here, however, the guarantor and the tenant were both insolvent. Therefore the advantage for the landlord in enforcing the covenant to take the lease was to enable it to claim that it was not in occupation of the premises and so was not liable for rates. No doubt in the current economic climate more landlords may seek to do the same.

Lease held on trust for bankrupt and another

Not part of bankrupt estate

Abdulla v Whelan
[2017] EWHC 605 (Ch); [2017] 1 WLR 3318

Summary

The legal estate in a lease held on trust by a bankrupt and her co-tenant on behalf of themselves was ‘property held on trust for any other person’ within s283(3) of the Insolvency Act 1986 and so was excluded from the bankrupt’s estate. A disclaimer served by the trustee in bankruptcy therefore did not end the legal estate in the lease or the bankrupt’s liability to pay rent.


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