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This is an example of constructive disclaimer. This document is useful for studying constructive disclaimer.
Possession – the constructive approach Paul McCartney forfeit the lease, whether through court action or by way of At a glance peaceable re-entry. If the tenant is a company that has gone into liquidation l A lease can be determined before the expiry of the (or is a bankrupt individual) the landlord may be faced with contractual term by surrender or forfeiture. the additional possibility of the lease being disclaimed by the l In Hindcastle v Barbara Attenborough, the House liquidator (or trustee in bankruptcy as the case may be). In of Lords noted that a lease could be brought to Hindcastle v Barbara Attenborough Associates,3 the House an end (following disclaimer) by the landlord of Lords explained the effect of a disclaimer. In the basic case taking possession. of a landlord and an insolvent (original) tenant, where there l Some acts or courses of conduct can give rise to are no other parties involved, the disclaimer operates so as to a constructive determination of the lease. determine all of the tenant’s obligations under the tenant’s l This article examines these concepts and how covenants and its rights under the landlord’s covenants. The they are related. landlord’s obligations and rights, which are the reverse of the tenant’s rights and obligations, are also determined. Thus, disclaimer operates to determine the tenant’s interest in the property and hence to determine the lease. Introduction However, where there are third parties who may have an interest in or some rights or liabilities in respect of the In a well-drafted modern form of lease, the guarantee disclaimed lease, the position is less straightforward. Whilst the provisions will usually afford the landlord the ability, should disclaimer may operate to determine the interest of the the original lease be disclaimed by the liquidator or trustee in insolvent tenant, it is not, except in so far as is necessary for the bankruptcy of the tenant, to require the guarantor to accept purpose of releasing the insolvent tenant from liability, to the grant of a replacement lease for the balance of the original affect the rights and liabilities of any other person. Thus the term. In the recently reported case of Active Estates v rights and liabilities of others such as guarantors and original Parness,1 the court explored the liability of a guarantor to take tenants are to remain as though the disclaimed lease continued a new lease following a disclaimer. The guarantor had and had not been determined. In these circumstances, the declined to take such a lease when so required by the landlord disclaimed lease, whilst determined from the insolvent tenant’s and put forward several arguments as to why it was not bound point of view, survives in a form of legal limbo as regards other to do so. Part of the guarantor’s case was that certain acts on relevant parties. As Neuberger J graphically explained in the part of the landlord had amounted in effect to the landlord Active Estates: taking back possession of the premises. The effect of the landlord repossessing the premises would have been to ‘The disclaimed lease was neither in the heaven of determine the lease thus causing the supporting guarantee perfect existence, nor in the hell of complete obligations to fall away. The court, whilst accepting the determination. It was in the purgatory of disclaimer guarantor’s argument in principle, rejected the contention … with the possibilities of being determined as that the landlord had actually retaken possession on the between parties unaffected by the disclaimer, or being particular facts of the case. subject to a vesting order.’4 In Active Estates the landlord had not taken possession by directly effecting a peaceable re-entry on to the premises. This strange state continues either until a relevant party Instead, the court was asked to consider whether the actions applies for a vesting order under the relevant insolvency of the landlord amounted to a constructive re-entry or legislation or the landlord takes possession of the premises. repossession of the premises. This article looks at some of This point about taking possession is important as Lord the case law in this area and at the general principles which Nicholls explained in Hindcastle: can be drawn from it. However, much turns on the specific facts of each case. ‘If no vesting order is made and the landlord takes possession, the liabilities of other persons to pay the rent and perform the tenant’s covenants will come to Legal background2 an end as far as the future is concerned. If the landlord A landlord of premises, faced with a defaulting tenant, has acts in this way, he is no longer merely the involuntary various responses and remedies available to it. On the one recipient of a disclaimed lease. By his own act of hand, he might look for others who may be obliged to pay the taking possession he has demonstrated that he regards rents reserved by the lease and to perform the tenant’s the lease as ended for all purposes. His conduct is covenants, for example guarantors of the tenant or perhaps inconsistent with there being a continuing liability on former tenants who still remain liable. Alternatively, the others to perform the tenant covenants in the lease. He landlord may look to terminate the lease either consensually, cannot have possession of the property and, at the through the agreement of a surrender, or by taking steps to same time, claim rent for the property from others.’5 Insolvency Law & Practice, Vol 19, No 1, 2003 9 Clearly what amounts to taking possession of the to the assignment, A had also been required to guarantee premises by a landlord will be a crucial issue. In cases where payment of the rent, in the event of the default by M. the landlord has obtained possession through formal court Subsequently, M defaulted on rental payments and vacated proceedings or by way of an agreed surrender the position the premises. A began negotiations with the landlord for the should not be in doubt. Additionally the landlord also has grant of a reversionary lease to A. At the same time, A the possibility of forfeiting the lease by way of peaceable opened negotiations with a third party, ‘D’, for the grant by (also referred to as physical) re-entry. This is usually A of a new sub-tenancy to D. Prior to the reversionary lease effected by changing the locks on the premises. Forfeiture and the sub-lease being completed, D, at a suggestion of and clauses in well-drafted leases should allow the landlord to with A’s support went into occupation of the premises. re-enter part of the premises in the name of the whole. Shortly thereafter the landlord granted a reversionary lease Consequently, securing possession of part of the relevant of the premises to A which was expressed to be ‘subject to premises can be sufficient to amount to a forfeiture. and with the benefit of’ M’s lease. A then put up a notice at the premises stating that A had re-entered the premises on the grounds of non-payment of rent. Constructive determination Court proceedings were instigated by a mortgagee of Where there has been no formal forfeiture by way of court M’s lease who claimed an order for possession. The Court action or actual physical re-entry onto the premises, the of Appeal, applying Baylis, concluded that M’s lease had courts have nevertheless been prepared to accept that action been terminated as a result of A’s re-entry and consequently on the part of a landlord can amount to a constructive the mortgagee’s security was lost. Although A and D had determination of the lease – normally consisting of some act commenced their possession of the premises as trespassers, or conduct on the part of the landlord inconsistent with the vis-à-vis M, their continued possession after the grant of the continuing existence of the original lease. However the reversionary lease to A operated as a re-entry. There was no limits of this doctrine of constructive determination are not requirement that the trespass be discontinued before there always clear. Much turns on the facts of each particular case. could be a forfeiture by re-entry – in other words it was not necessary for A and/or D to go through the ‘idle ceremony’ Case history of vacating the premises and then formally re-entering. Baylis v Le Gros Ashton v Sobelman 6 In Baylis v Le Gros, premises were let for a term of 21 years In Ashton v Sobelman,9 the tenant (‘T’) of an 80-year headlease to a tenant, a private individual who died shortly after the lease at a yearly rent of £50.00 per annum had granted a sub-lease was granted. The tenant’s widow alone proved the will and she at a substantial rent to ‘ST’. On several successive quarter days, continued his business at the premises for a couple of years T failed to pay its rent whereupon the landlord decided to before she herself died. Shortly thereafter, a third party, Messrs forfeit the headlease. The landlord proposed to forfeit by way Le Gros went into possession (although the basis on which they of peaceable re-entry, evidenced by changing the locks at the did so was not clear). Subsequently the landlord inspected the premises. Unfortunately, the landlord failed to consider what premises and discovered that they were out of repair. The the legal effect of forfeiture of that headlease would be – landlord allowed Le Gros to remain in possession as his tenant namely that it would involve a forfeiture of the underlease at under an oral agreement and upon condition that certain works the same time. Thus the landlord’s advisers approached ST and and other matters were dealt with. When Le Gros later wrote to him specifically in the following terms: indicated their intention to quit the premises there were further negotiations pursuant to which Le Gros remained in possession ‘We would like to make it perfectly clear that [the and agreed a tenancy for a further year. The son of the original landlords] are not in any way challenging your right tenant thereafter obtained letters of administration to both his to remain in occupation of the premises under the father’s and his mother’s estate and began an action to eject Le provisions of the underlease under which you are the Gros and recover possession. Essentially the court was asked to present lessee. Their sole concern is to enforce their decide whether the original lease had been determined by legal rights of forfeiture against their tenant …’ re-entry. The court concluded that it had. Chadwick J reviewed the authorities including ‘Finding the premises in a dilapidated state, the Sportsman and Baylis. His view was that the most that could landlord comes upon them and enters into an agreement be derived from Baylis is that a landlord may effect a re-entry with the man he finds in possession, to become his against his tenant by an arrangement with an existing tenant, – intending thereby to act upon the forfeiture sub-tenant under which that sub-tenant is to remain in and to oust the lessee. I think that is quite sufficient to occupation as the tenant of the landlord upon the terms of a constitute an entry by the landlord so as to put an end new tenancy. However on the facts of the case, it was clear to the [original] lease.’7 that the landlord was not seeking to maintain the sub-tenant as his direct tenant under the terms of a new lease. Indeed the landlords were saying that as far as they were concerned London and County (A & D) Ltd v Wilfred the existing sub-underlease was not to be adversely affected. Sportsman Ltd The court on this basis determined that the effect of what the In London and County (A & D) Ltd v Wilfred Sportsman landlord had done could not be to forfeit the headlease. It Ltd,8 ‘A’ assigned a lease to ‘M’. In order to obtain consent specifically rejected the proposition that a landlord may 10 Insolvency Law & Practice, Vol 19, No 1, 2003 effect a re-entry of premises against its tenant by an end under the proposition expounded in Hindcastle. Nor arrangement made with an existing sub-tenant under which had the landlord manifested an intention to forfeit the the sub-tenant is to remain in occupation of the premises as leases and install a new tenant. tenant of the landlord for the residue and otherwise upon the terms of its existing sublease. The facts of this case are significant. It should be noted Active Estates v Parness that the rent arrears under the headlease amounted in total In Active Estates v Parness,12 the landlord (‘L’), in April to barely £65. The passing rent under the underlease was 1993, granted to E Limited a lease for a term of 25 years some £3,500 per annum at the time. By forfeiting the subject to rent review every five years. ‘P’ and ‘O’ were headlease (which at that point still had some 27 years to run) parties to the lease as guarantors and covenanted that if the the landlord would have gained a significant windfall. lease were to be disclaimed, they would if required by notice Interestingly, having established to its own satisfaction that in writing from L take a new lease of the premises for the the headlease had not been forfeited, the court did go on to residue of the term which would have remained had there consider whether, if it had been wrong on the initial finding, been no such disclaimer. the tenant would have been entitled to relief from forfeiture. In 1997 the lease was assigned to G Limited. The It concluded that relief should have been available and the premises were used as a fast food franchise but this was court would have been prepared to grant relief to the tenant. operated through a different company, J Limited. By early 1999, G Limited was having difficulties paying the rent. The rent was then paid by J Limited but was accepted by Cromwell Developments v Godfrey L expressly on the basis that J Limited was acting as agent In Cromwell Developments v Godfrey,10 the landlord granted for G Limited. In June 1999, G Limited was wound up by leases of adjoining commercial premises to ‘D’. In 1984 the High Court pursuant to a petition presented in April both leases were assigned to ‘CBL’. In early 1987, CBL 1999. L and G Limited had been having discussions and in was dissolved under the Companies Act 1985 and the July 1999 reached an understanding that, whilst the lease leases became vested in the Crown as bona vacantia. The remained vested in G Limited, J Limited could remain in landlord was unaware of these events. The leases were occupation and would pay the rent – albeit on behalf of G ultimately disclaimed by the treasury solicitor in 1993. Limited. Were the lease to be disclaimed by a liquidator ‘CBTS’ another company controlled by the same person of G Limited, J Limited would remain in occupation while who controlled CBL and which was also a tenant in the there were negotiations for a new lease, subject to L being same building paid the rents under the CBL leases up until satisfied as to the reliability of J’s covenant and with its about September 1990. Liquidators were then appointed references. Agreement was also reached for a slight in respect of CBTS. The landlord claimed rent arrears reduction in the amount of the rent (with payment by from D as original tenant. At first instance the court ruled monthly instead of quarterly instalments), the rent to be that D was not liable, as the leases had been terminated paid by J Limited on behalf of G Limited. In late August either by forfeiture or as a result as the landlord’s having 1999, the liquidator of G Limited disclaimed the lease. entered upon their own property. The case then came L continued to send rent statements addressed to G before the Court of Appeal. Limited and for a number of months thereafter J Limited The Court of Appeal examined the authorities and continued to make payment. Payment ceased by April looking back at Baylis, accepted the basic principle that ‘if 2000. Meanwhile, in December 1999, L served noticed on the landlord intends to take rent and maintain as a tenant P and O requiring them to take a new lease of the premises somebody other than the original tenant … this will amount pursuant to their guarantee obligations. P and O declined in law to a forfeiture and a re-letting’. At first instance the to take the new lease and the matter came before Mr Justice judge had added a gloss to this principle to the effect that the Neuberger. For present purposes two of the points raised law would consider there to have been a forfeiture and re- by the guarantors are relevant. letting regardless of the landlord’s intention to re-let. This Firstly they argued that the lease had either been the Court of Appeal specifically rejected. In their view, ‘in surrendered or forfeited before the disclaimer in August order to conclude that there was a constructive re-entry 1999 by G Limited’s liquidator. Neuberger J was prepared there had to be evidence of, or a finding, that at some time to accept that circumstances can arise in which either … the [landlord] decided to terminate the leases to CBL and surrender or forfeiture occur without the parties concerned install new tenants under a new … tenancy. There was no intending it to happen. However, the only basis on which evidence to found such a finding’.11 P and O argued that the lease was surrendered or forfeited The Court of Appeal indicated that the key issue was was by reference to the arrangements agreed with J whether or not the landlord chose to resume possession by Limited. On the facts Neuberger J was rapidly able to re-letting to CBTS shortly after the dissolution of CBL. dispose of this. In the various discussions between L and The court found that the person behind both CBL and the representatives of G Limited, it was made clear that L CBTS was the same and treated CBL as continuing to carry was continuing to treat G Limited as its tenant. L had made on the business at the premises. Rent demands from the it clear that J Limited occupied the premises effectively as landlord continued to be addressed to CBL. The landlord licensee of G Limited and would pay rent as G Limited’s was never aware of the dissolution of CBL or that (at the agent. It could not possibly be said that there was any relevant time) its rights of re-entry under the leases had intention on the part of L, J Limited or indeed G Limited arisen. Accordingly, the landlord had not taken possession to create a new tenancy whilst the lease remained vested in upon the disclaimer of the leases so as to bring them to an G Limited. Insolvency Law & Practice, Vol 19, No 1, 2003 11 The second argument raised by the guarantors was (b) Where a right for the landlord to forfeit the lease that following disclaimer, the agreement of July 1999 has arisen, intention to forfeit must be demon- took effect. It was argued that this involved L granting strated (Baylis; Cromwell Developments). Where and J Limited taking a tenancy of the premises. To grant the landlord’s action is unequivocal, the requisite such a tenancy would have necessitated L taking (con- intention may well be presumed, but only if the structive) possession and once he had done so the lease action is incapable of having any other effect would have terminated and L could not thereafter en- (Active Estates). Compare this with the case of force the guarantee obligations. Neuberger J, applying Relvok Properties v Dixon13 where the assignee of Hindcastle, accepted this in principle and agreed that if a lease absconded leaving arrears of rent. When a landlord takes possession after a disclaimer, it is not the landlord discovered this it changed the locks open to him subsequently to seek to invoke a provision of the premises in order to protect the property such as the guarantee obligation in the present case. and the interests of the absconding party, before However, on the facts, had the landlord taken possession suing an earlier tenant which remained liable for of the premises? The position after the disclaimer was the rent arrears. In this case the changing the locks same as it had been before the disclaimer subject to three was not held to be an unequivocal act, as there was differences. Firstly, there was the agreement as to the no intention on the part of the landlord to bring reduction of the rental payments and the fact that rent was the lease to an end. to be paid monthly not quarterly; second was the agreement (c) A constructive re-entry takes place where the to grant a new lease to J Limited subject to references; landlord decides to maintain some other party as and third was the disclaimer itself. his direct tenant under the terms of a new tenancy The first point was easily dealt with. The fact that (Baylis). That third party may even be one who a landlord has agreed to take a lower sum than that to initially entered the premises as a trespasser which he was entitled could not of itself give rise to the (Sportsman) or could be an existing sub-tenant. conclusion that there had been a surrender or forfeiture (d) The mere fact that the landlord accepts rent from of the original lease. The fact that this arrangement took a person other than the tenant is not in itself effect after a disclaimer was irrelevant. Had it been put sufficient to amount to constructive re-entry in place before disclaimer it would not have affected the (Cromwell Developments; Active Estates). What conclusion that there was no taking of possession before matters is whether the landlord intends to accept that disclaimer was made. the third party as his tenant in place of the old On the second point, the arrangements for a possible tenant. If the landlord’s actions are inconsistent grant of a new lease to J Limited did not at that stage amount with this – for example, allowing a subtenant to to an enforceable contract. At best there was an agreement remain in occupation under the terms of the in principle that a new lease would be granted but subject to existing sub-tenancy rather than under the terms references and covenant. Clearly this was not an enforceable of a new direct tenancy with the landlord – then arrangement in its own right. there is no forfeiture (Ashton). Finally, the court looked at the disclaimer itself. Neuberger J indicated that the effect of the disclaimer can Comment be overstated. Its effect was not to determine the lease for all purposes. The lease may have been determined as against G Limited, but did not prevent the lease from being treated Re-entry and taking possession as enforceable as between others, for instance L and the In Active Estates, arguments were framed in terms of the guarantors. The disclaimed lease remained in the state of landlord having forfeited or accepted a surrender of the purgatory which Neuberger J had identified and L had lease prior to the disclaimer, but in terms of having taken neither done anything or intended to do anything which possession, albeit constructively, after the disclaimer. The would end that state of affairs. Accordingly, the second line change of terminology for the post-disclaimer position of defence raised by P and O was rejected. reflects the language of Lord Nicholls in Hindcastle but does it reflect a real underlying difference between the pre and post disclaimer situations? The answer must be no as Some principles regards forfeiture. What principles can we draw from a review of the case law? In Cromwell Developments, Simon Brown LJ was The following would appear to be the main points. referred to the dictum of Lord Nicholls in Hindcastle (set out above).14 He noted that this could support the argument (a) Whilst a disclaimed lease may come to an end as that the lease had come to an end ‘only if it could be said between the landlord and the insolvent (disclaiming) that the [landlords] themselves took possession. But this tenant, the lease will not automatically be treated as takes one straight back to the concept of constructive having fallen away as between other interested physical re-entry for the purposes of the law forfeiture. parties or parties with obligations in respect of that Unless the [landlords] were intending to let CBTS into lease. Instead the lease will continue either until it is occupation and maintain them there as tenants, there was the subject of a vesting order under the relevant no constructive re-entry, no taking of possession’ [emphasis insolvency legislation or until it is otherwise brought added].15 Lord Simon Brown stated that he could see no to an end by the landlord taking back possession of material distinction between looking at the matter in terms the premises (Hindcastle). of forfeiture or by reference to Hindcastle. 12 Insolvency Law & Practice, Vol 19, No 1, 2003 Surrender and taking possession rights (although admittedly there are some conceptual difficulties as to what exactly the mortgagee’s rights will be In some of the cases reviewed above, it was argued that the in these circumstances – for example even if the relationship acts of the landlord in relation to the premises amounted between the landlord and the tenant has been brought to an either to a forfeiture or a surrender. Surrender is normally a end by the surrender, does the mortgagee have the ability to consensual arrangement between the landlord and its tenant, exercise his power of sale and deliver to a purchaser a lease but there is a long line of case law to support the proposition equivalent to that surrendered?). that surrender by operation of law can occur even in the Returning to change of terminology seen in Active absence of intention on the part of the parties to surrender – Estates (surrender for pre-disclaimer period and taking the concept being based on the doctrine of estoppel. possession for post-disclaimer), is there something to In Mattey Securities v Ervin,16 a tenant, E Limited, justify this in the context of a surrender? Here it is went into administration. B Limited was allowed into suggested the answer is yes. Post-disclaimer (and pending occupation of the premises by the administrator and paid some appropriate person seeking a vesting order), there is rent to the landlord. Negotiations between the landlord no ‘tenant’ from whom the landlord can accept a surrender and B Limited for an assignment of the lease ensued but or in relation to whom he may undertake some action or did not complete. Subsequently, the landlord pursued embark on a course of conduct which gives rise to the former tenants for rent arrears accumulating after B Limited estoppel underpinning a surrender by operation of law. ceased trading. Was there sufficient to uphold a finding Any act amounting to taking possession would therefore that the lease had been surrendered by virtue of the fall to be analysed as a forfeiture not a surrender. arrangements between the landlord and B Limited (thereby bringing the former tenant’s liabilities to an end)? There was not. The Court of Appeal underlined that, whilst Conclusion intention is not a prerequisite to surrender by operation of The law in this area remains difficult. When facing a law, there must be some unequivocal act which has the defaulting tenant, the lesson for landlords is to take care. effect of estopping the parties denying the lease is extant. Take legal advice early, and, if you want to keep your On the facts, the negotiations for an assignment were only options open (whilst you assess the state of the market and consistent with the continued existence of the lease, not decide whether or not to enforce the existing lease against with a surrender. others potentially liable), be careful how you deal with Mattey Securities was pleaded as a case of surrender by those in occupation of the premises if they are not the actual operation of law. On the facts it might equally have been tenant under the lease. If the decision is to terminate the argued as a case of constructive forfeiture – although that existing lease, make sure this is done properly. approach would probably have failed also, applying Cromwell What is clear is that the cases often turn on facts which Developments and Active Estates. Indeed there are a number at the time may not have seemed important. Had the landlords of parallels between the surrender and forfeiture cases, and in Ashton made it clear that the sub-tenant could remain in in cases such as Relvok Properties, the court seemed to view occupation on the terms of a new lease (the rent and other the tests of whether something amounted to a surrender or terms and conditions for which just happened to be identical a forfeiture as being the same. Cases such as Oastler v to those of its former sub-lease) then the test set out in Baylis Henderson17 had already decided that attempts by a landlord would have been satisfied and proper forfeiture effected – and to re-let premises which had been abandoned by a tenant did the landlords could have kept their windfall. not constitute an unequivocal act amounting to acceptance of a surrender. As with Cromwell Developments and Active Paul McCartney, Partner, Property Finance Team, Estates, it was not sufficient to show negotiations with or Davies Arnold Cooper acceptance of rent from a third party. There needed to be a NOTES clear demonstration that the old lease had been replaced by a new legal relationship.18 1. Active Estates Limited v Parness  36 EG 147. 2. For a more detailed discussion of the landlord and tenant and However, it should be remembered that there are insolvency issues see ‘Disclaimer of leases and its impact: the fundamental differences between a surrender and a forfeiture. “pecking order”’ (2002) Vol 18 No 3 IL&P 79–89. One key area of difference is the effect on derivative 3. Hindcastle v Barbara Attenborough Associates  AC 70. 4. Supra n 1 at 152. interests. Where a lease is forfeited, this brings to an end not 5. Supra n 3 at 89. only to the forfeited lease but also to any interests derived 6. Baylis v Le Gros (1858) 4 CBNS 537. out of it. 7. Ibid at 554 per Cockburn CJ. 8. London and County (A & D) Ltd v Wilfred Sportsman Ltd  3 WLR 418 (‘Sportsman’). ‘It is a rule of law that if there is a lessee and he has 9. Ashton v Sobelman  1 WLR 177. created an underlease, or any other legal interest, if 10. Cromwell Developments v Godfrey  2 EGLR 62. 11. Ibid at 65 per Otton LJ. the lease is forfeited, then the underlessee or person 12. Supra n 1. who claims under the lessee, loses his estate as well as 13. Relvok Properties v Dixon (1973) 25 P & CR 1. the lessee himself.’19 14. Supra n 5. 15. Supra n 10 at 66 per Simon Brown LJ. 16. Mattey Securities v Ervin  2 EGLR 66. On the other hand, a surrender of a lease does not 17. Oastler v Henderson (1877) 2 QBD 575. prejudice or extinguish a sub-lease granted out of it.20 A 18. See also Bhogal v Cheema  L & TR 59. 19. Great Western Railway v Smith (1876) 2 Ch. D. 235 per Mellish LJ. mortgagee of a lease is in the same position as the sub-tenant21 20. Law of Property Act 1925, s 139. and a surrender of that lease should not defeat the mortgagee’s 21. Law of Property Act 1925, s 87. Insolvency Law & Practice, Vol 19, No 1, 2003 13
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