The recent decision in Scottish Widows plc & anr v Tripipatkul, makes it clear that a surety can remain liable to the landlord for rent where the tenant has gone into liquidation and the liquidator has disclaimed the lease. The disclaimer operates to determine the interest of the insolvent tenant. It does not, however, affect the rights and obligations of other parties, including sureties, which remain as though the lease has continued.
Facts
Guardian Assurance Plc ("GA") leased premises in Covent Garden Market to Trip Ltd. Trip Ltd was controlled by the defendant who gave surety covenants in the lease. One of the covenants was that, in the event that the tenant went into liquidation and the liquidator disclaimed the lease, the surety would pay the landlord a sum equal to the rent which would have been payable but for the disclaimer until the expiration of 6 months therefrom.
In March 2000, Trip Ltd went into liquidation and the liquidator subsequently disclaimed the lease pursuant to Section 178 Insolvency Act 1986 (the "Act"). In June 2000, GA entered into an agreement to sell its interest in the property to Scottish Widows plc which, in turn, agreed to transfer it to a third party.
Scottish Widows and the third party issued proceedings against the surety for the rent payable during the 6 month period following the disclaimer of the lease. The claimants successfully obtained summary judgment against the surety on the basis that there was no real prospect of the defendants successfully defending the claim. The surety appealed.
Issues
The main issues before the court were:
whether the surety was potentially liable for the rent during the 6 month period following the disclaimer of the lease, and
if so, whether the claimants were entitled to enforce the covenant of suretyship even though they had each acquired an interest in the property after the lease had been disclaimed.
Decision
Mr Justice Pumfrey upheld the first instance decision in favour of the claimants. He said that Section 178 of the Act clearly envisaged that a person may be liable to perform the tenant's covenants even after the lease has been disclaimed. The effect of the statutory provisions was that the lease remained on foot to the extent to which its provisions were relevant to the liabilities and rights of the parties other than the insolvent tenant.
In relation to the second issue, the surety had argued that, following the disclaimer, there was no reversionary interest in the property and, therefore, nothing with which the sureties covenant could run. Mr Justice Pumfrey accepted that the disclaimed lease was deemed to subsist so far as the landlord and surety were concerned. The "notional reversion" could be assigned with the benefit of the covenant annexed to it as if the lease had not been disclaimed.
If you have any queries, please contact Janet Currier, Tel No. 020 7367 2326 or Janet.Currier@cms-cmck.com.
