Prudential Assurance Co Ltd v David Monroe Ayres & Christopher Grew (2008)


A supplemental deed limiting the liability of an assignee of an underlease to partnership assets related only to the assets against which recourse could be had by the tenant in the event of default and did not operate to alter the terms of the relationship between the tenant and the subtenant established under a licence to assign, which provided that the tenant was entitled to recover from the subtenant any losses arising from the assignee's default without limitation.


The appellant tenant (P) successfully appealed against the dismissal of its claim for outstanding rent and other charges under a guarantee given by the respondent subtenants (G) in relation to an underlease. P, which was the lessee of office premises, granted an underlease of part of the premises to G, who were partners in a United States law firm. The underlease provided for G to execute a guarantee of the assignee's covenants in accordance with the Landlord and Tenant (Covenants) Act 1995 s.16. Subsequently, G sought to assign the residue of the underlease to another US law firm (X), and to that end a licence to assign was entered into between P, G, X and the head lessor. The licence contained covenants by X to observe and perform all the covenants under the underlease, and covenants by G to make good to P any unpaid rents resulting from X's default and to indemnify P against any losses arising from X's non-performance of the provisions of the underlease. On the same date, P and X executed a supplemental deed which provided that any recovery by P against X "or any previous tenant" for default under the lease was limited to the partnership assets and did not extend to the personal assets of the individual partners of X. X became bankrupt and the Official Receiver as liquidator formally disclaimed the underlease. At that time, the outstanding rents and charges amounted to approximately £1.3 million. P brought proceedings against G for the outstanding sums under the provisions of the licence. G resisted the claim on the ground that the terms of the supplemental deed prevented P from recovering from them any greater sum than it could recover from X in the liquidation, arguing that G's liability under the guarantee was reduced by virtue of X's limited liability. G also maintained that any provisions of the licence imposing on them a greater burden than that imposed on X under the lease were void by virtue of s.16 and s.25 of the 1995 Act. P argued that the judge had failed to take proper account of the commercial background to the transaction and had reached a conclusion which was absurd and did not reflect the intentions of the parties, as evidenced by the unqualified covenants in the licence guaranteeing the payment of rents by G in the event of X's default. In particular, P argued that the words "or any other tenant" in the supplemental deed should not be construed as limiting P's right to recover against G in the same way as it limited the right to recover against X.


Allowing the Appeal the authorities demonstrated that documents should be interpreted by judges in the same way as they would be interpreted in everyday life, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (1997) AC 749 HL applied. In the instant case, although P and G had accepted that the assignment to X was to proceed on the basis that there was to be no recourse to the assets of individual partners in connection with the lease, there was no evidence to suggest that the parties intended the relationship between P and G to be affected as a result. Indeed, the execution of the licence, which was entered into after the terms of the supplemental deed were settled and which contained unqualified covenants as to payment of rent, suggested that it should not be. (2) Taking an objective view of the language used in the supplemental deed, it was the parties' intentions to limit the scope of the assets to which recourse could be had by P in order to enforce its rights under the deed and not to alter the relationship between P and G which had been established under the licence, Investors Compensation Scheme Ltd v West Bromwich Building Society (No1) (1998) 1 WLR 896 HL applied. Had that been their intention, G would have been made a party to the supplemental deed. It seemed likely, therefore, that the deed had been misdrafted and that G were intended to be treated as persons making claims rather than as persons against whom claims were envisaged. (3) Section 16(5) of the 1995 Act was concerned only with the nature and scope of the obligations imposed on a tenant under a guarantee and not with any arrangements that may have been made between landlord and assignee as to the manner in which the obligations under the lease may be enforced. Thus, the terms of the licence allowed P to enter into arrangements with X of a kind that would ordinarily discharge a surety without affecting their liability. Accordingly, G were not relieved of their obligations under the covenants contained in the licence.