Kumar v Dunning

The benefit of a surety covenant guaranteeing a tenant’s performance is normally assignable. Where the covenant supports tenant covenants which touch and concern the land, it may itself touch and concern the reversion and pass to an assignee without express assignment or privity of contract or estate. The relevant test is whether the covenant affects the mode of occupation or, per se, the value of the land rather than merely affecting value through collateral circumstances. A covenant requiring only payment of money may satisfy that test. Sections 62 and 189(2) of the Law of Property Act 1925 did not independently determine the result.

The claimant was the original underlessee of premises which he had assigned to Sundowners Ltd. As part of the assignment, the defendants guaranteed Sundowners’ payment of rent and performance of the tenant’s covenants. Sundowners went into liquidation and defaulted. The headlease was later assigned to Hedges & Butler Ltd, which recovered the rent from the claimant. The claimant sought reimbursement from the sureties by way of subrogation.

The judge dismissed the claim. The appeal concerned whether the assignee of the immediate reversion could enforce the surety covenant despite there being no express assignment of its benefit and no privity of contract or estate between the assignee and the sureties.

Sir Nicolas Browne-Wilkinson V-C gave the leading judgment. Croom-Johnson and Neill LJJ agreed.

1. The parties accepted that the original underlessee, having paid rent demanded by the assignee of the reversion, was subrogated to the assignee’s rights. The decisive question was therefore whether the assignee could enforce the surety covenant. The court referred to Re Downer Enterprises Ltd [1974] 1 WLR 1460 in recording that agreed premise.
2. The benefit of a surety contract is ordinarily assignable. Clear indications are required to show that the parties intended the benefit to remain personal to the original covenantee. Properly construed, the licence was made pursuant to the underlease’s assignment provisions, and the obligations of both assignee and sureties were expressed to continue throughout the underlease term. The surety covenant was consequently intended to benefit the person entitled to the reversion from time to time.
3. The argument based on section 62 of the Law of Property Act 1925 required the covenant right to appertain to the land. That required annexation. Section 189(2) of the Act was confined to indemnities against liability for rent where land subject to a single rent had been divided, and did not apply to this surety covenant.
4. At common law, a covenant runs with the covenantee’s land where it touches and concerns that land. The applicable test is whether it affects the mode of occupation or, independently of collateral circumstances, affects the value of the land. The further formulation adopted from Vernon v Smith (1821) 5 B & Ald 1 and Vyvyan v Arthur (1823) 1 B & C 410 asks whether the covenant benefits the owner for the time being of the land and no other person.
5. A surety covenant securing rent and other tenant obligations increases the value of the reversion and benefits its owner as owner. The fact that it requires payment of money or damages does not prevent it touching and concerning the land. The court rejected contrary reasoning in Pinemain Ltd v Welbeck International Ltd [1984] 2 EGLR 91, Re Distributors & Warehousing Ltd [1986] BCLC 129 and Coastplace Ltd v Hartley (1987) (unreported).
6. The court preferred Dyson v Forster [1909] AC 98 to the reasoning in Dewar v Goodman [1909] AC 72 insofar as the decisions could not be reconciled. Authorities concerning options, business-specific covenants, security deposits and mortgage sureties were distinguished or regarded as providing no assistance. The separate principle in Griffith v Pelton [1958] Ch 205 was left undecided.
7. The surety covenant touched and concerned the reversion and was enforceable by its assignee. Hedges & Butler could therefore have recovered from the sureties, and the claimant was entitled to recover the sum paid. The appeal was allowed and judgment entered for £23,401.96 plus interest. Leave to appeal to the House of Lords was granted, with a stay on usual terms.

• Court of Appeal: The appeal was allowed and judgment entered for the appellant in the sum of £23,401.96 plus interest. Leave to appeal to the House of Lords was granted, with a stay pending appeal on usual terms. [1987] EWCA Civ 1
• First instance: The judge dismissed the claimant’s action against the sureties.