Michael Gerson (Leasing) Ltd v Loach & Ors

Where an equipment lease is terminated for repudiatory breach and the agreement provides a self-contained termination sum, contractual interest on future rentals is not recoverable merely because those rentals become payable on termination. “All arrears” bears its natural meaning and refers to sums already in arrear or accrued due. A general interest clause applying during the subsistence of the lease does not enlarge the termination regime. The court may instead permit an amendment to claim statutory interest where the contractual claim fails.

S&J Loach Ltd entered an equipment sale-and-leaseback arrangement with Michael Gerson (Leasing) Ltd. The appellants, who guaranteed S&J Loach Ltd’s obligations, became liable after Gerson terminated the lease for unpaid rentals and claimed the contractual termination sum and compounded interest.

His Honour Judge Langan QC gave judgment against each defendant, including interest on discounted future rentals, and ordered continuing interest at 2% per month. On appeal, the defendants raised a construction point not argued below: whether the lease allowed interest on future rentals under schedule 2 paragraphs 3(D) or 9(C)(iv), and, if not, what interest could be awarded.

Appeal allowed in part. Sir Martin Nourse gave the first judgment. Lord Justice Robert Walker and Lord Justice Pill agreed.

1. Paragraph 9(C) of schedule 2 created a distinct and self-contained regime on termination following a repudiatory breach. It required calculation of a termination sum comprising arrears and other accrued amounts, discounted future rentals, repossession and collection costs, and interest on arrears, subject to the agreed credit for the equipment’s open market value. Although the proviso was formally attached to the interest component, the parties correctly agreed that it applied in substance to all four components.
2. The expression “all arrears” in paragraph 9(C)(iv) referred to rental arrears and other amounts accrued due. It did not include future rentals in paragraph 9(C)(ii), which were not arrears merely because termination made them payable. The words “after as well as before judgment” did not enlarge that natural meaning.
3. Paragraph 3(D), which provided interest on unpaid payments, applied while the lease agreement remained subsisting. It could not be construed as overlapping with or making an inroad into the separate termination regime in paragraph 9.
4. Gerson therefore could not recover contractual interest on the future rentals. The court allowed amendment of the particulars of claim and awarded interest under section 35A of the Supreme Court Act 1981 at 6% from 25 August 1998 on the appropriate sum. The precise principal sum and any question whether the rate should increase to judgment rate from 19 December 2001 were left for determination after judgment.

The order below was varied accordingly.

• Court of Appeal (Civil Division) On 10 July 2002, the court allowed the appeal in part and varied the order below.
• Chancery Division, Leeds District Registry His Honour Judge Langan QC ordered the defendants to pay £203,212.27, including contractual interest, with continuing interest at 2% per month. Permission to appeal was refused.