The Prudential Assurance Company Ltd v Ayres & Ors

A contractual limitation of a tenant’s liability may restrict the landlord’s remedies without reducing the rent reserved by the lease. Where the limitation expressly extends to recovery against a previous tenant, a guarantor may rely on it even though the guarantor was not a party to the later agreement. Under section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999, a term purports to confer a benefit if, on its true construction, it has that effect. The benefit need not be the term’s predominant purpose. Section 1(2) does not prevent enforcement where the contract does not indicate that third-party enforcement was intended to be excluded.

The claimant was the lessee of commercial premises. The defendants were previous underlessees who had guaranteed the obligations of Altheimer & Gray, the assignee and subsequent tenant. A Supplemental Deed between the claimant and Altheimer & Gray limited the tenant’s liability and stated that recovery against the tenant or any previous tenant was limited to partnership assets.

After Altheimer & Gray became insolvent and substantial rent remained unpaid, the claimant sought recovery from the defendants under their guarantees. The defendants relied on the limitation clause and the Contracts (Rights of Third Parties) Act 1999. The central issues were the construction of clause 2.1, whether the defendants could enforce it, and whether the Landlord and Tenant (Covenants) Act 1995 restricted their guarantee liability.

1. Construction of clause 2.1. The clause did not reduce the rent reserved by the Underlease. It recorded the claimant’s binding willingness, in specified circumstances, to accept less than the reserved rent and limited the remedies available against the tenant. The words “or any previous tenant” had to be given effect. They limited recovery against a previous tenant who was liable as guarantor, preventing recovery beyond the partnership assets. The word “consequently” and the drafting imperfections did not justify ignoring those words.
2. Third-party enforcement. The defendants were identified by the description “any previous tenant” for the purposes of section 1(3) of the Contracts (Rights of Third Parties) Act 1999. Clause 2.1 purported to confer a benefit on them because it placed a cap on their liability. Nothing in the proper construction of the Supplemental Deed showed that the parties intended to prevent enforcement under section 1(2). The benefit did not need to be the predominant purpose of the term. The defendants could therefore enforce clause 2.1 in their own right.
3. Guarantee legislation. Section 16 of the Landlord and Tenant (Covenants) Act 1995 did not invalidate or reduce the guarantees. The reserved rent remained unchanged, and the limitation of recovery against the previous tenants meant that their liability was not more onerous than the liability of the assignee for the purposes of section 16(5).
4. Indulgence and outcome. Clause 2.1 was not merely an indulgence granted to Altheimer & Gray. It also benefited previous tenants and could be relied upon despite the guarantee provisions preserving liability for acts or indulgences affecting the tenant. The court held that clause 2.1 protected the defendants from recovery exceeding the partnership assets and invited submissions on the appropriate form of relief.