Prudential Assurance Company Ltd v Ayres & Anor

Commercial documents are construed objectively by reference to their language, read as a whole and against the background reasonably available to the parties. Business common sense may require a grammatical reading to yield where it produces an incoherent, uncertain or commercially absurd result, including correction of an apparent drafting error. A restriction on the assets available to enforce a tenant’s obligations does not reduce the obligations themselves. Under section 16(5) of the Landlord and Tenant (Covenants) Act 1995, the comparison is between the nature and scope of guaranteed obligations and those owed by the assignee, not between the parties’ enforcement arrangements.

The Prudential appealed against Lindsay J’s dismissal of its claim for rent and other charges under covenants given by former tenants when the lease was assigned to Altheimer & Gray, as recorded in [2007] EWHC 775 (Ch). A supplemental deed between the Prudential and Altheimer & Gray limited recourse for lease liabilities to partnership assets and protected individual partners’ assets.

The respondents argued that the deed reduced Altheimer & Gray’s underlying liability, limited their guarantee correspondingly, and made the guarantee void under sections 16 and 25 of the Landlord and Tenant (Covenants) Act 1995. They also relied on the Contracts (Rights of Third Parties) Act 1999. The central questions were the proper construction and effect of the deed and whether the guarantee was statutorily unenforceable.

Moore-Bick LJ delivered the judgment, with Ward and Moses LJJ agreeing.

1. Appeal allowed. The Supplemental Deed did not provide a defence to the Prudential’s claim under the respondents’ covenants in the Licence.
2. Construction of the documents. Commercial documents are construed objectively. The court considers the language used, the document as a whole, and the background reasonably available to the parties. Dictionary meanings and grammatical structure are relevant, but they are not conclusive. The approach in Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd [1997] A.C. 749, Reardon Smith Line v Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] A.C. 191 and Investors Compensation Scheme v West Bromwich Building Society [1998] 1 W.L.R. 896 supported that conclusion.
3. The Supplemental Deed limited the assets available to enforce Altheimer & Gray’s obligations. It did not reduce the partnership’s obligation to pay the reserved rent or the amount for which judgment could be obtained. The Prudential could prove for and recover judgment for the full debt, although execution was confined to partnership assets.
4. The words referring to any previous tenant did not limit the Prudential’s rights against the respondents. That construction produced uncertainty and deprived the Prudential of the benefit of the unqualified covenants obtained under the Licence. The drafting required correction so that the deed assimilated the respondents’ position to that of the Prudential in relation to claims against partnership assets. It therefore limited the respondents’ rights against the individual partners rather than conferring a benefit on the respondents. No issue arose under the Contracts (Rights of Third Parties) Act 1999.
5. Section 16(5) of the Landlord and Tenant (Covenants) Act 1995 concerns the nature and scope of liabilities imposed by a guarantee, compared with the obligations for which the tenant would have been liable as sole or principal debtor. It does not compare the parties’ arrangements for enforcing the assignee’s obligations. Section 25 did not invalidate the covenants. Section 16(8) preserved the ordinary law relating to guarantees, but clause 6.4 permitted arrangements with the assignee which would otherwise have discharged a surety.

The respondents therefore remained liable under clauses 6.3 and 6.4 of the Licence.

1. Court of Appeal (Civil Division): In [2008] EWCA Civ 52, the appeal was allowed. The court held that the Supplemental Deed did not reduce the respondents’ liability under the Licence and that the statutory provisions did not relieve them from liability.
2. High Court of Justice, Chancery Division: Lindsay J, in [2007] EWHC 775 (Ch), dismissed the Prudential’s claim. He held that the Supplemental Deed limited the Prudential’s rights of recovery and conferred an enforceable benefit on the respondents.