RVB Investments Ltd v Bibby

The court held that the surety remained liable under the lease guarantees despite the tenant's liquidation, subsequent dissolution and disclaimer by the liquidator or the Crown. The decision applies the principles in Hindcastle and the equivalent provisions in the Companies Act 2006 and Insolvency Act 1986 to conclude that disclaimer or vesting as bona vacantia does not of itself release a guarantor.

The court rejected the defendant's arguments based on the drafting of the guarantee, on section 17 of the Landlord and Tenant (Covenants) Act 1995, and on alleged surrender or re-possession by the landlord. Because no valid rent review had been carried out the new lease to be imposed under the guarantee must reflect the pre-review rent, and specific performance was ordered as damages were not an adequate remedy given the surety's insolvency and potential rates liability.

Background and parties:

• Two leases (Units 2 and 4) granted to Cannon Transport (Midlands) Limited (the tenant); RVB Investments Limited was landlord; Alastair Bibby was guarantor/surety under identical guarantees (Schedule 6) in each lease.
• The tenant entered creditors' voluntary liquidation on 30 July 2008; the Unit 4 lease was disclaimed by the liquidator on 25 November 2008; the tenant was dissolved on 27 March 2009 and the Unit 2 lease later vested in and was disclaimed by the Crown (Treasury Solicitor) on 19 May 2011.

Nature of the claim and relief sought:

• The landlord sought (i) specific performance requiring the surety to execute a new lease of Unit 2 for the residue of the term (exercise of paragraph 3 of Schedule 6), (ii) rent and service charge due in respect of Units 2 and 4, and (iii) alternatively rates in respect of Unit 2 if specific performance were not ordered.

Issues for determination:

1. Whether disclaimer by the liquidator or by the Crown, or dissolution, terminated the surety's liability under the guarantees;
2. Whether section 17 of the Landlord and Tenant (Covenants) Act 1995 restricted recovery against the guarantor;
3. Whether the landlord had, by acts such as taking possession, marketing or clearing the premises, accepted surrender or otherwise extinguished the leases;
4. Whether specific performance should be granted and, if so, on what terms (including the correct rent given an unperformed rent review).

Court's reasoning and conclusions:

• Applying section 178(4) of the Insolvency Act 1986 and the Companies Act 2006 provisions on vesting and disclaimer (sections 1012, 1013 and 1015), and following Hindcastle, the judge held that disclaimer or vesting and subsequent disclaimer by the Crown does not, of itself, discharge guarantors; their liabilities survive unless the landlord's conduct (such as taking possession) makes continuation impossible.
• The argument that the guarantor's liability ceased because the guarantee covered obligations "until the Lessee ceases to be bound by the covenants" was rejected on construction: the wording is apt to address assignment situations under the 1995 Act and should not be read as terminating liability on disclaimer or dissolution, which would conflict with statute.
• Section 17(3) of the Landlord and Tenant (Covenants) Act 1995 did not assist the defendant. The statutory definition of "assignment" is subject to section 11 and 'assignments by operation of law' in the insolvency/vesting context do not trigger the 17(3) notice requirement in these circumstances; moreover the notice requirement applies only to fixed charges such as future service charges and did not defeat the landlord's claim for specific performance under paragraph 3 of Schedule 6.
• On the facts the court found no unequivocal acts by the landlord amounting to surrender or acceptance of surrender by operation of law: the return of keys, clearing of pallets, inspections, marketing, removal of racking and disposal of forklifts were either not established or were acts consistent with protecting the landlord's interest rather than taking possession. Authorities on surrender by operation of law (Artworld, Bellcourt, Relvok and others) require unequivocal conduct, which was not shown.
• Specific performance was appropriate despite the short residual term (which actually expired in December 2012) because damages were not an adequate remedy: the surety was insolvent and a money judgment would be of limited value, while the landlord faced continuing rates exposure that a specific order could address. However, the rent in the new lease must reflect the rent payable immediately before disclaimer (£78,000 p.a.) because no valid rent review procedure had been invoked.

Result:

• The landlord's claim succeeded: specific performance was awarded requiring the surety to enter a new lease of Unit 2 at £78,000 per annum and judgment was given for the sums claimed in respect of Units 2 and 4 (subject to agreed figures on liability).

At first instance the claim succeeded. The court ordered specific performance against the surety in respect of Unit 2 (requiring execution of a new lease at the pre-review rent of £78,000 per annum) and awarded the landlord the sums claimed in respect of Units 2 and 4. Rationale: disclaimer or vesting/disclaimer by the Crown does not discharge a guarantor (following Hindcastle and the relevant provisions of the Insolvency Act 1986 and Companies Act 2006); section 17 of the Landlord and Tenant (Covenants) Act 1995 did not bar enforcement here; the landlord had not accepted surrender or taken possession; damages were inadequate because of the surety’s insolvency and potential rates liability.