When you can't give it away

Lankester & Son Ltd –v- (1) David Robert Rennie and (2) Anne Rennie [2014] EWCA Civ 1515

Summary

This case contains facts that are commonly encountered in practice, where a tenant has allowed a third party into occupation of the property. In this case, the tenants tried to argue that they had effectively assigned the lease to the third party, and so were no longer liable to the landlord.

The Court of Appeal upheld the original decision of the County Court, and found that the tenants remained liable. From a legal perspective, they had failed to complete the assignment. From an equitable perspective, there were no grounds that enabled the tenants to argue that the landlord was estopped from arguing that the assignment had not taken place, nor that there had been an implied surrender of the lease.

The case provides useful clarification for landlords and tenants where the tenant wishes to assign the lease. It highlights the importance of complying with the requirements to ensure that transactions are completed.

The facts

In May 2007, Lankester & Son Ltd ("the Landlord") entered into a lease with Mr and Mrs Rennie ("the Tenants"). The property was a car showroom.

Amongst other covenants in the lease, the Tenants were obliged to pay the rent and not to assign the lease without the consent of the Landlord, such consent not to be unreasonably withheld. There was also an option to break the lease on 6 months' notice. This break option was personal to the Tenants, meaning that any subsequent assignees would not be able to exercise it. Furthermore, it could not be exercised after May 2012.

By October 2008,  the Tenants no longer wished to trade from the premises, and approached the Landlord to discuss either a surrender or an assignent to a third party, The Car Agency Limited ("TCA").

The Landlord was sympathetic to the Tenant's wish not to trade from the premises any longer, but nonetheless said that it would only grant consent to the assignment if the directors of TCA gave personal guarantees. These personal guarantees were never given. Meanwhile, TCA itself was only willing to proceed if it was given the benefit of the break clause, and there was a registration issue with the land that the Tenants had to resolve before completion. 

Notwithstanding the issues above, the Tenants vacated in November 2008, and let TCA take up occupation. TCA therefore moved into the premises without completing a formal assignment. The Tenants and TCA instructed the same solicitors, who were holding a signed but undated transfer deed. This deed was never completed.

Although TCA had moved into occupation without the consent of the Landlord, once it was in occupation, it proceeded to make payments to the Landlord on account of rent. It also carried out improvements to the property and requested that the Landlord carry out repairs.

By February 2010, TCA wished to vacate, and duly gave notice to the Landlord. At this stage, the landlord instructed solicitors, who wrote to both the Tenants and TCA. When corresponding with TCA, the Landlord claimed that the lease had been effectively assigned to TCA and therefore that it was the legal tenant. Conversely the Landlord stated to the Tenants that the lease had not been assigned and that the Tenants remained liable.

In July 2010, TCA agreed to settle the Landlord's claim for £15,000. The Landlord accepted this and then issued proceedings against the Tenants for the remaining balance. The Landlord argued that it had not permitted the Tenants to assign the lease, that there had been no assignment, and thus that the Tenants remained liable.

The Tenants defended the claim on the basis that there had been an equitable assignment of the lease if not a legal one, and that the Landlord was estopped from arguing that TCA was not the tenant by virtue of its own behaviour and thus from claiming against the Tenants. Alternatively they argued that there had been a surrender by operation of law.

At first instance, Southampton County Court found in favour of the landlord. The judge held that the assignment had not completed. The Landlord had made it clear that it was only prepared to give the necessary consent if the personal guarantees were provided and the formalities completed.  The Tenants had been made aware of this, and had therefore accepted that, if they allowed TCA into occupation before the assignment was concluded, they would remain liable.

The Tenants appealed.

The issues

The Court of Appeal was asked to consider the following:

  • Whether there had been an equitable assignment of the lease;  
  • Whether there was an estoppel by representation, given that the Landlord had represented that TCA was the tenant, because it had paid the rent and had dealt with it as the tenant;  
  • Whether there was an estoppel by convention that had arisen due to all parties acting on the shared understanding that TCA was the tenant; and   
  • Whether the settlement with TCA had surrendered the lease by operation of law.

The decision

The Court of Appeal upheld the original decision and found in favour of the Landlord. It dealt with each of the Tenants' points as follows:

Assignment

There had been no effective transfer of the lease from the Tenants to TCA. The parties agreed that there had been no transfer of the legal title because TCA had never been registered as tenant. This meant that the legal interest remained with the Tenants. However, even if the transfer had been completed correctly, the Court did not believe this would have affected the Landlord's rights to pursue the Tenants under the covenants in the lease. The Court was concerned with the legal position, not the equitable one.

In addition to this, it is a requirement of a deed that it has to be delivered in order to be effective. In this case, the solicitors were still holding the signed but undated deed, pending the resolution of the issue with the Tenants' registration of their own title; the Landlord's insistence on personal guarantees from the directors of TCA; and TCA's insistence that it should have the benefit of the break clause. Consequently the deed had never been delivered and therefore did not take effect. The solicitors were simply holding it and awaiting final instructions.

Estoppel

Estoppel is an equitable argument that is intended to prevent a party from acting in a certain way and then denying it. So if the first party promises the second that it will not enforce its legal rights, and the second party then relies on this to its detriment in some way – for example spending money – the first party is then prevented from behaving inequitably by trying to go back on its word or actions.

In this case, the Tenants were trying to argue that the Landlord was estopped from denying the assignment by virtue of its own treatment of TCA as the tenant. The Court dismissed the Tenants' arguments. It found that an estoppel by representation is personal to the parties. The issue here was the relationship between the Landlord and the Tenants. Given that the Landlord had made it clear to the Tenants that it required personal guarantees from the TCA directors, the Court found that the Landlord had never represented to the Tenants that it had accepted the assignment.

In any event, an estoppel argument requires the party claiming it to have relied upon the representation and acted to its detriment as a consequence. In this case, the Tenants had not acted to their detriment. Rather, the rent had been paid and the Tenants' right to exercise the break option had not been lost until many months after TCA vacated the property.

Although the Landlord's correspondence had seemed contradictory, the Court found that this did not help the Tenants. The Landlord's claim to TCA that it was the tenant was countered by the Landlord's assertions to the Tenants that there had been no assignment.

Similarly, the Court found that there was no estoppel by convention because there was no common understanding that TCA was now the tenant. Without a shared understanding, there can be no estoppel by convention.

Finally, the Court did not find that the settlement with TCA went so far as to surrender the lease. The Court found that it was simply a surrender by TCA of whatever interest it had in the property, but that this interest was not the lease.

Consequently the Court of Appeal confirmed that the Tenants remained liable under the lease.

Our advice

This case is a very useful reminder that tenants must comply with the necessary formalities if they wish to assign the lease effectively and ensure that they are released from liability. Failure to comply with these formalities will mean that the tenant remains on the hook. As the tenants in this case found, it may not be sufficient to rely on what has happened in practice.

Landlords should ensure that it is made clear from the outset if they have requirements to consent to an assignment. This case could have had a very different outcome if the landlord had not insisted on the personal guarantees. Landlords should therefore ensure that they do not inadvertently find themselves prevented from arguing that an assignment has not completed.