Summary

A clause under a licence to assign an underlease requiring the tenant to use all reasonable endeavours to give notice to the guarantor of the undertenant each time the rents were more than two months in arrears was not a condition precedent of the liability under the guarantee and the failure of the tenant to give such notice did not release the guarantor.

Facts

The appellants (Q and S) appealed against a decision ordering them to pay rent arrears and service charges, due under a lease, to the respondent company (G).

G had demised premises to Q, which was wholly owned and controlled by S, by way of an underlease. In 2007, the underlease was assigned to the third defendant (D). Under the terms of the licence to assign Q covenanted and guaranteed to G that D would pay the rents and S guaranteed that Q would comply with its obligations under the licence. Clause 8 provided that G would use all reasonable endeavours to give written notice to the undertenant's guarantor, namely S, each time the rents were more than two months in arrears. Arrears of rent and service charges built up and, in 2009, G served on Q and S a notice pursuant to the Landlord and Tenant (Covenants) Act 1995 s.17 in respect of unpaid rent but no notice had been served under cl.8 in respect of the accumulated arrears. Q and S disputed liability under their guarantees on the basis that G had acted in breach cl.8. The judge held that G had been in breach by failing to give S notice of the arrears, as required, but that the cl.8 operated neither as a condition precedent to Q and S's liability under the guarantees nor as a condition of the licence.

Held

(1) The guarantee of Q, on which S's liability was dependent, was not in terms conditional on G's performance of its obligations under cl.8. Clause 8 could not be construed as a condition precedent to Q's liability under its guarantee. The giving of notice was not expressed as a pre-condition to the operation of the guarantor's covenant but arose as a separate obligation on the part of G in the main body of the deed. The guarantor's liability arose and would be enforceable in the two-month period following the contractual date for payment of the rent which made it impossible to treat compliance with cl.8 as a condition precedent to liability under the guarantee (see paras 16, 29 of judgment). (2) Clause 8 was inserted in order to impose on G a contractual obligation to use all reasonable endeavours to notify S of any occasion when the rent was more than two months in arrears. Prompt notice would have given S an early opportunity to bring pressure on D to meet the arrears. However, the options open to S were limited; D was not subject to any form of legal control by S beyond being contractually liable to indemnify him and Q in respect of any instalments of rent met under the guarantee. There was no prospect of S acquiring the reversion on the underlease from G and so terminating his liability under the guarantee. As such it was difficult to attribute to the parties an intention to treat any breach of cl.8 as going to the root of the contract so as to entitle S and Q to be discharged from their liabilities as guarantors. Further, the benefit of cl.8 was enjoyed by S alone which indicated that a breach of cl.8 was never envisaged as releasing either Q or S from their guarantees. The structure of the licence was that Q was primarily liable for the due performance of the tenant's covenants by D. S's guarantee only operated in the event that Q failed to perform its obligations as guarantor. He undertook no direct responsibility to G for the conduct of the assignee. Clause 8 was not intended to operate as a condition but was merely intended to give S warning of a problem with the assignee so as to enable him to take whatever informal steps were open to him to minimise his exposure (paras 31, 33-34).

Appeal dismissed