Landlord and tenant - Business tenancies - Companies - Liquidation

Gabriella Shaw v Hazel Doleman: CA (Civ Div) (Lords Justice Mummery, Stanley Burnton, Elias): 1 April 2009

The appellant (S) appealed against a decision that she was liable to pay arrears of rent and of insurance rent to the respondent landlord (D).

S was the original tenant under a lease of a retail unit. She assigned the lease to a company (C). C fell into arrears with the rent and went into liquidation. The liquidator disclaimed the lease. Upon the assignment, S and the then landlord had entered into an ‘authorised guarantee agreement’ under which S gave a guarantee in respect of the rent. The guarantee was stated to remain in force for ‘the liability period’, which was defined as ‘the period during which the assignee is bound by the tenant covenants of the lease’. D issued proceedings against S based on the guarantee and the judge found in D’s favour.

S argued that her guarantee liability under the terms of the authorised guarantee agreement was limited to ‘the liability period’, that that period had expired when C ceased to be bound by the covenants in the lease, that C ceased to be bound when the liquidator disclaimed the lease, that section 178(4)(a) of the Insolvency Act 1986 determined C’s liability under the lease and that her liability under the guarantee had ended.

Held: The impact of a disclaimer on guarantee liability had been settled by the House of Lords in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 HL. The disclaimer terminated the lease and the liability of the assignee company, but that did not affect the liabilities of any other person. Section 178(4)(b) stated that the rights and liabilities of third parties, such as a guarantor, were not to be affected. The liabilities remained, as though the lease had not come to an end but had continued after the disclaimer. That was the legal landscape in which the crucial question of whether ‘the liability period’ had come to an end had to be decided. The duration of that period was linked to whether C was bound by the tenant covenants of the lease. On the disclaimer, the determination, by virtue of section 178(4)(a), of C’s liability under the lease was subject to the qualification in section 178(4)(b) that, except for the purpose of releasing C from liability, the disclaimer did not affect the liability of any other person.

S was such a person with a guarantor liability. She remained liable as guarantor if C was bound by the tenant covenants. It was clear from Hindcastle that, although the lease was determined and C ceased to be liable to D under the tenant covenants, C was, so far as other parties such as S were concerned, still bound by the tenant covenants as though the lease had not determined. The ‘liability period’ of S’s guarantee and her liability to D had not therefore terminated. Accordingly, the judge had been correct to find in D’s favour, Hindcastle followed.

Appeal dismissed.

Philip Glen (instructed by Horsey Lightly Fynn) for the appellant; Timothy Fancourt QC, Edward Peters (instructed by MacDonald Oates) for the respondent.