- Giving judgment, SIR NICOLAS BROWNE-WILKINSON V-C said: This appeal raises the question whether an assignee of the reversion on a lease can enforce the payment of rent by those who have entered into surety covenants guaranteeing performance of the tenant's obligations under the lease. The question has been raised in a number of recent cases at first instance. This is the first time it has come before this court.
- By a head lease dated April 30 1970 the then freeholder demised to Old Kentucky Restaurants Ltd ('OK') the premises 198-200 Earl's Court Road, London SW5, for a term of 42 years. By an underlease dated October 9 1970 OK demised part of the premises to the plaintiff for a term of 21 years from April 30 1970 at an initial rent of £ 2,500 per annum with provisions for review. OK was defined as 'the lessor which expression where the context admits includes the owner from time to time entitled in reversion immediately expectant on the determination of the term hereby granted'. The plaintiff was defined as 'the lessee which expression where the context admits includes his successors in title'. Clause 2(10) of the underlease contained a covenant against assigning or parting with possession of the premises in terms which were subsequently amended by agreement. As amended, clause 2(10)(b) included a covenant against assigning or underletting the whole of the demised premises without the consent of the lessor and the superior lessor. Clause 2(10)(d) then provided as follows:
For the purpose of sub clause (10)(b) above the Lessor may require the proposed assignee or under tenant to enter into direct covenants with the Lessor and the Superior Lessor to perform and observe all the covenants and conditions herein contained on the Lessee's part to be performed and observed.
- On May 31 1978 the plaintiff assigned the unexpired residue of the underlease to Sundowners Ltd ('Sundowners'). The licence to make such assignment was dated June 7 1978 and is the critical document in this case. The licence is made between the then freeholder (defined simply as 'the Lessor') of the first part, OK (defined as 'the Lessee') of the second part, the plaintiff (defined as 'the Underlessee') of the third part, Sundowners (defined as 'the Assignee') of the fourth part and a Mr Dunning and Mr Powell (defined as 'the Sureties') of the fifth part. Clauses 3 and 4 of the licence provide as follows:
3 The Assignee hereby covenants with the Lessee that henceforth during the remainder of the term created by the Underlease the Assignee will pay the rent and perform and observe the covenants on the part of the Underlessee and the conditions therein contained . . .
4 In consideration of the Licence herein before contained the Sureties hereby jointly and severally covenant with the guarantee to the Lessor and the Lessee and with and to each of them as follows that is to say:
(i) that the Assignee shall at all times during the term created by the Underlease duly pay the rent and will perform and observe all the covenants on the part of the Underlessee therein contained,
(ii) that the Sureties will at all times hereafter so long as aforesaid pay and make good to the Lessor and the Lessee or either of them all losses costs damage and expenses occasioned to the Lessor and the Lessee or either of them by the non-payment of the said rents or any of them or any part thereof or the breach non-observance or non-performance of any of the covenants or conditions as aforesaid including the covenants hereinbefore contained . . .
- The defendants in this action are Mr Dunning and the executor of Mr Powell, the sureties under the licence. It is to be noted that neither Sundowners nor the sureties entered into any direct covenant with the plaintiff to perform the covenants in the underlease.
- Sundowners went into liquidation on November 24 1982 and has paid no rent since that date. At a date which is not known, OK assigned the headlease to Hedges & Butler Ltd ('H & B'). The assignment of the headlease is not in evidence. The argument has, therefore, proceeded on the footing that there was no express assignment to H & B of the benefit of the surety covenants.
- H & B demanded from the plaintiff, as the original underlessee, payment of rent accruing due since the winding-up of Sundowners totalling £ 23,401.96. The plaintiff, having paid this sum to H & B, in this action seeks to recover it from the sureties. The judge dismissed the plaintiff's claim.
- There is a substantial measure of agreement between the parties as to the relevant law. Mr Blackburn, for the defendants, accepts:
1 That the plaintiff, as the original underlessee, was liable to pay the rent to H & B as assignees of the reversion, notwithstanding the fact that the rent was largely in respect of a period before the assignment of the reversion to H & B;
2 That the plaintiff, having paid the rent, is entitled to be subrogated to the rights of H & B: Re Downer Enterprises Ltd [1974] 1 WLR 1460;
3 Accordingly, the plaintiff is entitled to succeed if, but only if, H & B as assignee of the immediate reversion were entitled to recover the rent from the sureties.
Therefore, the only question we have to decide is whether, in the absence of any express assignment to H & B of the benefit of the surety covenants contained in the licence, H & B as assignee of the immediate reversion on the underlease is entitled to enforce the surety covenants in the licence.
- Mr Blackburn first argues that the surety covenants are purely personal covenants between the sureties on the one hand and OK on the other. As such, he submits, they were incapable of assignment either expressly or by operation of law. He relies primarily on the fact that, in the licence, 'the Lessor' and 'the Lessee' are defined as meaning simply the freeholder and the headlessee, OK, respectively. He emphasises that, in contra-distinction to the definitions in the underlease itself, in the licence there is no provision extending the definition of 'the Lessee' to mean the owner for the time being of the immediate reversion on the underlease. Therefore, he submits, the covenant by the sureties with 'the Lessee' is simply a covenant for the benefit of OK and was not intended to be capable of assignment to, or enforcement by, anyone other than OK.
- I have no hesitation in rejecting this argument. The benefit of a surety contract, like the benefit of any other contract, is normally assignable. The burden lies on Mr Blackburn to show clear indications that in this case it was intended, contrary to the general rule, that only OK should have the benefit. I do not think the mere nature of the definitions by itself would be sufficient for that purpose. But, as Mr Primost for the plaintiff has demonstrated, there are clear indications that the surety covenant was intended to be for the benefit of the reversioners for the time being. The licence contains a recital that the consent of OK to the assignment was required 'by reason of the covenant to that effect contained in the . . . underlease'. Accordingly, the licence was entered into pursuant to clause 2(10) of the underlease, subclause (d) of which entitled 'the Lessor' (as defined by the underlease) to require an assignee to enter into a direct covenant with 'the Lessor' (as so defined) to perform the covenants in the underlease. Given the definition of 'the Lessor' as including the owner from time to time of the immediate reversion on the underlease, one would therefore expect clause 3 of the licence to be a covenant with 'the Lessor' as defined by the underlease, ie as including the owners from time to time of the reversion on the underlease. By clause 3 of the licence the assignee covenants 'during the remainder of the term created by the underlease' to pay the rent and perform the covenants in the underlease. Accordingly, on its proper construction, clause 3 imposed on Sundowners, as assignee, an obligation to perform the tenant's covenants throughout the term of the underlease. In my judgment, it must have been intended that that obligation was to be for the benefit of the person who was for the time being entitled to the reversion on the underlease. When one turns to the surety covenant in clause 4 of the licence, one finds the sureties guaranteeing to 'the Lessee' that the assignee will perform the covenants 'at all times during the term created by the underlease' and 'at all times hereafter so long as aforesaid'. In my judgment, it is clear that the intention was to guarantee performance of the covenants throughout the term, whoever was the reversioner. There is no ground for saying that the intention was that the liability under the surety covenant was to last only so long as OK was entitled to the immediate reversion.
- For these reasons, in my judgment, the surety covenant was capable of assignment and was not a covenant intended to be for the benefit of OK alone.
- The crucial question is whether the benefit of the surety covenant has become vested in H & B, as assignee, of the reversion on the underlease. There is no privity of contract or estate between H & B and the sureties. Nor, it must be assumed, has there been any express assignment to H & B of the benefit of the surety covenant. How, then, can H & B enforce the surety covenant against the sureties?
- Mr Primost puts his case in four different ways, viz:
1 that, whatever the terms of the assignment of the reversion by OK to H & B, section 62 of the Law of Property Act 1925 operated to assign to H & B the benefit of the covenant as being a right 'appertaining or reputed to appertain' to the land;
2 that section 189(2) of the Law of Property Act 1925 annexed the benefit of the surety covenant to the land;
3 that the surety covenant touches and concerns the land and accordingly the benefit of the covenant passed with the reversion to H & B;
4 the principle in Griffith v Pelton [1958] Ch 205 enables H & B to enforce the covenant.
I will deal with these submissions in turn.
1 Section 62 of the Law of Property Act 1925
- Section 62 has the side heading 'General words implied in conveyances'. Subsection (1) reads as follows:
A conveyance of land shall be deemed to include and shall by virtue of this Act operate to convey, with the land, all buildings, erections, fixtures, commons, hedges, ditches, fences, ways, waters, watercourses, liberties, privileges, easements, rights, and advantages whatsoever, appertaining or reputed to appertain to the land, or any part thereof, or, at the time of conveyance, demised, occupied, or enjoyed with or reputed or known as part or parcel of or appurtenant to the land or any part thereof.
- The main intention of section 62 was to provide a form of statutory shorthand rendering it unnecessary to include such words expressly in every conveyance. It is a matter of debate whether, in the context of the section, the words 'rights . . . appertaining . . . to the land' include rights arising under covenant as opposed to strict property rights. However, I will assume, without deciding, that rights under covenant are within the words of the section. Even on that assumption, it still has to be shown that the rights 'appertain to the
land'. In my judgment, a right under covenant cannot appertain to the land unless the benefit is in some way annexed to the land. If the benefit of a covenant passes under section 62 even if not annexed to the land, the whole modern law of restrictive covenants would have been established on an erroneous basis. Section 62(1) replaces section 6(1) of the Conveyancing Act 1881. If the general words 'rights . . . appertaining . . . to the land' operate to transfer the benefit of a negative restrictive covenant, whether or not such benefit was expressly assigned, it would make all the law developed since 1881 unnecessary. It is established that, in the absence of annexation to the land or the existence of a building scheme, the benefit of a restrictive covenant cannot pass except by way of express assignment. The law so established is inconsistent with the view that a covenant, the benefit of which is not annexed to the land, can pass under the general words in section 62.
- Therefore, in my judgment, the plaintiff cannot rely on section 62 unless, at the least, he can show that the surety covenant touches and concerns the land so as to be capable of annexation, a point which I consider at (3) below.
2 Section 189(2) of the Law of Property Act 1925
- The subsection reads as follows:
The benefit of all covenants and powers given by way of indemnity against a rent or any part thereof payable in respect of land, or against the breach of any covenant or condition in relation to land, is and shall be deemed always to have been annexed to the land to which the indemnity is intended to relate, and may be enforced by the estate owner for the time being of the whole or any part of that land, notwithstanding that the benefit may not have been expressly apportioned or assigned to him or to any of his predecessors in title.
- The plaintiff submits that the surety covenant in this case is a covenant 'by way of indemnity against a rent . . . payable in respect of land' and, therefore, the benefit of such covenant, being annexed to the land, has passed to H & B. There is a question whether a surety covenant guaranteeing to A performance by B of B's covenant to A is an 'indemnity' to A within the meaning of the section. But, in any event, Mr Blackburn has satisfied me that section 189(2) is not of general application but is directed only to a specific type of case, ie a case where land charged with a rent has been divided. In the absence of provision to the contrary, on the division of land subject to a charge for rent each part of the land remains liable to the person to whom the rent is payable for the whole amount of the rent. Before 1925 in such a case those liable for the rent used to agree an apportionment of the liability to pay the rent, such apportionment being supported by cross-indemnities between them similar to those now implied by the Law of Property Act 1925, section 77 and the Second Schedule. After 1925, the benefit of such implied covenants for indemnity arising on the severance of land charged with the rent are annexed to the land of the covenantee: see section 77(5). Section 189(2) produces the same annexation where, on the severance of the land charged, the indemnities have been given expressly and not merely by way of implication. In my judgment, read in the context of the Act as a whole, the effect of section 189(2) is limited to those indemnities against liability to pay a rent where land subject to a single rent has been divided. The section, therefore, does not touch the present case.
3 Does the surety covenant touch and concern the land?
- Mr Primost submits that the surety covenant 'touches and concerns' the reversion to the underlease in consequence of which the benefit of such covenant passed to H & B automatically on the assignment of the reversion. As a result, he submits, H & B is entitled to sue the sureties.
- It must be noted that there is no privity of contract between H & B and the sureties. Nor is there privity of estate. Accordingly, the Grantees of Reversions Act 1540 (now sections 141 and 142 of the Law of Property Act 1925) is not directly in point. Those provisions apply only to covenants between landlord and tenant. Where there is neither privity of contract nor privity of estate, the benefit of a covenant runs with the land of the covenantee at law if, but only if, the covenant touches and concerns the land of the covenantee: Megarry and Wade's Law of Real Property, 5th ed, pp 764-5. Such a covenant, if it does touch and concern the land, is enforceable by an assignee of the land against the covenantor, whether or not the covenantor has any land: Smith and Snipes Hall Farm v River Douglas Catchment Board [1949] 2 KB 500. Although this case is not concerned directly with covenants between landlord and tenant, authorities on the latter type of case are in point: as between landlord and tenant only covenants which touch and concern the land are enforceable.
- The test whether a covenant touches and concerns land is that formulated by Bayley J in Congleton Corporation v Pattison (1808) 10 East 130 and adopted by Farwell J in Rogers v Hosegood [1900] 2 Ch 388 at p 395:
the covenant must either affect the land as regards mode of occupation, or it must be such as per se, and not merely from collateral circumstances, affects the value of the land.
But although the test is certain, its exact meaning when applied to different sets of circumstances is very obscure. In Grant v Edmondson [1931] 1 Ch 1 at p 28 Romer LJ said:
In connection with the subject of covenants running with the land, it is impossible to reason by analogy. The established rules concerning it are purely arbitrary, and the distinctions, for the most part, quite illogical.
- Before seeking to analyse the authorities, I will first state how the matter strikes me as a matter of impression. The surety covenant is given as a support or buttress to covenants given by a tenant to a landlord. The covenants by the tenant relate not only to the payment of rent but also to repair, insurance and user of the premises. All such covenants by a tenant in favour of the landlord touch and concern the land, ie the reversion of the landlord. The performance of some covenants by tenants relate to things done on the land itself (eg repair and user covenants). Other tenants' covenants (eg payment of rent and insurance) require nothing to be done on the land itself. They are mere covenants for the payment of money. The covenant to pay rent is the major cause of the landlord's reversion having any value during the continuance of the term. Where there is privity of estate, the tenants' covenant to pay rent touches and concerns the land: Parker v Webb (1693) 3 Salk 5. As it seems to me, in principle a covenant by a third party guaranteeing the performance by the tenant of his obligations should touch and concern the reversion as much as do the tenants' covenants themselves.
- This view accords with what, to my mind, is the commercial common sense and justice of the case. When, as in the present case, the lease has been assigned on the terms that the sureties will guarantee performance by the assignee of the lease, justice and common sense ought to require the sureties, not the original tenant, to be primarily liable in the event of default by the assignee. So long as the reversion is not assigned, that will be the position. Why should the position between the original tenant and the sureties be rendered completely different just because the reversion has been assigned, a transaction wholly outside the control of the original tenant and the sureties?
- Yet in all save one of the cases decided at first instance, the court has held that the surety covenant does not touch and concern the land. The exception is Pinemain Ltd v Tuck (unreported), where the question was left open. In Pinemain Ltd v Welbeck International Ltd (1984) 272 EG 1166, [1984] 2 EGLR 91, Mr Nugee QC sitting as a deputy High Court judge held that the surety covenant did not touch and concern the land. He held that for a positive covenant to run at law (as opposed to a negative covenant running with the land in equity) it was necessary that the covenant should require something to be done which affected the land itself, not merely its value. I find this view difficult to reconcile with those cases which establish that a tenant's covenant to pay rent and to insure touch and concern the land. Moreover, Mr Nugee's view is, to my mind, inconsistent with the decision in Dyson v Forster which I will mention later.
- In Re Distributors & Warehousing Ltd [1986] BCLC 129* Walton J held that a surety covenant did not touch and concern the land. He pointed out that payment by a surety does not constitute payment of rent by the tenant. He held that the subject-matter of the surety covenant was not the land but the tenant's covenants themselves. He held, in the absence of authority being cited to him, that a covenant at 'this double remove' could not itself touch and concern the land. In the present case, Tucker J followed this reasoning. I will refer later to certain authorities not cited to Walton J which might well have led him to a different conclusion.
- In Coastplace Ltd v Hartley (1987) (unreported† ) French J held that the surety covenant did not touch and concern the land because it affected the value of the land not per se but by a collateral circumstance. He held that as the value of the surety covenant depended on the ability of the surety to meet his obligations, which might vary from time to time, the value of the covenant was due to a collateral matter. I cannot agree that the variations in the surety's ability to meet his liability necessarily lead to the conclusion that the value of the covenant to the land is collateral. Exactly the same can be said of the tenant's own covenant to pay rent. Yet such covenants do touch and concern the land and, therefore, cannot be said merely to affect the value collaterally.
- Reverting to the test laid down in the Mayor of Congleton case, it is clear that the surety covenant in the present case does not 'affect the land as to the mode of occupation'. The question is whether it affects the value of the reversion 'per se and not merely from collateral circumstances'. The meaning of those latter words has been expounded in a number of cases which have not often been cited subsequently. In Vernon v Smith (1821) 5 B & Ald 1 the question was whether a covenant by the tenant to insure the demised premises was enforceable by the assignee of the reversion. Although the case was one of privity of estate, the enforceability of the covenant depended on whether the covenant touched and concerned the land. It was argued that the covenant was merely to pay money to a third party. The majority of the court decided that the covenant was enforceable on the narrow point that the assignee of the reversion would have an interest in the insurance moneys. Best J, while agreeing on that point, also held that apart from that special factor, the insurance covenant touched and concerned the land. He said at p 9:
A covenant in a lease which the covenantee cannot, after his assignment, take advantage of, and which is beneficial to the assignee as such, will go with the estate assigned. If this were not the law, the tenant would hold the estate discharged from the performance of one of the conditions on which it was granted to him. The original covenantee could not avail himself of this covenant: he sustains no loss by the destruction of the buildings, and therefore has no interest to have them insured.
Later (at p 10) he said:
If a court of equity will not interfere, either for the one or the other, still this covenant is as beneficial to an assignee as it was to the covenantee. It secures to the tenant the means of performing his covenant, and to the landlord, a solvent instead of a ruined tenant. It is a covenant beneficial to the owner of the estate, and to no one but the owner of the estate; and therefore may be said to be beneficial to the estate, and so directly within the principle on which covenants are made to run with the land.
Finally (at p 11) he said:
The covenant here mentioned is not beneficial to the estate granted in the strict sense of the word, because it has no effect until that estate is at an end, but it is beneficial to the owner as owner, and to no other person. By the terms collateral covenants, which do not pass to the assignee, are meant such as are beneficial to the lessor, without regard to his continuing the owner of the estate. This principle will reconcile all the cases.
- In Vyvyan v Arthur (1823) 1 B & C 410 at p 417 Best J repeated this test in the following words:
The general principle is, that if the performance of the covenant be beneficial to the reversioner, in respect of the lessor's demand, and to no other person, his assignee may sue upon it; but if it be beneficial to the lessor, without regard to his continuing owner of the estate, it is a mere collateral covenant, upon which the assignee cannot sue.
- The test laid down by Best J is, in my judgment, a sound one which in the normal case will provide a satisfactory yardstick for differentiating between those covenants which touch and concern the land in the true sense and those which are merely collateral.
- The test has received the approval of the Court of Appeal and the House of Lords in Forster v Elvet Colliery Co Ltd [1908] 1 KB 629 affirmed sub nom Dyson v Forster [1909] AC 98. In that case, the owner of minerals, who did not own the surface, granted a lease of the minerals. The lease contained a covenant by the tenant with the lessor and with the owners or occupiers for the time being of the surface, to pay compensation for damage caused to the surface by working the minerals. The defendant was the assignee of the term: the plaintiffs included persons who were for the time being surface owners but who had acquired their land since the date of the lease. The case, therefore, was like the present in that there was privity of neither contract nor estate between the plaintiffs and the defendant. Moreover, the covenant did not require the doing of any work but merely the payment of compensation for damage done to land which was not the land of the landlord. It was held that the surface owners were entitled to enforce the covenant against the defendant. In the Court of Appeal Cozens Hardy MR (at p 635) said:
It is old law that in cases not between lessor and lessee the benefit of a covenant will pass if and in so far as it necessarily affects the value of the land, in this sense, the owner of the land would get more for his land by reason of the covenant being attached to and annexed to it . . . I see no reason why the covenant to pay compensation for damage caused by the subsidence of the surface should not be a covenant to which this principle applies. The analogy of a covenant to insure against fire, which has been held to be a covenant which runs with the land as between lessor and lessee - Vernon v Smith - seems to be rather close.
Farwell LJ at p 640 said:
I am further of opinion that the benefit of these covenants as between the present plaintiffs and the present defendants in all the actions does run with the land. They certainly fulfil the first requisite - namely, they are 'such as per se and not merely from collateral circumstances affect the value of the land': Mayor etc of Congleton v Pattison. There is nothing in the fact that the covenant sounds in damages to prevent it from so running - see The Prior's Case, where it was said that 'the remedie by covenant doth runne with the land to give damages to the partie grieved' . . . and all the covenants for title and quiet enjoyment sound in damages and run with the land.
In the House of Lords, Lord Macnaghten in his speech, with which the other members of the House concurred, said ([1909] AC at p 102):
The question is, Does this covenant affect the nature, quality, or value of the land, or is it a covenant simply collateral? It is not, I think, simply collateral, for one reason which is sometimes proposed as a test for the purpose of determining whether a covenant runs with the land or not. It is beneficial to the surface owner and beneficial to no one else: see Vyvyan v Arthur . . . I also think the covenant affects the value of the land in respect of which it was given. Suppose the land, being properly drained, were to be let for agricultural purposes, a tenant, I should suppose, would be more likely to take it and would probably give more for it if he were assured that compensation would be payable in the event of the drainage system being dislocated by subsidence. Similar considerations would apply if the land were to be let for building purposes.
- It is clear, therefore, that the House of Lords was accepting the test of what was collateral laid down by Best J.
- From these authorities I collect two things. First, that the acid test whether or not a benefit is collateral is that laid down by Best J, namely 'is the covenant beneficial to the owner for the time being of the covenantee's land, and to no one else?' Second, a covenant simply to pay a sum of money, whether by way of insurance premium, compensation or damages, is a covenant capable of touching and concerning the land provided that the existence of the covenant, and the right to payment thereunder, affects the value of the land in whomsoever it is vested for the time being. Therefore, in my judgment, these cases (which were not cited to Walton J) show that he was in error in holding that a covenant at double remove could not touch and concern the land.
- Applying the test laid down by Best J, a covenant by a surety securing the performance of a tenant's covenants in a lease satisfies it. The surety covenant increases the value of the reversion in that the landlord can look not only to the tenant but also to the sureties for the payment of a sum equal to the rent and for damages for failure to comply with the other tenant's covenants. Such surety covenant is of value to no one other than the owner for the time being of the reversion, since it is in support of the tenant's covenants and the tenant's covenants can be enforced only by the reversioner for the time being. Once the lease has been assigned, the assignor cannot enforce the tenant's covenants in respect of breaches occurring after the date of assignment and a fortiori cannot enforce the surety covenant. No one other than the landlord can enforce the surety covenant. The fact that it is a covenant only to pay a sum of money or damages is not inconsistent with its touching and concerning the land.
- Mr Blackburn cited a number of cases which, he submitted, were inconsistent with this conclusion. He submitted, in reliance on Woodall v Clifton [1905] 2 Ch 257, that an option to purchase the freehold contained in a lease did not run with the land. In that case, an assignee of the lease sought to exercise an option to purchase the freehold against the assignee of the reversion. This court held that the action failed because the option to purchase the freehold did not touch and concern the land in question. They identified the land to be touched and concerned as being the term granted by the lease: see at p 279. In my judgment, that decision does not impinge on the present case but depends wholly on the fact that the court held that the land to be touched and concerned had to be the term of years: the right to purchase the freehold could not touch and concern the term of years: it was 'something wholly outside the relationship of landlord and tenant'.
- In Thomas v Hayward (1869) LR 4 Ex 311 a covenant by the lessor of a public house not to use adjoining land for the sale of liquor was held not to touch and concern the land because its value to the tenant was collateral: it related to the business he carried on, not to the land itself. The decision was a hard one and is to be treated as authority for no more than that a covenant the value of which is wholly dependent on the use of the land for a specific business is collateral.
- Next Mr Blackburn relied on Dewar v Goodman [1909] AC 72. In that case, a headlease contained a covenant by the headlessee to repair all buildings erected on the land, which numbered some 211 in total. The headlessee granted an underlease of two of the houses and covenanted with the underlessee to perform the covenants in the headlease so far as they related to premises not comprised in the underlease. The plaintiff was the assignee of the underlease: the defendant was the assignee of the headlease. Because of a breach of the covenant to repair in the headlease, the freeholder forfeited the headlease and ejected the plaintiff. The plaintiff sued the defendant for damages for breach of the lessor's covenant in the underlease. The House of Lords held that the covenant to perform the covenants in the headlease did not touch and concern the land in the underlease because it did not require anything to be done on the land demised: the covenant related to the buildings other than those contained in the underlease. Surprisingly, there is little discussion of the second limb of the test in the Congleton case, ie that it is sufficient if the covenant per se affects the value of the land even though this does not involve doing anything on the land of the covenantee itself. Even more surprisingly, although both cases were decided within months of each other and the argument and decision in the House of Lords in Dewar v Goodman was given after the argument in the House of Lords in Dyson v Forster, in neither case is the other referred to, although Lord Loreburn was party to both decisions.
- I find the two cases very difficult, if not impossible, to reconcile. The performance of the covenant by the headlessee in Dewar v Goodman was manifestly of value to the underlessee for the time being and to no one else. Yet this point is not dealt with in the judgment. The distinction may lie in this. In Dewar v Goodman the doing of the covenanted act did not benefit the land of the covenantee as such but only his estate in it. The covenant was to repair adjoining premises: the breach of the covenant did not affect the land comprised in the underlease but merely led to a forfeiture of the estate in the land. In Dyson v Forster, on the other hand, the covenant benefited the owner of the surface land whatever his estate in it, eg it enabled him to let the land at a better price. The distinction, if any, is therefore between a covenant which operates only to protect the estate or interest in the covenantee's land (which does not touch and concern the land) and a covenant which affects the value of the land as such. If this is a valid distinction, then a surety covenant falls squarely on the Dyson v Forster side of the line: it increases the value of the landlord's reversion as such, whatever his estate. If, as I suspect, the two decisions are in fact irreconcilable, I am free to choose between them. I prefer to follow Dyson v Forster, which gives effect to the second limb in the Congleton test (which everyone has treated as the true basic test) whereas Dewar v Goodman appears to ignore the second limb completely.
- Mr Blackburn also relied on Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] 2 WLR 179. In that case a lease provided that at the commencement of the term the tenant should pay to the landlord a substantial security deposit on the terms that it would be repayable at the end of the term if there was no breach of the tenant's covenants. The landlord mortgaged the reversion to the defendant bank, which went into possession. The tenant committed no breach of covenant during the term and sought to recover the security deposit from the bank, claiming that the provisions as to the deposit touched and concerned the land. The Privy Council dismissed the claim, holding that the covenant did not touch and concern the land. Lord Oliver, giving the judgment on behalf of the committee, plainly rejected any general rule that every covenant which is related, however obliquely, to some other obligation which touches and concerns the land itself necessarily touches and concerns the land: see at p 187C. But he did not rule out the possibility that a covenant closely connected and bound up with a covenant which does touch and concern the land can itself touch and concern the land. The ratio of the decision, in my judgment, is to be found at p 187F-H. Lord Oliver points out that the assignee of the reversion was not entitled to receive the deposit from the original lessor on the assignment of the reversion: nor was an assignee of the term entitled to recover it at the end of the term. The liability to repay the deposit at the end of the term remained throughout on the original landlord and was an obligation to repay to the original tenant. So viewed, the decision is entirely consistent with the test laid down by Best J. The benefit of the covenant to repay could not touch and concern the land because someone other than the owner for the time being of the term could take the benefit of it.
- Finally, Mr Blackburn relied on two Australian cases. The first, Consolidated Trust Co Ltd v Naylor [1936] 55 CLR 423, was a decision that under certain Australian statutory provisions an assignment of a mortgage did not operate to transfer the benefit of the covenant by a surety that the borrower would repay the principal debt. I do not myself gain any assistance from that decision. A surety for a mortgage debt is a surety for the payment of the principal debt. The borrower's own covenant to pay the principal has nothing to do with the land and cannot touch and concern the land: there is, therefore, no reason why a covenant by way of surety for such a payment should touch and concern the land. It is quite different from a surety for the performance of a tenant's covenant which does touch and concern the land: such a surety covenant is necessarily and inextricably bound up with the tenant's obligations.
- The other case, Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] NSWLR 5, was concerned with the assignment of the benefit of a covenant guaranteeing performance of tenant's covenants. But no argument appears to have been advanced that such covenant touched and concerned the land. It therefore does not provide any assistance.
- For these reasons, in my judgment, it is consistent with both principle and authority to hold that a covenant by a surety, guaranteeing performance of covenants by a tenant which touch and concern the land, itself touches and concerns the land and is enforceable by an assignee of the reversion. It follows that H & B could have enforced the surety covenant against the defendants and that, accordingly, the plaintiff is entitled to be subrogated to the rights of H & B and recover from the defendants the sums he has paid to H & B.
4 The principle in Griffith v Pelton
- In the light of my decision on the third issue, it is not necessary to consider this principle. Since I have considerable difficulty in understanding what Griffith v Pelton did decide, I express no view on it.
- In my opinion the appeal should be allowed and judgment entered for the plaintiff.
- CROOM-JOHNSON and NEILL LJJ agreed and did not add anything.
The appeal was allowed and judgment entered for the appellant in the sum of £ 23,401.96 plus interest at a figure to be agreed. Leave to appeal to the House of Lords was granted, with stay pending appeal on the usual terms.
