Construction - lease held on trust by defendant tenants - clause limiting liability of tenants - whether applying after forfeiture of lease - correct meaning of clause

Warborough Investments Ltd v Berry and others; Chancery Division; Mr William Blair QC, sitting as a deputy judge of the division; 18 December 2003

The defendant tenants held a lease on trust for a youth centre operating from the premises.

The claimant purchased the freehold in 1999, and the lease was brought to an end by forfeiture in 2001.

The claimant later brought proceedings to recover rent arrears and damages for dilapidations.

It relied on the tenants' joint and several liability, under clause 2 of the lease, to pay the rent, to keep the premises in good and tenantable repair and condition, and to yield it up in such condition on determination of the lease.

The defendants argued that their liability as tenants was limited to the extent of the trust assets.

They relied, in particular, on clause 4(3) of the lease, which provided: 'As long as the demised premises shall be held in trust for the Youth Centre the tenants shall be liable under the covenants herein contained only to the extent of the assets vested in them or any other person or persons in trust for and for the benefit of the youth centre.'

Preliminary issues were raised as to, among other things, the meaning of clause 4(3), whether it was capable of applying in the particular circumstances of the case, given the forfeiture of the lease, and what constituted the assets of the trust.

Edwin Johnson (instructed by asb law, Croydon) for the claimant; Daniel Hochberg (instructed by Lass Salt Garvin and Hegarty & Co, Peterborough) for all the defendants, except the fourth and tenth, who did not appear and were not represented.

Held: It was clear from the terms of clause 4(3) that the parties had intended the tenants' liability for breach of covenant to be limited to the extent of the assets held in trust for the youth centre: Bank of Credit & Commerce International SA (in liquidation) v Ali (No 1) [2001] UKHL 8; [2002] 1 AC 251 applied.

It had been agreed that the tenants would hold the premises on trust for the benefit of the centre according to its rules and constitution, and the opening words of clause 4(3) had to be read in that context.

Those words meant that the clause applied to liabilities under the tenants' covenants that accrued while the demised premises were held on trust for the centre.

In respect of those liabilities, the tenants were liable only to the extent of the assets vested in them or in persons in trust for the centre, regardless of whether, and how, the lease had come to an end, or when the landlord had brought proceedings.

'The tenants' in clause 4(3) referred to the original tenants, the survivors of them, and their successors in title who held the lease as trustees for the youth centre.

The assets referred to in clause 4(3) were to be valued at the time or times when any judgment as to the tenants' liabilities came to be enforced.

The lease itself was not an asset for the purposes of clause 4(3).

Having elected to forfeit the lease and to recover the freehold reversion, enabling it to sell the property free of the lease, the claimant could not treat it as having some notional continued existence with regard to the value of the trust assets: Serjeant v Nash Field & Co [1903] 2 KB 304 and Associated Deliveries Ltd v Harrison [1984] 2 EGLR 76 considered.