Kilarden Investments Ltd -v- Kirwans (Galway) Ltd & Ors [2013] IEHC 224 (10 May 2013)

Judgment Title: Kilarden Investments Limited -v- Kirwans [Galway] Limited & Ors

Neutral Citation: [2013] IEHC 224

High Court Record Number: 2011 8119 P

Date of Delivery: 10/05/2013

Court: High Court

Composition of Court:

Judgment by: Laffoy J.

Status of Judgment: Approved

Neutral Citation [2013] IEHC 224

THE HIGH COURT

[2011 No. 8119P]

BETWEEN

KILARDEN INVESTMENTS LIMITED

PLAINTIFF

AND

KIRWANS (GALWAY) LIMITED (IN VOLUNTARY LIQUIDATION), JOHN P. GREALISH AND PAUL GREALISH

DEFENDANTS

Judgment of Ms. Justice Laffoy delivered on 10th day of May, 2013.

Relief claimed in the proceedings
1. The relief claimed in the general endorsement of claim on the plenary summons in these proceedings, which issued on 9th September, 2011, as against the second and third named defendants (the Guarantors) was an order by way of specific performance of the agreement contained in a guarantee (the Guarantee) in writing made between the Guarantors of the one part and the plaintiff of the other part. The Guarantee was endorsed on a lease dated 22nd February, 1999 (the Lease) made between the plaintiff of the one part and the first named defendant (the Lessee) of the other part. The specific terms of the order sought would require the Guarantors to accept and execute a lease of the licensed premises situate at Prospect Hill, Galway, formerly known as “Robert Lee’s” and currently known as Cuba (the Licensed Premises), which had been the subject of the Lease, for a term commencing on 3rd June, 2011, or, alternatively, on 15th January, 2011, and terminating on 21st February, 2019 at a rent of €10,220.40 per week but otherwise on the same terms and conditions as were contained in the Lease. In the alternative, the plaintiff claimed damages in lieu of specific performance as against the Guarantors. There was an alternative claim for judgment for all sums due by all of the defendants to the plaintiff in respect of arrears of rent and insurance under the Lease and/or in respect of back rent and insurance under the terms of the lease which the Guarantors were required to accept.

2. Nothing had changed by the time the statement of claim was delivered on 23rd September, 2011 and the relief sought in the statement of claim replicated the relief sought in the plenary summons.

3. However, things had changed by the time the matter came on for hearing on 28th February, 2013. By order of the Court (Murphy J.) dated 26th March, 2012 the plaintiff had obtained judgment against the Lessee in the sum of €107,443 in respect of unpaid rent and costs. Moreover, having regard to the factual circumstances which I will outline later, the plaintiff was no longer seeking specific performance against the Guarantors, but was seeking damages in lieu of specific performance.

4. Accordingly, the issue the Court has to determine is whether the Guarantors are liable for the damages claimed by the plaintiff.

Factual background
5. The Lease created a demise of the Licensed Premises for a term of twenty years from 21st February, 1999. It reserved the yearly rent of IR£364,000, which was subject to review every five years in accordance with provisions which provided for review on an upwards only basis. Rent was payable weekly in advance. The provisions of the Lease which were invoked by the parties at the hearing were the following:

(a) Paragraph (34) of the Lessee’s covenants, which was in the following terms:

“In the event of the Lessee being a Company and going into liquidation . . . or in the event of a receiver being appointed then and in that event the Lease will automatically terminate and the Lessor will be entitled to take over immediate possession of the property.

(b) The proviso for re-entry, which was the penultimate provision of the Lease, being paragraph (b) of an unnumbered proviso, and which provided as follows:

“If the rent hereby reserved or any part thereof shall be in arrear or remain unpaid for a period of ten days after same shall have become due or the Lessee shall fail or neglect to perform or observe the covenants and conditions and agreements on the part of the Lessee herein before contained or any of them then in every such event this Lease and the term hereby created shall cease and determine absolutely as if it [had] expired by effluxion of time and it shall and may be lawful for the Lessor or his Agents duly authorised to re-enter upon the demised premises or any part thereof and the same to have again re-possess and enjoy as if the agreement had never been made and further in such event or events the Lessee’s claim to the demised premises shall be entirely at an end and the Lessee’s Lease shall cease . . ..”

(c) The final provision in the Lease, which was paragraph (c) of the unnumbered proviso, which was a proviso for re-entry if the Lessee being a company should go into liquidation, in which event the Lessor would be “entitled to immediately re-enter the premises and take possession of the same”.

6. The Guarantee given by the Guarantors was endorsed on the Lease. In the Guarantee the Guarantors jointly and severally covenanted with the plaintiff in the terms set out. The first obligation undertaken by the Guarantors in Clause (1), which was headed “Covenant and Indemnity”, was that the Lessee or the Guarantors would at all times during the term duly perform and observe all the covenants on the part of the Lessee contained in the Lease, including the payment of the rents and all other sums payable thereunder. Further, the Guarantors indemnified the plaintiff against all claims and suchlike by reason of any default by the Lessee in the performance and observance of any of its obligations or the payment of any rent and other sums arising before or after the expiration or termination of the Lease.

7. Clause (7) of the Guarantee was headed “Disclaimer or forfeiture” and contained two alternative provisions. Clause 7.1, on which the plaintiff relies, provided:

“[I]f

(i) A liquidator . . . shall disclaim or surrender this Lease; or

(ii) this Lease shall be forfeited; or

(iii) the Lessee shall cease to exist

THEN the Guarantor shall, if the Lessor by notice in writing given to the Guarantor within twelve months after such disclaimer or other event so requires, accept from and execute and deliver to the Lessor a new lease of the demised premises subject to and with the benefit of this Lease if the same shall still be deemed to be extant at such time for a term commencing on the date of the disclaimer or other event and continuing for the residue then remaining unexpired of the term, such new Lease to be at the cost of the Guarantor and to be at the same rents and subject to the same covenants, conditions and provisions . . . as are contained in this Lease;”.

Clause 7.2 gave the plaintiff, as lessor, the choice of not requiring the Guarantors to take a new lease and in that event it was provided that –

“. . . the Guarantors shall nevertheless upon demand pay to the Lessor a sum equal to the rents and other sums that would have been payable under this Lease but for the disclaimer, forfeiture or other event in respect of the period from and including the date of such disclaimer, forfeiture or other event until the expiration of twelve months therefrom or until the Lessor has granted a lease of the demised premises to a third party (whichever shall first occur).”

The position of the plaintiff is that it invoked Clause 7.1 and that it is relying on Clause 7.1 and not on Clause 7.2.

8. At the end of the first five years of the term the rent reserved by the Lease was reviewed and it was agreed that it would be subject to a fifteen per cent increase effective from 1st April, 2004. From that date the weekly rent was €10,220.40.

9. It is hardly surprising that the Lessee got into difficulty in relation to discharging the rent in respect of the Licensed Premises in 2008 and 2009. There was a temporary arrangement between the plaintiff and the Lessee in October 2009 under which the plaintiff waived the arrears of rent which had accumulated at that time and agreed to reduce the weekly rent by €4,000 for a period of twenty six weeks. However, when that period expired, the plaintiff required the payment by the Lessee of the full weekly rent of €10,220.40. The Lessee continued to pay the weekly rent at the reduced rate and at a lesser sum from the end of 2010. The plaintiff brought summary proceedings in this Court (Record No. 2011/500S) against the Lessee and the Guarantors and the outcome of those proceedings was an order made on 25th July, 2011 by the Court (O’Neill J.) giving judgment against all of the defendants in the sum of €271,190.40 and costs.

10. However, by the time that order was made the Lessee was already in liquidation. The liquidation, a creditors’ voluntary liquidation, commenced on 14th January, 2011. Brian McEnery (the Liquidator) was appointed liquidator for the purposes of the winding up. Aside from the prosecution of the summary proceedings to which I have referred above, which were pending, the course of events after that until the commencement of these proceedings was as follows:

(a) By letters dated 11th March, 2011 from the plaintiff’s then solicitors to the two firms of solicitors who were acting for the Guarantors, the plaintiff’s solicitors referred to Clause 7.1 of the Guarantee, the substance of which, purporting to be a quotation, was set out as follows:

“. . . that if a liquidator shall disclaim or surrender the Lease, then the Guarantor shall, if the lessor by notice in writing given to the Guarantor within twelve months after such disclaimer or other event so requires, accept from and execute a new lease of the premises subject to and for the benefit of this Lease . . ..”

The plaintiff’s then solicitors went on to state that each of the addressees would “have a draft lease shortly”. They also stated that they did not wish to incur unnecessarily the additional costs of proceedings by the Liquidator in getting court approval for a disclaimer by the Liquidator and, to avoid such costs, they were calling on each addressee to confirm its client’s agreement to comply with the terms of the clause referred to in relation to a new lease. The final sentence of each letter stated that the relevant Guarantor was being given “formal notice” that the Lessor required the relevant Guarantor to execute and deliver a new lease as provided for in the Guarantee.

(b) By letters dated 5th April, 2011, the plaintiff’s solicitors furnished to their respective solicitors a draft lease for execution by each of the Guarantors and confirmed the plaintiff’s formal notice in accordance with Clause 7.1 of the Guarantee required each Guarantor to execute and deliver a new lease as provided in the Guarantee. It was also stated in those letters that the plaintiff was prepared to accept a surrender from the Liquidator on the basis that the Guarantors would execute a new lease immediately after the surrender. While there was communication between the plaintiff’s solicitors and the Guarantors’ solicitors subsequently, there is nothing in the book of correspondence put before the Court to suggest that either of the Guarantors indicated his willingness to take a new lease in accordance with Clause 7.1 of the Guarantee.

(c) The deed of surrender was dated 2nd June, 2011 and was expressed to be made between the Lessee of the first part, the Liquidator of the second part and the plaintiff of the third part. It was a straightforward surrender by the Lessee of the Lease to the plaintiff. The Liquidator had already vacated the Licensed Premises with effect from 10th March, 2011.

(d) By letters dated 27th July, 2011 the plaintiff’s solicitors furnished to each of the Guarantors’ solicitors a copy of the deed of surrender. Each was asked to confirm that notice had been given under Clause 7.1 of the Guarantee on 11th March, 2011, reference also being made to the letter of 5th April, 2011.

(e) The plaintiff issued a notice under seal on 4th August, 2011 to each of the Guarantors, in which notice was given to each that the plaintiff required them to accept from it and execute and deliver to it a new lease of the Licensed Premises commencing from the date of the surrender and continuing for the residue remaining unexpired of the term of the Lease. It would appear that the notice accompanied letters dated 5th August, 2011 from the plaintiff’s solicitors, although those letters are not in the book of inter partes correspondence before the Court. That notice, apparently, did not evoke any response and these proceedings were commenced on 9th September, 2011.

11. Since the proceedings were initiated, the plaintiff has succeeded in leasing the Licensed Premises. By letters dated 30th March, 2012 to the solicitors on record for each of the Guarantors in these proceedings, the plaintiff’s solicitors informed the Guarantors that Mullery, Auctioneers, had been engaged to find a tenant for the Licensed Premises, and that it was the plaintiff’s view that the best attainable rent was then €5,000 per week. It was further stated that by proceeding to re-let the Licensed Premises the plaintiff’s claim against the Guarantors would be reduced, but it would result in “an end” to the Guarantors being able to take over the Lease as had been requested by the plaintiff. The Guarantors’ agreement to the plaintiff proceeding to re-let was sought. In essence, the response from the solicitors for each of the Guarantors was that neither of the Guarantors would be taking a new lease of the Licensed Premises and the course proposed by the plaintiff was not being objected to. The new lease, referred to hereafter as the “Current Lease”, was subsequently executed and took effect from 1st May, 2012 for a term of ten years.

The pleadings

12. In the plaintiff’s statement of claim the material provisions of the Lease, the Guarantee and the relevant factual matters were pleaded. For present purposes, the only pleas in the statement of claim which I consider it appropriate to allude to are the following:

(a) It was pleaded that the sum in respect of which judgment was obtained by virtue of the order of 25th July, 2011 referred to at para. 9 above in the summary proceedings represented arrears of rent due under the Lease in respect of the period ending on 27th March, 2011. It was further pleaded that no rent had been paid for the period commencing on 28th March, 2011 and ending on 2nd June, 2011, the date of the surrender of the Lease, and the arrears were quantified at €97,833.40. It was also pleaded that the plaintiff had discharged the insurance premium amounting to €9,609.60 for the then current year but, notwithstanding demands made, the defendants had failed to reimburse the said sum to the plaintiff. In the prayer for relief in the statement of claim judgment was sought for arrears of rent and the insurance premium. The aggregate of the two figures set out above (€107,443) is the amount for which the plaintiff has obtained judgment in this Court against the Lessee.

(b) It was pleaded that the Liquidator had indicated his intention to seek to disclaim the Lease and that, pursuant to an agreement, the surrender was executed. It was pleaded that the surrender constituted a breach of contract by the Lessee and that, unless the Guarantors complied in full with their obligations under the Guarantee, the plaintiff would suffer substantial loss and damage. The notice dated 4th August, 2011 was pleaded as the notice for the purposes of Clause (7) of the Guarantee. The earlier correspondence commencing with the letter of 11th March, 2011 was not alluded to.

(c) Paragraph 19 of the statement of claim gave rise to some controversy at the hearing. Clause 34 of the Lease was referred to and it was then pleaded that, insofar as Clause 34 was effective to determine the Lease on the appointment of the Liquidator on 14th January, 2011, the defendants’ obligation to pay rent under the Lease determined on that date and their obligation to pay rent after 14th January, 2011 arises from their obligation to accept and execute a new lease at the same rent backdated to that date. That plea was premised on termination of the Lease having occurred on the Lessee going into voluntary liquidation, rather than when the surrender was effected, that is to say, 2nd June, 2011. When the Lease actually determined is a question of the application of a combination of landlord and tenant and company law provisions. However, whenever it determined, the Guarantors were liable as guarantors both before and after determination, after determination in accordance with Clause 7 of the Guarantee.

13. An amended defence was delivered on behalf of each of the Guarantors very late in the day. I consider that it is only necessary to refer to the following matters pleaded by way of defence:

(a) Throughout, the deed of surrender of 2nd June, 2011 was characterised as a “purported surrender”. The basis of that plea was that the Lease had already determined prior to 2nd June, 2011 and the basis on which that was asserted was reliance on paragraph (b) of the proviso in the Lease quoted at para. 5(b) above. It was asserted by reference to that provision that the Lease and the term thereby created “ceased and determined absolutely as if it had expired by effluxion of time arising from non-payment of rent on the part of the [Lessee] which non-payment commenced on a date not later than 3rd May, 2010, so on or about 13th May, 2010 the Lease and the term so ceased and determined”. Accordingly, the substance of the plea is that the Lease had not survived until 2nd June, 2011 to be surrendered and, therefore, Clause 7 of the Guarantee had no application.

(b) An alternative plea was that the plaintiff had failed to comply with the requirement of Clause 7.1 so as to entitle it to require the Guarantors to take a lease, the requirement in question being the necessity to give notice in writing to the Guarantors within twelve months “after such disclaimer or event”. For the reasons which I will outline later, the assumption that the Lease determined on 13th May, 2010 on which that plea is based is misconceived.

(c) Without prejudice to the foregoing principal line of defence at law, the Guarantors also relied upon the decision of the High Court in Reox Holdings Plc v. David Cullen and Simon Davidson [2012] IEHC 299, on the application of s. 132 of the Land and Conveyancing Law Reform Act 2009 (the Act of 2009).

14. The plaintiff delivered a reply to the Guarantors’ amended defences on the day the hearing commenced, 28th February, 2013, which contained the usual joinder of issue. However, it also contained the following special pleas:

(a) that, insofar as, contrary to the plaintiff’s contention, the defendants’ assertion that the plaintiff is not entitled to rely on Clause (7) of the Guarantee is well founded, the plaintiff will rely on Clause (1) of the Guarantee and the indemnity contained in it; and

(b) s. 132 of the Act of 2009 has no relevance to the assessment of the liability of the Guarantors under the Guarantee in circumstances where they have indicated that they are not willing to accept a new lease under Clause 7, so that liability is to be assessed by reference to the loss suffered arising from the default of the Lessee.

The plaintiff’s quantification of alleged loss
15. At the hearing the plaintiff handed in a statement the purpose of which was to quantify the plaintiff’s loss in consequence of the Guarantors not entering into a lease with the plaintiff in the terms required by Clause 7.1 of the Guarantee. There were two components in the quantification: loss of rent to date, that is to say, 28th February, 2013, being the date of the hearing, which was purely a mathematical calculation; and loss of future rent, which was the loss of future rent capitalised on an actuarial basis. It was stated that the calculations were made on the assumption that the Current Lease will continue until 21st February, 2019, the date on which the Lease would have expired, notwithstanding that it is due to expire on 30th April, 2017. That assumption is not quite accurate. As I understand the evidence, there is a break clause in the Current Lease, which may be exercised at the end of the first five years of the term, i.e. on 30th April, 2017. In any event, whichever way one looks at the assumption, if the Guarantors have the liability asserted by the plaintiff under the Guarantee, the assumption is to their benefit.

16. The statement also acknowledged that payments of €36,500 had been received from the Guarantors during 2012 and 2013, but it was asserted that they are to be credited against the judgment obtained on 25th July, 2011 in the summary proceedings. The purpose of that acknowledgment and assertion is obviously to ensure that the payments made to date are not deducted from the sums which the plaintiff contends have become due since the summary proceedings were determined. That does, however, highlight a most unfortunate aspect of these proceedings. After judgment had been obtained in the summary proceedings, the plaintiff sought an instalment order against each of the Guarantors and, in consequence of a District Court order in one case and of a Circuit Court order on an appeal from the District Court in the other case, each of the Guarantors is obligated to pay €500 per month to the plaintiff on foot of the judgment. Although no evidence was called on behalf of the Guarantors, the picture which emerged at the hearing was that each of the Guarantors is in dire financial straits and each is acting honourably in attempting to meet his obligations to the plaintiff. It was put to Mr. Stephen Lydon, a director of the plaintiff, who testified, that seeking judgment for the sums involved in this case from the plaintiff was like “trying to get blood from a stone”. While that does appear to be the case, nevertheless, the Court has to apply the law.

17. The quantum of rent claimed over the period from the date to which the amount due on the summary judgment was calculated (27th March, 2011) to the date of the hearing (28th February, 2013), after giving credit for the rent payable by the new lessee under the Current Lease, comes to €848,695.09. That figure together with the sum claimed in respect of the insurance premium paid by the plaintiff in 2011 (€9,609.60) comes to €858,304.69.

18. The capitalised value of loss of rent from 28th February, 2013 to 21st February, 2019, as claimed in the statement, is €1,493,271, bringing the total claimed to €2,351,575.69. It was agreed between the parties that it was not necessary to adduce actuarial evidence. Instead, the Court was furnished with a report dated 28th February, 2013 prepared by Maura Carter of James R. Kehoe & Co. Limited, Consulting Actuaries. The report itself, which is very concise, contains two possible variations on the calculation of the capitalised value. One is based on the capitalised value of the future rental payments, if a one per cent real rate of interest is found by the Court to be more appropriate, which gives a “bottom line” of €1,581,604. The other is calculated on the basis of valuing the loss as “the net after tax proceeds from the rent”, which gives a “bottom line” of €749,485. I do not understand why the “net after tax proceeds from the rent” is calculated on the assumption of a marginal rate of tax of 41%, 4% PRSI and 7% USC, given that the potential recipient of the rent, the plaintiff, is a company. Frankly, if it is necessary to do so, on the state of the evidence, it is impossible to assess the quantum of damages in lieu of specific performance because of a range of factors, that conundrum being only one factor.

Legal issues
19. The following difficult legal issues emerge from the factual background, the pleadings and the submissions made by the parties, namely:

(1) the proper construction of paragraph (b) of the proviso in the Lease and its application in the context of the relevant statutory provisions in force at the material time and, in particular, whether, as contended for by the Guarantors, the Lease terminated absolutely on 13th May, 2010;

(2) the proper construction of paragraph 34 of the Lessee’s covenants in the Lease and paragraph (c) of the proviso and their application in the context of the relevant statutory provisions in force at the material time, in particular, s. 14 of the Conveyancing Act 1881 (the Act of 1881) as amended;

(3) the proper construction of Clause 7.1 of the Guarantee and its application against the factual context and, in particular, the fact that the winding up of the Lessee commenced on 14th January, 2011;

(4) the impact, if any, of s. 132 of the Act of 2009 and the decision in the Reox case on the entitlement of the plaintiff against the Guarantors under Clause 7.1 of the Guarantee; and

(5) if s. 132 impacts on the application of Clause 7.1 of the Guarantee, whether the plaintiff can rely on Clause (1) of the Guarantee.

I will consider each of the issues in turn.

Paragraph (b) of the proviso in the Lease
20. As is pointed out in Wylie on Irish Land Law (4th Ed.) at para. 17.101, there seems to be no statutory provision in force in this jurisdiction governing forfeiture or re-entry for non-payment of rent. The only requirement would seem to be the common law requirement that the landlord must make a formal demand for rent, unless the tenancy agreement exempts him from this, citing Kelly v. Murnaghan [1948] I.R. 38. In that case, the letting agreement, which was for a term of three years, had provided that, if any instalment should be in arrear for fourteen days after the gale day, the tenancy should be absolutely determined and the landlord might re-enter and resume possession. There the proviso in the letting agreement did not dispense with the necessity imposed upon the landlord by the common law of formally demanding the rent in arrears before proceeding to exercise his right of re-entry. Therefore, Davitt J. held that the common law requirement that the landlord should make a formal demand of the rent before proceeding to exercise his right of re-entry remained. Although this point is academic having regard to the facts in this case, as Wylie points out, a tenant is entitled to apply for equitable relief against forfeiture for non-payment of rent.

21. The Lease to the Lessee in issue here was in a fairly conventional form, but contained a few oddities. Clause (1) contained the demise and the reservation of rent. Clause (2) contained the Lessee’s covenants, including paragraph (34) to which reference has already been made, which was in a peculiar location, although that may be explained by the fact that it was preceded by covenants designed to protect the publican’s licence. There was no Clause (3). Clause (4) contained the covenants by the plaintiff as Lessor, including the covenant to insure the Licensed Premises subject to the entitlement to recover the cost from the Lessee, and also the usual covenant for quiet enjoyment. The proviso which followed did not bear a clause number, but it contained three paragraphs. I have already referred to paragraphs (b) and (c) above. Paragraph (a) gave the Lessor power to enter on the Licensed Premises and to distrain if the rent or any part thereof “shall be in arrears or unpaid for a space of ten days after any of the days herein before appointed for the payment thereof (whether demanded or not)”. That entitlement is not material, but it does highlight the distinction between paragraph (a) and paragraph (b). As is clear from paragraph (b), as quoted at para. 5(b) above, the entitlement of the plaintiff as Lessor to re-enter, strangely, does not dispense with the common law requirement to make a formal demand for rent, because the words “whether demanded or not” are not included. There is no evidence before the Court that the plaintiff, as lessor, made a formal demand for the rent due on 3rd May, 2010, and, that being the case, there is no proof before the Court that on that day the Lease determined absolutely and the right of re-entry of the plaintiff as Lessor arose.

22. In any event, the evidence clearly shows that by the implicit agreement of the parties the Lease continued because the Lessee remained in possession of the demised premises, although paying part only of the reserved rent, and the plaintiff, as Lessor, accepted that part of the reserved rent and acquiesced in the continued possession of the Lessee. It must be borne in mind that in this jurisdiction the relationship of landlord and tenant is governed by s. 3 of the Landlord and Tenant Law Amendment Act Ireland 1860 (Deasy’s Act), which provides that the relationship “shall be deemed to be founded on the express or implied contract of the parties” and “shall be deemed to subsist in all cases in which there shall be an agreement by one party to hold land from or under another in consideration of any rent”.

23. Having regard to the foregoing, the Lease did not, as the Guarantors contend, absolutely determine on 13th May, 2010. On the contrary, it continued until at least the commencement of the winding up of the Lessee on 14th January, 2011. What happened on the occurrence of that event, turns on paragraph (34) of the Lessee’s covenants in the Lease (Clause 2) and on paragraph (c) of the proviso, which falls for consideration next.

Paragraph (34) of the Lessee’s covenants and paragraph (c) of the proviso in the Lease
24. As is pointed out in Wylie (op. cit.) at para. 17.98, forfeiture for re-entry for breach of condition or covenant relating to matters other than non-payment of rent is now governed by the Act of 1881, as amended by the Conveyancing Act 1892 (the Act of 1892). Section 14(1) of the Act of 1881 requires the lessor to serve notice on the lessee before he enforces any right of forfeiture and the notice must specify the breach complained of, require it to be remedied, if it is capable of remedy, and require the lessee to make compensation for the breach, if the lessor wants compensation. Further, s. 14(2) gives the lessee the right to apply for relief against forfeiture. Counsel for the plaintiff relied on subs. (5) of paragraph 14 as effectively ousting the purported effect of paragraph (b) of the proviso in providing that the Lease and the term created “shall cease and determine absolutely as if it had expired by effluxion of time”. Subsection (5) provides as follows:

“For the purposes of this section a lease limited to continue as long only as the lessee abstains from committing a breach of covenant shall be and take effect as a lease to continue for any longer term for which it could subsist, but determinable by a proviso for re-entry on such a breach.”

That provision was clearly intended to prevent a lessor avoiding the application of s. 14 by framing the duration of the lease in the manner outlined. In this case, the plaintiff, as Lessor, did not attempt to avoid the application of s. 14 in the manner outlined in subs. (5). However, what is of particular relevance for present purposes is the limit on the application of s. 14, as stipulated in subs. (6) of s. 14 and the subsequent amendments to subs. (6).

25. As originally enacted, subs. (6) of s. 14 of the Act of 1881 did not extend to a condition for forfeiture on bankruptcy. However, subs. (2) of s. 2 of the Act of 1892 provided that subs. (6) of s. 14 was to apply to a condition for forfeiture on bankruptcy of the lessee “only after the expiration of one year from the date of the bankruptcy . . . and provided the lessee’s interest be not sold within such one year . . ..” Sub-section (3) provided that subs. (2) was not to apply to any lease of a “house used or intended to be used as a public-house or beershop”. Like most of the basic norms governing the relationship of landlord and tenant in this jurisdiction, the foregoing provisions were not addressed by the parties, and, for present purposes, it is not necessary to consider their application. Rather it is sufficient to note that the earliest date on which the Lease could have terminated by forfeiture under paragraph (34) of the Lessee’s covenants, when read in conjunction with paragraph (c) of the proviso, was the date of commencement of the winding up, that is to say, 14th January, 2011. That is the earliest date which could be relevant to the application of Clause 7.1 of the Guarantee.

Clause 7 of the Guarantee
26. As regards its claim against the Guarantors in these proceedings, the plaintiff relies on Clause 7.1 in the Guarantee and, given that since the proceedings were initiated the plaintiff has, with a view to mitigating its loss, re-let the Licensed Premises for ten years, the plaintiff’s claim now being pursued is for damages in lieu of specific performance. It was open to the plaintiff to elect under Clause 7.2 of the Guarantee not to require the Guarantors to take a new lease, but instead to invoke the obligation of the Guarantors, as quoted at para. 7 above, upon demand to pay to the plaintiff a sum equal to the rents and other sums that would have been payable under this Lease for a term of one year. It was made clear by counsel for the plaintiff that the plaintiff had not engaged with, and is not relying on, Clause 7.2 at all.

27. Whether the Lease was forfeited on 14th January, 2011 at the commencement of the winding up of the Lessee, or whether the Lease continued in being and was terminated by the surrender by the Liquidator on 2nd June, 2011, the plaintiff did comply with the requirement of Clause 7.1 of giving notice to the Guarantors within the stipulated period of twelve months to take a new lease by service of the notice dated 4th August, 2011. Leaving aside when the new lease would commence in accordance with Clause 7.1, whether from 14th January, 2011 or 2nd June, 2011, if the Guarantors complied with the obligation to execute it, it would continue until 21st February, 2019 and, as a matter of contract, it would be “at the same rents” as were contained in the Lease, including the provision for upward only rent review. That leads to the issue as to the impact of s. 132 of the Act of 2009 on Clause 7.

Section 132 of the Act of 2009
28. Section 132 of the Act of 2009, which came into operation on 28th February, 2010 pursuant to the Land and Conveyancing Law Reform Act 2009 (Commencement) (Section 132) Order 2009 (S.I. No. 471 of 2009), provides in subs. (1) that it applies “to a lease of land to be used wholly or partly for the purpose of carrying on a business”. However, subs. (2) provides as follows:

“Subsection (1) shall not apply where –

(a) the lease concerned, or

(b) an agreement for such a lease,

is entered into prior to the commencement of this section.”

Subsection (3) provides that a provision in a lease to which s. 132 applies which contains provision for review of the rent payable thereunder –

“. . . shall be construed as providing that the rent payable following such review may be fixed at an amount which is less than, greater than or the same as the amount of rent payable immediately prior to the date on which the rent falls to be reviewed.”

Sub-section (4) provides that subs. (3) shall apply notwithstanding any provision to the contrary contained in the lease or in any agreement for the lease. In other words, where s. 132 applies, in general terms, the rent review provision cannot be construed as providing for upwards only review.

29. Section 132 is to be found in Part 14, which is headed “Miscellaneous”, of the Act of 2009. A peculiarity of Part 14 is that s. 131 provides that, in Part 14, “business” and “lease” have the same meanings as they have in the Landlord and Tenant (Amendment) Act 1980 (the Act of 1980). In s. 3 of the Act of 1980 “lease” is defined as meaning –

“an instrument in writing, whether under or not under seal, containing a contract of tenancy in respect of any land in consideration of a rent or return and includes a fee farm grant.”

The peculiarity arises not only from the fact that there is already a definition of “lease” in s. 3 of the Act of 2009 (“as a noun means an instrument creating a tenancy; and as a verb means the granting of a tenancy by an instrument”), but also from the fact that, as Wylie points out in the annotation on s. 131 in “Land and Conveyancing Law Reform Act 2009: Annotations and Commentary” (Bloomsbury Professional, 2009), the definition in the Act of 1980 “is a very wide-ranging definition and includes activities of a non-profit-making nature, including the operation of government departments, local authorities and various bodies carrying on educational, social, sporting, cultural and charitable services”. The reference to the inclusion of a fee farm grant is also very puzzling because s. 12 of the Act of 2009 provides that the “creation of a fee farm grant at law or in equity is prohibited”. Of course, in this case, the Court is concerned with a lease for a term of years, not a fee farm grant. Nonetheless, the peculiarity raises questions as to what the Oireachtas intended in referring in subs. (2) of s. 132 to “the lease concerned”, or “an agreement for such a lease”, having been “entered into” prior to 28th February, 2010.

30. If the plaintiff had been in a position to persist, and had persisted, in its claim for specific performance, the question to be addressed on the application of s. 132 would have been whether the agreement which the plaintiff was seeking to specifically enforce was “an agreement for such a lease” referred to in subs. (2) of s. 132 “entered into” prior to 28th February, 2010. If it was not, the Guarantors could not be compelled to take a lease which provided for revision of the rent on an upwards only basis. In reality, the question for determination remains the same, notwithstanding that the relief now being pursued is damages in lieu of specific performance. However, the practical effect of the agreement in respect of which the plaintiff seeks damages in lieu of specific performance not having been “entered into” prior to 28th February, 2010, if that is the case, is that it is open to the Guarantors to argue, as they have done, that there is no loss to the plaintiff, or that the loss is less than contended for by the plaintiff. That is because the plaintiff is now receiving from the lessee under the Current Lease of the Licensed Premises rent, which it is reasonable to assume is at the level for which the Guarantors would be liable on the application of the displacement of the upwards only revision provision in the Lease by operation of subs. (3) of s. 132.

31. Predictably, counsel for the Guarantors submitted that the Court should follow the decision in the Reox case.

32. Notwithstanding that the plaintiff in the Reox case was a guarantor which was prepared to take a lease in accordance with the provision of the guarantee which it had entered into in terms similar to Clause 7.1 of the Guarantee and was seeking a declaration that s. 132 applied to the circumstances of that case, that difference from the circumstances in this case is not material. In substance, the provisions of the relevant guarantee, which was actually in the body of the lease under consideration in the Reox case, were precisely the same as the provisions in the Guarantee, both, obviously, having followed the same precedent. Further, the lessee under the lease in the Reox case had gone into liquidation after 28th February, 2010 and that lease was subsequently disclaimed. An additional complication, which I mention purely by way of explanation, was that a receiver, the second named defendant, had been appointed a receiver over the interest of the lessor, the first named defendant, in the demised premises.

33. In the Reox case, the defendant receiver had argued that, once the guarantee had been entered into by the plaintiff guarantor, an agreement for a lease was thereby created. In addressing that argument, Charleton J. stated (at para. 17):

“That agreement was, however, contingent in its operation on the occurrence of other factors and upon the exercise by the landlord of a choice of options. The lease contended for might never be entered into. It was dependant upon the occurrence of one of three conditions, namely the disclaimer or forfeiture of the lease or the tenant ceasing to exist. It was also dependant upon the defendant landlord exercising an option within twelve months to require the guarantor to enter into a lease as opposed to, in the alternative, seeking an indemnity of up to 12 months for lost rent. Such an agreement does not appear to this Court to carry the characteristics of a lease or of an agreement for such a lease.”

Charleton J. concluded (at para. 18) that it was impossible to state that, as of the date of the coming into force of s. 132 of the Act of 2009, the guarantor and the landlord had an agreement for a lease and he continued:

“One of the characteristics of such an agreement is that it is specifically enforceable; on the basis that an agreement for a lease is, in equity, as good as a lease. In this instance, until the occurrence of the contingency that gave rise to the entitlement of the landlord to make a choice between either requiring the guarantor to step into the tenant’s shoes and hold the lease or seeking lost rent instead, and the option was exercised by the landlord to require the guarantor to become the tenant, no agreement for a lease existed. The availability of that mere contingency cannot be construed as a lease between the guarantor and the landlord and nor can it be construed as an agreement for such a lease.”

34. In the Reox case, Charleton J. also rejected an argument advanced on behalf of the defendant receiver that “a decision that a guarantee option is a contingency interferes with existing rights” and that, consequently, “the Act of 2009 should be construed so as to avoid any retrospective effect”, stating (at para. 23):

“To the extent that the 2009 Act interferes with a pre-existing arrangement which the parties had entered into on the basis of their view on the state of the law, the Court is not entitled to rearrange the balance of rights that arises from a decision of the Oireachtas to amend the law. Once the balance struck is reasonable no issue of unconstitutionality can arise; and indeed no claim that the section of the 2009 Act is contrary to the Constitution is pleaded in this case.”

35. Having addressed the obligation of the Court of constitutional interpretation of a statute by reference to the decision of the Supreme Court in McDonald v. Bord na gCon [1965] I.R. 217, Charleton J. concluded on the issue as to the applicability of s. 132(2) (at para. 25):

“Fundamentally, the situation of a guarantor is not covered by the 2009 Act. The situation of a guarantor who, at the option of the landlord, may be required to either pay up to a year’s rent or to take over the lease is even more remote from the wording of the 2009 Act. There is not, furthermore, anything either obscure or ambiguous about the application of the legislation and nor is the wording of the section in its literal interpretation in any way absurd so as to invoke s 5 of the Interpretation Act 2005 . . .. This Court is not entitled to extend the law outside the boundaries set by the legislation.”

36. In submitting that the situation which has arisen in this case comes within subs. (2) of s. 132, counsel for the plaintiff distinguished between two situations, namely:

(a) a situation in which an agreement is entered into between a lessor and a guarantor under which the guarantor agrees that the lessor has the option to require the guarantor to take a lease of the demised premises on the happening of a contingency, such as the winding up of the lessee and the disclaimer of the lease by the liquidator, in which situation the guarantor could not avoid the obligation to take the lease if the contingency occurred and the option was exercised, and

(b) a situation in which an agreement to take a lease by a guarantor becomes legally enforceable against the guarantor in consequence of the exercise by the lessor of such an option following the occurrence of such a contingency.

It was submitted on behalf of the plaintiff that subs. (2)(b) is concerned with the point in time at which an agreement is entered into, not when it becomes legally enforceable and that it is intended to disapply s. 132 to the situation at (a) if it occurs before 28th February, 2010, whether the situation at (b) has occurred before that date or not. It was further submitted that in this case the plaintiff has had the right since February 1999, if a stipulated contingency occurred and it chose to do so, to require the plaintiff to take a lease, which the plaintiff was obliged to take and that such right could not be taken away by s. 132. The obvious intention of the Oireachtas in enacting subs. (2) was to avoid unconstitutionality. This aspect of the matter was not addressed adequately in the Reox decision, it was submitted.

37. As was the case in Reox, in this case there is no challenge to the constitutionality of s. 132. Accordingly, the only question for the Court is the question outlined earlier (at para. 30), namely, whether the agreement on which the plaintiff bases its action is “an agreement for such a lease”, which was “entered into” before 28th February, 2010, having regard to the proper construction of s. 132, which necessitates the application of the definition of “lease” in s. 131. In my view, Clause 7.1 of the Guarantee cannot be regarded as an agreement entered into on 22nd February, 1999 between the plaintiff and the Guarantors for “an instrument in writing . . . containing a contract of tenancy” in respect of the Licensed Premises. As a matter of basic principle, an agreement to create a contract of tenancy necessarily involves, not only an obligation on the part of the prospective lessee to take the lease, but also an obligation on the part of the prospective lessor to grant the lease. Aside from the contingent nature of the Guarantors’ obligation to take a lease of the Licensed Premises, the reality of the situation is that at no time prior to 28th February, 2010 was there an obligation on the plaintiff to grant a lease to the Guarantors. The plaintiff had kept its options open to either rely on Clause 7.1 or Clause 7.2 or, indeed, not to invoke Clause 7 at all.

38. In enacting a provision to effectively disapply s. 132 to the situation which has arisen in this case in relation to the obligation of a guarantor to take a lease, in my view, the provision would have to be drafted in a manner that would make it clear that entering into “an agreement for such a lease” would be deemed to have occurred when the lessor and the guarantor entered into an agreement granting the lessor an option, on the happening of a contingency, to “put” a lease on the terms specified on the guarantor. In the Reox judgment, Charleton J. noted that –

“. . .similar provisions in England and Wales in the form of the Law of Property (Miscellaneous Provisions) Act 1989 are specifically worded so as to capture situations of contingent options.”

Counsel for the plaintiff pointed out that the relevant provisions applicable in England and Wales are to be found in the Law of Property (Miscellaneous Provisions) Act 1994. The provisions in that Act were concerned with the introduction of new form implied covenants for title. However, the old form implied form covenants dating from the Law of Property Act 1925 were to apply “in relation to a disposition of property after the commencement of this Part in pursuance of a contract entered into before commencement”. However, a subsequent section provided that in relation to a disposition of property in accordance with an option granted before commencement and exercised after commencement, “the contract for the disposition shall be deemed to have been entered into on the grant of the option”.

39. Accordingly, I have come to the conclusion that s. 132 would have applied to a lease granted by the plaintiff to the Guarantors, whether on foot of an order of specific performance or otherwise, pursuant to the notice of 4th August, 2011.

Clause (1) of the Guarantee
40. In the Reox case the defendant receiver had argued that, if the plaintiff guarantor was entitled to the benefit of the Act of 2009, then notwithstanding that the defendant receiver had exercised the option requiring the plaintiff as guarantor to take a new lease, he was nevertheless entitled to a full indemnity for any loss on a downward rent review by reason of the application of a clause in similar terms to Clause (1) of the Guarantee. Charleton J. rejected that argument, holding that the applicability of the general indemnity was ousted by the occurrence of a specified event, namely, the defendant receiver choosing to require the plaintiff to take a lease. Charleton J. so found on the basis of the application of the maxim generalia specialibus non derogant as applied by the Supreme Court in Welch v. Bowmaker Ir. Ltd. [1980] I.R. 251.

41. Even without recourse to that maxim, it seems to me that, as a matter of construction of the Guarantee, by invoking Clause 7.1 thereof and seeking to specifically enforce the agreement thereby created, the plaintiff’s entitlement to rely on the indemnity contained in Clause (1) was displaced and its only remedy was pursuant to Clause 7.1.

Conclusion
42. In the light of the finding at paragraph 23 above, the Guarantors’ contention that the Lease absolutely determined on 13th May, 2010 and that the Guarantors have no current liability to the plaintiff fails.

43. As to the extent of the Guarantors’ current liability to the plaintiff, having regard to the manner in which the case was run, it is impossible to make a conclusive determination on that issue. The factors which are relevant to determining that issue are, in my view, the following:

(a) The plaintiff has already got judgment against the Guarantors in the summary proceedings for their liability up to and including 27th March, 2011. Therefore, the Guarantors’ liability relates only to the period commencing on 28th March, 2011. It is to be observed that it appears that the Guarantors did not resist judgment in respect of the period after the letter of 11th March, 2011.

(b) The plaintiff’s case as pleaded (at set out at para. 12(b) above) is that the application of Clause 7.1 of the Guarantee, and the requirement of the Guarantors to take a lease of the Licensed Premises, was instigated by the notice dated 4th August, 2011. Therefore, in the light of the finding at para. 40 above, the liability of the Guarantors from 4th August, 2011 was on foot of Clause 7.1 of the Guarantee, not under the general indemnity in Clause (1) of the Guarantee.

(c) The liability of the Guarantors after 4th August, 2011, on the basis of the plaintiff’s claim as pursued at the hearing, is for damages in lieu of specific performance. In broad terms, the measure of those damages is the loss which the plaintiff has incurred in consequence of the failure of the Guarantors to comply with their obligation of Clause 7.1 of the Guarantee, that is to say, to take a lease of the Licensed Premises from 4th August, 2011 to 21st February, 2019 “at the same rents and subject to the same covenants, conditions and provisions” as were contained in the Lease. However, in assessing that loss, additional factors arise.

(d) The first additional factor is that the plaintiff has been in receipt of the rent reserved by the Current Lease in respect of the Licensed Premises with effect from 1st May, 2012 of which, in fact, the plaintiff’s statement (referred to at para. 15 et. seq. above) took account.

(e) However, another factor which the plaintiff’s statement did not take account of is that, as has been found at para. 39 above, s. 132 of the Act of 2009 would have applied to the Lease granted by the plaintiff and accepted by the Guarantors pursuant to Clause 7.1. This aspect of the assessment of damages in lieu of specific performance was not alluded to by any of the parties to the proceedings. On the basis of my understanding of the terms of the Lease, the next review date after 4th August, 2011 would have been 22nd February, 2014 and it would have been from that date that the application of s. 132 would have impacted on the construction of the new lease granted to the Guarantors. If the Court was in a position to assess the damages in lieu of specific performance, the question which would arise is whether, at that point in time and subsequently, the reviewed rent, determined in accordance with the provisions of the Lease applied by reference to s. 132, would be any greater than the passing rent payable under the Current Lease, so that the plaintiff could show a loss. Even in the absence of evidence, it is not unreasonable to speculate that such an outcome probably is unlikely.

(f) Finally, the issue raised in the actuarial report referred to at para. 18 above as to whether damages should be assessed as “the net after tax proceeds from the rent” would have to be considered and, if so, the appropriate calculation would have to be made on the basis that the recipient of the rent is a company which, presumably, is liable to corporation tax.

44. I have already made a general observation (at para. 18 above) that, on the state of the evidence, it is impossible to assess the quantum of damages in lieu of specific performance. In outlining the foregoing factors, I have sought to clarify the extent to which the Court is hampered. Having regard to the Guarantors’ financial circumstances, in my view, there could be no justification, either in terms of justice and fairness or commonsense, for giving the plaintiff, as the saying goes, “another bite of the cherry”.

45. However, as there is evidence to support the claim for damages for breach of contract, I consider that the proper approach is to award the plaintiff damages for breach of contract in respect of the failure of the Guarantors to comply with their obligations under Clause (1) of the Guarantee between 27th March, 2011 and 4th August, 2011, which I calculate at €199,450.60 representing:

(a) rent for one hundred and thirty days

at €1,460.20 per day €189,826.00

(b) the insurance premium paid by the plaintiff

in respect of 2011 €9,609.60

Total: €199,435.60

Order
46. There will be judgment in the sum of €199,435.60. The remainder of the claim will be dismissed.

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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Kilarden Investments Ltd -v- Kirwans (Galway) Ltd & Ors [2013] IEHC 224 (10 May 2013) URL: http://www.bailii.org/ie/cases/IEHC/2013/H224.html Cite as: [2013] IEHC 224

High Court of Ireland Decisions