The landlord had granted a lease, under which the tenant paid a security deposit on the signing of the lease. The deposit was returnable on the expiration of the term provided that there was no breach of any of it terms and conditions on the part of the tenant or else the deposit would be absolutely forfeited. The landlord subsequently mortgaged its interest in the reversion by assignment to the bank without reference to the security deposit. The landlord defaulted and the bank entered into possession. The landlord then became insolvent. At the end of the term, the tenant demanded the bank to return the deposit.
Held: The critical question was: ‘there remains in any event the critical question of whether, even assuming that, as a matter of construction of the clause, there can be deduced the intention by the original parties that the benefit and burden of the landlord’s obligation for payment should pass without express assignment or novation to and against successors in title, that is a result which, having regard to the nature and purpose of the obligation, is capable of achievement. And as regards this question, their Lordships have found themselves unable to agree with the decision reached by the Court of Appeal of Hong Kong.’
After reciting the tenant’s argument, explained the Board said: ‘That the original tenant’s obligation to make the deposit is ‘bound up’ with his obligation to perform the tenant’s covenants in the lease is undeniable, but the former is, of course, a once-for-all contractual obligation between the original parties as regards which no question of transfer with the term or with the reversion can arise. The sum deposited is to be paid on or before the execution of the lease. What this appeal is concerned with, however, is only the landlord’s obligation to repay once the lease has expired without breach of covenant, there being neither any obligation on the original landlord to pay over the amount of the deposit to an assignee of the reversion nor any obligation on the original tenant to assign to an assignee of the term his contractual right to receive back the amount of the deposit when and if the condition for its repayment is fulfilled. It is bound up with the tenant’s covenant only, as it were, at one remove, as being an obligation correlative to a contractual obligation which is itself connected with the performance of covenants touching and concerning the land.’
The Board concluded: ‘There is not, on any conceivable construction of the clause, anything which either divests the original tenant of his contractual right to receive back after assignment the deposit which he had paid or which entitles an assignee from him to claim the benefit of the sum to the exclusion of his assignor; and, plainly, the money cannot be repaid more than once. Equally, there is not on any conceivable construction anything in the clause which entitles the assignee of the reversion to take over from the assignor the benefit of the sum deposited or which obliges the assignee, in enforcing the covenants against the tenant for the time being, to give credit for money which he himself has never received and to which he has no claim. Whilst it is true that the deposit is paid to the original payee because it is security for the performance of contractual obligations assumed throughout the term by the payer and because the payee is the party with whom the contract is entered into, it is, in their Lordships’ view, more realistic to regard obligation as one entered into with the landlord qua payee rather than qua landlord. By demanding and receiving this security, he assumes the obligation of any mortgagee to repay on the stipulated condition and that obligation remains, as between himself and the original payer, throughout the period of the lease, even though neither party may, when the condition is fulfilled, have any further interest in the land demised. The nature of the obligation is simply that of an obligation to repay money which has been received and it is neither necessary nor logical, simply because the conditions of repayment relate to the performance of covenants in a lease, that the transfer of the reversion should create in the transferee an additional and co-extensive obligation to pay money which he has never received and in which he never had any interest or that the assignment of the term should vest in the assignee the right to receive a sum which he has never paid.’
Citations:
[1987] AC 99, [1987] 1 All ER 1110, [1987] 2 WLR 179, [1987] ANZ Conv R 158
Cited by:
Cited – JBW Group Ltd v Westminster City Council CA 12-Mar-2010
The tenant had applied to the landlord for consent to assign certain leases. The court had declared the right to exercise break clauses in certain leases as lost. The court had found the right to be lost after the assignment of the leases by the . .
Lists of cited by and citing cases may be incomplete.
Landlord and Tenant
Updated: 15 May 2022; Ref: scu.426721