Simmons v Lee[1997] QDC 94

BETWEEN:

AND:

REASONS FOR JUDGMENT - WOLFE DCJ

Delivered the 20th day of February 1997

This application pursuant to Rule 231A of the District Court Rules was heard in Chambers. The applicants are the plaintiffs in the action. They purchased land which had been leased. They are now the registered proprietors of the estate in fee simple of the land. As the assignees of the reversion expectant on the expiration of the lease they seek to enforce a guarantee of the lease. The guarantee was given to their predecessor in title. This raises the question whether a surety's covenant under a guarantee of a lease is a covenant which runs with the land, or whether the provisions of s. 199 of the Property Law Act 1974 deny the plaintiffs the benefit of the guarantee.

This question has not been considered by the High Court or by the Court of Appeal but decisions of the House of Lords (P & A Swift Investments (a firm) v Combined English Stores Group Plc [1989] AC 632) and the English Court of Appeal (Kumar v Dunning [1989] 1 QB 193), which have been followed by the Full Court of Victoria in Lang v Asemo Pty Ltd [1989] VR 773, suggest the question be answered in the plaintiffs' favour.

Be that as it may, none of the authorities relied upon by the plaintiffs concerned an unregistered lease or a lease for a term of less than three years, and in each of those cases the guarantee was in the form of a deed or included in the lease or a document concerning the lease.

The respondents are the guarantors of the lessee's covenants under the lease which was for a term of less than three years. The lease was granted by Hewchester Pty Ltd, the plaintiffs' predecessor in title, which had obtained the benefit of the guarantee from the respondents. There was no document under which the benefit of the guarantee was expressly assigned to the plaintiffs. The plaintiffs did not give any notice to the respondents pursuant to s. 199 of the Property Law Act 1974.

The plaintiffs claim that the respondents' covenant guaranteeing performance by the lessee of the lessee's obligations is a covenant which touches and concerns the land and runs with the reversion. They say that by the transfer of Hewchester's interest in the land to them, the benefit of the covenant of guarantee automatically passed to them by operation of s. 117 of the Property Law Act 1974 or the common law and perhaps s. 53 of the Property Law Act. The respondents deny any liability to the plaintiffs, saying that the benefit of the guarantee is a legal chose in action which has not been assigned absolutely under the hand of Hewchester, and further that the plaintiffs failed to give them the notice in writing required by s. 199. They assert that the surety covenant is a personal obligation which does not touch and concern the land and even if it does, being personal to Hewchester, it does not run with the reversion.

these proceedings

This action was commenced in the Magistrates Court in October 1991, the plaintiffs suing the respondents, Walter Lee and Karita Bushell-Lee, as guarantors, and also the lessee, Walter Lee Design Pty Ltd (“WL Design”). The action was later transferred to this Court. The plaintiffs' application under R. 231A (cf. O. 39 r. 12 of the Rules of the Supreme Court; Re Cotton Crops Pty Ltd [1985] 2 Qd R 448, 450) seeks an order that the following questions be tried separately and heard and determined summarily:

The parties agreed that all relevant facts were before me to decide the issues. It is appropriate that these questions be determined summarily. If the questions are resolved against the plaintiffs, effectively, the action is determined, but if either of them is found for the plaintiffs, then all questions in the action, except quantum, will be resolved.

the facts

Having regard to the pleadings and the material filed in this application, the following facts were uncontroversial. On about 17 August 1990 the plaintiffs entered a contract to purchase the land at Milton from Hewchester which was then the registered proprietor of the land. The contract was not in evidence. On about 1 November 1990, pursuant to a written agreement (“the lease”) made between Hewchester as lessor and WL Design as lessee, WL Design agreed to lease from Hewchester that land being Lot 2 in BUP 10397 Certificate of Title Volume 8050 Folio 200 (“the premises”), for the term commencing on 1 November 1990 and terminating on 30 June 1993. The lease was in registrable form. It was never registered. A copy of the lease is exhibit “MBS2” to the affidavit of Mark Bradney Simmons filed on behalf of the plaintiffs. It is not a model of legal drafting, defining “the Lessor” as meaning “the said Hewchester Pty Ltd and its executors and administrators and assigns”. Under the lease WL Design as lessee covenanted and agreed to pay to the lessor rent as therein reserved (as provided in clause 3.1), to contribute to outgoings (clauses 3.4 and 3.5) and to pay interest on any rent or other moneys in arrears at the rate stipulated (clause 3.41). The definition of “outgoings” expressly excludes those “specifically payable by the Lessee on any part of the demised premises under its terms of occupancy”, and includes rates charges and taxes, insurance premiums not so excluded, repairs and maintenance and “all contributions to the Administrative and Sinking Fund of the Body Corporate together with all contributions pursuant to 38A and 38B of the Building Units Act payable in respect of the demised premises”.

The lessee's covenants are set out in Part 3 of the Schedule, which provides:

The respondents were not parties to the lease nor named in it.

The respondents, as guarantors, executed a document containing the guarantee and indemnity (the guarantee) on 2 November 1990. The parties agreed a copy of the relevant guarantee is annexure “A” to exhibit “RZB1” to the affidavit of Richard Baumfield filed in this application on behalf of the plaintiffs. The respondents accept that the lease described in the guarantee is the relevant lease. Another, clearer, copy of this guarantee formed part of exhibit “MBS 2”. It was not submitted that this meant that the guarantee was supplemental to or formed part of the lease contained in exhibit “MBS 2” (the lease document defines “the Lease” as meaning “this Lease and any covenant or agreement expressed to be supplemental to this Lease and all amendments to any such document”). The respondents admitted by their pleadings that the document containing the guarantee is a deed.

The guarantee is addressed to Hewchester which is described by reference to its registered name and registered office address. Hewchester is then simply referred to as “the Lessor”. The guarantee then provides:

The guarantee contains no provision expressly providing that the surety covenant is also given to Hewchester's successors in title or assigns, nor any express provision excluding the s. 199 requirement of giving notice to the guarantors of an assignment of the benefit of the covenant.

On 12 November 1990, Hewchester transferred its estate in fee simple in the land to the plaintiffs and the plaintiffs were registered as proprietors thereof on 30 November 1990. The plaintiffs plead that rent reserved under the lease, interest, body corporate levies and rates amounting to $106,805.49 accrued during the period 1 July 1991 to 1 May 1993 and remained due and owing by the defendants to the plaintiffs. The plaintiff's claim against the respondents is for moneys owing pursuant to the guarantee, that is, in respect of moneys which accrued under the lease after the plaintiffs were registered as proprietors of the land.

There was no express assignment by Hewchester of the benefit of the guarantee. Nor was any notice pursuant to s. 199 of the Property Law Act 1974 given to the J respondents in respect of their guarantee.

the issues

The plaintiffs say that the respondents' covenant of guarantee that the tenant's covenants which touch and concern the land shall be performed and observed is itself a covenant which touches and concerns the land, and that the benefit of the respondents' covenant of guarantee ran with the reversion and accordingly the covenant is enforceable at the suit of the plaintiffs without any express assignment (P & A Swift Investments (a firm) v Combined English Stores Group Plc [1989] AC 632, at 637-8).

Although not pleaded in their entry of appearance and defence, the respondents say that the plaintiffs' non-compliance with s. 199 provides a complete answer to the plaintiffs' claim against them. It was said that the plaintiffs cannot enforce the guarantee against the respondents nor hold them liable for rent and other outgoings payable by WL Design, as the respondents' obligation as sureties was a personal one (Consolidated Trust Co Ltd v. Naylor (1936) 55 C.L.R. 423) owed only to Hewchester, the plaintiffs' predecessor in title. Certainly there was no privity of estate or contract between the plaintiffs and the respondents.

The plaintiffs say s. 199 is irrelevant as a surety's covenant securing the performance of the lessee's obligations under a lease is a covenant which runs with the land and that both s. 117 of the Property Law Act and the common law allows them to sue the respondents on the guarantee. In other words, registration of the transfer of the reversion effected the assignment of the benefit of the guarantee of the lessee's obligations.

On registration the new registered proprietor obtains legal title in the fee simple formerly held by the transferee, with all the transferee's rights and interest in that legal estate albeit with such limitations, qualifications or enlargements as the law imposes on or extends to the estate so transferred. Thus by registration of the transfer of the estate in fee simple from Hewchester to the plaintiffs the whole of Hewchester's estate or interest in the land, that is the reversion expectant on the lease, was transferred to the plaintiffs and they became registered as proprietors of that estate or interest in the land (ss. 34(2) and 48 of the 1861 Act). Accordingly there was an absolute assignment under the hand of Hewchester of its estate and interests in the land. But what interests were assigned? A guarantee is not an instrument capable of registration under the Real Property Acts, although the benefit and burden of the covenants of a lease which touch and concern the land will pass with the reversion by operation of s. 117 of the Property Law Act and so on registration of the transfer of the reversion expectant on a lease, the covenant for payment of rent reserved will enure for the benefit of the transferee.

The plaintiffs' registered interest in the land, although then paramount to all other interests not then noted on the register (s. 44 of the 1861 Act), was not paramount or having priority over the short term lease: see, s. 11 of the Real Property Act of 1877 which speaks of a “tenancy” for a term not exceeding three years. The lease was in registrable form but not registered although s. 18 of the 1877 Act permits registration of a “lease” for a term not exceeding three years if executed in the prescribed form. Had the lease been registered, s. 47 of the 1861 Act would have preserved all “powers rights and remedies to which a reversioner is by law entitled”. Although s. 43 of the 1861 Act provides that no instrument shall be effectual to pass any estate or interest in the land or to render such land liable as security for the payment of money until such instrument is registered, s. 52 retains the distinction between leases for terms not exceeding three years (short term leases) and other leases, requiring execution of a lease in the prescribed form - only if, relevantly, it was for any term exceeding three years. While s. 11 preserves some incidents of the “tenancy” against a later registered proprietor, s. 18 of the 1877 Act - ensures the validity of a short term “lease” for “all intents and purposes” whether registered or not. It may be noted that the expression “lease” is used in s. 18 in its classic sense of a grant or assurance, as is shown by the reference to execution in the form prescribed, and not as referring to the tenancy or leasehold interest created by the grant or anything that might then or later affect the validity or the continuance of the estate so created.

It is well established that s. 11 protects only the tenancy itself and not all its incidents such as an option for renewal (Friedman v. Barrett, ex parte Friedman [1962] Qd R 498) but the words “any lease of land” in s. 18 of the 1877 Act are sufficiently wide to include unregistered leases, see, Leahy v Canavan [1970] Qd R 224, at 228 where W.B. Campbell J. held that the now repealed s. 70 of the 1861 Act (implied covenant to pay rent) (cf. s. 105(2) of the Property Law Act), applied to unregistered as well as registered leases. The covenants in a short term lease run with the reversion, although not all covenants which touch and concern the land enure for the benefit of the tenant as the intention of s. 11 is to protect only the tenancy itself and not the tenancy with all its incidents, see Friedman v. Barrett; Re Davies [1989] 1 QdR 48 at 51. However the covenants in a lease which touch and concern the land run with the reversion by operation of s. 117 of the Property Law Act even where the covenant sued upon is not contained in a registered lease. There is then in principle no relevant distinction between the interest of the reversioner in covenant under a registered lease the reversioner's interest in those under a short term, unregistered lease.

The respondents however, relying on Consolidated Trust Co. Ltd v. Naylor (1936) 55 CLR 423, say that the surety's covenant is a personal obligation which does not run with the reversion, and consequently the plaintiffs have no standing to sue as they did not comply with s. 199.

Undoubtedly the benefit of a guarantee may be characterised as a legal chose in action: see, Loxton v. Moir (1914) 18 CLR 360; PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643, 660. Section 199(1) of the Property Law Act requires that the assignment of a chose in action be absolute and in writing under the hand of the assignor, and further that an assignee cannot enforce the guarantee in the assignee's own name unless notice of the assignment has been given to the guarantor.

the extent of Consolidated Trust Co. Ltd v. Naylor (1936) 55 CLR 423

The question in Naylor was whether a cause of action, given by covenants of guarantee, vested in law in the plaintiff enabling him to sue in his own name. At issue was the effect of the transfer or assignment of two mortgages. Each mortgage contained the guarantor's covenant. One of the mortgages was of land under the general law, and the other mortgage was over land held under Real Property legislation. In the result, an endorsement on the deed of mortgage of land under the general law assigning to the plaintiff the mortgagee's rights powers and remedies thereunder was sufficient to satisfy the requirement of s. 12 of the Conveyancing Act 1919 (s. 199 of the Property Law Act) so that the guarantor's covenant contained in that mortgage was thereby assigned in law to the plaintiff (see, International Leasing Corp (Vic) Ltd v Aiken [1967] 2 NSWR 427, 439, 451). However the transfer of the statutory mortgage did not satisfy that requirement, even though the transfer had been registered. It was held that a transfer of a statutory mortgage under ss. 51 and 52 of the Real Property Act 1900 (NSW) (cf ss. 65 and 66 of the Real Property Act 1861) did not operate to give the mortgagee the right to sue a surety on a covenant of guarantee contained in the instrument of mortgage. Thus registration per se did not effect the assignment of the surety's covenant. Referring to the New South Wales Torrens legislation, Dixon and Evatt JJ said at 434:

The statutory provisions (cf ss. 65 and 66 of the Real Property Act 1861) also relate to transfers of registered leases. Thus Naylor has since been considered in cases involving transfers of statutory mortgages (for example, in Katsikalis v Deutsche Bank (Asia) AG [1988] 2 Qd R 641; PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643) and in cases involving transfers of leases, such as International Leasing Corp (vic) Ltd v Aiken [1967] 2 NSWR 427 (a chattel lease) and Sacher Investments Pty Ltd v. Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5. In Sacher Investments, Yeldham J applied Naylor in holding that a lessor's successor in title could not sue the guarantor of a lessee's covenant, even though the lease had been registered and executed by the lessee's director, as guarantors. At p. 10 he said:

It seems that it was assumed that the surety's covenant did not run with the reversion as the plaintiffs' argument, that no question of assignment was involved as the guarantors had covenanted with the lessor and its successors and assigns, was rejected on the basis that neither the general law or s. 117 of the Conveyancing Act (NSW) (cf s. 117 of the Property Law Act) deals with collateral obligations.

The Full Court, in Katsikalis v Deutsche Bank (Asia) AG [1988] 2 Qd R 641, considered the effect of ss 65 and 66 of the Real Property Act 1861 in relation to transfers of mortgages. Andrews CJ and Thomas J held that those provisions did not have the result that an all moneys mortgage was security for moneys owing to the assignee of that mortgage prior to its assignment. Thomas J discussed the relationship between these provisions of the Real Property Act and s. 199 of the Property Law Act, at 650-651:

But there are matters which might be borne in mind when considering Naylor and the cases applying it. Firstly, as Thomas J warned in Katsikalis v. Deutsche Bank, the differences in the relevant legislation of the States may be of some importance. Secondly, whether or not the land is subject to a lease, there are significant differences between a common law or old system mortgage and a statutory mortgage, which are conveniently collected in the judgment of Williams J in Tessman v Costello [1987] 1 Qd R 283 at 296. Under the former there is a transfer of proprietary rights as the fee simple is transferred to the mortgagee until the mortgagee's rights under the mortgage are satisfied. Under the statutory scheme the “estate or interest” of the transferor of a registered mortgage is an “interest in land” and the transferee obtains an indefeasible title upon registration of the transfer; the incidents of a Torrens mortgage depending on the provisions of the statute and so much of the general law as is availed of by or under those provisions (English Scottish and Australian Bank Limited v. Phillips (1937) 57 CLR 302 at 323, and the legislation treats Torrens mortgages as “distinct and persistent interests capable of the same ready transfer by registration as estates in fee simple and without any discrimination or concern as to the relation of the transferee or transferor thereof to any other estate or interest in the land” (English Scottish and Australian Bank Limited v. Phillips at 324; Naylor at 434).

Thirdly, Naylor concerned transfers of a general law mortgage and a statutory mortgage, both of which differ in some important respects from the registered transfer of the reversion expectant on a lease. Registration of a statutory mortgage does not effect a transfer to the mortgagee of an estate in the land, although the mortgagee has an interest in the land at law in the nature of a charge (Partridge v. McIntosh & Sons Limited (1933) 49 CLR 453 at 466); the mortgagee's interest involves no ownership in the land the subject of the security, but it “is a separate interest in the land which may be dealt with apart altogether from the fee simple or other estate or interest mortgaged” and the interests obtained on the registration of a transfer of the fee simple or a reversion expectant on a lease differ from those vesting on registration of a statutory mortgage. In Queensland the statutory mortgagee, even a mortgagee in possession, is not the owner of the reversionary estate in the land, see Re Partnership Pacific Securities Limited [1994] 1 Qd R 412 at 421 where the rights which vest in the owner of the reversion expectant on a lease are contrasted with those of a mortgagee of leased land. Central to the issue was whether a deed entered into by the mortgagor, the lessee and the mortgagee consenting to the mortgagor granting a lease to the lessee, had the effect of assigning the mortgagor's rights under the lease to the mortgagee. Referring to s. 199 Williams J said at 422:

Then at 423 he said:

Consequently, if Naylor and Sacher Investments apply here, s. 199 governs the situation and the plaintiff's fail in their claim against the respondents.

However s. 199 is of no concern if the true effect of either the common law or s. 117 of the Property Law Act is that the benefit and burden of the surety's covenant which secures the performance of those of the lessee's covenants which touch and concern the land, itself runs with the land. Both Naylor and Sacher Investments were distinguished in decisions of the English Court of Appeal in Kumar v. Dunning [1989] 1 QB 193, which was approved by the House of Lords in P&A Swift Investments (a firm) v Combined English Stores Group Plc [1989] AC 632, and by the Victorian Full Court in Lang v. Asemo Pty Ltd [1989] VR 773, which applied Kumar and Swift Investments. The decisions of those courts was to the effect that the surety's covenant touched and concerned the land and so ran with the reversion expectant on a lease, which the plaintiffs here contend is the effect of both s. 117 and the common law.

Grantees of Reversions Act

Turning firstly to the development of s. 117. At common law, only the heir who inherited the reversion or the successor of the corporation sole could enforce the lessee's covenants affecting the land. The benefit of the lessee's covenants did not run with the reversion, except in the case of covenants for the payment of rent or the rendering of services in the nature of rent (Vyvyan v. Arthur (1823) 1 B. & C. 410) as privity of estate only gave the assignee the right to sue the lessee in debt for rent falling due in his own time. But failure to pay rent during the assignor's time was a breach which caused damage to the assignor exclusively, and the assignee had no right to sue on the express covenants, see Ashmore Developments Pty Ltd v Eaton [1992] 2 QdR 1 at 5-6, per Ryan J. As the assignee obtained no benefit of any of the express covenants in the lease, he could not even sue for breaches that occurred after he bought the premises, because he was a stranger to the covenant between the lessor and the lessee.

In 1540 the Grantees of Reversions Act (32 Hen. 8, c.34) was passed to alter the law in this respect in order to preserve the remedies under leases for assignees of the reversion by giving them the same advantages, benefits and remedies as the heir. In brief it provided that the grantee of a reversion and his assigns had the same benefits and remedies as the heir or devisee of the estate, that is, the same right against the lessee and his successors by entry for non-payment of rent or enforcing forfeiture and the same remedies by action for non-performance of other conditions or covenants contained in the indenture of lease as the lessor himself had (Halsbury's Laws of England, 1st ed., vol 18 para 1123). This was construed to apply only where the condition or covenant concerned the land within the rules in Spencer's Case (1583) 5 Co. Rep. 16a, 18a. Further it was well settled that the Grantees of Reversions Act applied only to covenants in leases by deed (Standen v. Christmas (1847) 10 Q.B. 135; Re Rakita's Application [1971] QdR 59 at 63) and not to undertakings in leases not under seal although where an agreement for lease was specifically enforceable by an order for a grant of the lease by deed (Walsh v. Lonsdale (1882) 21 Ch. D. 9) it was treated as a lease by deed for the purposes of the statute (Manchester Brewery Co v. Coombe [1901] 2 Ch. 608). The Grantees of Reversions Act was replaced by s. 10 of the Conveyancing Act of 1881 which was itself replaced by s. 141 of the Law of Property Act (UK) substantially re-enacting the earlier legislation from 1881 onwards. Section 117 of the Property Law Act is in similar terms to s. 141.

s. 117 of the Property Law Act

Sections 117 and 118 contain the current Queensland re-enactment of the Grantees of Reversions Act of 1540 and provide for covenants that touch and concern the land to run with the land and the reversion. On assignment of the reversion, the assignee is protected by s. 117, and the tenant by s. 118. Section 117 provides:

The history and development of the law since the Grantees of Reversions Act and the effect of its provisions as subsequently re-enacted (for example as in s. 117) has been considered in cases where a covenantor denies the entitlement of an assignee of the reversion or of a person otherwise claiming the benefit of a covenant annexed to the land on the ground that the covenant was personal to the original covenantee or the assignment was merely equitable. Ashmore Developments Pty Ltd v Eaton [1992] 2 QdR 1 is a recent local example of this. It was decided after Kumar, Swift Investments and Lang v Asemo, and it seems that in the event the plaintiff's claim was dismissed because the plaintiff had not given notice under s. 199. The issues there differ from those for determination here, for the action was in respect of rent accruing prior to the assignment of the reversion, and there was privity of estate between the plaintiff and the defendants. The question was whether a clause in the contract of sale altered the effect of s. 117, or whether a notice to the tenant under s. 199 might have had that effect for all practical purposes. It was accepted that s. 117 confers on the assignee of the reversion a right to arrears of rent accrued prior to the assignment of the reversion and that once the assignor acquires that right, the assignee loses it. Each member of the Court construed the clause as having altered rights to rent accruing prior to the assignment, Byrne J further deciding that the relevant clause had the effect of altering the rights conferred on the assignee by s. 117 as well as retaining for the assignor the right to sue in the assignor's own name. However the majority (Macrossan CJ and Ryan J) dismissed the vendor's claim against the tenant. They decided, despite the intention of the vendor and purchaser as expressed in their contract of sale of land, that the effect of s. 117 was such that the right to sue for rent accruing prior to the assignment of the reversion had vested in the assignee alone. In the opinion of Macrossan CJ, because the clause did not alter the effect of s. 117 and the vendor, the assignor of the reversion, had not given notice to the tenant following what was at most an equitable assignment of the assignor's interest in the past rent, and in the opinion of Ryan J, because s. 117 obliged the tenant to pay the rent to the purchaser and the contract of sale having effected an equitable assignment of the debt, the plaintiff had not joined the later registered proprietor in the action nor sued in its name. At pp 3-4 Macrossan CJ said of section 117:

In London and County (A. & D.) Ltd v. Wilfred Sportsman Ltd [1971] Ch. 764 the Court of Appeal distinguished Flight v. Bentley (1835) 7 Sim. 149 (where Shadwell V-C had ruled that the purchaser of the reversion could not sue for rent accruing prior to the conveyance as that rent had been severed from the reversion and was a mere chose in action) and in Arlesford Trading Co v Servansingh [1971] 1 WLR 1080 at 1082 it held that by force of s. 141 “an original lessee remains at all times liable under the lessee's covenants throughout the lease, and assignment of the reversion does not automatically release him from that liability”.

Thus Ashmore Developments answers any suggestion that any provision in the lease the subject of the respondents' guarantee excludes the operation of s. 117 of the Property Law Act. However it does not seem to me that Macrossan CJ's description of s. 117 as providing “a fully adequate prescription in the area” excludes the operation of the common law so far as it is not inconsistent with the statutory provision. Otherwise there is nothing in the judgments of Macrossan CJ or Ryan J which suggest that the reasoning of the House of Lords in Swift Investments [1989] 1 AC 632 or of the Victorian Full Court in Lang v Asemo [1989] VR 773 should not be followed in Queensland.

The protection extended by s. 117 to the assignee of the reversion extends not only to covenants that run with the land but to every obligation or provision contained in a lease which touches and concerns the land. Secondly, when regard is had to the definition of “lease” in s. 4 of the Property Law Act as it then applied, it extended to all leases valid at law, whether or not under seal, including unregistered leases for short terms. Apart from this, s. 117 has not created new rights. For example, s. 117 does not give a mortgagee a right to sue for or recover arrears of rent, see: Re Partnership Pacific Securities Limited [1994] 1 Qd R 412 at 421 where Williams J said of s. 117:

However where there is no privity of estate between a surety and the assignee of the reversion, the assignee cannot rely upon s. 117 to sue the surety as s. 117 applies only to covenants or obligations between the landlord and tenant, see: Kumar v Dunning [1989] 1 QB at 200 and Swift Investments [1989] 1 AC at 639, where Lord Oliver said:

Accordingly the plaintiffs' claim against the respondents cannot succeed if reliance is placed only on s. 117.

the common law position - Swift Investments; Kumar v Dunning; and Lang v. Asemo Nonetheless the House of Lords has held in Swift Investments [1989] AC 632, approving the decision of the Court of Appeal in Kumar v Dunning [1989] 1 QB 193, that even where there is no privity of contract or estate between the guarantor and the assignee of the reversion expectant on a lease, the assignee may enforce a benefit under the surety's covenant, including the payment of money. Generally this is now the position in Australia if regard is had to Lang v Asemo Pty Ltd [1989] VR 773, which applied Kumar v Dunning and Swift Investments (cf. Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, 492).

In both Kumar v Dunning and Swift Investments, it was held firstly, that a legal conveyance of the reversion does not assign the benefit of the surety's covenant unless at least the surety's covenant touches and concerns the land; secondly, that the surety's covenant ran with the land; and thirdly, that on the true construction of the relevant guarantee, there was a clear intention on the part of the guarantor to guarantee the performance of the tenant's obligations throughout the term provided for in the lease.

In Kumar v Dunning the guarantee was contained in a licence under which the lessor of an underlease allowed the lessee to assign the unexpired residue of the underlease to another. The sureties, the original lessee and the lessor were parties to the document. The terms of the guarantee did not expressly state that the holder of the guarantee extended to the holder for the time being of the immediate reversion. The original lessor subsequently sold the head lease without expressly assigning the benefit of the surety covenant. When the new tenant defaulted under the underlease, the assignee of the reversion expectant on that lease successfully claimed from the original lessee who then being entitled to be subrogated to the rights of the assignee of the reversion, sued the sureties for contribution under their guarantee of the new lessee's obligations.

The assignee's standing to sue on the surety covenant depended on whether the covenant touched and concerned the land or was merely collateral (cf Sacher Investments). Sir Nicolas Browne-Wilkinson V-C said how the matter struck him as one of first impression, at 200:

At 200 he discussed the common law position:

This would also appear to be the law in Queensland, see Re Rakita's Application [1971] Qd R 59 per DM Campbell J at 63, with whom Hanger ACJ and Wanstall J agreed. It was also confirmed in Swift Investments, Lord Oliver noting, at 639, that the claim against the surety would rest on the common law rule only if the assignee of the reversion had the legal estate in the reversion and the covenant touched and concerned the land.

Accordingly it was said by the Vice-Chancellor in Kumar v Dunning (approved by Oliver LJ in Swift Investments [1989] 1 AC at 640) that the question of whether a surety's covenant in a lease touches and concerns the land falls to be determined by the same test which is applicable to the tenant's covenant:

The Vice Chancellor then referred to the test laid down by Best J. in Vyvyan v Arthur (1823) 1 B.C. 410, 417:

The Vice-Chancellor's analysis and conclusion at 204, was stated thus:

He then went on:

This statement of the common law position was unanimously approved and adopted by the Judicial Committee in Swift Investments [1989] 1 A.C. 632, where again an assignee of the reversion sued the surety of the obligations of a tenant under an underlease. The lessor was defined in the underlease to include the reversioner for the time being immediately expectant on the term thereby created, the guarantee being included in the underlease, the surety joining in it as surety only.

It was held that the benefit of the surety's covenant could be enforced by the assignee of the reversion without express assignment as the covenant touched and concerned the land, it was beneficial only to the reversioner for the time being, and it was not personal to the assignor of the reversion. Lord Oliver, at 640, disposed of the argument that a reversion on a lease is not ‘land’ for the purposes of the application of the common law rule:

Lord Oliver formulated the following as a working test for whether in any given case a covenant touches and concerns the land (at p. 642):

Lord Templeman (who also agreed with Lord Oliver's reasons) explained the principle in these terms at 637:

Lord Oliver's “satisfactory working test” was applied by the Full Court of the Supreme Court of Victoria in Land v. Asemo Pty Ltd [1989] V.R. 773. There, it seems, the assignee's interest was held in land under Torrens legislation and it was said that there was no reason in principle why it should not apply: at 776 per Gobbo J, with whom Murphy and Phillips JJ agreed. The surety's obligations securing the lessee's covenants under a deed of guarantee granted to the plaintiffs' predecessor in title were held to be enforceable by the assignee of the reversion as covenant touching and concerning the land. The Court was satisfied that the surety's covenant was not a collateral covenant as it could benefit only the lessor for the time being and that once separated from the reversion ceased to be of any benefit to the covenantee. Gobbo J then said, at 776-7:

I can see no reason in principle why the same cannot be said of the respondents' guarantee. The bases on which Naylor and Sacher Investments were distinguished in Kumar are mentioned in Lang v Asemo, apparently with approval. In respect of Naylor, the Vice-Chancellor said ([1989] 1 QB at 206-207):

Although the Court in Lang v Asemo did not refer to Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] AC 1999, which held that a covenant in a lease providing for the payment of a security deposit did not touch and concern the land, it was explained in Kumar v Denning [1989] 1 Q.B. at 206):

I accept that the distinction drawn in Kumar applies here, as I do the view taken of Naylor and Sacher Investments. Finally the Kumar-Swift Investments view more recently has been applied or again confirmed in Caerns Motor Services Ltd v Texaco [1194] 1 WLR 1249; Coronation Street Industrial Properties v Ingall Industries Plc [1989] 1 WLR 304 at 309 (HL); Forestview Nominees Pty Ltd v Perpetual Trustees WA Ltd (1995) 133 ALR 465 at 495 and in Show Shoji Australia Pty Ltd v Oceanic Life Ltd (1994) 34 NSWLR 548 at 554-557, where Giles J accepted that in those cases and in Lang v Asemo, “there was a lessee's covenant which undoubtedly touched and concerned the land, and the guarantor's covenant was similarly characterised because in commercial terms it could not realistically be differentiated from the lessee's covenant and buttressed that covenant”.

But the application of this principle depends upon the plaintiffs showing firstly, that the covenant touched and concerned the land; secondly, that there was an intention to benefit the holder of the reversion that is that the covenant ran with the land; thirdly, that the covenantee acquired a legal estate in the land; and fourthly that any successor in title who sought to enforce the covenant had some stake in the land as the original covenantee.

I am satisfied of the first requirement and they have proved the third and fourth. The question whether the surety covenant runs with the reversion comes down to whether or not it was intended that the surety covenant benefit the plaintiffs as assignees of Hewchester's reversion.

intention

The respondents argued that the guarantee was personal to Hewchester and was not intended to be capable of assignment or benefit to anyone other than the original lessor. The guarantee does not expressly provide that the benefit of the surety's covenants passes to Hewchester's successors or assigns. The question then, as was said by Lord Greene MR in Shayler v Woolf [1946] Ch 320 at 322, is whether on the true construction of the guarantee, “when interpreted in relation to the surrounding circumstances and its own subject matter” was it the intention that the guarantee should be assignable? See also Rogers v. Hosegood [1900] 2 Ch 388 at 396-7; Forestview Nominees Pty Ltd v Perpetual Trustees WA Ltd (1995) 133 ALR at 482.

The lease is not annexed to the guarantee, and there are few references to the express terms of the lease in the guarantee, apart from the address of the demised premises. Hewchester is referred to in the guarantee as the “lessor” but that term is not further defined, unlike the lease document where the definition of “lessor” includes the lessor's assigns. It was said that as the lease contains this reference to the assigns, the benefit of the guarantee passed to the plaintiffs, see Weg Motors Ltd v Hales [1962] Ch 49 at 72. In the law of property the term “assigns” has an extensive meaning. But a reference to successors and assigns is not a prerequisite for the benefit of a covenant passing to subsequent owners of the reversion, see Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500, where it was held that a covenant if it runs with the land and is binding on the covenantor though a mere stranger, may be enforced at the suit of the covenantee, the covenantee's successor's in title and persons deriving title under the covenantee or her successors.

Undoubtedly the provisions of the lease document indicate that the lessee's covenants were intended to run with the reversion. Apart from the definition of “lessor”, clauses 3, 5.27 and 5.31 indicate that the landlord's covenants was intended to enure for the benefit of any assignee of the reversion. Secondly, it was clear that the guarantee was to be available for the whole of the term of the lease as well as any holding over by the tenant: see clause 1, and perhaps clause 2(b), of the guarantee. Although the term of the lease ran from 1 November 1990, the respondents executed the guarantee on 2 November, the lease appears to have been signed on 7 November, and it seems that the respondents signed the lease over the common seal of WL Design, some days after the guarantee was executed. I therefore assume that the respondents were officers of the company and had knowledge of the terms of the lease which Hewchester was granting in consideration of their guarantee.

The surrounding circumstances are not unlike those in Lang v Asemo. The documents may be favourably compared with those in Kumar v Dunning, where the lessor was defined in the lease to include “the owner from time to time entitled to the reversion immediately expectant on the determination of the term hereby granted”, but in the licence, which also contained the guarantee, there was no provision extending these meanings to the words “lessor” and “lessee” in the licence. In my opinion the respondents have not discharged the burden on them to show clear indications that it was intended, contrary to the general rule, that only the original lessor should have the benefit of the covenant: Kumar v Dunning, at 197. There is nothing in the language of the guarantee to support the conclusion that the guarantee was intended to be limited to Hewchester.

In the law of property the term “assigns” has as extensive meaning.

s. 53 of the Property Law Act

Further support for the plaintiffs' claim may be found in s. 53(1) of the Property Law Act, if the word “covenant” as used in the section is not confined to meaning an obligation arising under a deed or contract under seal. It provides:

At the hearing, counsel for the plaintiffs. Mr GA Thompson, intimated that there might be some doubt whether the guarantee was contained in a deed, as that document is not expressed on its face to be a deed, an indenture or to be sealed (s. 45 of the Property Law Act). Nor does it expressly state that it was delivered, but he submitted nothing turned on this. Mr Coulsen, who appeared for the respondents, did not suggest that the form of the guarantee was an obstacle to the plaintiffs' claim, nor did the respondents seek to amend their pleadings to withdraw the admission that the document was a deed. I note the guarantee expressly provides for the separate covenant of each of the respondents as guarantors. Consequently I will proceed on the basis that the respondents intended the guarantee to operate as a deed (cf. s. 4 of the Property Law Act which defines “deed” as including an instrument having under that or any other Act the effect of a deed; Leahy v Canavan [1970] Qd R 224, at 228-9.). As the respondents' covenant of guarantee touches and concerns the land, it is a covenant relating to the plaintiffs' land, see Weg Motors Ltd v Hales [1962] Ch 49 at 72 and accordingly the plaintiffs are in the same position as they would have been had they been named as lessors in the guarantee. Although the plaintiffs do not have the benefit of the procedural provisions under s. 117(2), they are entitled to sue on the guarantee notwithstanding that no notice was given under s. 199. Section 13(2) enables them to do so.

The questions raised in the summons are answered as follows:—

Accordingly the plaintiffs are entitled to the orders sought in the summons. I will hear submissions as to the form of order and further directions in the action. The plaintiffs are entitled to their costs of the application.