Demands for rent and waiver

In Greenwood Reversions Ltd v World Environment Foundation Ltd ([2008] EWCA Civ 47) the English Court of Appeal (Thomas LJ delivering the judgment) had to consider whether letters from a landlord’s solicitor to the assignor of a lease amounted to a waiver of the right to forfeit.

The long lease of a flat was vested in M. The lease required the landlord’s consent (not to be unreasonably withheld) to any assignment.

M. fell into arrears with the rent and then assigned the lease to WEF without obtaining the landlord’s consent.

The landlords’ solicitors wrote to M to say that forfeiture proceedings would be brought unless the landlords received the pre- and post-assignment arrears. The letter was copied to WEF (who later reassigned the flat to M, again without consent).

M contended that the letters from the landlord’s solicitors amounted to a waiver of the breach of the prohibition on assignment without consent (applying the test propounded by Neuberger J. in Yorkshire Metropolitan Properties Ltd v Co-Operative Retail Services Ltd ([2001] L& TR 26 at [91]).

Thomas LJ assumed, without deciding, that an unqualified demand for future rent would operate as a waiver ([27]).

Even on that assumption, there was no waiver first because the demand was addressed to M (the assignor) not WEF (the assignee and actual tenant at the time of the letters) ([28]).

More important, the letters were not ‘an unqualified demand’:

‘What the letter to Dr Mehra said was that, unless the sums enumerated in the letter (which included the unpaid judgment sum, interest and costs of the first action against Dr Mehra) were paid, proceedings which would include a claim for forfeiture, would be taken. The letter made it quite clear that it was only on payment of the rent that the landlord would accept the tenancy as continuing.’ ([29]).

Michael Lower

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Commentary on Toms v Ruberry

Just published this commentary on Toms v Ruberry in the CUHK Law Issues in Property Law blog.

Michael Lower

When does a landlord have right to serve a CPO s. 58 notice?

In Toms v Ruberry ([2019] EWCA Civ 128) the forfeiture clause in a lease required the landlord to serve notice of default on the tenant. The notice of default was to identify the breaches in question and to give the tenant 14 days to remedy (if the breach was capable of remedy). If the breaches were not remedied by the end of the 14 day period, the landlord could forfeit the lease.

The tenant broke a number of lease covenants. On 25 February 2016, the landlord served on the tenant both a notice of default and a notice under the English equivalent of section 58 of the Conveyancing and Property Ordinance (Law of Property Act, s. 146).

The question was whether the section 146 notice could validly be served before the expiry of the 14 day period specified in the notice of default.

The landlord argued that the section 146 notice was valid. To require the 14 day notice period to expire without the breaches being remedied before the section 146 notice could be served would be to prolong the process unnecessarily; the tenant would have two opportunities to remedy the breaches.

The Court of Appeal agreed with the tenant that the right to forfeit only arose if the 14 day notice period expired and the breaches were not remedied.

Michael Lower

Relief from forfeiture of a contractual licence

In The Manchester Ship Canal Company Limited v Vauxhall Motors Limited  ([2019] UKSC 46) the UK Supreme Court considered whether contractual licensees were entitled to apply for relief from forfeiture of a contractual licence. Lord Briggs gave the judgment with which the other members of the Supreme Court agreed. Lady Arden gave a separate judgment reflecting on whether the judgment introduced unacceptable uncertainty into the law.

Facts

In 1962 The Manchester Ship Canal Company Limited (‘MSCC’) granted Vauxhall Motors Limited (‘Vauxhall’) a perpetual licence (‘the licence’) relating to land owned by MSCC next to the Manchester Ship Canal (‘the Canal’).

The licence entitled Vauxhall to install pipes between Vauxhall’s land and the Canal under land owned by MSCC and to discharge surface water and treated effluent through the pipes into the Canal.

Vauxhall had to pay a ‘rent or annual sum’ of GBP 50. If it failed to make this payment on the due date then MSCC had a right to serve a notice requiring payment within 28 days. If payment was not made within this 28 day period then MSCC had the right to serve notice on MSCC to terminate the licence.

Vauxhall failed to pay the sum due in 2013. MSCC gave 28 days notice but Vauxhall did not pay the sum due within the notice period. MSCC served notice to terminate the licence. Vauxhall claimed relief from forfeiture.

When is relief from forfeiture available?

MSCC argued that relief from forfeiture was only available in respect of proprietary interests. The UK Supreme Court rejected this and held that the court could grant relief from forfeiture where:

•  the primary object is the securing of a stated result for which the forfeiture provision is added by way of security ([18]); and
•  ‘where what is in question is forfeiture of proprietary or possessory rights as opposed to merely contractual rights, regardless of the type of property concerned’ ([94])

Lady Arden may be expressing the first requirement in other words where, in her judgment, she says that there will be no relief where:

‘it was inconsistent with the terms of the parties’ bargain that there should be any relief from strict performance of the contract if the other party chose to enforce his rights’ ([87]).

The Supreme Court did not accept Vauxhall’s contention that the right to relief applies to all forms of right to use property ([49]). The Supreme Court did not commit itself to the idea that the right to possession had to be of indefinite duration ([51]).

‘Possessory rights in relation to land’

In the Court of Appeal, Lewison LJ explained possessory rights as involving factual possession and an intention to possess:

‘There are two elements to the concept of possession: (1) a sufficient degree of physical custody and control (‘factual possession’); (2) an intention to exercise such custody and control on one’s own behalf and for one’s own benefit (‘intention to possess’). What amounts to a sufficient degree of physical custody and control will depend on the nature of the relevant subject matter and the manner in which that subject matter is commonly enjoyed. The existence of the intention to possess is to be objectively ascertained and will usually be deduced from the acts carried out by the putative possessor ..’ ([2018] EWCA Civ 1100 at [59])

and the Supreme Court accepted this understanding ([42]).

Outcome

The rights in this case were possessory ([55] – [58]). There was no reason to disturb the decision of HHJ Behrens to grant relief from forfeiture.

Michael Lower

 

 

 

 

 

Fundamental importance of the right to apply for relief from forfeiture: Golding v Martin

In Golding v Martin ([2019] EWCA Civ 446), the tenant of a long lease of a flat failed to pay a service charge reserved as rent. The landlord brought forfeiture proceedings and was awarded possession. The landlord gave the flat to his daughter and she sold it. The tenant, who lived in Spain, found out what had happened and sought to have the order set aside. The Court of Appeal set the order aside on the grounds that the County Court did not have power to make the order in the terms in which it had been made.

Section 138(3) of the County Courts Act 1984 specifies the form of the order that the County Court can make. The order for possession may not take effect within four weeks from the date of the order nor may it be unconditional. The order made in the present case was an immediate unconditional order.

The point was raised for the first time on appeal but this was one of those exceptional cases in which this was permissible since it went to the jurisdiction of the County Court (Pittalis v Grant [1989] QB 605).

The point was ‘no mere technicality’ since, ‘Where the forfeiture of a long (and potentially valuable) lease is in issue it is plainly of the utmost importance that the lessee be given the right to pay.’ ([20]).

The landlord argued for an alternative interpretation of section 138 which would have meant that the County Court had no right to grant relief from forfeiture in cases of non-payment of rent.

The Court of Appeal rejected this argument, emphasising the fundamental importance of the right to grant relief:

‘it is in our judgment inconceivable to imagine that Parliament could have intended that an important safeguard for tenants should be completely by-passed in the event of a sumamry disposal of a claim to forfeit on the ground of non-payment of rent. To attribute such an intention to Parliament would be to attribute to it an intention to legislate for an irrational scheme.‘ ([31]) (emphasis added).

Michael Lower

Forfeiture: is immoral user by a sub-tenant always an irremediable breach of a head-lease covenant?

Introduction

When, and how, should a tenant’s rights be affected if a subtenant uses the property for immoral purposes in breach of a head-lease covenant? These were the questions considered by the Court in Patel v K&J Restaurants Ltd ([2010] EWCA Civ 1211).

Forfeiture and irremediable breaches

A lease that contains an appropriately worded forfeiture clause can be brought to an end in the event of a tenant’s breach by following the appropriate procedure. The procedure for breaches other than non-payment of rent is laid down in section 58 of the Conveyancing and Property Ordinance (which follows section 146 of the English Law of Property Act 1925).

Section 58 requires the landlord to serve a notice (‘the section 58 notice’) on the tenant specifying the breach complained of and ‘if the breach is capable of remedy, requiring the lessee to remedy the breach’ (emphasis added).

This phraseology suggests that there are irremediable breaches, breaches that are not capable of remedy and that there is no need for the notice to require the lessee to remedy the breach in such a case.

Where the breach is capable of remedy, the section 58 notice has to specify the reasonable period within which the breach must be remedied. Where the breach is irremediable then the notice can specify a very short period. At the end of that period, the landlord can take steps (proceedings or peaceable re-entry) to recover possession.

Is breach of a prohibition on immoral use irremediable?

Breach of a covenant against immoral user has been held to be irremediable. In Rugby School (Governors) v Tannahill ([1935] 1 KB 87) a tenant allowed a house to be used as a brothel in breach of the covenant prohibiting immoral user. The English Court of Appeal held that this breach was irremediable.

In Glass v Kencakes Ltd ([1966] 1 QB 611), however, it was decided that a sub-tenant’s use of the property for immoral purposes was not an irremediable breach of the head-lease where the head-lease tenant neither knew nor had reason to know that the property was being used for immoral purposes.

A tenant who knows, or has reason to know, about a sub-tenant’s breach of a prohibition on immoral use has to take immediate steps to bring the use to an end and to forfeit the sub-lease.

Patel v K&J Restaurants

In Patel v K&J Restaurants, the English Court of Appeal had to consider whether the head-lease tenant satisfied the Glass v Kencakes requirements.

K&J Restaurants were tenants under a head-lease which contained a covenant against immoral use. A sub-tenant used her flat for prostitution. Was this an irremediable breach of the head-lease covenant?

The problem was that K&J Restaurants was informed of the problem by police but took no action for a while though, after some delay, it did evict the sub-tenant. This delay was enough to render the breach irremediable.

When does a tenant ‘know’ of an immoral use?

The first instance judge in Patel put forward this proposition that:

‘”Known”, as in “so soon as the user is known”, must mean exactly that. No court expects a tenant to act on mere suspicion. However, if there are reasonable grounds for suspicion the tenant should make enquiries. He cannot turn a blind eye. The question, therefore, whether breaches are remediable depends on the facts of the individual case.’

In the Court of Appeal, Lloyd LJ agreed with this approach but with one clarification:

‘It seems to me that the tenant must take some action when he has either knowledge or, at least, reasonable grounds for suspicion.’ ([28]).

Why had the tenant in Patel not done enough?

The tenant was informed of the immoral use in a telephone call from a police officer. The tenant took no action at that time, claiming that the police officer had promised to write to him with further details. This call was enough at least to raise a reasonable suspicion that the sub-let flat was being used for immoral purposes. He should at least have made enquiries but did not do so. Three months later, the tenant brought the sub-lease to an end.

This failure to act promptly on the reasonable suspicion of breach meant that the breach was irremediable, not immediately after the phone call but well before the service of the s. 146 (CPO. s58) notice ([32]).

Relief from forfeiture

Even though the breach was irremediable, the Court of Appeal agreed with the decision of the first instance judge to grant relief from forfeiture.

In Ropemaker Properties Ltd v Noonhaven Ltd ([1989] 2 EGLR 50), Millett J. said that where the breach involved immoral user, the courts would only grant relief in the rarest cases.

The first instance judge, however, decided that no stigma attached to the property as a result of the immoral use. The problem use was ended and the character of the area in which the property was located meant that it was difficult for stigma to attach to any particular property.

While it was unusual to grant relief in this class of case, there was no reason to disturb the finding that relief should be awarded given the lack of stigma.

Michael Lower

 

 

 

No waiver where landlord accepts rent after commencing possession proceedings

In Evans v Enever ([1920] 2 KB 315) T’s lease contained a forfeiture clause which gave the landlords the right to re-enter if the rent was in arrears or if the tenant became bankrupt. The tenant fell into arrears with the rent and was adjudicated a bankrupt.

The landlords commenced possession proceedings but these came to an end, in accordance with section 212 of the Common Law Procedure Act, when the tenant paid the rent and costs to the landlord. The landlords knew of the tenant’s bankruptcy when accepting this rent.

The landlords then brought new proceedings seeking possession on the grounds of the tenant’s bankruptcy. The question was whether the landlords had waived the right to forfeit when they accepted rent with knowledge of the bankruptcy.

It was held that they had not. The landlords’ action in bringing the first possession proceedings was an irrevocable election to determine the lease. The subsequent acceptance of the rent could not qualify this.

Michael Lower

Relief from forfeiture will ordinarily only be granted once during a lease term

In Ramadour Industries Ltd v Bullen ([2017] HKEC 974, CA) L granted T a lease of a house on Lamma Island for a two year term. T fell into arrears with the rent but was granted relief from forfeiture. T quickly fell into arrears again and L brought new proceedings seeking possession. T sought relief from forfeiture a second time but this was refused.

The Court of Appeal (Yuen JA giving the court’s judgment) upheld this refusal. The court’s power to grant relief is now codified in section 21F of the High Court Ordinance. Section 21F(1A) provides that relief will only be granted to a tenant once during the term, ‘unless the Court is satisfied that there is good cause why this section should apply in favour of a lessee’.

The intention is clear: relief pursuant to section 21F will normally only be granted once to a tenant during a lease term. The onus is on the tenant trying to invoke section 21F for a second time during a term to show that there is good cause.

Michael Lower

Agreement determines whether landlords must give credit for security deposit when enforcing a judgment against tenant

In Power Plus Ltd v Fruit Design & Build Ltd ([2016] 5 HKLRD 707, LT) the tenant of a flat paid a security deposit of HK$150,000 at the commencement of the tenancy. The forfeiture clause provided that this would be forfeited to the landlord ‘as liquidated damages’ should the tenant be in breach of its obligations under the terms of the lease. The tenant fell into arrears with the rent and the landlord obtained judgment for the sum of HK$105,000. The question was whether the landlord could forfeit the deposit and, in addition, enforce the judgment.

The Lands Tribunal (Judge Wong King Wah) decided that whether this was possible or not depended on the terms of the lease. In this case, on a proper interpretation of the forfeiture clause, the landlord was not entitled to forfeiture and to enforce the judgment without giving credit for it ([15]). The parties’ intention was that the security deposit should be liquidated damages in respect of any claim that the landlord might have against the tenant in respect of the lease.

Michael Lower

Penalty or pre-estimate of loss: an inadequate dichotomy.

In Cavendish Square Holding BV  v Talal El Makdessi and Parking Eye Limited v Beavis ([2015] UKSC 67]) the UK Supreme Court addressed fundamental issues concerning the law of penalties in two cases. One concerned provisions in a very substantial share sale; these provided for the sellers first to lose their entitlement to very substantial installments of the sale price and, second, to transfer their remaining shares to the buyers at a reduced price which left goodwill out of account. These provisions would take effect if the sellers defaulted by soliciting customers for a competing business or working for a competitor. The sellers defaulted and these provisions were invoked by the buyers. The sellers contended that these provisions were penalties and unenforceable. The other concerned a provision whereby motorists agreed that they would pay GBP 85 if they overstayed a two hour free parking limit. A motorist overstayed (by 56 minutes) and Parking Eye Limited (which operated the car park on behalf of its owner) demanded the GBP 85. The motorist contended that it was a penalty. The Supreme Court was unanimously of the view that none of the provisions just outlined amounted to a penalty.

Penalties are clauses that operate in the event of a breach of a primary obligation by a contracting party. They may provide for the payment of money, the transfer of property or the loss of the right to receive money (such as purchase price installments) from the other contracting party. Where any such provision: (a) serves a legitimate commercial interest; and (b) is not  unconscionable or extravagant then it is enforceable. Otherwise, it is a penalty and unenforceable. The idea that the sum payable or forfeited must always be a genuine pre-estimate of loss occasioned by individual breaches of contract is too narrow an approach to the question as to whether or not there is a penalty. One has to look more broadly at whether the provision in question protects some legitimate interest or purpose of the innocent party.

The common law concerning penalties and the equitable jurisdiction to grant relief from forfeiture have common origins and serve similar purposes. They are, nonetheless, distinct from each other and might each be applicable in a particular case. Thus, the court might determine that a particular provision is not a penalty and then go on to consider whether it should grant relief. There is a ‘safe haven’ for the forfeiture of deposits that are restricted to the amount that is customary in a given jurisdiction. If a provision is a penalty, it is completely unenforceable, the courts cannot allow the provision to be partially enforced.

In Cavendish Square, a large proportion of the very substantial purchase price was attributable to goodwill. The clauses restricting the sellers from soliciting clients or engaging in a competing business were designed to protect the goodwill. This was the legitimate commercial purpose of the provisions. Where the sellers broke these clauses, it was not extravagant or unconscionable for them to lose the right to receive payments of the purchase price that were intended to reflect the ongoing value of this goodwill. On balance, the Supreme Court was of the view that the sellers’ obligation to transfer their remaining shares in the company to the sellers at a reduced price could be justified on the same grounds.

As for the car parking case, the legitimate interest was to secure an adequate turnover of traffic on a car park that served a shopping outlet and to prevent the availability of free parking from being abused by people who were not shoppers at the retail outlet. The provision for overstaying also funded the operating costs of the car park and made the offer of free parking possible. The amount of the charge for overstaying was in line with industry guidelines for car park operators and was clearly publicised so that motorists would be aware of it before they entered the car park.

Michael Lower