Archive for the ‘forfeiture’ Category

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

June 22, 2019

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

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

June 13, 2019

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

October 23, 2017

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

May 27, 2017

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

February 3, 2017

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.

January 20, 2016

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

 

Does acceptance of rent waive a continuing breach of covenant?

January 13, 2016

In Kwok Hon Shing v Happy Team (China) Ltd ([2015] HKEC 2038, LT) L granted T a four year lease of a unit in an industrial building. There were sub-lettings of part for residential purposes in breach of a covenant not to use the property for residential purposes. These breaches continued even after L’s complaint letter of 12 November 2014. L began forfeiture proceedings in February 2015. The breaches of covenant continued at least until 14 February 2015 but the unlawful sub-tenancies were subsequently terminated. L continued to accept rent until April 2015.

The lease contained a clause to the effect that acceptance of rent would not constitute a waiver of any breach by T. This clause had no effect in this case (if it ever has any effect at all); it could not alter the legal implications of acceptance of rent with knowledge of the breach ([33] – [35]).

In the case of a continuing breach of the user covenant, acceptance of rent only waived the breach up to the date of acceptance of rent. Subsequent breaches were only waived to the extent that L knew at the date of acceptance of rent that they would continue ([42]). The application to forfeit the lease was an unequivocal election to determine the lease and acceptance of rent after that could not amount to a waiver ([47]). L had not waived the breach and was entitled to forfeit. The breaches had, however, been rectified and T was granted relief from forfeiture under section 58 of the Conveyancing and Property Ordinance.

Michael Lower

Interpretation of clause modifying duty to respond to requisitions concerning unauthorised structures

August 20, 2013

In Channel Green Ltd v Huge Grand Ltd ([2013] HKEC 1124, CFI) CG had entered into a contract to buy property from HG. It had paid a 15% deposit. The contract contained a clause to the effect that the property was sold on an ‘as is’ basis. The clause provided that CG could neither raise requisitions concerning unauthorised additions, alterations or illegal structures nor refuse to complete or delay completion on account of any such matters. There were several unauthorised structures at the property. CG raised requisitions concerning these structures and refused to complete. HG elected to terminate the contract and forfeit the deposit as a result.

The question was whether, as a matter of contractual interpretation, the relevant clause meant that CG had no right to raise requisitions nor to refuse to complete on account of the unauthorised structures. The Court of First Instance decided that this was the case ([91] – [98] per Recorder Coleman SC).

The court noted that although the content of pre-contractual negotiations is irrelevant to the process of interpretation, statements of fact made in the course of negotiations are good evidence as to the context or factual matrix and so  are relevant to the construction of the contract ([23]). Thus, the fact that HG had informed CG of the existence of a number of the unauthorised structures before contracts had been exchanged was relevant to the construction of the clause.

The court also considered whether the 15% deposit was a true deposit or whether it could potentially be a penalty and decided that it was a true deposit. While the amount exceeded the conventional 10%, this was justifiable in the context of a lengthy period between contract and completion ([109]).

Michael Lower

Deposit or penalty? The court can order repayment of a penalty that has already been paid.

June 26, 2013

Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd ([1993] AC 573, PC) was an appeal to the Privy Council from the Court of Appeal of Jamaica. A purchaser had paid a 25% deposit and this had been forfeited by the vendor when the purchaser failed to complete on time (time being of the essence for completion). The purchaser successfully sought relief from forfeiture of the deposit.

Lord Browne-Wilkinson explained that in general a provision that a party in default is to pay or forfeit a sum of money is an unlawful penalty unless the sum in question can be shown to be a genuine pre-estimate of damages. There is an exception to this general rule in the case of deposits; these can be forfeited even where they bear no relation to the anticipated loss of the innocent party (p. 578).

For a sum to be treated as a deposit it must be a sum that can reasonably be described as a deposit. Since it is difficult to say what sum would be a reasonable deposit, the approach is to accept (without searching for any further explanation) that it is long established custom and usage in the United Kingdom and Jamaica to accept a 10% deposit as being reasonable in those jurisdictions. It is for a seller wishing to rely on any larger sum to show what special circumstances would justify the larger deposit (p. 580). A reference to market practice at the time of the contract does not amount to such a justification (pp. 579 – 580).

Here the vendor had not been able to show why a larger (25%) deposit was justified. As a result, the entire sum (not merely the excess over 10%) was treated as a penalty. The court had jurisdiction to order the vendor to repay the entire sum less the amount of any damage actually suffered by the vendor as a result of the purchaser’s breach (p. 582).

Michael Lower

Provision for forfeiture for non-payment of rent is a usual covenant in Hong Kong

May 30, 2013

In Sun Hing Company v Brilliant Investment Co Ltd ([1966] HKLR 310, FC) L and T entered into a provisional agreement for lease but no formal agreement was entered into (though the ‘provisional’ agreement envisaged that this would happen). The provisional agreement did not contain a forfeiture clause and T fell into arrears with the rent. The question was whether the provisional agreement (enforceable by virtue of Walsh v Lonsdale) included a forfeiture provision as a ‘usual’ covenant. It was held that a forfeiture clause for non-payment of rent is a usual covenant and was enforceable under the rule in Walsh v Lonsdale.

Stamp Duty had not been paid on the provisional agreement. The court had a duty to take notice of that fact and no order would be made until the landlord’s solicitors had undertaken to submit the agreement to the Inland Revenue and to pay the stamp duty.

Michael Lower