Tenant subletting premises to claimants – Breach of clause in lease requiring prior consent of landlord – Landlord forfeiting lease – Claimants seeking relief from forfeiture – Whether claimants unlawful subtenants – Whether appropriate to grant relief – Section 146(4) of Law of Property Act 1925 – Relief granted
The defendant, M, purchased the freehold reversion of a property that was subject to a lease granted to T. The terms of T’s lease restricted the premises to use as a restaurant or club. Clause 2(18)(b) provided that T was not to sublet the premises without the landlord’s prior written consent of the landlord. T’s brother, B, dealt with the premises on behalf of T. He met with the claimants, D, and a contract was signed, which purported to effect the sale of T’s leasehold interest in the premises to D. The contract provided that the deposit was to be paid in weekly instalments over a period of one year. However, D made it clear from the outset that while they could pay a weekly rent, they would not be in a position to pay a large capital sum at the end of their first year of trading. D took up possession of the premises, which they operated as a nightclub. Following further negotiations between B and D, a second contract was drawn up, stating that an increased sum was to be paid as a deposit, and extending the repayment period. D remained in occupation of the premises, but T fell into rent arrears, and, consequently, M re-entered the premises and forfeited T’s lease.
M sought an order for possession, contending that D’s occupation was as a licensee. D sought relief from forfeiture, contending that both contracts with T had been sham contracts, and that, at all material times, their true status was that of weekly tenants of T and, therefore, subtenants of the lessor. D submitted that they were entitled to seek relief from forfeiture both under section 146(4) of the Law of Property Act 1925 and under the court’s equitable jurisdiction (equivalent to the statutory power contained within section 38 of the Supreme Court Act 1981).
The issues were whether: (i) the contracts were sham contracts; (ii) the subtenancy was unlawful, since D contended, M must have known about the subletting and had therefore waived its entitlement to complain of the breach of clause 2(18)(b) in the lease; and (iii) it was right, in principle, to grant D relief. D contended that the forfeiture was for non-payment of rent alone, and that the general principle was that if the landlord could be restored to the position he would have been in but for the breach, then relief ought to be granted. D had always been, and remained, prepared to pay the outstanding arrears.
Held: Relief from forfeiture was granted.
1. Both contracts were sham contracts. The true nature of the agreement between T and D was an oral weekly tenancy.
2. Suspicion of a breach of a lease is not sufficient justification for forfeiting the lease. Chrisdell Ltd v Johnson [1987] 2 EGLR 123 applied. M had not waived its entitlement to rely upon the breach of clause 2(18)(b) in the lease as the evidence pointed strongly to M having no knowledge of the breach. Accordingly, D were unlawful subtenants.
3. Although the discretion to grant relief from forfeiture was a wide one, it should be exercised sparingly in relation to a subtenant, because its effect is to thrust upon a landlord a person whom he has never accepted as a tenant and to create privity of contract between them. However the situation in this case was almost the reverse. M was extremely anxious to have D as tenants, even to the point of using re-entry as a negotiating tactic to secure the maximum commercial advantage. Had M’s consent been sought prior to D’s occupation, it could not reasonably have been withheld. If relief were refused, D would suffer hardship, having spent considerable sums refurbishing the premises.
4. It was right to grant D relief from forfeiture, under section 146(4) of the 1925 Act. Where there was a specific statutory provision, exceptional circumstances would have to prevail before a court could depart from it and invoke some wider equitable power.
Romie Tager QC (instructed by Peter Mercadante & Co) appeared for the claimants; David Holland (instructed by Speechly Bircham) appeared for the defendant.
Sarah Addenbrooke, barrister
