Distress — Conflict between rival claims to receive rent from undertenants — Superior landlords, trustees of a pension fund, claimed under section 6 of the Law of Distress Amendment Act 1908 to be entitled to receive direct from undertenants arrears of rent due from intermediate tenants — At the same time receivers appointed by a bank which had advanced money to the intermediate tenants executed distress warrants to obtain payment of rent due from the undertenants to the intermediate tenants — The bailiffs acting for the receivers obtained from the undertenants sums amounting to £16,000 — In view of this conflict the receivers sought the directions of the court — If the section 6 notices served by the superior landlords were effective, the receivers were not entitled to recover the rents from the undertenants, the distress was unlawful and the money should be handed over to the superior landlords — If, however, the section 6 notices were ineffective, then the distraint was lawful and the receivers were entitled to retain the money
examining the background and the provisions of the Law of Distress Amendment
Act 1908 Nicholls LJ said that prima facie the superior landlords were fully
entitled under section 6 to receive and give a discharge for the undertenants’
rent. The receivers for the bank, however, contended that the section 6 notices
were not effective against them — They argued that the rule in Dearle v Hall, which
governed priorities in the case of successive dealings with equitable
interests, applied to the competing claims; and they submitted that the
superior landlords were already affected by notice of the bank’s prior interest
before they became entitled to serve the section 6 notices — The court rejected
this submission — In the present case the bank never went into possession of
the mortgaged property and accordingly the intermediate tenants remained
entitled to the rents from the undertenants notwithstanding the charge by way
of legal mortgage — The appointment of receivers made no material difference —
The intermediate tenants were entitled to receive the undertenants’ rents
before the bank’s debenture was executed and they continued to be so after its
execution — There was no question of competing assignments attracting the
Dearle v Hall rule — Finally, if the bank had gone into possession of the
property under the debenture and had not paid rent to the freeholders, the
superior landlords, section 6 of the 1908 Act would have been available to the
latter — Appeal allowed
The following
cases are referred to in this report.
Challoner v Robinson [1908] 1 Ch 49
Dearle v Hall (1828) 3 Russ 1
Gaskell v Gosling [1896] 1 QB 669, CA
Ind Coope
& Co Ltd, Re [1911] 2 Ch 223; (1911) 105 LT
356; 35 Digest (Repl) 378
Knill v Prowse (1884) 33 WR 163
Ratford v Northavon District Council [1986] 3 WLR 771; [1986] 3 All
ER 193; (1986) 85 LGR 443, CA
Turner v Walsh [1909] 2 KB 484; [1908-10] All ER Rep 822; (1909)
100 LT 832; 25 TLR 605, CA
Wallrock v Equity and Law Life Assurance Society [1942] 2 KB 82;
[1942] 1 All ER 510; (1942) 111 LJKB 625; 166 LT 257; 58 TLR 223; 86 Sol Jo
224, CA 31(1) Digest (Reissue) 189
This was an
appeal by Allied Dunbar (Pension Services) Ltd and Terence Peter Sims, the
trustees of the pension fund known as the OSV (Self-administered) Pension Plan,
from a decision of Harman J holding that notices served by the appellants under
section 6 of the Law of Distress Amendment Act 1908 requiring payment of rent
by undertenants to the appellants were ineffective. The property subject to the
disputed claims to the payment of rent was a freehold factory at 44A Gloucester
Road, Croydon. The respondents to the appeal were Geoffrey William Rhodes and
Ian David Holland, who had been appointed joint receivers and managers of
Offshore Ventilation Ltd by the Royal Bank of Scotland.
W Goodhart QC
(instructed by Sharpe Pritchard, agents for A R Drummond & Co, of Epsom)
appeared on behalf of the appellants; C H Pymont (instructed by Nabarro
Nathanson) represented the respondents.
Giving the
first judgment at the invitation of O’Connor LJ, NICHOLLS LJ said: This appeal
concerns the effectiveness of four notices served by a superior landlord on
four undertenants under section 6 of the Law of Distress Amendment Act 1908.
Under that section a superior landlord may serve a notice on an undertenant
requiring the undertenant to make all future payments of rent directly to him
until the arrears of rent due from the intermediate landlord to the superior
landlord have been paid.
The notices
were served in the following circumstances. The appellants are the trustees of
a pension fund known as the OSV (Self-administered) Pension Plan. One of the
assets of that fund was the freehold of a factory at 44A Gloucester Road,
Croydon. On May 9 1984, the trustees granted three 20-year leases, each of a
different part of the factory, to Offshore Ventilation Ltd (‘the company’). The
company subsequently sublet parts of the factory to four individual
undertenants by four underleases for periods varying from five years to almost
20 years.
On March 3
1986 the company entered into a debenture deed in favour of its bankers, Royal
Bank of Scotland, to secure all money from time to time owing. By that deed the
company granted to the bank a first fixed legal charge over the factory. The
deed also created, in the usual way, a fixed charge over all the book debts and
other debts of the company, present and future, and a floating charge on all
the undertaking and property of the company. Shortly thereafter, on July 31
1986, the bank (which was owed more than £150,000 by the company) appointed the
respondents to this appeal to be joint receivers and managers of the company,
under a power in that behalf contained in the debenture. The rent due from the
company to the superior landlords in June 1986 was not paid, nor did the
receivers pay the rents falling due from the company under the headleases in
September and December 1986. These rents totalled about £17,200. Furthermore,
the undertenants did not pay rents due from them in December 1986 totalling
£16,897.
On February 2
1987 the trustees, who were aware of the appointment of the receivers, served
the notices in dispute on the undertenants. Thereupon the receivers, two or
three days later, proceeded to levy distress at the factory in respect of the
arrears of rent due from the undertenants. The warrants were executed on
February 9 and 10. The outcome was that the bailiffs received from the four
undertenants sums amounting in the aggregate to about £16,000.
The receivers
then applied to the court for directions regarding that sum. In short, the
issue was whether the section 6 notices were, in the circumstances outlined
above, effective to assign to the trustees as superior landlords the right to
receive the undertenants’ rents. If they were, the receivers were not entitled
to recover those rents, the distress authorised by them was unlawful, and the
money received by them under that distress ought not to be retained by them but
must be paid to the trustees. Conversely, if the notices were ineffective to
assign that right to the trustees, then the distraints were lawful and the
receivers were entitled to retain the money. On June 19 1987 Harman J held that
the notices were ineffective. From that decision the trustees have appealed.
Law of
Distress Amendment Act 1908
Distress for
rent is a remedy which enables landlords to recover arrears of rent, without
going to the court, by taking goods from the demised property and selling them.
Its origin is the common law, but over the centuries the scope of the remedy
has been modified and extended and, more recently, restricted by Parliament.
The basic rule of common law is that any goods physically on the property for
which rent is due are liable to be taken by the distraining landlord, even
though they belong to an undertenant or other third party and even though the
distraining landlord knows that the goods are not the property of the tenant:
see Halsbury’s Laws of England, 4th ed, vol 13, pp 120-121. Exceptions
were grafted on to this rule; for example, in the interests of trade, husbandry
and public convenience, and in some circumstances a landlord might be estopped
by his own conduct from asserting his right to seize the property of a third
party. Nevertheless, the basic rule still stood at the beginning of this
century.
In 1907 the
case of Challoner v Robinson [1908] 1 Ch 49 came before the
court. A superior landlord levied distress upon some paintings belonging to
various artists which were in the possession of an underlessee for the purposes
of exhibition and sale on part of the premises. Neville J, and subsequently the
Court of Appeal, held that the pictures did not fall within any of the
exceptions. Accordingly, the basic common law rule applied, and the superior
landlord was entitled to seize and sell the pictures.
When giving
judgment, Neville J delivered himself of a trenchant observation on the state
of the law. He said at p 55:
Now this is
the year 1907, and it seems to me extraordinary that it should be possible in a
country which boasts of civilisation, which purports to protect the property of
the law-abiding citizen, to raise such a question. But so it is. The rule that
the landlord is entitled to distrain on the property of third persons upon the
premises, subject to certain exceptions, has up to the present day escaped the
zeal of the legal reformer, and therefore I have to deal with the law as I find
it . . .
In the
following year, the Law of Distress Amendment Act 1908 was passed. In short,
section 1 protects from distress goods of certain undertenants, lodgers, and
other persons who are not tenants and have no beneficial interest in any
tenancy if the person in question makes a declaration that the goods are not
the goods of the immediate tenant but are his goods or in his possession and,
in the case of an undertenant or lodger, if he undertakes in future to pay his
rent directly to the superior landlord until the arrears of rent in respect of
which the distress is being levied have been paid. Shorn of words
If any
superior landlord shall levy . . . a distress on any . . . goods . . . of:
(a) any under tenant liable to pay . . . a rent
which would return in any whole year the full annual value of the premises or
of such part thereof as is comprised in the under tenancy, or
(b) any lodger, or
(c) any other person whatsoever not being a
tenant of the premises or of any part thereof, and not having any beneficial
interest in any tenancy of the premises or of any part thereof,
for arrears
of rent due to such superior landlord by his immediate tenant, such under
tenant, lodger or other person aforesaid may serve such superior landlord . . .
with a declaration in writing made by such under tenant, lodger or other person
aforesaid, setting forth that such immediate tenant has no right of property or
beneficial interest in the . . . goods so distrained or threatened to be
distrained upon, and that such . . . goods, . . . are the property or in the
lawful possession of such under tenant or lodger . . ., setting forth the
amount of rent (if any) then due to his immediate landlord, and the times at
which future instalments of rent will become due, and the amount thereof, and
containing an undertaking to pay to the superior landlord any rent so due or to
become due to his immediate landlord, until the arrears of rent in respect of
which the distress was levied or authorised to be levied have been paid off,
and to such declaration shall be annexed a correct inventory . . . of the goods
. . . referred to in the declaration . . . .
Section 2
provides that it is unlawful to proceed with a distress on the goods of the
undertenant or lodger or other person after the requirements of section 1 have
been met.
Section 3 is a
consequential provision. It provides:
For the
purposes of recovery of any sums payable by an under tenant or lodger to a
superior landlord under such an undertaking as aforesaid, or under a notice
served in accordance with section six of this Act, the under tenant or lodger
shall be deemed to be the immediate tenant of the superior landlord, and the
sums payable shall be deemed to be rent; but, where the under tenant or lodger
has, in pursuance of any such undertaking or notice as aforesaid, paid any sums
to the superior landlord, he may deduct the amount thereof from any rent due or
which may become due from him to his immediate landlord, and any person (other
than the tenant for whose rent the distress is levied or authorised to be
levied) from whose rent a deduction has been made in respect of such a payment
may make the like deductions from any rent due or which may become due from him
to his immediate landlord.
It will be
noted that the latter part of this section envisages that the undertenant who
has paid rent direct to a superior landlord pursuant to a section I undertaking
or a section 6 notice may not be the immediate tenant of the person in respect
of whose rent the superior landlord has levied distress.
Sections 4 and
5 exclude from the Act certain goods, and certain under-tenancies, such as
those created in breach of covenant. Thus far, the Act operates to restrict
superior landlords’ rights to distrain when an undertenant or lodger or other
person takes the steps prescribed by section 1. Section 6, however, enables the
superior landlord to short-circuit this procedure in the case of undertenants
and lodgers. Instead of having first to levy a distress, which is then rendered
abortive by the service of the necessary declaration and undertaking, section 6
empowers the superior landlord, where the rent of his immediate tenant is in
arrears, to serve a notice on any undertenant or lodger requiring all future
payments of rent to be made direct to him. Section 6 provides:
In cases
where the rent of the immediate tenant of the superior landlord is in arrear it
shall be lawful for such superior landlord to serve upon any under tenant or
lodger a notice (by registered post addressed to such under tenant or lodger
upon the premises) stating the amount of such arrears of rent, and requiring
all future payments of rent, whether the same has already accrued due or not,
by such under tenant or lodger to be made direct to the superior landlord
giving such notice until such arrears shall have been duly paid, and such
notice shall operate to transfer to the superior landlord the right to recover,
receive, and give a discharge for such rent.
It was
pursuant to this section that the trustees served the notices which are in
contention in this case.
Successive
assignments
Prima facie these notices fall within section 6. The rent payable by the
company, which was the immediate tenant of the trustees, was in arrears. The
trustees, as the superior landlord, served notices in due form on the four
undertenants. Prima facie, therefore, the consequence prescribed by the
section follows: the notices operated to transfer to the trustees the right to
recover, receive and give a discharge for all future payments of rent by the
undertenants until the arrears of rent due to the trustees had been paid.
Mr Pymont, for
the receivers, contended otherwise. He submitted that the section 6 notices
were not effectual against the bank. He developed an argument to the
following effect. This is a case of successive assignments of the same chose in
action, namely, the right to be paid the undertenants’ rents. The section 6
notices, as observed by Lord Greene MR in Wallrock v Equity & Law
Life Assurance Society [1942] 2 KB 82 at p 84, brought about a statutory
assignment of that chose in action. But that was not the only assignment of
that right in the present case. On the contrary, here there had been a prior
assignment of the same right. When the receivers were appointed, the floating
charge created by the debenture crystallised, and by reason thereof, even if
the fixed charge over book debts had not already achieved that result, the
right to future payments of rent was assigned in equity to the bank. Priority
as between those two successive assignments is governed by the rule in Dearle
v Hall (1828) 3 Russ 1. In the instant case, each section 6 notice
operated as the assignment itself and also as notice thereof to the debtor
(namely, the undertenant). But this did not give the trustees priority, because
when the assignments to the trustees were made the trustees already knew of the
appointment of the receiver and, hence, of the prior assignment to the bank.
That knowledge prevented the trustees from acquiring priority, in accordance
with the principle and authorities summarised in Snell’s Principles of
Equity, 28th ed, pp 65-66.
Mr Pymont next
pointed out that the Act contemplates only the relationships of landlord,
tenant, undertenant and lodger. No mention is made of assignees of the rent
payable by undertenants, even though in law there can be an assignment of the
right to recover rent simpliciter (see, for example, Knill v Prowse
(1884) 33 WR 163). The Act, it was submitted, cannot have been intended to
strip a legal or equitable assignee of the benefit of such an assignment even
if he has given valuable consideration for it, and to do so without giving him
any compensation. The Act should be construed so as to avoid such an injustice
and, therefore, as not overriding the rights of prior assignees who would have
priority under the rule in Dearle v Hall.
This argument
found favour with the judge. However, it is important to note that before the
judge the starting point of Mr Pymont’s contention seems to have been common
ground between the parties. By the starting point, I mean Mr Pymont’s
contention that the crystallisation of the floating charge by the appointment of
the receiver had the effect of assigning to the bank in equity the right to
future payments of the undertenants’ rent. In this court, Mr Goodhart, for the
trustees, disputed that this was the proper analysis of the debenture.
I turn,
therefore, to the terms of the debenture deed. Clause 4(i) reads:
For the
purpose of securing all such moneys and/or the discharge of all such
liabilities as aforesaid the Company as Beneficial Owner hereby charges its
undertaking and all its property and the other assets of whatever nature both
present and future including its uncalled capital for the time being and the
charge hereby created shall rank as:
(a) a first fixed charge by way of legal mortgage
of all (if any) the freehold and leasehold property now vested in the Company
(including land of which the Company is registered as proprietor at HM Land
Registry details of which are set out in the schedule hereto) together with all
fixtures and fittings (including trade fixtures and fittings) and fixed plant
and machinery from time to time therein or thereon;
(b) a first fixed charge on all the goodwill and
uncalled capital for the time being of the Company and all other (if any) the
freehold and leasehold property hereafter vested from time to time in the
future in the Company;
(c) a first fixed charge on all the book debts
and other debts of the Company both present and future; and
(d) a first floating charge on all the
undertaking and all the property and assets of the company both present and
future not subject to a fixed charge hereunder.
At the date of
this deed the company owned the three leases of the factory at 44A Gloucester
Road. Clause 4(i)(a) of the debenture, therefore, created in favour of the bank
a charge by way of legal mortgage over those leases. I shall consider first
what was the effect of this fixed charge in relation to the undertenants’ rents
and, second, whether this position was affected by clause 4(i)(c) or (d) of the
debenture.
The charge
by way of legal mortgage
As a chargee
by way of legal mortgage the bank obtained, by virtue of section 87 of the Law
of Property Act 1925, the same protection, powers and remedies, including the
right to take proceedings to obtain possession from the occupiers and the persons
in receipt of rents and profits, as if a subterm less by one day than the term
vested in the company had been thereby created in favour of the bank. Had such
a subterm been created, the bank would have been entitled to
occupied by undertenants under subsisting underleases, possession would have
taken the form of requiring the undertenants to pay their rent to the bank. The
legal mortgagee of a lease is the reversioner expectant on the underleases (see
In re Ind, Coope & Co Ltd [1911] 2 Ch 223 at pp 231-232) and a legal
chargee is placed in a similar position by section 87.
However, a
mortgagee may permit the mortgagor to remain in possession. If he does so, even
though the mortgagor remains in possession only by leave and licence of the
mortgagee, the mortgagor remains entitled to receive and retain the income of
the mortgaged property without any liability to account at law or in equity.
That means, where the mortgaged property is leasehold and subject to
underleases, that so long as he is so entitled to the income of the mortgaged
property, the mortgagor may recover the rent payable by the undertenants
despite the existence of the mortgagee’s reversionary interest (see section 141(2)
of the Law of Property Act 1925 and the observations of Farwell LJ in Turner
v Walsh [1909] 2 KB 484 at p 494). In the present case, the bank never
went into possession of the property and thus, in accordance with these
established principles, the company remained entitled to receive the rents from
the undertenants notwithstanding the charge by way of legal mortgage.
In this
regard, in my view, the appointment of the receivers made no material
difference. Although the receivers were appointed by the bank, they were,
pursuant to clause 10 of the debenture, deemed to be the agents of the company.
As Slade LJ observed in Ratford v Northavon District Council
[1987] 1 QB 357 at p 371, citing passages from the classical exposition of the
status of receivers given by Rigby LJ in Gaskell v Gosling [1896]
1 QB 669 at p 685, subsequently approved by the House of Lords [1897] AC 575,
this agency of receivers is a real one, even though it has some peculiar
incidents. Thus although, after their appointment, it was the receivers who
were entitled to payment of the undertenants’ rents, their entitlement was as
agents of the company. This was so even though when they received the rents,
they were obliged to deal with the money, as with other money coming to their
hands as receivers, in accordance with the terms of the debenture.
The
floating charge
I turn next to
consider whether the presence in the debenture of paras (c) and (d) of clause
4(i) alters the position regarding the undertenants’ rents in any way. In my
view, it does not. The opening words of clause 4(i) create a charge on all the
property of the company. The nature of this charge is then further defined (‘.
. . and the charge hereby created shall rank as:’). Para (a) deals explicitly
and unambiguously with land currently owned by the company. In my view, para
(a) was intended to state, and it was effective to state, what was to be the
nature of the bank’s charge over such land. It was to be a charge by way of
legal mortgage, with all the incidents which would flow from that (save as
expressly provided elsewhere in the deed, as, for example, in clause 6). Those
incidents, as mentioned above, covered what was to happen to the rents of the
undertenants.
Given the
existence of that charge by way of legal mortgage, I can see no scope for the
operation, in relation to the same property, of the fixed charge created by
para (c) or the floating charge created by para (d), nor do I see any reason to
think that para (c) or para (d) was intended to apply, in some way or other, to
property or rights in property in respect of which a fixed charge by way of
legal mortgage had been created. Indeed, in the case of para (d), the closing
words make it abundantly plain that the floating charge was intended to be a
residual provision, operating only in the absence of a fixed charge.
In my view,
the rights of the bank in respect of the receipt of rents from the undertenants
were governed by para (a), and those rights were not enlarged or altered by
para (c) or para (d).
The
section 6 notices
If the
debenture is thus construed, the present case does not seem to me to give rise
to any particular difficulty. The spectre of successive assignments of the same
chose in action vanishes. Instead, the case presents a comparatively
straightforward picture: the company, as the undertenants’ immediate landlord,
was entitled to their rent payments before the debenture was executed on March
3 1986; the company continued to be so entitled after the execution of the
debenture, the bank not having exercised its right to take possession; and the
company, in the persons of the receivers who were its agents, continued to be
so entitled after the appointment of the receivers on July 31 1986.
That remained
the position when the section 6 notices were served on February 2 1987. Thus
there is no question of competing assignments; there is no question of some
person other than the company having become entitled, in place of the company
and by reason of an assignment from the company, to receive the undertenants’
rents which fell due in and after December 1986.
On that short
ground, which seems not to have been argued in front of the judge, I would
allow this appeal.
I do not find
the result surprising or, even less, unconscionable. Quite the contrary. If the
company had never executed the debenture but had failed to pay its rent,
section 6 plainly would have been available to the trustees.
Conversely, if
the bank had gone into possession of the property under the debenture and had
not paid rent to the trustees as freeholders, section 6 would have been
available to the trustees. Section 6 is as much available where the defaulting
tenant is an assignee of the lease as it is available where he is the original
lessee. The statutory right of the superior landlord to serve a section 6
notice and divert to himself rent payable by an undertenant, where the
intermediate lessor has failed to pay his rent, and also the statutory right of
an undertenant to undertake to pay his rent direct to the superior landlord
under section 1 and thereby preclude the superior landlord from levying
distress on the undertenant’s goods in respect of arrears of rent due to the
superior landlord are now incidents of the superior landlord/intermediate
landlord/undertenant relationship. A person who takes an assignment of a
headlease does so subject to the possibility that if the rent due to the
superior landlord is not paid, the superior landlord may garnishee, so to
speak, the rent due from undertenants. He takes, subject to that possibility,
in the same way as he takes subject to the possibility that if there is default
in payment of the rent under the headlease, the superior landlord may forfeit
the headlease, with the consequence that (unless relief is granted) any
undertenancies will automatically be brought to an end. Likewise, in my view,
in the case of a person, including a mortgagee, who takes not an assignment of
a headlease but a subterm carved out of the headlease. Such a person acquires
an estate which from its inception is subject to the rights conferred on
superior landlords and undertenants by section 6 and section 1.
If that be
right, and the section 6 notices would have been effectual according to their
tenor if no legal charge in favour of the bank had been created, and if also
the notices would equally have been effectual if the bank had gone into
possession under the legal charge, I think it would be surprising to find that
such notices were ineffectual if a receiver were appointed under the legal
charge. I can see no rhyme or reason in that.
In the light
of the conclusion stated above, it is not appropriate or necessary for me to
express any view on what would be the position under section 6 of the Act, or
under section 1, if there were any assignment of a right to receive rent from
an undertenant unaccompanied by an assignment of the reversion. That point can
be decided if and when it arises.
TAYLOR and
O’CONNOR LJJ agreed and did not add anything.
The
appellants were awarded two-thirds of their costs, with no alteration to the
order for costs below in so far as it affected the hearing; other costs below
to be paid by receivers. Leave to appeal was refused.
