Landlord and tenant — Forfeiture — Insolvency — Whether forfeiture by peaceable re-entry constitutes the enforcement by a secured creditor of his security for purposes of section 285(3)-(4) of the Insolvency Act 1986 — Whether forfeiture a remedy requiring leave of court before exercise
By a lease dated July 14 1986 the
plaintiff held a 14-year term of shop premises. On January 9 1996 the defendant
landlords served a notice under section 146 of the Law of Property Act 1925
alleging breaches of the repairing covenant. The plaintiff failed to pay the
rent due on June 25 1996. On August 13 1996 a bankruptcy order was made against
the plaintiff. On September 10 1996 the defendants peaceably re-entered the
premises for non-payment of rent. Following payment of the petitioning
creditor, the bankruptcy order was annulled on October 28 1996 with no trustee
having been appointed. The plaintiff contended that the defendants required the
leave of the court under section 285(3) of the Insolvency Act 1986 as the
forfeiture was not a right of a secured creditor to enforce his security within
the meaning of section 285(4).
forfeit the lease. For the purposes of section 383(2) of the 1986 Act the
landlord’s right of re-entry does not constitute a security. The word ‘security’
in section 11(3)(c) cannot include a landlord’s right of re-entry. A
right of re-entry, whether commenced by writ or by peaceable re-entry, does not
constitute a remedy against the property or person of the bankrupt for the
purposes of section 285(3): Ezekiel v Orakpo [1976] 2 EGLR 47. On
the facts the re-entry did not interfere with the possession, if any, of the
premises by the official receiver, or with the performance of his duties.
Relief from forfeiture was granted on terms.
The following cases are referred to in
this report.
Billson v Residential Apartments Ltd
[1992] 1 AC 494; [1992] 2 WLR 15; [1992] 1 All ER 141; [1992] 1 EGLR 43; [1992]
01 EG 91, HL
Brenner v Rose [1973] 1 WLR 443; [1973] 2
All ER 535
Bristol Airport plc v Powdrill [1990] Ch
744; [1990] 2 WLR 1362; [1990] 2 All ER 483, CA
Conley, Re [1938] 2 All ER 127; (1938) 54 TLR 641
Debtors 13A-IO and 14A-IO of 1995, In re [1995] 1 WLR 1127
Doorbar v Alltime Securities Ltd [1996] 1
WLR 456; [1996] 2 All ER 948; [1996] 2 EGLR 33; [1996] 32 EG 70
Exchange Travel Agency Ltd v Triton Property Trust
plc [1991] 2 EGLR 50; [1991] 35 EG 120; [1991] BCLC 396; [1991] BCC 341
Ezekiel v Orakpo [1977] QB 260; [1976] 3
WLR 693; [1976] 3 All ER 659; [1976] 2 EGLR 47; (1976) 239 EG 501, CA
House Property & Investment Co Ltd,
In re [1954]
Ch 576; [1953] 3 WLR 1037; [1953] 2 All ER 1525
March Estates plc v Gunmark Ltd [1996] 2
EGLR 38; [1996] 32 EG 75; [1996] 2 BCC 1
Saunders, In re [1997] Ch 60
This was an application by the plaintiff,
Abdul Razzaq, by summons under, inter alia, Ord 14A of the RSC seeking
declaratory relief and relief from forfeiture against the defendants, Zaverilal
Odhavjimulji Pala and Bipin Zaverilal Pala.
John Machell (instructed by Michael, Amy
& Partners) appeared for the plaintiff; Martin Hutchings (instructed by
Salusburys Robinson & Turnor, of Leicester) represented the defendants.
Giving judgment, LIGHTMAN J said:
I have before me an appeal from an order by Deputy Master Iwi made on February
25 1997 dismissing a summons by the plaintiff. The appeal raises unresolved
questions as to the effect of the bankruptcy of a tenant on the right of a
landlord peaceably to re-enter and forfeit the lease.
Facts
By a lease (‘the lease’) dated July 14
1986, the premises known as 277 Green Street, London E7 (‘the premises’), were
let for a period of 14 years from December 25 1984 at an initial rent of £3,250
pa, payable by equal quarterly payments in advance on the usual quarter days.
Pursuant to the rent review clause contained in the lease, as from December 25
1989 the rent was increased to £10,000 and a further review is provided for as
from December 25 1994. The machinery for this further review has yet to be activated.
The parties agree that the revised rent will not be less than £10,500 and may
be as high as £18,000. The lease contains a repairing covenant and provides
that, if the rent reserved is in arrears for 21 days after the same has become
due or there is any breach of any of the covenants contained in the lease, the
lessor shall have a right of re-entry.
On September 16 1992 the lease was
assigned to the plaintiff who thereafter earned his livelihood by carrying on
the business of a shop at the premises. The freehold reversion became vested in
the defendants on March 20 1995. On January 9 1996 the defendants served on the
plaintiff a notice under section 146 of the Law of Property Act 1925 requiring
certain alleged breaches of the repairing covenant to be remedied. The
plaintiff made default in payment of the quarter’s rent due on June 25 1996. On
August 13 1996 a bankruptcy order was made against the plaintiff. The plaintiff
did not disclose his ownership of the lease to the official receiver. The
defendants became aware of the bankruptcy order on September 6 1996. Also on
September 6 1996 the plaintiff lodged third party funds sufficient to pay off
the petitioning creditor and the costs of the petition with the insolvency
practitioner retained by him. The solicitors for the petitioning creditor
acknowledged receipt of payment of the sum owed to it on September 18 1996. On
September 13 1996 the plaintiff applied to have the bankruptcy annulled on the
ground that all his creditors had been paid in full and (subject only to
payment of the fees of the official receiver) the bankruptcy was annulled on
October 28 1996. No trustee in bankruptcy was ever appointed.
On September 9 1996 the defendants’
solicitors, who by then knew of the bankruptcy, by telephone informed the
plaintiff’s solicitors that the defendants intended to re-enter and forfeit the
lease the following day for non-payment of the arrears of rent. Immediately
thereafter the plaintiff’s solicitors sent by fax a letter to the defendants’
solicitors saying that the plaintiff had instructed them that he had the funds
to pay the arrears and that once put in funds the following day the solicitors
would send a client account cheque for the arrears; and requesting the
defendants to refrain from re-entering. In view of the plaintiff’s bankruptcy
and his past history of defaults in his obligations as tenant, the weight to be
given to this assurance of payment on his part was open to question. No
reference was made in the plaintiff’s solicitors’ letter of any need on the
part of the defendants for the leave of the court before this course could
lawfully be adopted. Notwithstanding receipt of this letter, at 6 am on
September 10 1996 before the plaintiff arrived at the premises the defendants
broke the locks on the doors of the premises, and peaceably re-entered on the
grounds that the rent was in arrears for a period exceeding 21 days. Later on
the same day the plaintiff’s solicitors posted the cheque for the arrears
(which the defendants subsequently accepted) and in the accompanying letter
stated that the plaintiff intended to apply for relief from forfeiture.
On September 26 1996 the defendants wrote
to the official receiver informing him of the re-entry and inviting him to
remove the plaintiff’s stock from the premises. On October 1 1996 the
defendants agreed on the telephone with Mr Sen of the official receiver’s
office to provide him with a copy of the lease. In the course of this
conversation Mr Sen told the defendants that the plaintiff had applied for the
annulment of the bankruptcy order. On October 7 1996, in the course of a
further telephone conversation with the official receiver’s office, the
defendants agreed to allow the official receiver to remove the plaintiff’s
stock the following day. The official receiver never raised any objection to
the re-entry nor did he ever suggest that this occasioned any interference with
his possession of the premises or his duties or prejudiced the plaintiff’s
creditors.
On October 11 1996, the plaintiff issued
these proceedings claiming in his statement of claim: (1) that by reason of
section 285(3) of the Insolvency Act 1986 (‘the Act’) the alleged forfeiture
(having taken place without the prior leave of the court) is void and that in
consequence he is entitled as of right to an order for possession and damages
for breach of the covenant for quiet enjoyment and trespass; and (2) in the
alternative relief from forfeiture. The defendants in their defence and
counterclaim deny the plaintiff’s entitlement to any of the foregoing relief
and further or in the alternative claim that the lease has been forfeited for
breach of the covenant to repair (such forfeiture being effected by service of
the counterclaim) and seek damages for the dilapidations. The plaintiff in his
defence to counterclaim and counterclaim to counterclaim denies the defendants’
entitlement to forfeit on the grounds of the alleged dilapidations and seeks in
the alternative relief from this second forfeiture.
The plaintiff by summons dated January 17
1997 seeks: (1) determination pursuant to RSC Ord 14A of the issue of law
whether the alleged forfeiture by re-entry was void by reason of section 285(3)
of the Act; (2) if the re-entry is held void, summary judgment for damages to
be assessed for breach of the covenant for quiet enjoyment and trespass in
respect of the period after September 10 1998; (3) in any event an interim
order for possession of the premises pending trial. The master held that the
forfeiture was valid. On this appeal before me, the parties have agreed that,
if I think that relief should be granted against the forfeiture by re-entry for
non-payment of rent, I should grant such relief, but entirely without prejudice
to the defendants’ claim in this action to forfeit for failure to repair, which
should proceed to trial.
Two matters are agreed by counsel. The
first is that the reviewed rent will not be less than £10,500 and that, if the
plaintiff is granted relief against forfeiture for non-payment of rent, payment
at this rate should be made pending the rent review and thereafter payment
should be made at the rate of the reviewed rent pending judgment in the
proceedings regarding the dilapidations and that the review and such payments
should not in any way prejudice the defendants’ right to forfeiture if they
succeed in such proceedings. The second is that there are certain specified
dilapidations which the plaintiff can and will repair within three months and
that £4,591.40 representing the plaintiff’s estimate of the cost of these
repairs shall within seven days be paid into court or the joint names of the
parties’ solicitors to secure the execution of and payment for these repairs.
Law
1. Validity of peaceable
re-entry
Section 285 of the Insolvency Act 1986
(so far as material) reads as follows:
(3) After the making of a bankruptcy
order no person who is a creditor of the bankrupt in respect of a debt provable
in the bankruptcy shall —
(a) have any remedy against the
property or person of the bankrupt in respect of that debt, or
(b) before the discharge of the
bankrupt, commence any action or other legal proceedings against the bankrupt
except with the leave of the court and on such terms as the court may impose.
This is subject to sections 346
(enforcement procedures) and 347 (limited right to distress).
(4) Subject as follows, subsection (3)
does not affect the right of a secured creditor of the bankrupt to enforce his
security.
The principal issues of law raised in
this case are twofold. The first is whether the exercise of the right of
peaceable re-entry by a landlord when the tenant is in arrears with his rent
constitutes the enforcement by a secured creditor of his security. If this is
so, section 285(3) has no application. The second (which only arises if the
answer to the first issue is in the negative) is whether the right of peaceable
re-entry constitutes a remedy against the property or person of the bankrupt in
the prior leave of the court. It is common ground that the exercise of the
right of re-entry does not constitute the commencement of legal proceedings
within section 285(3)(b) and that no leave was sought or obtained before
the re-entry was made.
The words ‘security’ and ‘remedy’ are
each used in two different senses, the one according with the recognised legal
meaning of the words and the other a wider and more colloquial sense. The
question is the sense in which they are used in the section.
(a) Right of re-entry as security
The starting point for the examination of
this question is section 383(2) of the Act which provides (so far as material)
as follows:
… a debt is secured for the purposes of
this Group of Parts [relating to personal insolvency] to the extent that the
person to whom the debt is owed holds any security for the debt (whether a
mortgage, charge, lien or other security) over any property of the person by
whom the debt is owed.
Section 248 of the Act contains (for all
practical purposes) the identical definition of security for the purposes of the
group of parts of the Act relating to company voluntary arrangements,
administrations and liquidations.
It is well established that the right of
re-entry, though often colloquially referred to as a security, is not a
security in the strict legal sense of the word: see Ezekiel v Orakpo
[1977] QB 260* and In re House Property & Investment Co Ltd [1954]
Ch 576, at p614. Lord Browne Wilkinson in Bristol Airport plc v Powdrill
[1990] Ch 744, at p760C stated:
*Editor’s note: Also reported at [1976] 2
EGLR 47
Security is created where a person (‘the
creditor’) to whom an obligation is owed by another (‘the debtor’) by statute
or contract, in addition to the personal promise of the debtor to discharge the
obligation, obtains rights exercisable against some property in which the
debtor has an interest in order to enforce the discharge of the debtor’s
obligation to the creditor.
I would respectfully adopt this analysis,
though I may add for completeness that security may be given, eg for the making
of a payment, without the need for the existence of any personal obligation to
pay: see Re Conley [1938] 2 All ER 127. The threat to exercise and the
exercise itself of, the right of re-entry may secure (in the sense to induce)
the tenant to fulfil the covenants in the lease, but is not a form of charge
over the lease. Where the right of re-entry is exercised as the sanction for
non-fulfilment of the covenants, relief against forfeiture may be obtained if
the tenant can and will remedy the default on the ground that (using the term
in a colloquial sense) the right of re-entry is only a ‘security’ to achieve
this result. Mr Hamish Anderson in his valuable article ‘Tenants’ Voluntary
Arrangements’ in Tolley’s Insolvency Law and Practice 1996 vol 12
pp114–119 states the position clearly:
… rights of re-entry are not security
interests as a matter of general law. Security involves the owner/debtor
conferring an interest in his property on his creditor which is defeasible by
discharge of the debt (Re George Inglefield Ltd [1933] I Ch 1). A right
of re-entry is an incident of the very estate granted by the landlord to the
tenant. It is conceptually impossible for it to constitute discrete property
belonging to the tenant but capable of being made available by the tenant to
the landlord. The right is at all times a right vested in the landlord: in no
sense can it revert to the tenant upon performance of the tenant’s obligations.
It may have the commercial effect of a security interest but it lacks the
essential characteristics of security (consider Ezekiel v Orakpo
[1977] QB 260).
The question then arises whether in the
context of the scheme of the Act the intention can be found to give to the word
‘security’ in sections 383(2) and 248 a wider meaning which embraces rights of
re-entry. Such a wider meaning has been given to the word ‘security’ in the
context of section 11 (3)(c) of the Act in a consistent line of
authorities since the enactment of the Act. In particular this wide meaning
formed the ratio decidendi of the first instance decision in Exchange
Travel Agency Ltd v Triton Property Trust plc [1991] BCC 341* and
was accepted or assumed to be correct in obiter dicta in the others,
which include the Court of Appeal decision in Doorbar v Alltime
Securities Ltd [1996] 1 WLR 456†. In March Estates plc v Gunmark
Ltd [1996] 2 BCC 1‡, (a case concerned with the question whether the term
‘security’ in section 4(3) of the Act and accordingly for the purposes of a
company voluntary arrangement included a landlord’s right of re-entry), in the
absence of argument to the contrary I felt myself bound to adopt the same
construction.
*Editor’s note: Also reported at [1991] 2
EGLR 50
†Editor’s note: Also reported at [1996] 2
EGLR 33
‡Editor’s note: Also reported at [1996] 2
EGLR 38
Notwithstanding the authorities referred
to in March Estates v Gunmark, it is now quite clear to me that
the answer to the question is in the negative and that for the purposes of
section 383(2) the landlord’s right of re-entry does not constitute a security.
The scheme of the Act confirms that the word ‘security’ is used in its strict
legal sense. Section 269(1) provides that a fully secured creditor can only
petition for the bankruptcy of the debtor to the extent that he is an unsecured
creditor: a secured creditor can only petition if he is willing at least in
part to give up his security. The combined effect of section 383(2) and rr
6.109 and 6.115 of the Insolvency Rules 1986 is that a secured creditor must
put a value on his security and prove only for the balance.
The language of these sections is quite
inappropriate to the inclusion of a right of re-entry as a security. There can
be no question of a landlord being required to surrender his right of re-entry
if he is to petition or prove in a bankruptcy: yet he would have to do so if
his right of re-entry constituted for the purposes of personal bankruptcy a
security. Nor can his right of re-entry sensibly be valued. These
considerations confirm that the term ‘security’ is not to be extended to
include the right of re-entry. A landlord can only be a secured creditor if he
has taken security, eg a charge on the lease or subrents.
I should add that materially similar
considerations apply in respect of section 248 of the Act in case of corporate
insolvency. While a secured creditor may petition to wind up a company without
being required to express willingness to give up his security, he must put a
value on his security and only prove for the balance: see rr 4.88 and 4.95 of
the Insolvency Rules 1986. Again such a procedure is totally inapposite to a
landlord’s right of re-entry. The word ‘security’ in section 11(3)(c) of
the Act therefore cannot include a landlord’s right of re-entry. On
reconsideration, I am of the view that in March Estates v Gunmark
I should have so stated and declined to follow the ratio decidendi of Exchange
Travel Agency Ltd v Triton Property Trust plc [1991] BCC 341 and the
obiter dicta in the other authorities to the contrary effect. It would
appear that the dicta were uttered without full (if any) argument on the
question and that in none of those cases or indeed in Exchange Travel
was any reference made to the decision of the Court of Appeal in Ezekiel
v Orakpo or the statutory provisions to which I have referred. In this
case I have had the benefit of full and able argument from Mr John Machell and
Mr Martin Hutchings.
(b) Right of re-entry as remedy
The right of re-entry is often
colloquially referred to as a remedy of the landlord: see eg In re Debtors
13A-IO and 14A-IO of 1995 [1995] 1 WLR 1127, at p1133. But the Court of
Appeal in Ezekiel v Orakpo supra held, with reference to a
provision to like effect in section 7(1) of the Bankruptcy Act 1914, that the
right of re-entry, whether exercised by service of a writ claiming possession
or by peaceable entry, does not constitute a remedy against the property or
person of the bankrupt. The reasoning is that the exercise of the right of
forfeiture does not remedy any preceding breach of covenant: it merely prevents
its recurrence and affords relief to the landlord from being saddled with a
defaulting tenant. If this is so, it is anomalous that under section 285(3) a
landlord requires the leave of the court before he can commence proceedings for
forfeiture, but is immune from any restraint on exercising his right of
peaceable re-entry. This is the more so when
re-entry: see Billson v Residential Apartments Ltd [1992] 1 AC
494* at p536F. But that is not a sufficient basis on which I am free to give
the word ‘remedy’ a wider meaning than afforded in Ezekiel v Orakpo
supra.
*Editor’s note: Also reported at [1992] 1
EGLR 43
(c) Effect of interference with
possession of officer of the court
At my invitation counsel provided me with
detailed submissions in writing on the question whether the peaceable re-entry
in this case might be unlawful and of no effect as constituting a wrongful
interference with the possession of and performance of his duties by the
official receiver.
Upon the bankruptcy of the plaintiff the
official receiver, an officer of the court, automatically became receiver and
manager of the plaintiff’s estate (including the lease and business) with a
duty to protect it: see section 287 of the Act. No one may without the leave of
the court interfere with the possession or the performance of his duties by an
officer of the court. If the peaceable re-entry constituted an interference
with this possession or with the due performance by the official receiver of
his duties, such conduct on the part of the defendants would constitute a
contempt of court if they had the requisite mens rea.
On reflection I have concluded that on
the facts of this case it would be totally artificial and quite wrong to treat
the peaceable re-entry as an interference with the possession of the official
receiver (if in law the official receiver was in possession of the premises) or
the due performance of his duties because quite plainly the official receiver
did not regard it as either, any more than did the plaintiff or the defendants.
Further, if I had determined that leave was required for the making of the
peaceable re-entry I would have granted unconditional leave retrospectively.
The power to grant leave retrospectively
has been held to be available to validate legal proceedings begun without
leave: see Re Saunders [1997] Ch 60. This position has been reached as a
matter of construction of the legislation requiring the leave of the court for
the commencement of such proceedings. There is no statutory provision governing
the requirement of leave to re-enter when the property is in the possession or
control of an officer of the court: the requirement of leave is one of
judge-made law reflecting the power of the court to protect its processes and
officers. I have no doubt that the court has the inherent jurisdiction to grant
retrospective leave. Such power is necessary to enable the court to ensure that
the requirement for leave achieves its purpose and does not afford an unmerited
windfall to one party at the expense of another. If the defendants had applied
for leave at the time of the re-entry, they were entitled to such leave
practically as of right, for the plaintiff was already 10 weeks in arrears with
his rent, there was no answer in law to their claim and there could be no
prejudice to any creditor of the plaintiff: see Brenner v Rose
[1973] 1 WLR 443 at p446H.
2. Relief from forfeiture
Since the peaceable re-entry was valid, I
must now turn to the question whether I should grant to the plaintiff relief
from forfeiture and if so, on what terms.
In my view, the plaintiff should be
granted relief in respect of the forfeiture and restored to possession on terms
that: (1) the plaintiff and his uncle Mr Pssas Peerzada give the undertaking to
the court already proffered to me within seven days to pay the sum of £4,591.40
into court or the joint names of the parties’ solicitors as security for the
repairs which the parties agree require remedying; (2) the plaintiff undertakes
to the court to carry out those repairs within three months; (3) the plaintiff
pays sums equal to the rent due under the lease in respect of the period until
expiration of the three-month period. For this period, the rent due under the
rent review shall be provisionally set at £10,500 pa pending the determination
of the reviewed rent in accordance with the terms of the lease; and (4) the
plaintiff shall fully co-operate with the defendants in obtaining with all
speed the review of the rent of the premises as from December 25 1994 in
accordance with the machinery set out in the lease; and the grant of such
relief shall be conditional upon the compliance by the plaintiff with the said
terms. As agreed between the parties, the foregoing shall not in any respect
prejudice the rights (if any) of the defendants to forfeit the lease for breach
of the covenant to repair. Subject to further argument, I am of the view that
the plaintiff, having obtained the indulgence of relief, should as a further
term pay the defendants’ costs of these proceedings.
It appears to me that it would be just
that I should grant the plaintiff relief from forfeiture for non-payment of the
rent and order that possession be restored to the plaintiff on the above terms
for the following reasons:
(a) the rent was promised before and paid
very shortly after the forfeiture;
(b) the loss of possession has occasioned
and continues to occasion real hardship to the plaintiff, who is deprived of
his business premises and his means of livelihood;
(c) the conditions which I am imposing will
afford the defendants the fullest protection to which they can reasonably lay
claim pending trial of their counterclaim;
(d) restoring the plaintiff to possession
in the interim would afford the plaintiff the opportunity to make profitable
use of the premises pending judgment on the counterclaim; while if the
plaintiff were kept out pending trial of the counterclaim, the premises would
be sterilised in the meantime, for the defendants could not safely or properly
relet until the matter is finally resolved.
