Landlord and tenant — Lease of business premises — Rent review clause — Collateral agreement in the form of undertaking by landlords that if lease were executed they would install in the premises suitable lavatory and washing accommodation — Undertaking not fulfilled — Rent not paid — Claim for forfeiture of lease — Counterclaim for breach of collateral agreement — Judge’s order giving judgment in favour of landlords on claim for possession with relief to tenants on terms — Appeal by landlords seeking implementation of rent review provisions — Appeal allowed with qualifications
concerned in this case was a ground floor and basement used by the tenants for
the sale or hire of video cassettes — It was clear before execution of the
lease that the premises were wholly lacking in lavatory and washing
accommodation — The landlords as a condition of execution entered into the
collateral agreement mentioned above — Apart from being a necessity for the
convenience of the tenants the installation was required to conform, inter
alia, with the Health and Safety at Work etc Act 1974 — Unfortunately, the
landlords’ undertaking was not fulfilled and the tenants ceased to pay rent —
Litigation became inevitable and the landlords claimed in a High Court action
the forfeiture of the lease and the tenants counterclaimed for damages for
breach of the collateral agreement — The trial judge’s order was that the
landlords were entitled to possession and recovery of arrears of rent and mesne
profits, abated by one-third on account of the landlords’ continuing failure to
provide the lavatory and washing accommodation — It was, however, part of the
order that, on the landlords’ fulfilling their obligations, the tenants should
be relieved against forfeiture on payment of the abated rent and mesne profits
— The landlords appealed and sought an order to provide for the implementation
of the terms of the lease dealing with rent review — In their appeal the
landlords complained that the one-third abatement ordered by the judge did not
represent a proper valuation but was merely taking figures ‘out of the air’
which was for a 10-year term, contained a rent review clause which became
operative for the second five years — It provided, briefly, for an open market
rent to be agreed or, failing agreement, to be determined by an independent
surveyor — The writ in the present case had been issued and served well before
the end of the first five years — The trial judge had rejected a submission
that the judge should consider and deal in his order with the question of rent
review — The Court of Appeal held that the judge was wrong in this ruling and
that he should have attached some condition to the grant of relief against
forfeiture which would preserve the landlords’ rights under the rent review
provisions of the lease — The judge had not exercised his discretion at all in
this respect — The court recalled that it could, and in suitable cases would,
exercise its own discretion in substitution for that of the trial judge — The
present was a suitable case — All the necessary materials were before the court
— The main circumstance was the issue of the writ well before the termination
of the first five-year period and well before the time when the landlords
should have taken action under the provisions of the lease to obtain a review
for the second period of five years — The court accordingly allowed the appeal
on
landlords to bring into operation the rent review procedures
rejected the complaint that, in arriving at an abatement of one-third of the
rent, on account of the landlords’ continuing breach of undertaking, the judge
had merely taken a figure out of the air — On the contrary, he had carefully
considered the effect on the tenants of the continuing breach, including the
inconvenience caused to the tenants’ staff — It was not necessary for the judge
to go into the profits and losses of the business — There was no justification for
the court to interfere with the exercise of the judge’s discretion in this
respect
was allowed to the extent set out in the judgment of Purchas LJ
No cases are
referred to in this report.
This was an
appeal by the landlords, Nicholas Soteri and Andrew Koumis, from an order made
by Judge Harris QC at Westminster County Court. The appeal arose out of a lease
and collateral agreement between the landlords and Kyriacos Konstantinou
Psylides and Charalambos Manoras, the tenants, relating to a ground-floor and
basement property at 21 Camberwell Church Street, London SE5.
Simon Wheatley
(instructed by Armstrong & Co) appeared on behalf of the appellants; Brian
Riley (instructed by John Constant & Co) represented the respondents.
Giving
judgment, PURCHAS LJ said: This is an appeal by Nicholas Soteri and
Andrew Koumis (to whom I shall hereafter refer jointly as ‘the landlords’) from
an order of His Honour Judge Harris QC made on October 12 1989 in the
Westminster County Court. The appeal arises out of a lease and collateral
agreement made between the landlords and Kyriacos Konstantinou Psylides and
Charalambos Manoras (to whom I shall hereafter refer as ‘the tenants’). The
property concerned was the ground floor and basement at 21 Camberwell Church
Street, London SE5. The premises were business premises and were used by the
tenants for the sale or hire of Greek video cassettes. The judge made findings
of fact which are not in dispute and for convenience I will read from the note
of his judgment:
Now the facts,
as I find them are these, that these premises were purchased by the plaintiffs
in about 1980 for a sum I am told in the region of £9,000. The premises had to
have some work done to the roof but it was a shop premises on the ground floor
and basement, which was operated prior to the lease, it seems, by the second
plaintiff, Mr Koumis as a hirer out and/or vendor of Greek video films. When
the lease was to be executed it was appreciated by the defendants that there
was no lavatory or washing accommodation there and the evidence is quite clear
and is not seriously challenged by the plaintiffs, that Mr Soteri, on behalf of
both of the plaintiffs, gave a promise or assurance, which formed a collateral
agreement, in my judgment, that if the lease was to be executed the plaintiffs
would undertake to put in these premises, as I say, suitable and lawful
lavatory and washing accommodation so that the staff of the shop could use the
same and that the owners of the shop premises being used as a shop could comply
with the necessary statutory regulations and orders, I am satisfied that it was
on that basis that the defendants agreed to take this lease, that is the sort
of collateral contract that one often finds in this sort of case where
undertakings are given by a vendor or a prospective lessor in respect of doing
various works to the property. It is not necessary, in my judgment, for the
lease to be amended, no doubt at great expense and parties often do this
collateral agreement to deal with matters which are thought to be of no great
expense and great moment. I am satisfied further that Mr Soteri told Mr
Manoras, the second defendant, that about February was thought to be the date
when in fact these works were to be done. I do not think Mr Soteri knew when
the works were going to be done because he left these matters of detail in
respect of getting a grant from the local authority to his co-owner, the second
plaintiff, Mr Koumis. However, I am satisfied on the evidence that February was
the date when Mr Soteri gave this undertaking that the lavatory and washing
facilities would be installed. Rent was paid for the first quarter on the
execution of the lease, the defendants having gone into occupation in December,
the lease not being executed until February. However, by the time of the next
quarter day March 25 1983, no work had been done, no endeavours to get the
lavatory installed had been taken by the plaintiffs, and the matter was left as
it was at the date the defendants went in. Accordingly the defendants, as in my
judgment was sensible for them, did not pay the rent, they no doubt were
thinking that their failure to pay the rent might in fact crystallise the
matter and bring things to a head.
In April of
1983 the landlords instructed solicitors, who demanded the rent, and the
tenants replied that the landlords were in breach of the collateral agreement.
That was the first exchange following the tenants’ ceasing to pay the rent
until something had been done about the collateral agreement.
In June and
July 1983 the environmental health department of the local authority started to
take enforcement action by way of serving a notice on the tenants including a
schedule of works required to comply with the Health and Safety at Work etc
Act. The tenants referred the matter to landlords. Things drifted on until the
end of 1983. There was another gentleman, also called Mr Soteri, instructed by
the landlords to try to effect some resolution of the impasse which had arisen
between the parties. The judge commented on the attitude and conduct of the
parties, but I do not feel it is necessary to review those matters as they have
no impact on the issues raised in this appeal.
This long
history of dispute dragged on. There were no new events of significance until
1986. In December 1986 the landlords issued a writ in the High Court claiming
forfeiture of the lease for non-payment of rent and the tenants counterclaimed
for damages for breach of the collateral agreement.
It is
convenient here to refer again to the judgment, where the learned judge made
further findings of fact:
Accordingly,
I am satisfied, as I have said, that there was a collateral agreement. I am
satisfied also that it was not complied with. What the plaintiff, Mr Soteri,
now says is that the work can be done to put in a proper lavatory and
wash-basin within a very short time. Mr Soteri has in the interim bought out
his co-owner Mr Koumis, the property now being worth in the region of £80,000
and Mr Koumis has settled for his half, so he is no longer really concerned, he
is now having no legal interest in the land at all. So what one has to try and
consider is what damages the defendants are entitled to in respect of the
failure of the plaintiffs to comply with that contract of a collateral nature.
In my judgment although the agreement between Mr Soteri dealt with the matter
up to December 1983, it was then envisaged by the parties that in fact the
lavatory would be put in very shortly thereafter and the balance would be paid.
It was not and there was a continuing breach and the longer it went on I am
satisfied from Mr Manoras’ evidence the more difficult it was to keep their
staff on an equable level. They had to go down the road to the restaurant if
they wanted to go to the lavatory, that seems to me to be an intolerable situation.
I interpose
here to say that the judge is referring to the fact that, by chance, the tenant
or a relative of his had another establishment in the same road and in that way
they were able to relieve the difficulties arising out of the failure to provide
proper lavatory accommodation. Accordingly, in my judgment, for the period when
the contract was broken that the rent should be abated by one-third.
Accordingly, that is the amount of the counterclaim which I have not, as at the
present, calculated. However, no doubt the parties will be able to calculate
and agree an abatement.
The order was
drawn up by the judge and signed by counsel. Having adjudged that the
plaintiffs were entitled to recover possession of the land and that they were
entitled to recover a sum of some £6,635.63 for arrears of rent as abated,
together with mesne profits, the order by para 3 provided as follows:
AND upon the
plaintiff within 8 weeks of today installing a water-closet connected to the
main drains and a water wash basin to comply with statutory regulations and
orders and to the satisfaction of the local authority and the defendants’
surveyor, THAT if when such works have been so completed the defendants do have
relief from forfeiture provided they pay into the office of this court the sum
due in respect of rent as abated, namely £6,633.63 together with £83.75 in
respect of the mesne profits as abated and £3,610.67 in respect of interest
together with the costs of the action as taxed or agreed within a period of 42
days of the date of such completion, and unless such sum is paid by such date
the defendants shall thereupon give possession of the land to the plaintiffs.
4 AND THAT
there be judgment for the defendants on their counterclaim for relief against
forfeiture and for an abatement of the rent and mesne profits due in the amount
of one third from the 25th of December 1983 until such time as the said works
be completed and as provided for above, and that the plaintiffs do pay half the
defendants costs of the counterclaim on scale 3 to be taxed if not agreed.
The intent and
purpose of that order was, therefore, first of all, to give judgment in favour
of the plaintiffs on the claim for possession but to grant relief on terms set
out in the order. The matter then rested at that point.
The landlords
appeal against the order and seek an order to provide for the implementation of
terms of the lease dealing with rent review.
I must here
refer to the second ground of the appeal before coming back to the terms of the
lease. Mr Wheatley, who appears for the appellant landlords, submits that the
judge’s assessment of an
were in continuing breach of the collateral agreement was a figure reached, as
he has submitted, ‘out of the air and upon no rational computation’. He submits
that the judge should have taken into account the market value, the loss of
profits (if any) to the video cassette business, and so on.
I should also
record one event during the currency of this long and tiresome history, namely
that at one point the tenants made an effort to install a lavatory and washing
facilities. Regretfully they did not do it very well and the situation remained
that the premises were still in breach of the Health and Safety at Work etc
Act. Mr Wheatley submits that that should have been in mitigation of damages,
and I will return to that in a moment.
I now turn to
record the relevant terms of the lease. It is necessary only to recite from a
proviso to the agreement to pay rent, on the second page of the document. The
lease, as was stated in the judgment, was created on February 3 1983 and ran
for 10 years. The proviso read as follows:
PROVIDED
ALWAYS AND IT IS HEREBY AGREED that the yearly rent payable by the Lessees
hereunder during the last five years of the said term . . . time being computed
from the date from which the term hereby expressed to have commenced shall be
the amount of rent which was payable immediately before the Lessors have given
notice of their intention to review the rent or such a sum (whichever shall be
the higher) as shall be assessed as current market rent for the demised
premises in the open market at that time . . .
(a) such rent not being less than the rent hereby
reserved as shall be agreed in writing between the parties three months before
the commencement of the second period
— That is
after five years —
(b) in the event of the parties hereto failing to
reach such agreement on or before the date appointed . . . the current market
value rent . . . for the second period shall be fixed or assessed by an
independent Surveyor appointed by agreement by the parties hereto or (failing
agreement as to such appointment within two months before the commencement of
the second period time to be of the essence) by an independent Surveyor
appointed for the parties by the President for the time being of The Royal
Institution of Chartered Surveyors (upon the application of the Lessors) . . .
(c) providing that if the Lessors have failed
through inadvertence to exercise their right hereunder to require the review of
the rent at the time hereinbefore appointed they shall be entitled to require
such review of rent on any succeeding rent day (hereinafter called ‘the late
revision date’) by giving the Lessees three months prior written notice and the
yearly rent payable from such late revision date shall be the amount of rent
which was payable immediately before the Lessors gave notice of their intention
to review the rent . . .
The writ of
course had been issued well before the end of the first period of five years.
Mr Wheatley submits that that having been done and being an unequivocal
repudiation of the lease, subject to the obtaining of a court order for
possession on the grounds relied upon of failure to pay rent, it was not open
to the landlords to take any action under the rent review clauses to which I
have just referred. If they did, it would have been treated as a waiver of
their seeking possession and forfeiture of the lease. But Mr Wheatley submits
that, when affording relief against forfeiture on terms which should arise from
a consideration of all the circumstances by him, the judge should have applied
his mind to the question of rent review.
It is fair to
say that until we arrived at court this morning a crucial event was not
disclosed within the court’s papers. We are not concerned with whose fault that
was, it does not matter, but it is of crucial importance. It is true that in
the notice of appeal, had one read it with some degree of prescience and
perhaps a little more, the point is fairly taken:
1. The
learned judge was wrong and/or erred in law by:
. . .
b. refusing
to hear argument in relation to the rent review clause.
That arose in
these circumstances, which are now disclosed in a copy of a letter passing
between Mr Wheatley (who did not appear in the court below but, as I have said,
now appears before us) and Mr Riley (who had the opportunity of appearing both
in the court below and here). I need not read the contents of the letter. It
does record total agreement between counsel as to what in fact happened. The
tenant’s counsel, Mr Riley, had already concluded his submissions on the main
issues in the case as pleaded. The pleadings did not disclose any request for
directions as to rent review from the court. At the end of his submissions Mr
Hoffman (who has since unfortunately died) invited the judge to deal with the
question of rent review. The judge commented that there was nothing before him
and, furthermore, that he had not been referred to the appropriate clause in
the lease. In whatever language he used, he firmly declined to deal with the
question of attaching a condition to the relief from forfeiture which
reinstated the rights which would otherwise have been available under the terms
of the lease (which I have cited) had the possession proceedings not been
initiated as and when they were. In his judgment the learned judge in fact
refers to the rent review clause in these terms:
There was a
rent review clause which has not been dealt with, there were various repairing
covenants and there was the usual clause for forfeiture if the tenants did not
pay their rent within 21 days. The claim by the plaintiffs is for forfeiture
and possession on the ground, they claim in their writ, of £39,606.
That is a
wholly exaggerated figure, and the judge comments on it.
Mr Wheatley
submits that the judge should have accepted Mr Hoffman’s invitation to consider
the matter and make some provision in his order so as to preserve the right
otherwise arising in favour of the landlords from the terms of the proviso to
the agreement for the payment of rent. He further submits that there was no
requirement to plead this matter, nor was there any need to place before the
court any evidence as to the details of the exercise of the right preserved by
the terms of the lease, since the judge was not being asked to assess what the
new rent ought to be or from what date it ought to run. The judge was merely
being asked to deal with the strict provisions of the provisos of the lease
with particular regard to two matters, namely that the notice which the landlords
were obliged to give, ie two months before the commencement of the second
period of five years (and I quote from the lease) ‘time to be of the essence’,
failing an agreement between the parties three months before the commencement
of the second period; and the relief clause, subclause (c), providing that the
landlords ‘. . . if . . . through inadvertence to exercise their right . . . to
require the review of the rent’ could repair their omission within the terms of
that proviso. Mr Wheatley rightly submits that in this case it could never be
argued that the landlords had been inadvertent.
Mr Riley has
submitted that that is not so and that the landlords could have safeguarded
their position either by making some extra-curial offer or by applying to the
court itself. With respect to his able argument on that matter, I am not
persuaded by it. In my judgment, Mr Wheatley is right that the judge should
have accepted the invitation from Mr Hoffman, at least to consider the position
which had then arisen and that he should have attached some condition to the
relief from forfeiture which would preserve the landlords’ rights under the
provisions of the lease to which I have referred.
It is quite
clear that the judge did not exercise his discretion at all in these
circumstances. That being so, this court will in suitable cases intervene,
because the failure to exercise discretion is the exercise of no discretion at
all and that is plainly wrong if an exercise of discretion is required. And,
moreover, in appropriate cases, this court will exercise its own discretion in
substitution for the discretion of the trial judge. In my judgment, this is
such a case. The matters to which the judge’s attention should have been drawn
are all before this court. They are extremely short and simple. They rest upon
the terms of the lease itself and the accepted history of the matter, the main
incident being the issue of the writ well before the termination of the first
period and well before the time at which the landlords should have taken action
under the provisions of the lease to achieve a review of the rent for the
second period of five years.
On this point,
therefore, I would allow the appeal and would include in the order made by the
judge a provision which would entitle the landlords as from the date of this
order to take such steps as they saw fit to bring into operation the rent
review procedures under the lease.
However, in
that context, I must now turn to the second of Mr Wheatley’s submissions. With
respect to those, I am not persuaded that the judge merely took a figure out of
the air. As I read his judgment the judge carefully considered the effect upon
the tenants of what he rightly described as a ‘continuing breach’ of the
collateral agreement. In my judgment, the incident to which I have referred of
a somewhat ineffective attempt to mitigate the position by the tenants should
not be held against them and certainly was not a feature which would have
obliged the judge to make a different approach to the assessment of the damages
from that which he adopted. In my judgment, he rightly looked at the situation
on the ground, including the inconvenience caused to the tenants’ staff. It was
not necessary for him to go into the financial effects on the profits or losses
of the business. The judge was correct to consider the
facilities and being exposed to the threat of proceedings under the Health and
Safety at Work etc Act. The judge was right to ask himself the question, as he
clearly did: what would be the appropriate rent to charge as a result of this
failure to put the premises in proper order?
He adopted that approach and came to a round figure for compensation for
damages which he related to one-third of the rent. He was also correct to
provide that it should run not from the beginning of the lease, because it was
not until after the rent period for the first three months that the agreement
envisaged that the work would be done. Thereafter until today, because I
understand the work has still not been done, there is a continuing figure of
damages running.
For my part, I
see no reason for this court to interfere with what was essentially a question
of discretion, that discretion including the method of approach to computation
of the overall general figure for damages. I appreciate there are other
methods, but there is no reason to say that one method is more appropriate than
another in the circumstances of this case. I would therefore not disturb the
assessment of damages by the judge on the counterclaim or that part of his
order which dealt with an abatement by one-third of the rent with effect from
the end of the first rent period, that is March 25 1983.
With those
qualifications and in that respect I would allow this appeal.
THORPE J agreed and did not add anything.
