Relief from forfeiture of lease–Non-payment of rent–Lease giving landlords right of immediate re-entry or after period of notice–Landlords electing to give notice–Tenant paying arrears of rent–Whether a forfeiture clause–Whether tenant entitled to relief from forfeiture–Tenant’s appeal allowed
This was an
appeal by Frederick Edward Widnall, tenant of licensed premises, the Stag’s
Head Hotel, Mill Lane, Great Warford, Cheshire, from a decision of Deputy Judge
Woolley at Macclesfield County Court on September 15 1975, granting the
landlords, Richard Clarke & Co, a firm of brewers, possession of the
premises and mesne profits of £150.35. By a counterclaim, the tenant sought
relief from forfeiture, contending that the judge was wrong in holding that a
provision for entry after a period of notice was not a forfeiture clause.
P W Watkins
(instructed by Barlow, Lyde & Gilbert, agents for Foysters, of Manchester)
represented the appellant, and A W Simpson (instructed by Cobbetts, of
Manchester) appeared for the respondents.
Giving
judgment, MEGAW LJ said that the landlords were brewers and freehold owners of
licensed premises, the Stag’s Head Hotel. The appellant (defendant) became the
tenant of the hotel by an agreement of April 3 1974, granted by the landlords.
By a notice to quit dated February 25 1975, served the following day, the
landlords gave the tenant three months’ notice to determine the tenancy
"in accordance with clause 13(4) of your agreement . . . dated April 3
1974 by reason of your non-observance of clause 2(1) (to pay rent) of the same
agreement." The tenant was
substantially in default in payment of rent when the notice was served. Under
the agreement the rent was £480 per annum, payable quarterly. The tenant had
failed to pay the rent due on the quarter days in June, September and December
1974. On February 27 1975 the tenant paid £186 towards the outstanding rent. On
March 21 1975 the landlord made a demand on the tenant for the quarter’s rent
due on June 24 1975. Such a demand was inconsistent with the intended effect of
the notice to terminate, for the notice, if effective, would have put an end to
any obligation on the part of the tenant to pay any rent in respect of any
period after May 25 1975. It was conceded, however, that the landlords did not
intend by this demand, so far as their intention might be relevant, to create a
new tenancy, assuming that the notice to terminate was effective. On March 27
1975 the tenants paid the landlords £294, which covered both the arrears of rent
and the whole rent for the quarter ending June 24 1975. After May 26 1975 the
tenant continued in occupation of the premises. On June 10 1975 the landlords
began proceedings in the Macclesfield County Court, claiming possession against
the tenant and also mesne profits from May 26 1975. On June 13 1975 the
landlords sent a cheque to the tenant for £38.13, being a refund of rent for
the period from May 26 to June 24 1975. By his defence in the action the tenant
denied that the plaintiffs were entitled to possession, for reasons which would
appear after the relevant provisions of the tenancy agreement had been cited.
At the county court hearing on September 15 1975 there was no material dispute
as to the facts. Deputy Judge Woolley gave judgment for the landlords for
possession and for mesne profits of £150.35 to the date of judgment, continuing
until possession should be obtained. He granted a stay of execution pending an
appeal.
The tenancy
agreement of April 3 1974 provided by clause 1 for the letting of the premises
to the tenant from April 11 1974 at the rent already mentioned. Clause 2(1)
provided that the tenant should pay rent "at the times and in manner
aforesaid." Then followed various
provisions which were not relevant to the appeal. Part V of the agreement,
comprising clauses 13 and 14, was headed "Termination." The provision which was primarily of
importance was a part of clause 13(4). Clause 13(1) contained a provision
enabling either the landlords or the tenant to determine the tenancy by giving
12 months’ notice in writing at any time after the first six months had
expired. Clause 13(2) made special provision in the event of the death of the
tenant. Its broad effect was to enable the landlords to determine the tenancy
by 14 days’ notice, presumably to the deceased tenant’s personal
representatives. But there was a special provision enabling the tenant’s widow,
if she wished and if she obtained a transfer of the licence to herself, to
require a new agreement with her on the same terms.
Clause 13(3)
read:
If the tenant
shall either: (a) fail to observe and perform or commit any breach of any one
or more of the agreements contained in clauses 2(2) (to repair inside), 2(3)
(not to make alterations or additions), 2(4) (to insure plate glass and third
party risks), 2(5) (not to increase fire risks), 2(8) (not to use except as
licensed premises), 2(9) (not to cause a nuisance), 6 (to purchase goods from
landlords), 7 (not to dispose of fixtures, etc.), 9(1) (to allow landlords to
enter), 9(2) (to allow prospective tenants to view), 9(6) (to permit inspection
and sampling), 9(8) (not to give undertakings), 9(9) (not to permit slate
clubs, 12(1)(a) (to keep utensils and premises clean, to supply food, to
observe public bar prices and to reside on the premises); or (b) after due
complaint commit any further breach of the agreements contained in clause 12(2)
(reasonable prices and courtesy) hereof; or (c) be convicted of a misdemeanour
involving in the opinion of the landlords his suitability as a licensee, the
tenancy may be determined by the landlords giving to the tenant three calendar
months’ notice in writing expiring at any time as well during the first as
during any subsequent year and either at or at any time earlier than the end of
such first year or any subsequent year thereafter provided that such notice
shall specify the clause (if any) of this agreement alleged to have been broken
or not to have been observed and performed.
Clause 13(4)
had a marginal sidenote "Forfeiture."
It read:
(4) If the tenant shall either: (a) fail to
observe and perform or commit any breach of any or more of the agreements
contained in clauses 2(1) (to pay rent, etc.), 2(7) (not to assign) or 12(3)
(not to transfer or surrender licence, to comply with the law to renew licences,
to perform undertakings, to keep open, not to alter, not to comply with
conditions, not to give bills of sale and not to allow acquisition of easements
hereof; or (b) become bankrupt or compound with his goods creditors or suffer
his goods or any of them to be taken in execution or depart out of the country;
or (c) be convicted of any offence specified in section 10(3) of the Licensing
Act 1964 notwithstanding the provisions of the Criminal Justice Act 1948 with
regard to felonies committed by a licensee; it shall be lawful either: (i) for
the landlords or any person duly authorised by them into or upon the said
premises or any part thereof . . . in the name of the whole . . . to re-enter
and the said premises peacefully to hold and enjoy thenceforth as if the
letting or agreement had not taken place but without prejudice to any action or
remedy of the landlords for any arrears of rent or in respect of any antecedent
breach (if any) of the agreements by the tenant herein contained; or (ii) for
the landlords to give to the tenant three calendar months’ notice in writing
expiring at any time as well during the first as during any subsequent year and
either at or at any time earlier than the end of such first year or any
subsequent year thereafter determining the tenancy hereby granted provided that
such notice shall specify the clause (if any) of this agreement alleged to have
been broken or not to have been observed and performed.
Clause 14
read:
The
provisions of Section 146 of the Law of Property Act 1925 with regard to
restrictions on and relief against forfeiture of this agreement shall apply but
the landlords shall be entitled to apply to the court for the appointment of a
receiver and manager before any notice has been given to the tenant under the said
section if the tenant has committed a breach of covenant which entitles the
landlord to re-enter the said premises and endangers the licence.
Clause 15
(Part VI of the agreement) provided for arbitration. It began:
In the event
of three months’ notice of termination being served by the landlords under
Clause 13(3) or 13(4) hereof and of the tenant denying that any ground for
service of the notice had arisen the tenant shall within seven days of the
receipt of the notice notify the landlords of such denial whereupon the dispute
shall be referred to the local panel.
The three
months’ notice to terminate which the landlords served on the tenant was served
"in accordance with clause 13(4)" and was expressly based on the
breach of the covenant to pay rent. Clause 13(4), in the event of such a
breach, gave the landlords the choice of acting under sub-paragraph (i) or
sub-paragraph (ii). If they had acted under sub-paragraph (i), there was no
doubt that this would have constituted a "forfeiture" within the meaning
of that word as it was ordinarily understood in the law of landlord and tenant.
As a matter of long-established law, the tenant would then have had the right
to claim, in proceedings against him for possession, relief against forfeiture.
There was no doubt that, in that event, in the circumstances of this case,
relief would inevitably have been granted, because payment of all the arrears
had been made before proceedings for possession had been initiated. Section
191(1) of the County Courts Act 1959 might, perhaps, technically not cover this
case, since payment of the arrears had been made before the action was begun.
But clearly this was an a fortiori case. It might be, as Mr Watkins for
the tenant had submitted, that section 212 of the Common Law Procedure Act 1852
provided direct statutory authority. However, the landlords did not choose to
act under the provisions of clause 13(4)(i). They chose to proceed under
sub-paragraph (ii). The consequence, the landlords said, and the judge in the
court below accepted, was that no question of relief against forfeiture arose
because sub-paragraph (ii) did not involve forfeiture. It involved an ordinary
contractual right to terminate on the expiry of a contractually-provided period
of notice, which notice was duly given. There was no forfeiture; there was no
right of relief against forfeiture; and also the tenant could not rely on
waiver consisting of the demand for, and acceptance of, rent.
The question
raised was simply stated. Did a notice to terminate given under clause
13(4)(ii) by reason of a breach of the covenant to pay rent constitute, or have
the same effect in law as, a forfeiture?
If the answer was "Yes," the tenant succeeded in the appeal
and was entitled to relief. If the answer was "No," then the landlords
were entitled, as the judge had held, to possession on the expiry of three
months’ notice.
For the
landlords it was submitted that the essence of a forfeiture, in the law of
landlord and tenant, was that it took effect immediately–not immediately upon
the breach of covenant occurring, but immediately on the landlord’s giving an
indication unequivocally, by words or conduct, to the tenant of the landlord’s
intention to treat the breach as a forfeiture of the tenant’s right to
continuing possession: see Canas Property Co Ltd v KL Television
Services Ltd [1970] 2 QB 433, where it was held that the service on the
tenant of proceedings for possession effected a forfeiture. But there was no
case in which it had been held that there was a forfeiture where the date of
the termination of the lease specified by the landlord was a date which
followed the running of a period of notice. So, it was submitted for the
landlords, if the contractual term, as here, provided for the giving of a
period of notice, it was not a forfeiture, even though the event which gave
rise to the contractual right on the part of the landlord to terminate the
lease was a breach of a covenant, in particular, as here, a breach of a
covenant to pay rent. There was no reason, the landlords submitted, why the
parties should not validly agree by their contract to give to the landlord a
right to terminate by notice on the happening of a certain event. There was no
reason why that should not be a shorter period of notice than the general
period under the contract which, in the present case, was the period of 12
months under clause 13(1). The whole of the indication, it was submitted, from
the context of this tenancy agreement, was that the parties intended that
clause 13(4) should not be regarded as giving rise to forfeiture. The very fact
that the landlords were given the option as between sub-paragraph (i) and
sub-paragraph (ii) showed that. There were also indications to the same effect
elsewhere in the tenancy agreement–for example, by reference to the contrasting
provisions of clause 14 and clause 15.
For the tenant
it was conceded that no case could be found in which it had been clearly held
that a contractual provision giving the landlord the right to terminate for
non-payment of rent by shorter notice than the notice otherwise available to
either party constituted, or had the same legal effect as, a forfeiture, ie
that there was a right in the tenant to apply for relief. But equally, it was
contended, there was no authority which either expressly or by implication
indicated the contrary.
The doctrine of
relief against forfeiture for breach of covenant to pay rent was a
long-established doctrine in the law. The reasons for its existence were not in
doubt. In Chandless-Chandless v Nicholson [1942] 2 KB 321 Lord
Greene MR said at p 323:
The court, in
exercising its jurisdiction to grant relief in cases of non-payment of rent is,
of course, proceeding on the old principles of the court of equity which always
regarded the condition of re-entry as being merely security for payment of the
rent and gave relief if the landlord could get his rent.
So the
"condition of re-entry" in clause 13(4)(i) was "regarded . . .
as being merely security of payment of the rent"; and therefore the tenant
would have his right of relief. Was there any reason, first, in logic, why the
"condition of re-entry" in clause 13(4)(ii) should be regarded as
something essentially different in character and legal consequence, merely
because there was a contractual provision for a period of notice before the
landlord’s right to re-enter was to be effected? In his (his Lordship’s) judgment there was no
such logical reason.
Was there,
then, secondly, any practical reason why different legal consequences should be
attributed to clause 13(4)(ii) affecting the tenant’s right to claim
relief? Again, he could see no practical
reason. On the contrary, he thought there were strong practical reasons why no
distinction should be drawn in respect of the right to relief as between
sub-paragraph (i) and sub-paragraph (ii). If the landlords were right it would
mean that both (in a case such as this) the long-established doctrine of equity
as to relief against forfeiture and also (in cases falling within section 146
of the Law of Property Act 1925) the statutory requirement as to relief from
forfeiture could be evaded by the mere insertion in the tenancy agreement of a
provision for short notice–perhaps one day’s notice–in the event of a breach of
covenant. That could not be right. The answer suggested by Mr Simpson for the
landlords was that the court could, perhaps, disregard the provision for a
short period of notice if in the view of the court it was, as it was put,
"illusory" or "merely a sham." It would then become a question of degree, to
be decided on the basis of some undefined, and, he (his Lordship) suspected,
indefinable criterion. Unless, indeed, the criterion were to be whether the
motive for the insertion of the clause was to enable the landlord to avoid the
possibility that the tenant might be entitled to relief in respect of a breach
of covenant. If that were the criterion, could the present provision of clause
13(4)(ii) escape the category of "illusory"? He thought not.
He would hold
that, whether or not technically clause 13(4)(ii) was to be described as a
"forfeiture clause," its effect in law, as regards the tenant’s right
of relief for breach of covenant to pay rent, was no different from the effect
of a clause which provided for forfeiture operating immediately upon the
landlord indicating his intention to act on it. The inclusion of a period of
notice before the lease terminated, being a period unilateral to the landlord
and less than the general period of notice available to either party, did not
deprive the tenant of his right to claim relief where, as here, the event on
which the landlord relied as giving rise to his right to terminate was a breach
by the tenant of his covenant
the order for possession.
ORR and MILMO
LJJ agreed that the appeal should be allowed in respect of the possession order
with costs in the Court of Appeal and below. Judgment was given for the tenant
on his counterclaim for relief against forfeiture. The payment out of court to
the landlords’ solicitors of £150.35 by way of rent was ordered and the order
as to mesne profits discharged.
The landlords
were given leave to appeal to the House of Lords conditional on their
undertaking not to seek to disturb the order as to costs in the Court of
Appeal, not to seek costs in the House of Lords and to pay the tenant’s costs
in the House of Lords in any event.
