Lease or licence — Occupation of petrol service station under three agreements — Whether occupier held tenancy of licence — Whether originating summons under RSC Ord 113 appropriate procedure
F Ltd entered
into three agreements with the respondent petrol company for the occupation of
two service stations. (1) A partnership licence agreement for three years dated
November 1 1991. This was expressed as a licence and gave permission to F Ltd
to use the respondent’s land, fixtures and fittings. It contained obligations
by F Ltd and provisions for the control and management of the service stations
by the respondent. (2) A shop franchise agreement dated November 8 1991, which
required F Ltd to operate an ‘Esso Shop’ in accordance with the provisions of a
manual. (3) A car wash agreement dated November 1 1991, which contained
provisions for the operation of the car wash. Following the failure of F Ltd to
make payments to the respondent, the agreements were terminated on September 7
and 9 1993 in relation to each site. Mr and Mrs B, directors of F Ltd, appealed
the order of Morritt J giving possession to the respondent of the service
stations under RSC Ord 113. The appellants contended that F Ltd had a tenancy
of the service stations.
provisions. On their proper construction the agreements gave to the respondent
right of possession, a right to make alterations, to install a car wash and to
change the layout of the shop. The rights of the respondent have to be looked
at together and cumulatively and are quite inconsistent with an exclusive right
to possession given to F Ltd.
The following
cases are referred to in this report.
A G
Securities v Vaughan; Antoniades v Villiers
[1990] 1 AC 417; [1988] 3 WLR 1205; [1988] 3 All ER 1058; (1989) 57
P&CR 17; [1988] 2 EGLR 78; [1988] 47 EG 193, HL
Crancour
Ltd v Da Silvaesa [1986] 1 EGLR 80; (1986)
278 EG 618; [1986] 18 HLR 265, CA
Shell-Mex
& BP Ltd v Manchester Garages Ltd [1971]
1 WLR 612; [1971] 1 All ER 841; [1971] EGD 303; (1971) 218 EG 285, CA
Street v Mountford [1985] AC 809; [1985] 2 WLR 877; [1985] 2 All ER
289; [1985] 1 EGLR 128; (1985) 274 EG 821, HL; reversing (1984) 49 P&CR
324; 271 EG 1153, CA
This was an
appeal by Mr and Mrs Eric Brown from the order of Morritt J, who on November 17
1993 gave possession of Abbey Service Station, Ashby Road, Shepshed, and
Brookside Service Station, Nottingham Road, Melton Mowbray, to the respondent,
Esso Petroleum Co Ltd, against Fumegrange Ltd and the appellants on an originating
summons under RSC Ord 113.
Peter Smith QC
and Paul Chaisty (instructed by Peter W Marsh & Co, of Oakham) appeared for
the appellants; Alan Boyle QC and Patrick Walker (instructed by Kershaw Tudor,
of Sheffield) represented the respondent; Fumegrange Ltd (in liquidation) did
not appear and was not represented.
Giving
judgment, NEILL LJ said: This is an appeal by Mr Eric Gordon John Brown
and Mrs June Frances Brown from the order dated November 17 1993 of Morritt J,
sitting as the Vice Chancellor of the County Palatine of Lancaster, that Esso
Petroleum Co Ltd do recover possession of two service stations in
Leicestershire, namely Abbey Service Station, Ashby Road, Shepshed, and
Brookside Service Station, Nottingham Road, Melton Mowbray.
On October 4
1993 Esso Petroleum Co Ltd (whom I shall call ‘Esso’) brought proceedings
pursuant to the provisions of RSC Ord 113 claiming possession of the two
service stations. The proceedings were brought against Fumegrange Ltd and also
against Mr and Mrs Brown. The order for possession was made against Fumegrange
as well as against Mr and Mrs Brown, but on March 11 1994 Fumegrange was
compulsorily wound up under the provisions of the Insolvency Act 1986 pursuant
to a petition presented by Esso on November 19 1993. The solicitors acting on
behalf of the liquidator of Fumegrange informed the solicitors for Mr and Mrs
Brown by letter dated April 28 1994 that the liquidator did not wish to appear
at the hearing of the appeal, or to take any part in the proceedings in this
court. Accordingly, at an early stage of the hearing the court on an
application made by counsel on behalf of Esso dismissed the appeal by
Fumegrange.
Following the
dismissal of the appeal by Fumegrange the court had to consider whether Mr and
Mrs Brown had a sufficient interest in the outcome of the proceedings in this
court for the matter to proceed. We were satisfied that as an order for costs
had been made against Mr and Mrs Brown in the court below it was just,
irrespective of any other arguments which Mr and Mrs Brown might seek to
advance, that we should hear the case on its merits and consider the effect of
the agreements between Esso and Fumegrange.
With this
introduction I can turn to the facts. For this purpose it is sufficient to
refer to the facts relating to the Brookside Service Station.
According to
the affidavit sworn by Mr Brown dated October 14 1993 he personally entered
into an Esso Service Station licence agreement with Esso with effect from
January 7 1983. It is now accepted, however, that the agreements relating to
Brookside Service Station, which are relevant for the purposes of this appeal,
are the following agreements between Esso and Fumegrange:
(1) The partnership licence agreement for three
years with a commencement date (as specified in the first schedule) of November
1 1991.
(2) The Esso shop franchise agreement dated
November 8 1991.
(3) The Esso car wash agreement which (by clause
3 thereof) commenced on November 1 1991 and continued in force until the
termination of the partnership licence agreement.
The principal
question raised by Mr and Mrs Brown on this appeal is whether the judge was
wrong in law in concluding that the
licences and not leases. It was argued on behalf of Mr and Mrs Brown that on
their true construction the agreements created leases. In this context we were
referred to a number of passages in the speeches in the House of Lords in Street
v Mountford [1985] AC 809 and in A G Securities v Vaughan;
Antoniades v Villiers [1990] 1 AC 417. These authorities
establish:
(a) That save in exceptional circumstances the
enjoyment of exclusive occupation for a term in consideration of periodical
payments creates a tenancy: see A G Securities v Vaughan at
p459D.
(b) That if an agreement satisfies all the
requirements of a tenancy, then the agreement produces a tenancy and the
parties cannot alter the effect of the agreement by insisting that they created
only a licence: see Street v Mountford at p819F.
It is
therefore necessary to consider the nature of the occupation of Brookside
Service Station enjoyed by Fumegrange under the three agreements which I
earlier identified. For this purpose I shall refer to a number of the
provisions of these agreements.
The
documents
I turn first
to the partnership licence agreement. Clauses 1 and 2 under the heading ‘Grant
of Licence’ were in these terms:
1. In
consideration of the obligations undertaken by the licensee Esso grants to the
licensee licence and permission to use on the terms and conditions and solely
for the purposes hereinafter specified the land and buildings described in the
First Schedule . . . together with Esso’s fixtures, fittings, plant and
equipment thereon as set out in the inventory described in the Second Schedule
. . .
2. The
purposes for which this Licence is granted are set out in the Third Schedule
hereto.
By clause 5 it
was provided that the licence should be personal to the licensee and that the
licensee should not share ‘occupation of the Service Station or any part
thereof or possession of the Equipment or any item thereof’.
The third
schedule to the agreement set out the purposes for which the licence was
granted. It was provided that it was granted to enable the licensee to carry on
upon the service station the business of: (1) a service station or
petrol-filling station; (2) selling such retail goods and rendering and
supplying such services and commodities as are usually rendered and sold at
service stations or petrol-filling stations owned by Esso; (3) an Esso shop;
and (4) an Esso car wash.
The fifth
schedule contained provisions relating to the sale and purchase of motor fuels
and lubricants. Clause 8 of the fifth schedule granted Esso a right of audit in
these terms:
The Licensee
will permit Esso and its duly authorised representatives at all reasonable
times to inspect and take copies of all extracts from any books documents or
papers in the possession of or under the control of the licensee relating to
the business. If Esso should determine that an audit is necessary after the
expiration or termination of this Agreement the licensee will, upon notice,
deliver to Esso all required records and documents. The licensee will fully
co-operate with Esso and its authorised representatives concerning any such
audit.
The sixth
schedule contained provisions setting out the obligations of Esso including
obligations relating to the repair and decoration of the forecourt and shop.
The seventh
schedule, to which our attention was particularly directed, contained
provisions setting out the obligations of the licensee. These provisions
included provisions restricting the permitted use of the service station to the
purposes referred to in the third schedule, prohibiting the sale etc of any
motor fuels other than those supplied by Esso or any product or article which
Esso might deem to be unsuitable; and prohibiting the creation of any mortgage
or encumbrance of the business or its assets. It also contained the following
provisions which I should set out in extenso:
22(1) The licensee will not impede in any way the
officers, employees, agents or contractors of Esso in the exercise by them of
Esso’s right of possession and control of the Service Station and in particular
shall give all reasonable assistance and facilities to such officers,
employees, agents or contractors for the alteration at any time of the layout
or decoration of the Service Station and the equipment.
(2) The licensee will not impede any person
properly exercising a right granted by Esso or derived from a title paramount
in respect of any easements or rights in, over or under the Service Station and
shall afford to such persons and their authorised agents all necessary
facilities provided that such persons shall forthwith make good any damage
occasioned to the Service Station by the exercise of such rights and easements
at their own expense.
. . .
23. The
licensee will not make any alteration or addition whatsoever to the Service
Station or equipment or to the external appearance or paintwork design or
image.
. . .
25. It is
Esso’s intention that the licensee will not only personally conduct and
supervise the business of the Service Station but should also personally
operate and be in regular and frequent attendance at the Service Station or
(with Esso’s written consent) ensure that the Service Station is operated by a
nominated manager who is so in attendance. For that purpose the licensee will
when required by Esso so to do submit to Esso a system of operation and site
attendance for approval and thereafter operate in accordance with that system.
The eighth
schedule contained provisions relating to the termination of the agreement. It
was provided by clause 2 that Esso would periodically conduct inspections of
the service station to
appraise the
licensee’s compliance with the operating standards referred to in the manual
entitled ‘Operating Standards for Esso Service Stations’ and such other matters
that Esso may in its discretion determine.
It was further
provided that the agreement could be terminated if, inter alia,
Fumegrange ceased to offer motor fuels for resale at the service station.
I turn next to
the Esso shop franchise agreement. Under this agreement Esso granted Fumegrange
a licence and franchise to operate an Esso shop in accordance with the Esso
shop franchise. It was recited in the agreement that the Esso shop franchise
was
a concept
designed by Esso to provide the customer with a wide range of high quality
merchandise with the emphasis on convenience, high level of customer service
and value for money.
In addition
the agreement required Fumegrange to operate the Esso shop in accordance with
the standards set out in the manual entitled Operating Standards for Esso
Service Stations.
I should set
out para 3 of the schedule to the shop agreement, which was in these terms:
As part of
Esso’s continuing programme of refinement and improvement of the Esso Shop Franchise
Esso has or during the currency of this agreement may wish to carry out certain
works of alteration improvement and/or upgrading to the Esso shop including the
provision of additional services.
I come now to
the Esso car wash agreement. By clause 2 of this agreement Esso granted
Fumegrange a licence and permission to operate the car wash, which Esso had
installed at the service station. Clause 8 of this agreement was in the
following terms:
Esso and its
duly authorised representatives will have the right at all reasonable times
without notice to inspect the car wash meters and any books, documents or
papers relating to the operation of the car wash.
Part III of
the schedule to the car wash agreement set out Esso’s obligations, which
included a provision that Esso would obtain planning permission and would
install the car wash and all necessary utilities in connection therewith. Part
IV contained the obligations of Fumegrange. It is sufficient to set out paras 2
and 3, which provided:
2. The
operator will operate the Car Wash in an orderly and business-like manner. He
will use the Car Wash in a careful manner maintaining high standards of
cleanliness and tidiness.
3. The
operator will prominently display all advertising, direction and instructional
signs relating to the Car Wash and supplied by Esso in such position as Esso
directs and will use available illumination to merchandise the Car Wash.
Finally, I
should refer to some parts of the manual entitled Operating Standards for
Esso Service Stations. Section I of the manual was concerned with the
service station itself. Section II contained provisions relating to the Esso
shop.
Part I of the
manual was arranged in 29 paragraphs. It is sufficient to refer to only some of
these. Para 2 required Fumegrange to maintain an adequate number of trained
staff to service its customers and to protect the image of its service station.
Para 3 required that all staff working on the service station should wear a
complete Esso uniform selected from the Esso forecourt clothing brochure. Paras
4 and 6 contained detailed provisions relating to the cleanliness of the
premises and the maintenance of the forecourt. I should also refer to one of
the provisions of para 5 which was in these terms:
The licensee
will only place and display at the service station premises (interior and
exterior) such signs, emblems, lettering logos advertisements and display
materials as Esso will have at first approved in writing and will remove any
such matters as are not so authorised when requested by Esso.
Para 16
contained provisions relating to safety. The opening sentence of this paragraph
was in these terms:
As a basic
and underlying standard every reasonable effort must be made to ensure the
safety of customers and employees on site.
Later paragraphs
were concerned with the accounting systems to be used by Fumegrange and with
the reports and financial statements, which Fumegrange had to provide from time
to time. I should, however, make specific reference to para 19:
The
distinctive exterior and interior designs and features including the placement
of the equipment, colour schemes, pattern and design of furniture and fittings,
merchandising standards, landscaping and vehicle parking are part of the Esso
Retail Identification Concept (ERIC) as referred to in the guidelines issued by
Esso from time to time. The licensee will not alter any such features in any
way and shall comply with standards of ERIC at all times.
The licensee
will not bring into the service station any fixtures, fittings plant or
equipment (other than office equipment or canteen facilities for use by the
licensee and his staff) additional to that specified in the inventory of
equipment.
Section II
contained similar detailed provisions relating to the operation of the shop.
Para 6 of section II was in these terms:
Esso will
consult with the operator and give him the benefit of its knowledge and
experience in connection with any problems relating to the management and
operation of the business. Such assistance will include periodic visits to the
premises by representatives and specialist advisers of Esso.
Esso will
offer advice aimed to strengthen and improve profitability including the
provision of procedures for sales accounting and stock control.
Part II of
section II of the shop agreement set out the obligations of Fumegrange. Para 2
of Part II included this provision:
The operator
will not bring into the Esso shop any additional fixtures, fittings, modules,
units, shelving, plant equipment or machinery (other than office equipment and
canteen facilities for use by the Operator and his staff) to those supplied by
Esso. In particular no equipment or machinery for the dispensing of hot food
and drinks shall be brought into the Esso shop without Esso’s prior consent in
writing.
In addition I
should refer to the final sentence of para 13 of Part II, which provided:
For the
purpose of verifying the accounts during this agreement Esso or its
representatives shall have the right at any time during the normal opening
hours of the Esso shop without prior notice to the operator to inspect time
sheets, cheque stubs, payment records, bank deposit forms, the receipts, tax
records, cash register entries and returns, EFTPOS Records and inventory
records.
Finally, one
should notice the documents set out in the appendix to the manual. These
documents included an operating standards check list which was to be completed
by area managers on a regular basis ‘as a formal appraisal of licensee
compliance with the operating standards covered by this manual’.
Present
proceedings
It is not in
dispute that Fumegrange failed to make payments due to Esso under the licence
agreements relating to the two service stations. On September 7 and 9 1993 the
agreements relating to Brookside and Abbey Service Station respectively were
terminated by letter delivered by hand to Fumegrange. On October 4 1993 Esso
issued proceedings under RSC Ord 113 claiming possession of the premises. The
originating summons was heard by Morritt J, sitting at Leeds, on November 17
and 18 1993.
In his
judgment Morritt J referred to the documents and to some of the provisions to
which I have already made detailed reference. The judge continued (transcript
p9F):
I have
referred at some length to the various provisions of the three agreements
giving rise to the overall relationship between the parties. It is perfectly
true . . . that a number of the stipulations binding on the occupant with
regard to the conduct of the premises and the business on the premises are
equally consistent with a lease as with a licence. It is not uncommon to find
leases of shop premises which do contain detailed provisions with regard to
opening hours, maintenance of common parts and so forth. But they are, as it
seems to me, consistent either way; that is to say, they could be consistent
with a licence and they could be consistent with a lease. The essential
question is whether the terms of the documents indicate whether or no exclusive
possession or the right to it was conferred on Fumegrange.
The judge
concluded that exclusive possession had not been conferred on Fumegrange. He
relied in particular on para 22 in the seventh schedule to the licence
agreement. In addition, he drew attention to the fact that under the shop
agreement Fumegrange was granted a licensing franchise to operate an Esso shop
at the service station. The judge considered that the franchise and the ability
to grant it could be consistent only with the view that exclusive possession
under the licence had not been granted to Fumegrange already. He took a similar
view with regards to clause 2 of the car wash agreement under which Fumegrange
was granted a licence and permission to operate the car wash at the service
station.
In the course
of his judgment, the judge dealt in addition with a further argument on behalf
of Fumegrange and Mr and Mrs Brown that para 22 in the seventh schedule was a
pretence or sham which had been inserted by Esso for the purpose of preventing
what would otherwise be a lease being recognised as such. He concluded that
there was nothing in the terms of the agreements which could give rise to a prima
facie view that any of the provisions was a sham or pretence.
The judge
therefore concluded that Esso was entitled to possession and that it was a
proper case for an order to be made pursuant to the provisions of Ord 113.
In support of
the appeal counsel for Mr and Mrs Brown developed an argument on the following
lines:
(1) That on a proper construction of the
agreements it was clear that exclusive possession and occupation had been
granted to Fumegrange. Para 22 in the seventh schedule to the licensing
agreement constituted the reservation of a right in favour of Esso: such a
reservation would not have been necessary if Fumegrange had been granted only a
licence. The other provisions giving Esso a right of entry were also consistent
with a lease and were inserted either to enable Esso to carry out its
obligations under the agreements or for such purposes as the inspection of
business records.
(2) That the provisions in these agreements were
very similar to those to be found in leases of public houses. Such leases
frequently contained terms designed to ensure that only the brewery’s beer was
sold and that the public house was kept in a proper state and was properly
conducted.
(3) That in considering the factual matrix in
which the agreements were concluded it was relevant to notice that Mr Brown had
asserted on oath (in para 23 of his affidavit sworn on October 14 1993) that
‘the defendants’ had always enjoyed exclusive occupation of the service
stations. Esso had not put forward any evidence to contradict this claim.
(4) That Esso did not use the same form of
agreement for all its service stations. It was to be noted that on p4 of the
booklet headed
1982, there was a paragraph relating to ‘the rental charged for the service
station’.
(5) That it was at least arguable that some of the
provisions in the agreements were sham provisions designed to misrepresent the
true effect of the licence agreements. Counsel referred us to the decision of
the Court of Appeal in Crancour Ltd v Da Silvaesa [1986] 1 EGLR
80.
(6) That the case was not a suitable case for Ord
113 proceedings. The judge should have dismissed the originating summons and
should have ordered that the matter should proceed to trial.
In any case in
which it is contended that an agreement relating to the occupation of premises
may constitute a lease rather than a licence or a licence rather than a lease
it is necessary to have regard to the guidance given by the House of Lords in
Lord Templeman’s speech in Street v Mountford (supra). At
the same time it is relevant to take note of the fact that the point at issue
before the House of Lords was the true test to be applied for distinguishing
between a lease and a licence. The fact that Mrs Mountford had exclusive
possession of her furnished room was conceded by the landlord: see pp816B and
826B.
As Lord
Templeman explained at p817H an occupier of residential accommodation at a rent
for a term is either a lodger or a tenant. The occupier is a lodger if the
landlord provides attendance or services which require the landlord or his
servants to exercise unrestricted access to and use of the premises. A lodger
is entitled to live in the premises, but cannot call the place his own. In
considering the nature of the occupation of residential premises it is
therefore necessary to consider all the terms of the agreement between the
parties and in addition it may be necessary to consider how the agreement works
in practice.
In the Crancour
Ltd case (supra) the Court of Appeal was concerned with
written agreements for the occupation of rooms in the house which contained the
unusual provision that the occupiers were not entitled to use the rooms between
10.30am and noon. The question arose whether this was a sham provision and the
cases were remitted to the county court for the facts to be further investigated.
In the present
case, we are concerned with commercial premises. There is no dispute as to the
correct test to be applied. The question is whether on the proper construction
of the licence agreements exclusive possession of the service stations was
granted to Fumegrange.
It will be
convenient to deal first with the submission that the provisions in these
agreements, and in particular para 22 in the seventh schedule to the licence
agreements, were sham provisions designed to disguise the true nature of the
contract.
Like the
judge, I am quite unable to accept the submission that any of these provisions
was a sham or that any argument to that effect can properly be advanced.
Counsel for Esso took us through the agreements relating to Brookside Service
Station and explained the commercial justification for the several provisions.
I found these explanations convincing and I was satisfied that the suggestion
of pretence or sham was without foundation.
I come,
therefore, to the question of construction.
I have found
it to be of assistance to study the provisions of all three agreements relating
to Brookside Service Station as well as the terms of the manual. These
documents have to be read as a whole if one is to reach a clear conclusion as
to the true relationship between the parties and the nature of Fumegrange’s
occupation.
Para 22 of the
seventh schedule to the licence agreement provides a useful starting point. The
paragraph referred to ‘Esso’s right of possession and control of the service
station’ and required Fumegrange not to impede in any way the exercise of that
right. It is to be noted that para 22(1) is in very similar terms to clause 19
of the first schedule to the agreement, which was considered by the Court of
Appeal in Shell-Mex & BP Ltd v Manchester Garages Ltd [1971]
1 WLR 612. It is further to be noted that, though Lord Templeman in Street v
Mountford (supra) rejected Lord Denning’s conclusion in
the Shell-Mex case that exclusive possession was no longer decisive, it
does not appear that any doubt was thrown on the correctness of the Shell-Mex
decision or on the fact that the Court of Appeal attached great importance
to the fact that in clause 19 ‘the right of possession and control of the
premises’ was stated to be a right of the oil company.
In the present
case, however, para 22 does not stand alone. I have set out most of the
provisions to which I attach particular importance which demonstrate the degree
of control exercised by Esso over the premises and the way in which it was
conducted. Esso can make alterations on the premises; it can install a car wash
(as was in fact done at Brookside); and it can change the layout of the shop.
The rights and
powers of Esso have to be looked at together and cumulatively. I have come to
the conclusion that these rights and powers are quite inconsistent with an
exclusive right to possession of the service stations being vested in
Fumegrange. The degree of physical control over the premises is very
significant. In addition, account is to be taken of the degree of control over
the conduct of the business at the service station.
I would
dismiss the appeal.
SAVILLE LJ agreed and did not add anything.
Also agreeing,
SIR CHRISTOPHER SLADE said: The relevant agreements conferred on
Fumegrange the exclusive right to use the premises for particular purposes.
However, an exclusive right of this nature does not by itself suffice to create
a tenancy. For the reasons given by Neill LJ, I am satisfied that on their
proper construction the agreements did not confer on Fumegrange the right to
exclusive possession of the premises.
Appeal
dismissed with costs. Leave to appeal to the House of Lords refused.
