Landlord and tenant — Forfeiture of lease — Whether discretion to refuse relief for forfeiture properly exercised — Whether Court of Appeal can exercise discretion to grant relief — Whether tenant entitled to an inquiry in respect of unjust enrichment by landlord
By a lease
dated May 19 1987 the respondent council demised a site to the appellant
company for a term of 125 years at a yearly rent of one peppercorn for a
premium of £12,000. By clause 3(iii) of the lease the appellant covenanted at
its cost within a defined timetable to erect a medical practitioner’s surgery
building. The lease contained negative covenants by the appellant: (i) not to
use or permit the use of the premises for the purposes of retail sales save in
connection with a retail pharmacy; and (ii) not to use or permit the use of the
premises otherwise than as a surgery for qualified medical practitioners for
use in connection with the treatment of National Health Service patients
together with a retail pharmacy. Following the grant the appellant erected a
pharmacy, which opened for business on August 11 1987, but no surgery has ever
been built on the land. On January 23 1989 the respondents served a notice on
the appellant under section 146 of the Law of Property Act 1925 alleging breach
of covenants in that no surgery was erected nor were the premises used for that
purpose. No remedial work was carried out and on September 1 1989 the
respondents issued the writ in the present proceedings claiming possession
following forfeiture. Judge Bryant, in Darlington County Court, refused the
appellants relief from forfeiture. The appellants appealed.
appellant was losing money and its directors had no intention of building the
surgery at once, the trial judge was entitled to conclude that, if he granted
relief on condition that the surgery was erected immediately, the appellant
would be unwilling to comply with the condition. Although in an appropriate
case an appellate court can exercise a fresh discretion under section 146(2) of
the 1925 Act where circumstances have changed and new evidence is available, it
is important to distinguish between a change of circumstances and a change of heart.
The affidavit evidence filed with the Court of Appeal at the close of, and
after, the hearing and directed to the willingness and financial ability of the
appellant to erect the surgery did not show a change of circumstances. Any
enrichment by the respondents in recovering possession with the benefit of the
pharmacy building erected by the appellants was not unjust.
The following
cases are referred to in this report.
Hyman v Rose [1912] AC 623
Shiloh
Spinners Ltd v Harding [1973] AC 691; [1973]
2 WLR 28; [1973] 1 All ER 90; (1973) 25 P&CR 48, HL
Southern
Depot Co Ltd v British Railways Board [1990]
2 EGLR 39; [1990] 33 EG 45
This was an
appeal by Denmark Chemists Ltd from a decision of Judge Bryant, sitting in
Darlington County Court, who made an order for possession of premises in favour
of the respondents, Darlington Borough Council, against the appellants and
dismissed the appellants’ claim for relief from forfeiture.
Nicholas
Patten QC and John Fryer-Spedding (instructed by Grunhut Makepeace & Duffy,
of Tyne & Wear) appeared for the appellants; Christopher Parker (instructed
by the solicitor to Darlington Borough Council) represented the respondents.
Giving
judgment, NEILL LJ said: This is an appeal by Denmark Chemists Ltd
(‘Denmark’) from the order of Judge Bryant dated July 10 1991, whereby it was
ordered that Denmark do give Darlington Borough Council (‘Darlington’)
possession of the land and premises in Denmark Street, Darlington, identified
on a plan annexed to a lease between Darlington and Denmark dated May 19 1987.
The order for possession was made in forfeiture proceedings brought by
Darlington against Denmark, in which Denmark unsuccessfully sought relief from
forfeiture under section 146(2) of the Law of Property Act 1925 (‘the 1925
Act’).
By the lease
made on May 19 1987 Darlington demised to Denmark (then called Plansweep Ltd)
the piece of land identified on the plan annexed thereto for the term of 125
years at the yearly rent of one peppercorn. The lease was expressed to be made
in consideration of the sum of £12,000 and of the expense to be incurred by
Denmark under the lease and in consideration of the covenants on the part of
Denmark contained in the lease.
Clause 3 of
the lease contained no less than 35 covenants by Denmark. Five of these
covenants are relevant in these proceedings. In addition, the lease contained a
proviso for re-entry if Denmark should ‘fail to comply with the covenants
contained in clause 3(iii) and clause 3(iv)’ or ‘if any other covenant
agreement condition or stipulation’ on Denmark’s part should not ‘be performed
or observed’. It is not necessary to refer further to clause 3(iv) which
related to the construction of a road. By clause 3(iii) Denmark covenanted:
At their own
cost within six months from the date hereof to commence and within either the
period of two years from the date hereof or twelve months of the first
occupation of any part of the Demised Premises whichever shall be the sooner to
complete the erection upon the Demised Premises of a building or buildings and
works (together hereinafter called ‘the said building’) to be used as a surgery
for qualified medical practitioners together with a retail pharmacy and for no
other purpose in a thoroughly sound and workmanlike manner and in conformity in
every respect with plans designs layouts and specifications to be approved by
the Council in its capacity as Landlord and in addition to any approval
required of the Council in any other capacity Provided that if the Tenants are
unable for reasons beyond their control to complete the said buildings within
the said period of two years the Council on application being made to it in
writing by the Tenants before the expiry of the said period may extend the
period by such further period or periods of time as may appear to the Council
to be reasonable.
Clause 3(xxxi)
contained a further positive covenant by Denmark:
Within the
period of twelve months from commencing to use the Demised Premises as a retail
pharmacy and in any case within two years from the date hereof to commence to
use the Demised Premises as a surgery for qualified general medical
practitioners as referred to in subclause (xxx) hereof.
In addition,
the lease contained three relevant negative covenants.
Clause 3(xi):
Not to use or
permit the Demised Premises to be used for the purpose of retail sales other
than for retail sales made in connection with the use of the Demised Premises
as a retail pharmacy as permitted by sub-clause (xxx) hereof.
Clause 3(xxx):
Not to use
the Demised Premises or permit or suffer the same to be used otherwise than as
a surgery for qualified general medical practitioners for use in connection
with the treatment of National Health patients only together with a retail
pharmacy and not to carry on or permit to be carried on upon the Demised
Premises any other profession trade or business whatsoever.
Clause
3(xxxii):
Except as
permitted by sub-clause (xxxi) hereof not to use the Demised Premises or any
part thereof as a retail pharmacy without simultaneously using the greater
proportion of the floor area contained in the said building as a surgery for
qualified general medical practitioners as referred to in subclause (xxx)
hereof.
Following the
execution of the lease Denmark erected a pharmacy, which opened for business on
August 11 1987, but no surgery has ever been built on the land.
On January 23
1989 Darlington served a notice under section 146 of the 1925 Act setting out
the following alleged breaches of covenant:
(a) The tenants have failed to commence within
six months of the date of the Lease and complete within twelve months of the
11th August, 1987 being the first occupation of the Demised Premises the
erection upon the Demised Premises of a surgery for qualified general medical
practitioners together with a retail pharmacy.
(b) The tenants have failed to commence within
twelve months of commencing to use the Demised Premises as a retail pharmacy
the use of the Demised Premises as a surgery for qualified general medical
practitioners.
(c) The tenants have used the Demised Premises as
a retail pharmacy without simultaneously using the greater proportion of the
floor area contained in the building as a surgery for qualified general medical
practitioners.
It will be
seen that the notice alleged breaches of Clause 3, subclauses (iii), (xxxi) and
(xxxii) of the lease. The notice required Denmark to remedy the breaches within
a reasonable time and to pay compensation and costs. No remedial work was
carried out, however, and on September 1 1989 Darlington issued the writ in the
present proceedings. The proceedings were subsequently remitted for trial to
Darlington County Court.
At the hearing
before Judge Bryant in May 1991 three principal arguments were advanced on
behalf of Denmark:
(a) That the covenants in the lease had been
frustrated and should be treated by the court as suspended because after the
execution of the lease they had discovered that the Darlington area had
previously been declared an ‘intermediate’ area by the local family practitioner
committee (‘the FPC’) and that it was therefore unlikely that any general
medical practitioner would be permitted by the FPC to practise at the premises.
(b) That they should be relieved from forfeiture
because they were ready, able and willing to carry out their obligations under
the lease whenever there was a use for such a surgery.
(c) That if Darlington recovered possession of
the premises Darlington would be unjustly and inequitably enriched and that
therefore Denmark should receive restitution from Darlington in respect of such
unjust enrichment.
The judge
rejected the argument based on ‘frustration’ on the simple ground that the
alleged ‘frustrating’ event had occurred before the date of the execution of
the lease. The judge said:
Frustration
essentially depended on the occurrence of a fundamentally different state of
affairs to that which prevailed at the date the contract was made. It cannot
apply to a case where the state of affairs before the contract was made is
exactly the same as the state of affairs afterwards even if one party was
mistaken about that state of affairs and subsequently discovers his mistake. I
have no doubt that the doctrine of frustration has no application to the
circumstances of this case and that the defendants’ defence fails. It may be
that the doctrine of mistake would have some relevance but the defendants have
declined, no doubt because of the consequences if it were successful, to pursue
such a defence.
It seems to me
that the judge was plainly right on this issue and no argument based on
frustration has been pressed in this court.
The judge then
turned to consider the claim for relief from forfeiture. He took account of the
following circumstances:
(1) That the correspondence leading up to the
grant of the lease showed clearly that Darlington were concerned that Denmark
should build a surgery and a pharmacy which would operate together and that
Denmark should not build or operate a pharmacy alone; in an earlier part of his
judgment the judge referred to the letter from Darlington’s chief estates
officer who had written on March 30 1987:
If a retail
pharmacy is to be attached to the Surgery and operates on a smaller scale than
the treatment part of the premises, then this is acceptable to the Council,
provided that the pharmacy does not operate alone.
(2) That if he granted relief from forfeiture
without imposing a condition that the surgery must be erected immediately, the
situation which Darlington had been at such pains to prevent, ‘namely the
erection and operation of a pharmacy without an accompanying surgery would be
allowed to continue’.
(3) That Denmark’s ignorance of the fact that the
FPC was unlikely to give permission for a new practice to be opened at
the premises was not the fault of Darlington, but resulted from Denmark’s ‘own
failure to make simple and straightforward inquiries which any prudent person
would have made immediately before agreeing to the terms of the lease’.
(4) That if he granted relief from forfeiture
with a condition that Denmark erected a surgery immediately, he would be
imposing a condition with which Denmark ‘would certainly be unwilling and
probably financially unable to comply’. The judge therefore concluded that in
all the circumstances it was not a proper case for granting relief from
forfeiture.
Finally, the
judge considered the claim for unjust enrichment, which was based on the
contention that if Darlington recovered possession of the land they would
obtain a pharmacy built by Denmark at a cost of £90,000. This was a benefit for
Darlington, it was argued, for which it was equitable that Denmark should
receive compensation.
The judge
rejected this claim also, holding that there was no reason to suppose that
Darlington would be ‘enriched’ by having the pharmacy; indeed they might wish
to have it removed. He further held that even if Darlington were enriched by
the pharmacy such enrichment was neither unjust nor inequitable. ‘I am unable
to see,’ said the judge, ‘how the council’s failure to appreciate that the
defendant had not done its basic homework or to do it for the defendant can
properly be stigmatised as unconscionable.’
Denmark’s
case in the Court of Appeal
In this court
counsel for Denmark made five main submissions:
(1) That in exercising his discretion not to
grant relief from forfeiture the judge had failed to consider
(a) the effect of forfeiture on Denmark and on Mr
and Mrs Hussain, the owners of the shares in Denmark, and
(b) the fact that the failure to build a surgery immediately
would not cause any hardship to Darlington.
(2) That the judge had erred in not considering
the alternative solution whereby Denmark would have been required to erect the
surgery forthwith, but on terms that the operation of the covenants as to user
would be suspended for the time being.
(3) That in any event there had been a change of
circumstances; there was now evidence before the court which showed that
Denmark had sufficient financial resources to build the surgery.
(4) That the discretion given to the court under
section 146(2) of the 1925 Act was very wide. The court should look at all the
circumstances.
(5) That though the judge rejected the evidence
that Denmark had spent £90,000 on the pharmacy he was satisfied that about half
that amount had been spent. Accordingly, if relief from forfeiture were refused
and Darlington recovered possession, there should be an inquiry to determine
the extent to which Darlington would be ‘enriched’ by the work carried out by
Denmark on the land.
Towards the
close of his submissions counsel put forward a draft order which, he submitted,
contained suitable conditions on which relief from forfeiture could be granted.
The conditions in the draft order were in these terms:
1. That
within four weeks of the date of this order the Defendant shall apply to the
Plaintiff for building regulation approval and for landlord’s approval (under
sub-clause 3(iii) of the Lease dated 19th May 1987 (‘the Lease’) of the plans
designs layouts and specifications in respect of the surgery to be built at
Denmark Street, Darlington (‘the Surgery’).
2. That
within three months of the date of this order or within six weeks (if later) of
receiving the last of the building regulations approval and the landlord’s
approval as aforesaid the Defendant shall commence the construction of the
Surgery.
3. That the
Defendant shall construct the Surgery in accordance with its obligations under
clause 3(iii) of the Lease and shall complete the construction of the Surgery
within nine months of commencing the construction thereof or such further
period as the County Court may allow.
4. That
within the period of two years commencing from the date of this order or such
further period as the County Court may allow (and for this purpose and for the
purpose of condition 3 above the Defendant is to be at liberty to apply to the
Darlington County Court) the Defendant shall commence to use the demised
premises in accordance with the covenants contained in sub-clauses
3(xxx)-(xxxii) inclusive of the Lease.
I propose to
consider Denmark’s arguments under three headings:
(a) Whether the judge erred in refusing to grant
relief from forfeiture.
(b) Whether this court is entitled to exercise a
fresh discretion and, if so, whether we should grant relief from forfeiture.
(c) Whether Denmark are entitled to compensation
in accordance with the principle that, in appropriate circumstances,
compensation may be recovered from another party where (i) that party has been
enriched by the efforts of the claimant; and (ii) it is unjust that that party
should retain the benefit of his enrichment.
The
judge’s refusal to grant relief
The statutory
power to grant relief from forfeiture is conferred by section 146(2) of the
1925 Act, which, so far as is material, provides as follows:
. . . the
court may grant or refuse relief, as the court, having regard to the
proceedings and conduct of the parties under the foregoing circumstances,
thinks fit; and in case of relief may grant it on such terms, if any, as to
costs, expenses, damages, compensation, penalty, or otherwise, including the
granting of an injunction to restrain any like breach in the future, as the
court, in the circumstances of each case, thinks fit.
The discretion
to grant relief is a wide one, as Earl Loreburn LC explained in relation to
section 14(2) of the Conveyancing Act 1881, the forerunner of section 146(2),
in Hyman v Rose [1912] AC 623 at p 631:
I desire in
the first instance to point out that the discretion given by the section is
very wide. The Court is to consider all the circumstances and the conduct of
the parties. Now it seems to me that when the Act is so express to provide a
wide discretion, meaning, no doubt, to prevent one man from forfeiting what in
fair dealing belongs to some one else, by taking advantage of a breach from
which he is not commensurately and irreparably damaged, it is not advisable to
lay down any rigid rules for guiding that discretion.
Counsel for
Denmark relied on this passage in relation to the judge’s decision and also in
support of his submission that this court should exercise a fresh discretion
and grant relief. In addition he relied on the questions posed by Morritt J in Southern
Depot Co Ltd v British Railways Board [1990] 2 EGLR 39* at p 44,
where he said:
I return to
the words of the Lord Chancellor in Hyman v Rose . . ., which
describe the purpose of section 146(2). I would paraphrase it by posing the
questions whether the damage sustained by British Rail is proportionate to the
advantage it will obtain if no relief is granted and, if not, whether in all
the circumstances it is just that British Rail shall retain that advantage. I
answer both questions in the negative.
*Editor’s
note: Also reported at [1990] 33 EG 45, [1990] 2 EGLR 39.
It was
submitted that in the present case the advantage to Darlington of regaining
possession of the site on which the pharmacy had already been erected was quite
disproportionate to the minimal damage which they would suffer if the erection,
or at any rate the occupation, of the surgery was delayed for the time being.
It was further submitted that the judge should have considered the alternative
solution whereby the surgery would have been constructed as soon as possible,
but the covenant as to user would be suspended until some medical practitioners
could be found to occupy it.
For my part, I
have no doubt whatever that the judge was entitled to refuse relief on the
basis of the evidence before him. What has been called ‘the alternative
solution’ in this court was not an issue before the judge. Mr Hussain told the
judge in the course of his evidence that his business was losing money and that
the surgery would cost within £150,000 to construct. He made it clear that he
had no intention of constructing the surgery at once. In cross-examination he
said:
As long as
area is classified [as] intermediate I do not have to build the surgery. When
they change classification I will fulfil my obligation.
In the light
of this answer, which was consistent with Mr Hussain’s contention before the
judge that the obligation to build a surgery had been ‘frustrated’, the judge
was fully justified in concluding that if he granted relief on condition that
the surgery was erected immediately ‘the defendant would certainly be unwilling
. . . to comply’. The judge also concluded that Denmark would probably be
‘financially unable’ to build the surgery immediately. I see no ground whatever
for disturbing this conclusion.
Whether
this court can and should grant relief
It was
submitted on behalf of Denmark that even if the judge was entitled to refuse
relief on the basis of the evidence then before him this court was entitled to
and should exercise a fresh discretion and grant relief because the
circumstances had changed. It was said that Denmark were now prepared to
proceed with the construction of the surgery and that finance was now
available.
I am satisfied
that in an appropriate case an appellate court can exercise a fresh discretion
under section 146(2) where circumstances have changed and new evidence is
available. But it is important to distinguish between a change of circumstances
and a change of heart by the person seeking relief. It is also important to
bear in mind a passage in the speech of Lord Wilberforce in Shiloh Spinners
Ltd v Harding [1973] AC 691, at p 723:
. . . it
remains true today that equity expects men to carry out their bargains and will
not let them buy their way out by uncovenanted payment. But it is consistent
with these principles that we should reaffirm the right of courts of equity in
appropriate and limited cases to relieve against forfeiture for breach of
covenant or condition where the primary object of the bargain is to secure a
stated result which can effectively be attained when the matter comes before
the court, and where the forfeiture provision is added by way of security for
the production of that result.
It is true
that Lord Wilberforce was speaking of the general equitable jurisdiction to
grant relief from forfeiture but, in my view, it is equally necessary in
applying section 146(2) to remember the ‘stated result’ which the bargain
between the parties was intended to secure. In the present case the purpose of
the bargain was to secure the construction of a pharmacy and a surgery.
The council made it quite clear that they intended to avoid having a pharmacy
alone on the land. Towards the close of the hearing of the appeal counsel for
Denmark produced affidavits from Mr Hussain and Mr William Duffy dated June 24
1992. Mr Duffy is the solicitor who is acting for Denmark in these proceedings.
In addition, since the hearing ended, further affidavits have been sent to the
Registrar of Civil Appeals by both parties. This evidence is directed to the
financial capacity of Denmark to construct a surgery on the land.
I propose to
look at the evidence put forward on behalf of Denmark without taking account,
at this stage, of the criticisms made of it by Mr Derek Bainbridge [ARICS], a
quantity surveyor team leader with Darlington, in his affidavit dated July 3
1992.
It appears
from the evidence filed by Denmark:
(a) That Mr and Mrs Hussain are the joint owners
of their matrimonial home at East Boldon in the County of Tyne & Wear.
(b) That this property has a value of £190,000
and is charged to a building society to secure a loan of £50,000.
(c) That Mr and Mrs Hussain are prepared further
to charge the property to secure funding for the construction of the surgery.
(d) That Mr Hussain is prepared to undertake to
apply within four weeks for building regulations approval for the construction
of the surgery in accordance with the lease.
(e) That a company called Littlehaven
Developments (South Shields) Ltd (‘Littlehaven’) have written to Mr Duffy by
letter dated June 24 1992 to confirm that they are willing to lend Denmark a
sufficient sum to enable the surgery to be constructed.
(f) That the cost of construction of the surgery
has been estimated by a firm of architects in Darlington at £177,000, excluding
VAT.
(g) That the ability of Littlehaven to undertake
a contract of the value of £177,000 has been confirmed by Northern Rock Housing
Trust Ltd, with whom Littlehaven are engaged in a large joint venture at South
Shields having a sales value of £6,900,000.
It was argued
on behalf of Denmark that in the light of this evidence this court should grant
relief on the basis of a change of circumstances. To refuse relief would confer
a benefit on the council which would be quite disproportionate to the damage to
the council if relief were granted.
I am satisfied
that relief should be refused. The pharmacy opened for business in August 1987.
For a long time the attitude of Mr Hussain and Denmark was that they were under
no obligation to build a surgery until the area was reclassified. That was the
position at the trial. There has now been a change of heart and Denmark say
they are willing to construct the surgery. They have also put before us at the
last minute some proposals as to how the construction will be financed. In my
view, however, where a tenant had been in clear breach of covenant for years
and the judge at the original hearing was not satisfied that the tenant was in
a financial position to remedy the breach, it is necessary for the tenant, if
he wishes to rely on a change of circumstances, to put forward precise
evidence:
(a) of the sources of finance which are available
and of the capacity of the tenant to meet any interest payments; and
(b) to explain why the finance was not available
when the matter was before the judge.
In the present
case it seems clear that the pharmacy is not profitable and that the equity
value of the matrimonial home is less than the estimated cost of building the
surgery. The evidence of possible help from Littlehaven has come very late; it
was not available before the judge because at that stage the primary contention
of Denmark was that the relevant covenants had been frustrated.
One must look
at all the circumstances and the conduct of Denmark in the past. I consider
that it would be wrong to grant relief on this evidence.
(c) Unjust enrichment
It was
submitted that without evidence it was impossible to decide whether the council
would be enriched by the presence of the pharmacy on the land. The question of
enrichment, it was said, should be referred for inquiry. I see the force of
this submission. On the other hand, I can see no reason to interfere with the
judge’s conclusion that any enrichment would not be unjust. Denmark should have
known the status of the area when they signed the lease. Furthermore, counsel
for Denmark was unable to formulate any recognised principle of unjust
enrichment which would allow Denmark to recover compensation in circumstances
such as these
consider this point further as any enrichment would plainly not be unjust.
I would
dismiss the appeal.
STEYN LJ and SIR CHRISTOPHER SLADE agreed and did not add anything.
Appeal
dismissed with costs.
