Landlord and tenant — Forfeiture — Waiver — Arrears of rent — Bankruptcy petition by landlord against tenants — Landlord seeking to forfeit lease for breaches of covenant — One tenant paying bankruptcy sum and other rent arrears by cheque — Landlord processing cheque, retaining bankruptcy sum but repaying remainder — Whether acceptance of rent waiving right to forfeit for breaches of covenant — Whether bankruptcy proceedings amounting to waiver
In November 2005, the respondent landlord made a statutory demand against the appellant tenants in respect of arrears of rent accruing under a lease of public house/restaurant premises for the period 2004 to 2005. The demand was not met and the respondent presented a bankruptcy petition against the first appellant. It subsequently became aware of various breaches of other tenant covenants. In October 2006, shortly before the scheduled hearing of the bankruptcy petition, the first appellant sent a cheque for £10,000, part of which was to discharge the outstanding bankruptcy sum, the remainder being part-payment of other rent arrears. He received a letter in reply informing him that the respondent was retaining the sum of £3,414.80, representing the bankruptcy debt, but returning the balance. The letter stated that clearance of the cheque should not be regarded as a waiver of the respondent’s right to forfeit the lease. The respondent attended the bankruptcy hearing and secured the dismissal of its petition.
In 2007, the respondent brought proceedings to forfeit the lease. Allowing the claim in the county court, HH Judge Welchman rejected a submission by the first appellant that the respondent had waived the right to forfeit by banking the cheque; he held that this had not amounted to acceptance of rent. On appeal, the first appellant further argued that: (i) the pursuit of the bankruptcy petition amounted to a waiver of forfeiture, as an alternative cause of action pursued with knowledge of the breaches; and (ii) acceptance of the sum to discharge the bankruptcy debt was itself a waiver of the right to forfeit, since that sum represented rent arrears, albeit in respect of rent that had fallen due prior to the respondent obtaining knowledge of the breaches of covenant for which it sought to forfeit.
Held: The appeal was dismissed. (1) The processing of a cheque is not in itself conclusive of the question of whether a payment is accepted as rent. For waiver of forfeiture to take place, a payment must be accepted by the landlord and specifically as rent. The respondent had accepted only a part of the sum realised by banking the cheque, which part had been paid by the appellant and accepted by the respondent solely for the purpose of securing the dismissal of the bankruptcy petition. An objective observer would have no grounds for supposing that the amount repaid by the respondent had been accepted as rent. (2) The bankruptcy proceedings did not amount to a waiver of forfeiture since they had been commenced before the respondent knew of the breaches of covenant and they had been brought for the purpose of showing that the first appellant was unable to pay his debts. Moreover, there can be no waiver of the right to forfeit if the arrears upon which a bankruptcy petition is based relate to a rent period prior to the landlord’s acquisition of knowledge of the tenant’s breaches of covenant. (3) An acceptance of rent will not prevent a landlord from forfeiting in respect of any breaches of covenant that are continuing in nature, such as parting with possession, since the landlord can forfeit for a subsequent continuation of the breach.
The following cases are referred to in this report.
Central Estates (Belgravia) Ltd v Woolgar (No 2) [1972] 1 WLR 1048; [1972] 3 All ER 610; (1972) 24 P&CR 103; 223 EG 1273, CA
John Lewis Properties plc v Viscount Chelsea (1994) 67 P&CR 120; [1993] 2 EGLR 77; [1993] 34 EG 116, Ch
Matthews v Smallwood [1910] 1 Ch 777
Oak Property Co Ltd v Chapman [1947] KB 886, CA
Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504; [2007] 1 EGLR 31; [2007] 01 EG 94
This was an appeal by the appellants, Olufemi Osibanjo and Paul Olubayo, from a decision of HH Judge Welchman, sitting in Lambeth County Court, allowing a claim by the respondent, Seahive Investments Ltd, for possession of demised premises on the grounds of forfeiture.
The first appellant appeared in person; Joseph Harper QC and Myriam Stacey (instructed by Webster Dixon LLP) represented the respondent.
Giving the first judgment, Mummery LJ said:
[1] This appeal is from a possession order made by HH Judge Welchman on 20 December 2007. He refused relief from forfeiture of a lease dated 15 April 1998 (the lease) for a term of 16 years expiring on 25 March 2014. The lease was of premises at 54 Camberwell Church Street, London SE5 (the property), which were permitted to be used only as a public house/restaurant. The judge granted permission to appeal on the issue of whether there had been waiver of forfeiture by the acceptance of rent by the landlord, Seahive Investments Ltd (Seahive), with knowledge of breaches of covenant by the appellant tenants.
[2] Tuckey LJ’s refusal of permission to appeal on other grounds was renewed at the hearing of the appeal. The first appellant, Mr Olufemi Osibanjo, is one of the tenants under the lease. He is a practising solicitor and argued the appeal in person. The main point on the appeal is whether Seahive had waived the right to forfeit by acceptance of rent with knowledge of the tenants’ breaches of covenant. The judge held that there had been no waiver.
[3] There is no substantial dispute concerning the relevant law. Forfeiture may be waived by the receipt of rent. The rent must have accrued due since the landlord had notice of the cause for forfeiture and it must have been tendered and accepted by the landlord as rent. In those circumstances, the landlord has elected not to take advantage of the forfeiture. The cited authorities included Matthews v Smallwood [1910] 1 Ch 777, at pp786-787, per Parker J, Central Estates (Belgravia) Ltd v Woolgar (No 2) [1972] 1 WLR 1048*, at p1051H-1053A, per Lord Denning MR, John Lewis Properties plc v Viscount Chelsea (1994) 67 P&CR 120†, at pp137-140, and Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504‡, in [14] to [22], per Neuberger LJ. As |page:33| a matter of law, the right to forfeit may be waived by the acceptance of rent by the landlord with knowledge of the breach, even though the landlord had no intention to waive. The test is an objective one: did the landlord so act as to recognise the continued existence of the lease and the continuing relationship of landlord and tenant? Thus, the landlord’s acceptance of rent as the result of an error, or on a “without prejudice” basis, may indicate that the landlord had no intention to waive, but such circumstances do not, as a matter of law, prevent waiver.
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* Editor’s note: Also reported at (1972) 223 EG 1273
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† Editor’s note: Also reported at [1993] 2 EGLR77
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‡ Editor’s note: Reported at [2007] 1 EGLR 31
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Background facts
[4] The facts found by the judge relating to the waiver issue can be stated shortly.
[5] The lease contained covenants against making structural alterations or additions to the property, against parting with possession or changing the user of the property and against closing the property. The common form proviso for forfeiture for breach of covenant and for bankruptcy was included in clause 7.
[6] Seahive made a statutory demand dated 30 November 2005 for a sum based upon arrears of rent relating to the period 25 March 2004 to 24 June 2005 and rent due on 29 September 2005 and other sums. The demand was not satisfied, although some payments were made. Seahive presented a bankruptcy petition against Mr Osibanjo on 5 January 2006 to be heard on 21 February 2006. It was adjourned on a number of occasions. In June 2006, Seahive became aware of breaches of the tenants’ covenants.
[7] Shortly before the adjourned hearing of the bankruptcy petition, Mr Osibanjo sent a cheque for £10,000 under cover of a letter dated 24 October 2006 to Seahive’s former solicitor, Jennings Son & Ash. At that time, the outstanding sum left over from the date of the statutory demand was £3,414.80, but other sums had become due. Seahive banked the cheque. The letter stated that the cheque was:
to discharge the outstanding Bankruptcy sum and the remainder as part payment for arrears of rent. Please confirm the outstanding arrears.
Please note that this payment is only a pragmatic gesture. It is made without prejudice to our case that the Bankruptcy proceedings is a wrong action for issues such as this and we will be appealing the decision made by the Registrar.
Kindly arrange for the petition to be dismissed.
[8] By letter dated 31 October 2006, Seahive’s solicitor informed Mr Osibanjo that Seahive had retained the sum of £3,414.80, representing the bankruptcy debt, but returned the balance of £6,585.20. The letter explained how the bankruptcy sum was calculated and continued:
For the avoidance of doubt the clearance of your cheque through this firm’s client account should not be regarded as a waiver by our client of his right to forfeit the lease.
We will attend tomorrow’s hearing and request dismissal of the petition. We shall forward a schedule of costs in due course.
[9] On 1 November 2006, the bankruptcy petition was duly dismissed by the court.
[10] On 24 November 2006, Mr Osibanjo sent a further cheque for £18,750. Seahive did not bank it. The cheque was returned.
[11] In the forfeiture proceedings issued on 4 April 2007, the appellants unsuccessfully contended that Seahive had waived the right to forfeit the lease by appropriating the cheque for £10,000 dated 24 October 2006 to pay the rent due for the relevant period.
Judgment
[12] The judge held that there had been no waiver of the right to forfeit by the acceptance of rent with knowledge of breaches of covenant.
[13] The judge found as a fact that extensive works had been carried out on the property and that there had been breaches of covenant relating to the making of unauthorised alterations to the property, to the change of use of part to residential use, to the closure of the property for a substantial period and to unlawful parting with or sharing of possession. Seahive had no knowledge of the alleged breaches of covenant until 19 June 2006, when the property was inspected by Seahive’s surveyor, Mr Tobin. The rent arrears for which payment had been accepted related to a period prior to Seahive’s knowledge of the breaches of covenant.
[14] Although recognising that waiver is a matter of law and not of intention in the case of the tender and acceptance of money as rent, the judge held that, as a matter of fact, the money paid by the tenants was not accepted by Seahive as rent. He said, in [29]:
the real issue is whether this [taking part of the cheque and rejecting the other] was ever an acceptance of rent, and the conclusion that I reach is that it was not. It was certainly not intended to be by the landlords and it was not treated as such by the tenant. I only find that of some residual comfort, because I think the crucial thing, really, is what happened at the landlord’s end, but this was a conscious decision communicated effectively and appropriately to the defendants to say, “We’re going to take part but not the other part.” This was an indivisible cheque and they banked the cheque as I say. There it is, that is the conclusion that I reach and I accept the submissions that the first question is one of fact and I do not find that this money was accepted by the landlord as rent.
Appellant’s submissions
[15] Mr Osibanjo’s main contention was that Seahive had waived the right to forfeit because, instead of returning the £10,000 cheque, it had accepted and banked it at a time it had knowledge of the alleged breaches of covenant. Payment of rent due for the relevant period was accepted by virtue of the cheque having been presented for payment.
[16] Mr Osibanjo had two further points: first, that the commencement and pursuit to their conclusion of the bankruptcy proceedings, as an alternative cause of action with knowledge of breaches of covenant, was a waiver of forfeiture; and, second, acceptance of the part of the moneys to discharge the bankruptcy debt was a waiver of the right to forfeit because the sum in question was or represented rent arrears (albeit relating to a time before knowledge of breach) and it was accepted after Seahive had knowledge of the breaches of covenant.
[17] On the second point, Mr Joseph Harper QC, who appeared for Seahive, objected that this was a new point and that the court ought not to allow it to be taken for the first time on the appeal. If it had been taken earlier, Seahive might have wished to bring evidence to answer it. There had been no investigation of the facts relevant to this point. Mr Osibanjo claimed that the point had been taken and that a part of the transcript together with his closing skeleton documents not before the court would demonstrate that it had. On this aspect of the case, we allowed Mr Osibanjo to submit further documents to the court after the end of the oral hearing.
[18] Mr Osibanjo supplied a document headed “Revised skeleton argument” dated 13 December 2007. It bears a stamp that it was filed in Lambeth County Court on 6 October 2008. It apparently advances, as part of “the waiver point below” (sic), the argument that the bankruptcy proceedings were conduct evidencing Seahive’s decision not to use its right to forfeit on the breaches that it was aware of in November 2006. This document differs from another document headed “additional skeleton argument” also dated 13 December 2007. This was supplied to Seahive’s lawyer at the hearing. It was supplied to this court by Seahive’s advisers. This document does not mention the point on payment of the bankruptcy debt, although it appears from the transcript of the proceedings to have been mentioned in a short exchange between the tenants’ then counsel and the trial judge. It was not developed further. It did not feature in the judgment.
[19] I should mention that it was also argued that the November cheque, although returned unbanked, was a waiver of forfeiture. Reliance was placed upon the time a week or so that had elapsed before it was sent back. On this point, I say only that, in my judgment, the judge rightly held that there was nothing in it. In the absence of exceptional circumstances, the receipt of a cheque that the landlord does not present for payment does not amount to waiver. There were no exceptional circumstances in this case. I would not grant permission to amend the grounds of appeal to raise this point: ground 8.
Discussion and conclusion of waiver point
[20] The waiver argument boils down to very short points on the particular facts of the case. |page:34|
[21] First, it was impossible for Seahive, without first processing the cheque, to separate out the two liabilities expressly stated by the tenants in the covering letter: the payment to avoid a bankruptcy order in pending proceedings and the payment to discharge part of the arrears of rent. It was necessary to process the cheque in order to secure the dismissal of the bankruptcy petition. It was important for Mr Osibanjo to have the petition dismissed. The making of a bankruptcy order would itself be an event occasioning forfeiture. It would also be a very serious for him as a practising solicitor. This basis for division of the amount for which the cheque was drawn was made clear by Mr Osibanjo in his covering letter, as it was in the reply letter sent by Seahive’s solicitor promptly after processing the cheque. In those circumstances, an objective observer would have had no ground for supposing that the amount repaid by Seahive to Mr Osibanjo had been accepted by Seahive as rent.
[22] Second, the processing of the cheque is not in itself conclusive of the question of whether the payment was accepted as rent. The processing is evidence of payment to Seahive, but for waiver of forfeiture it must also be shown that the payment was accepted and that it was accepted as rent by the landlord. In this case, only part of the sum realised by the processing of the cheque was accepted. That sum related to the bankruptcy debt, which Mr Osibanjo had paid in order to secure the dismissal of the bankruptcy petition. It was accepted on that basis and it was used to achieve that end. In my judgment, that was not an acceptance of the balance by Seahive as rent.
[23] Third, I would reject Mr Osibanjo’s additional arguments in the proposed amended grounds of appeal. First, the bankruptcy proceedings were not in themselves a waiver of forfeiture. They were commenced before Seahive knew of the breaches of covenant. Their purpose was to demonstrate that the tenants were unable to pay their debts. They had not complied with the statutory demand. If they were to be made bankrupt, the proviso for forfeiture would apply. On Mr Osibanjo’s argument, a landlord could not forfeit for bankruptcy because the very process of making a tenant bankrupt would itself waive the right. This cannot possibly be correct, and I would not grant permission to amend the grounds of appeal to raise the point: ground 9.
[24] Nor would I accept his bankruptcy debt argument. It appears from the transcript that it was briefly raised below, although not elaborated in the written submissions or dealt with in the judgment or raised in the grounds of appeal. In my view, it is not a good point and I would not grant permission to amend the grounds of appeal to raise it: ground 10. The arrears upon which the bankruptcy petition was based related to a rent period prior to Seahive’s knowledge of the breaches of covenant. There can be no waiver of the right to forfeit if the relevant arrears preceded the landlord’s acquisition of knowledge of breach. As for the argument that the acceptance of payment of the bankruptcy debt was itself an acceptance of rent amounting to waiver of forfeiture, as distinct from a payment being made and accepted to secure the dismissal of the bankruptcy petition, it is unnecessary to express a concluded view, and I prefer not to do so.
[25] I would add that, in so far as there have been continuing breaches of covenant, such as parting with possession, the waiver point, even if valid, would not apply to prevent forfeiture in respect of continuing breaches. They would be recurring causes for forfeiture. Acceptance of rent would not prevent Seahive from seeking to take advantage of a subsequent continuation of the breach.
Renewed application for permission
[26] We received detailed written submissions and amended grounds of appeal on the renewed application for permission to appeal from other parts of the judgment. It was submitted that the judge had erred in holding that Seahive had had no knowledge of the alleged breaches and in finding that there had been a breach of covenant in carrying out non-structural alterations, parting with possession of the property and not keeping the property closed for a period of two months in a relevant period of 12 months on the basis that such findings were in the absence of evidence or against the weight of reliable evidence. It was also contended that the judge had wrongly refused relief from forfeiture by taking irrelevant matters into account and leaving relevant matters out of account. He submitted that, on the evidence, the judge ought to have held that Seahive had waived its right to forfeiture by standing by and allowing the expenditure of substantial sums of money in improving the property.
[27] On 23 June 2008, Tuckey LJ refused permission on the papers on the ground that the findings sought to be appealed were findings of fact open to the judge and this court would not interfere with them. He also stated that the judge’s refusal to grant relief from forfeiture was entirely justified in view of the serious and wilful breaches of covenant that had occurred. I agree. The same criticism applies to the proposed amendments to the grounds of appeal that seek to challenge the judge’s findings of breaches of covenant: grounds 11 and 12.
Result
[28] I would dismiss the appeal.
Giving the second judgment, Rix LJ said:
[29] I agree with Mummery LJ that this appeal should be dismissed and that permission to appeal on the renewed or amended grounds of appeal should be refused.
[30] In particular, I agree that the main argument raised by Mr Osibanjo on the appeal, that the cashing of the £10,000 cheque was itself a waiver of the right to forfeit because that sum included a smaller sum in respect of arrears of rent, fails because of the judge’s finding that the money in question was not accepted by Seahive as rent: see [14] and [22] above.
[31] My only purpose in writing a separate judgment is to say that I am not sure that a landlord cannot waive the right to forfeit by accepting rent with knowledge of the breach where that rent had accrued due before knowledge of the breach: provided of course that the rent had accrued due after the breach. Thus, I am concerned that acceptance of rent that accrues due after the breach upon which forfeiture is based may always be a waiver of the right to forfeit for that breach provided of course that, at the time of acceptance, the landlord has the requisite knowledge of the breach. It is true that in Oak Property Co Ltd v Chapman [1947] KB 886, at p898, Somervell LJ said (in a judgment of the Court of Appeal prepared by Evershed LJ) that “acceptance of any rent accrued due after the landlord’s knowledge of the tenant’s breach was regarded necessarily as inconsistent with an election to avoid the lease”. However, at p899, Somervell LJ restated the principle more broadly, as follows:
From long usage the acceptance of rent by a landlord after knowledge of circumstances giving rise to a claim for possession has come to be regarded by landlords and tenants alike as evidence of an intention to affirm the tenancy.
[32] The former statement is true, even if it is not necessary for the rent to accrue due after knowledge of the breach. On principle, I would be inclined to think that knowledge is what is necessary to found the waiver, since one cannot waive without knowledge, but that once there is the necessary knowledge it should not matter whether the rent that is accepted has accrued due before or after the date of knowledge. However, in any event, Mr Osibanjo’s difficulty here is that the judge found that there was no acceptance of rent as rent, and that is destructive of this appeal.
[33] As for the bankruptcy debt argument (see [24] above), I would therefore prefer to rest my agreement with Mummery LJ’s decision not to grant permisssion to appeal on this new ground, not upon the basis that the arrears upon which the bankruptcy petition was based related to a rent period prior to Seahive’s knowledge, but upon the basis that it would be wrong in any event to admit such a new ground in circumstances in which Seahive did not have the opportunity to investigate below the factual position whether the rent accrued due before breach and/or whether acceptance of the bankruptcy debt could in any event be said to be an acceptance of rent.
Smith LJ said:
[34] I agree.
Appeal dismissed.
