Landlord and tenant – Breach of covenant – Forfeiture – Respondent holding lease of premises comprising restaurant with flats above – One flat used as brothel by subtenant – Whether respondent in breach of covenant against use of premises for illegal or immoral purposes – Whether agreement for management of restaurant by another company breaching covenant against parting with or sharing possession – Appellants’ claim for possession for breach of covenant dismissed – Appeal allowed
The appellants were the landlords and the respondent was the tenant under a lease of a property that comprised a restaurant at ground-floor and basement level with three flats above. The lease, for a term of 20 years from December 2004, contained a user covenant prohibiting the use of the premises for illegal or immoral purposes and a covenant against underletting or parting with or sharing possession of part of the premises.
In 2007, the respondent entered into a series of agreements by which another company took over the management of the restaurant until the end of 2009. Under those agreements, the management company undertook to keep the restaurant open and to pay an annual “consultancy fee” to the respondent while retaining the turnover of the business.
The police suspected that the second-floor flat was being used as a brothel by the subtenant. In February 2008, they served notices on both the appellants and the respondent requiring each of them to take action to remedy the situation. The respondent secured the departure of the subtenant from the flat.
The appellants considered that the use of the flat as a brothel had amounted to a breach of the covenant against illegal or immoral use and that the arrangements for the management of the restaurant breached the covenant against sharing or parting with possession. They gave notice to the respondent, under section 146 of the Law of Property Act 1925, requiring those breaches to be remedied so far as they were capable of remedy, while asserting that they were not so capable. Although the respondent changed the locks and purported to terminate the management agreement, the management company was reinstated on an interim basis in court proceedings; that company left by agreement in May 2009.
The appellants brought possession proceedings against the respondent and the management company in reliance on the alleged breaches of covenant. The respondent contended that any breaches had been remedied and claimed relief from forfeiture. Dismissing the possession claim, the judge held that: (i) although the respondent had had sufficient reason to suspect the use of the flat as a brothel after it received a telephone call from the police in November 2007, it had reasonably awaited a promised confirmation of this by letter before taking any action; and (ii) the agreements with the management company did not give rise to a parting with or sharing of possession since that company occupied only as agent for the respondent. The appellants appealed.
Held: The appeal was allowed.
(1) There was a distinction between immoral use of premises by the tenant, which was not a remediable breach, and such use by a subtenant, which was remediable so long as the tenant acted promptly on discovering that use. The tenant was required to take action when it acquired knowledge, or at least reasonable grounds for suspicion, of the use in question. If a tenant had reason to suspect an offending use, it had to make enquiries. If it did not, it risked being found to have permitted the use by failing to take the action that it would have taken had it discovered the true position: Glass v Kencakes Ltd [1966] 1 QB 611 and Borthwick Norton v Romney Warwick Estates Ltd [1950] 1 All ER 798 applied. Although the respondent had acted promptly on receiving the formal notice from the police regarding the use of the second-floor flat, that was insufficient to discharge its obligations under the lease. Once the respondent had been given reasonable grounds for suspecting that the flat was being used as a brothel, it had been incumbent on it to take prompt action to check the position. Although it could not be expected without more to confront the tenant immediately and tell her to leave, it should have taken appropriate steps to check the position, for instance by observing the comings and goings at the flat. To do nothing was inconsistent with its obligations under the lease and its failure in that respect had allowed the prostitution to continue for three months. Accordingly, it had been in breach of covenant before the service of the section 146 notice by failing, for a significant period, to take reasonable steps to investigate despite having reasonable grounds for suspecting that the flat was being used as a brothel. Since it had not taken steps with reasonable promptness, the breach was no longer capable of remedy.
(2) Under the agreements with the management company, that company did not occupy solely as agent for the respondent but had its own distinct right to use and occupy the restaurant premises, albeit not to the exclusion of the respondent. Since it was not just entitled, but obliged, to run the business for the stipulated period, subject to termination as provided by the agreement, it had an implicit right to use the premises for that purpose. That right was enforceable against the respondent, which, while the agreement subsisted, was not entitled to exclude the management company from the premises. During the term of the agreement, the management company ran the restaurant for its own profit, not on behalf of the respondent. A “manager” that ran the business, took all the profits after the payment of fixed sums to the owner, bore any loss and was obliged to continue the business for a stated period could not fairly be said to carry on the business as agent for the owner. Although the respondent had not excluded itself from the premises, it had given the management company an enforceable right to use them for its own benefit, not just as its agent. That amounted to a sharing of occupation of the premises in breach of covenant. The breach, although remediable, had not been remedied before the trial. Although the respondent had by then changed the locks to exclude the management company, that action had not been effective given that the respondent had not given written notice terminating the management agreement, as the agreement required, and the management company had been reinstated by injunction. If a tenant successfully excluded a subtenant or licensee without taking court proceedings, the relevant breach might have been remedied, but where consequent proceedings resulted in the subtenant or licensee being allowed into occupation, the breach was not remedied.
(3) It would have been appropriate to grant relief from forfeiture on terms that the respondent should pay all the appellants’ costs of the proceedings on an indemnity basis and give an undertaking not to commit future breaches of either covenant. The requirement to pay costs on the indemnity basis should remain, even though the respondent had, by September 2010, agreed to surrender the lease and no longer sought relief from forfeiture. Since the deed of surrender, by its terms, was not intended to affect the parties’ position in the proceedings, it could not be relied on to support an alternative costs award.
Jonathan Small QC and Oliver Radley-Gardner (instructed by Hugh Cartwright & Amin) appeared for the appellants; Katharine Holland QC (instructed by Layzells Solicitors) appeared for the respondent; the management company did not respond to the appeal.
Sally Dobson, barrister
