Landlord and tenant — Forfeiture — Mortgagee of lease informed by landlord of intention to grant new lease — Whether mortgagee entitled to relief from forfeiture — Whether relief to mortgagee subject to new lease
On June 5 1991
the first defendant landlords obtained an order for forfeiture and possession
of a 125-year lease of a flat which had been mortgaged by the tenants to the
plaintiff bank as mortgagees. Peaceable entry was effected on March 13 1992 and
on April 21 the mortgagees were informed by the landlords that they were
intending to grant a new long lease. On July 14 the mortgagees gave an
undertaking to the landlords that they would pay the arrears and claimed
entitlement to relief on the usual terms. On August 10 the mortgagees applied
in the county court for relief under section 138(9) of the
original leasehold title. On August 19 1992 the new lease was granted to the
third defendant. In the present proceedings the mortgagees claimed the vesting
in the mortgagees of the original lease, either in possession free from the new
lease or as a lease taking effect in reversion upon the new lease.
Following the letter from the mortgagees dated July 14 1992 the landlords acted
unreasonably; the mortgagees were entitled to relief from forfeiture. They were
entitled to relief in the form of a reversionary lease upon the new lease. The
landlords were to pay to the mortgagees the premium they received on the grant
of the new lease of £48,000, and the costs of the mortgagees and the third
defendant.
The following
cases are referred to in this report.
Escalus
Properties Ltd v Robinson [1995] 3 WLR 524;
[1995] 2 EGLR 23; [1995] 31 EG 71, CA
Fuller v Judy Properties Ltd (1991) 64 P&CR 176; [1992] 1 EGLR
75; [1992] 14 EG 106
Newbolt v Bingham (1895) 72 Law Times 852
Official
Custodian for Charities v Mackey (No 2)
[1985] 1 WLR 1308; [1985] 2 All ER 1016; [1985] 1 EGLR 46; (1985) 274 EG 398
Silverman
v Afco (UK) Ltd [1988] 1 EGLR 51; [1988] 14
EG 67
Stanhope
v Haworth (1886) 3 TLR 34
This was an
application by the plaintiff, the Bank of Ireland Home Mortgages Ltd, for
relief from forfeiture against the first and second defendants, South Lodge
Developments and WE Black Ltd. The third defendant was Freda Violet Reinbach.
Martin
Hutchings (instructed by Clarks, of Reading) appeared for the plaintiff; Colm
Davis-Lyons (instructed by Lynch Hall & Hornby, of Harrow) represented the
first and second defendants; Jonathan Manning (instructed by Richard Steer
& Co) represented the third defendant.
Giving
judgment, Lightman J said:
In this action the issues are raised whether a mortgagee of a lease be granted
relief from forfeiture where, after the lessor has notified the mortgagee of
its intent to grant at a premium a new lease in place of the forfeited lease,
the mortgagee defers proceedings for relief for over three months and during
this period the lessor proceeds to grant such a new lease; and, if relief
should be granted, the form such relief should take.
Facts
On April 29
1985, South Lodge Ltd (‘SL’), who was registered at HM Land Registry as
proprietor of the freehold title, in consideration of a premium of £35,000
granted a lease (‘the original lease’) of a ground-floor flat, 60 Vicarage
Close, for a term of 125 years from September 29 1984 at the annual rent of
£60. A leasehold title was opened at HM Land Registry in respect of the
original lease. On June 27 1986, the original lease became vested in Dennis
Rogers and Susan Meier (‘the original lessees’). On December 6 1988 the
original lessees mortgaged the original lease to the Bank of Ireland (‘the
mortgagee’). Notice of the mortgage was not given to SL. On February 14 1991 South
Lodge commenced proceedings for forfeiture for non-payment of the £60 rent due
on September 29 1990. No notice of the proceedings was given to the mortgagee.
On May 1 1991 SL transferred the title to its holding company, WE Black Ltd
(‘Black’). On June 5 1991, SL obtained an order for forfeiture and possession.
This involved (at best) a serious irregularity: Black should have first been
substituted as plaintiff. But the mortgagee has not sought on this ground to
challenge the validity of the judgment and forfeiture. On March 13 1992,
according to the affidavit of Mr Gadsden of SL and Black, Black peaceably
re-entered. No distinction has been drawn between the positions of SL and Black
and I shall hereafter refer to SL and Black together as ‘the lessors’.
On April 15
1992, the mortgagee, having learnt of the proceedings by SL and being owed a
debt of £76,000 secured by the mortgage of the original lease, wrote to the
lessors informing them of the existence of the mortgage and requesting details
of the arrears. In the course of a telephone conversation on April 21, Mr
Gadsden told the mortgagee that the lessors proposed to sell, ie grant a new
lease at a premium, and that the property was in a poor state. By letter to the
mortgagee dated April 29, the lessors, apparently erroneously, stated that they
had taken possession on April 14 1992 pursuant to the order dated June 5 1991.
No further
communication proceeded between the parties until July 14. During this period,
Black entered into negotiations to grant a new lease (‘the new lease’) to Mrs
Freda Reinbach (‘the new lessee’) for a premium of £48,000 and these
negotiations reached close to the stage of a concluded contract. During this
same period the mortgagee sought legal advice as to its entitlement to relief
and made a search for the original lessees, for it was in the interest of the
mortgagee for two reasons that the original lessees made the application for
relief rather than the mortgagee. If the mortgagee made the application, relief
would only be granted on the basis that the mortgagee assumed liability under
the covenants in the lease vested in it by way of relief and some question
might arise whether the vesting of the lease in the mortgagee by way of relief
had retrospective effect, so that the mortgagee was to be treated as lessee at
the date of the grant of the new lease. On the other hand, if the original
lessees made application, and relief was granted, without question the original
lease would be revested in the original lessees (subject to the mortgage) with
retrospective effect, ie as if it had never been forfeited and there would be
no assumption of liability under the covenants in the lease by the mortgagee.
On July 14
1992, the mortgagee wrote to the lessors undertaking to pay the arrears,
claiming entitlement to relief on the usual terms and threatening proceedings
unless the lessors agreed to such relief within 14 days. The lessors totally
ignored this letter and no reason for this course of action is given in the
evidence: I can only infer that it was because they saw an advantage in
proceeding with the grant of the new lease without prior notice to the mortgagee
and ahead of any proceedings for relief.
The lessors
thereafter applied to HM Land Registry to cancel the leasehold title in respect
of the original lease on the ground that the original lease had been forfeited,
and in a statutory declaration in support stated that no application for relief
had been made by ‘an interested party such as a mortgagee’. No disclosure was
made of the letter dated July 14 or that the statutory six-month period for an
application for relief had not expired.
On August 10
1992 the mortgagee commenced these proceedings for relief under section 138(9)
of the County Courts Act 1984 against the lessors in the county court. On
August 11 1992 HM Land Registry confirmed that the leasehold title was
cancelled. In acceding to the lessors’ request in this regard, HM Land Registry
acted irregularly: no such cancellation should have taken place until the
registrar was satisfied that there was no longer any possibility of the
mortgagee applying for relief: see for example Ruoff & Roper, Registered
Conveyancing, para 21.32.
The new lessee
was concerned about a possible application for relief by the mortgagee, but her
anxieties were quieted by the unequivocal assurance of the lessors that any
application for relief was out of time. The lessors in their evidence have
given no explanation for this misrepresentation: it is common ground that the
time limitation was six months from the date that the lessors took possession.
On the basis of this assurance on August 19 1992, Black executed the new lease
and the new lessee paid the premium of £48,000. Later the same day, these
proceedings for relief were served on the lessors. Subsequently HM Land
Registry confirmed that the leasehold title had been closed in error because
the six-month period had not expired without an application for relief, and
pending the trial of this action HM Land Registry declined to proceed with the
application by the new lessee for registration of the new lease.
In the
particulars of claim in this action the mortgagee claimed by way of relief the
vesting in the mortgagee of the original lease, alternatively: (a) in
possession free from any interest purportedly
reversion upon the new lease. In view of the potential challenge to the
validity of the new lease, the new lessee applied to be and was joined as third
defendant.
Legal
position
In the
ordinary case, when relief is granted to a mortgagee, relief takes the form of
the vesting of a lease which takes effect from the date of the order for
relief: the lease does not have retrospective effect and accordingly the
mortgagee is not to be treated as lessee during the period between the
forfeiture and the date of the order: see for example Official Custodian for
Charities v Mackey (No 2) [1985] 1 WLR 1308*. But somewhat
remarkably it has apparently been held by the Court of Appeal that if relief is
granted under section 138 of the County Courts Act 1984, a lease may be vested
in the mortgagee with retrospective effect and accordingly the mortgagee is to
be treated as lessee throughout the period between forfeiture and the date of
the order granting relief: see Escalus Properties Ltd v Robinson
[1995] 31 EG 71† and Emmet on Title paras 26.239A and 26.224. The parties
are content to proceed on this basis and I need not consider it further.
*Editor’s
note: Also reported at [1985] 1 EGLR 46
†Editor’s
note: Also reported at [1995] 2 EGLR 23
It is clear
that, if relief is granted to the mortgagee: (1) the lease may be vested in the
mortgagee either in reversion upon the new lease or with priority to and
unincumbered by the new lease — see Fuller v Judy Properties Ltd
[1992] 14 EG 106*; and (2) since the lease will have retrospective effect and
accordingly the mortgagee is to be treated as lessee at the date of grant of
the new lease, if the lease is to take effect in reversion upon the new lease,
the mortgagee is entitled to payment by Black of the £48,000 premium paid by
the new lessee as moneys had and received (ibid).
*Editor’s
note: Also reported at [1992] 1 EGLR 75
The issue
between the parties is whether relief can, or should be, granted. The primary
submission on behalf of the lessors is that, as a matter of law, relief cannot
be granted if the parties have altered their position and new interests have
been created following forfeiture of the lease unless fraud is shown — see Stanhope
v Haworth (1886) 3 TLR 34 and Newbolt v Bingham (1895) 72
Law Times 852; and that in this case the mortgagee has not alleged fraud and
the position of the parties changed after forfeiture by the grant of the new
lease to the new lessee.
Section
138(9A) of the County Courts Act 1984 confers jurisdiction on the court in any
case where the lessor has recovered possession at any time after (and not
necessarily pursuant to) the making of an order for possession, on an
application made within six months of the lessor’s recovery of possession in
its discretion to grant relief subject to such terms and conditions as it
thinks fit. The discretion is unfettered though it must be exercised
judicially. There is one qualification, namely that relief cannot be granted to
the prejudice of a purchaser from the lessor without notice of the equity to
seek relief or of a purchaser who, upon registration under the provisions of
the Land Registration Act 1925, takes free of the equity. The criterion in the
exercise of the discretion is what is just as between the parties. The two
principal authorities cited by the lessors make clear that any alteration of
position on the part of the lessor or a third party in the interim period
between the date of forfeiture and the date of the application for relief, eg
the grant of a new lease, is potentially a factor of first importance in the
exercise of the discretion, for it may make it unjust to grant relief
thereafter: whether it does or does not do so must depend on all the
circumstances, and in particular the reasonableness or otherwise of the conduct
of the lessor and the third party in acting as they did, eg in proceeding with
their transaction, notwithstanding the potential application for relief or any
potential or actual appeal from the refusal of relief: see Silverman v Afco
(UK) Ltd [1988] 1 EGLR 51. Further, even if justice requires that a
transaction, eg a lease, should stand notwithstanding the grant of relief, this
may not render the grant of relief unjust if relief can be granted on terms, or
on a basis, which protects the rights of the parties under the transaction, eg
if relief can take the form of a lease in reversion upon a lease granted by the
lessor: see Fuller v Judy Properties Ltd [1992] 14 EG 106.
I accordingly
reject the first submission of the lessors that the grant of the new lease of
itself is an absolute bar in law to relief. Even if the equity to relief was
not enforceable against the new lessee and relief could not be granted to the
prejudice of the new lessee, relief could take the form of the vesting of a
lease in reversion on the new lease and such a grant of relief could not
prejudice the new lessee.
The lessors’
second submission is that if, contrary to the lessors’ primary submission, the
court has a discretion to grant relief, as a matter of discretion relief should
be refused because the delay of the mortgagee in commencing proceedings for
relief was such as to make it reasonable for the lessors to proceed with the
grant of the new lease.
Compliance
with the six-month time-limit on applications for relief is a necessary, but
not a sufficient, precondition for relief. It is incumbent on any applicant for
relief, whether a lessee or a person deriving title from a lessee, to make
application with all due diligence and keep the lessor informed of his
intentions and not leave him in the dark, and, if there is any apparent delay,
in his evidence fully to explain it. It is not the legislative policy that the
premises shall be sterilised producing no return for the lessor during the six-month
period, let alone that the lessor shall be occasioned loss. So long as the
lessor has given those entitled a reasonable opportunity to apply for relief
and has reasonably formed the view that no application will be seriously
pursued, he may exercise his rights as owner. What is reasonable in this
context must depend on the circumstances of the case, eg the amount of rent
due, the seriousness of any breach of covenant, the cost to the lessor of
retaining, and preserving the value of, the property unlet or unsold and the
loss occasioned to the lessor by the delay.
In the
circumstances of this case, but for the receipt of the letter dated July 14, I
might well have considered that the lessors acted reasonably in granting the
new lease. The passage of time from April 15 1992 — when the lessors informed
the mortgagee of the condition of the premises and the intention to sell —
until August 19 without any communication from the mortgagee might reasonably
have led the lessor to believe that there would be no application for relief.
But on July 14 the mortgagee made clear its position, and though at this stage
negotiations for the new lease were well advanced, the lessors had every reason
to believe, and on the basis of the evidence filed plainly did believe, that
there would be an application by a mortgagee well able and committed to
fulfilling all the conditions for relief and there was no reason to believe
that on the grant of relief the lessors would not be restored to the same
position as if there had been no breach of covenant by the original lessees. In
these circumstances I consider that the lessors acted totally unreasonably: in
thereafter ignoring and not replying to the letter; in falsely, for no reason
explained in the evidence, informing the new lessee that the period for an
application for relief had expired; and in precipitately granting the new lease
and pocketing the premium, moneys from heaven to which they had no moral claim.
Accordingly, it would be just to grant relief as against the lessors.
The question
then arises whether the grant of relief is just as against the new lessee:
(a) As I have
already said, relief takes the form of a reversionary lease on the new lease or
it may be a lease unincumbered by the new lease, and if relief takes the form
of a reversionary lease upon the new lease the grant of relief can occasion no
injustice or prejudice the new lessee.
(b) Likewise
it would be just to grant relief in the form of a lease unincumbered by the new
lease. If the new lease had been registered, in view of the (albeit erroneous)
cancellation of the leasehold title in respect of the original lease, under the
provisions of the Land Registration Act 1925 the new lessee would have obtained
title free from any equity arising from the mortgagee’s right to claim relief.
The mortgagee’s right would have been limited to relief in the form of a lease
in reversion upon the new lease. But as the new lessee was never registered as
proprietor, the mortgagee’s equity, of which the new
notice, for she (or her solicitors) knew, or should have known, that the
six-month period for an application for relief had not expired and should not
have accepted the lessors’ assurance to the contrary. Accordingly the mortgagee
is prima facie entitled at its election to relief in the form of a lease
in reversion upon the new lease or free of and unincumbered by the new lease.
Fortunately
(in particular since the new lessee is an 83-year-old widow who has spent
£9,000 on improvements to the flat) some time after joinder of the new lessee
as a defendant, the mortgagee and the new lessee agreed that the relief (if
any) to be granted to the mortgagee shall take the form of a reversionary
lease, leaving the new lessee entitled to a lease in possession and the
mortgagee to a reversionary lease with a consequent entitlement to the premium
of £48,000. The issue of the entitlement of the mortgagee to a lease in
priority to the new lease has been the subject of debate as relevant to costs
and in particular the costs of joinder of the new lessee. The new lessee sought
her joinder as a defendant because the mortgagee in its pleadings claimed (in
the alternative) a right to the unincumbered lease. If the mortgagee’s rights
were limited to a reversionary lease, this claim would have been misconceived
and would unnecessarily have occasioned the costs of such joinder. I hold that
the claim was perfectly properly made, albeit not pursued because of the
agreement.
Summary
I accordingly
hold that upon the usual terms as to payment by the mortgagee of the costs of
the proceedings for forfeiture and arrears of rent and upon the further term
that the mortgagee shall also pay the reasonable costs incurred by the lessors
in the grant of the new lease, the mortgagee is entitled to relief in the form
of a reversionary lease upon the new lease, and that the lessors shall pay over
to the mortgagee the premium of £48,000 together with interest at judgment rate
from the date of receipt.
As regards the
costs of this action, I think that the lessors have acted totally unreasonably:
in rejecting the offer made by the letter dated July 14 1992; proceeding
thereafter with the application to HM Land Registry without disclosing that
letter; in misleading the new lessee as to the position regarding the
application for relief; and in defending this application. The lessors have
unnecessarily occasioned the costs of these proceedings and in justice must be
ordered to pay the costs of the mortgagee and new lessee.
The
mortgagee’s counsel shall prepare a minute of order and this shall be agreed
and signed by counsel. In default of agreement, I give liberty to apply.
