Landlord and tenant — Misrepresentation — Causation of damages — Premises with no planning permission and unsuitable for car repairs — Whether landlord liable in damages for misrepresentation — Whether period of liability continued after expiration of initial six month term — Whether misrepresentation causative of loss
In 1991 the plaintiff landlord advertised
premises as ideally suitable for any storage workshop use and car repairs. The
defendants, who had formed a partnership to carry on a garage business, agreed
to take a six-month lease from October 20 1991. Shortly after commencing
business, complaints were made about the defendants’ activities and in February
1993 statutory notices were served concerning the fumes from spraying. On the
expiration of the six-month term, the defendants continued in possession under
a monthly tenancy. In June 1993 an enforcement notice was served alleging that
the premises were being used for a purpose without planning permission. In May
1993 the landlord commenced proceedings for forfeiture and arrears of rent. The
defendants counterclaimed for damages for misrepresentation that the premises
had planning permission, and was suitable, for car repairs. The landlords
appealed the decision of the judge in the court below, who had allowed the
claim for damages and awarded £17,230, after deducting arrears of rent of
£8,470, contending that the representation of suitability for car repairs did
not include paint spraying, that the defendants were entitled to leave the
premises after the expiration of the six-month term, and losses suffered
thereafter were not caused by the misrepresentations.
includes repairs to the body of a car, as well as other parts, and repairs to
the body
plaintiff’s liability for the negligent misrepresentations and the losses
directly flowing from the transaction which the defendants were induced to
enter by those misrepresentations. It was reasonable for the defendants to
remain in possession because they had sunk their money into establishing a
business at the premises. It was not unreasonable for them to continue in
business until they gave up possession by consent in June 1994. The
misrepresentations effectively caused the losses, the fact that there might
have been other causes did not enable the landlord to escape from the
consequences of the misrepresentation.
The following cases are referred to in
this report.
Downs v Chappell [1996] 3 All ER 344
Esso Petroleum Co Ltd v Mardon [1976] QB 801;
[1976] 2 WLR 583; [1976] 2 All ER 5; [1976] 2 Lloyd’s Rep 305; [1977] 1 EGLR
57; (1976) 241 EG 82, CA
Royscot Trust Ltd v Rogerson [1991] 2 QB
297; [1991] 3 WLR 57; [1991] 3 All ER 294, CA
Smith New Court Securities Ltd v Citibank NA [1996] 3
WLR 1051; [1996] 4 All ER 769, HL
This was an appeal by the plaintiff,
Bridgegrove Ltd, from a decision of Judge Graham QC in proceedings by the
plaintiff for forfeiture and arrears of rent to which the defendants, Richard
Smith and Roy Smith, had counterclaimed for misrepresentation.
Romie Tager QC and Sarah Benbow
(instructed by Keith Goldstein) appeared for the appellant; Jonathan Gaunt QC
and John Waithe (instructed by Makanda & Co) represented the first
respondent; the second respondent, Roy Smith, appeared in person.
Giving the first judgment at the
invitation of Nourse LJ, MUMMERY LJ said: Bridgegrove Ltd is a property
company. It purchased at an auction on June 21 1984 premises at 112 Kingsland
High Street, Dalston, London E8. The premises consist of a basement,
ground-floor shop and three storeys above, which at the relevant time were
occupied by residential tenants. There was also a yard at the back, in an area
called Birkbeck Mews. Part of the property was advertised for letting in the
autumn of 1991 as ‘ideally suitable for any storage workshop use and car
repairs’.
Mr Richard Smith, a motor mechanic, and
Mr Roy Smith, a school teacher, are the defendants in the action. They are
brothers. They formed a partnership to carry on a garage business under the
name ‘Dee-O-Roy Motors’. They were interested in premises in the Hackney area
and responded to the advertisement. They met Mr Ackerman, a director of
Bridgegrove. They agreed with him to take a lease of the basement of the
premises and the rear yard for a term of six months from October 20 1991. They
agreed to pay a rent of £650 a month, payable in advance. They paid a deposit
of £650 and took possession of the premises on October 28. The premises were in
a bad state. The brothers carried out what the judge described as
time-consuming and costly repairs: levelling the workshop floor, installing
electric wiring, repairing mains water pipes and unblocking the drains. Soon
after they entered into possession they signed the tenancy agreement.
Within a few weeks of starting up works
in the premises they received complaints from the occupier of the shop on the
ground floor about fumes emanating from spraying work on vehicles. The fumes
filtered through gaps in the ceiling. Attempts were made to seal the gaps and
an extractor was installed, but was only partially effective. As a result of
the complaints about spraying, the defendants had to limit their activities in
the garage. Complaints were made by the tenants occupying the upper floors to
the environmental health officer, who informed the defendants that the use of
the premises for car repairs was a breach of planning permission. In February
1993 statutory notices were served on the defendants alleging that their activities
were contravening the Environmental Protection Act 1990. The defendants were
convicted in July 1993 of a breach of that Act and fined. They had to cease
spraying. Their activities were limited to servicing and mechanical work.
Also in 1993 Mr Ackerman was informed, by
letters from the development office of the local authority, that there was no
planning permission for a car repair workshop on the premises. A request was
made that the contravening use should cease immediately under threat of
enforcement action. An enforcement notice was served at the end of June 1993.
During 1992 the defendants fell into
arrears with the rent. Bailiffs re-entered the premises. The defendants broke
in. The reason they gave for doing so, and accepted by the judge, was that they
did not have the resources to acquire and set up other premises. Bridgegrove
took legal proceedings to recover the rent arrears. On December 11 1992 they
obtained judgment for arrears amounting to £4,300 for the period April 20 to
October 20 1992. The bailiffs were successful in recovering £400 of the arrears
of rent in September 1992.
These proceedings were started by
Bridgegrove on May 24 1993. The claim was for forfeiture and for recovery of
further arrears of rent and mesne profits. The defendants counterclaimed
for damages and misrepresentation. During the course of the proceedings in
Shoreditch County Court, which were, unfortunately, protracted, it was agreed
that there should be an order for possession of the premises. A consent order
was made on June 27 1994.
The trial of the action and counterclaim
started on November 22 1994. It was fragmented, lasting for a total of about 10
days. It was not concluded until judgment was given by Judge Graham QC on
September 15 1995. He decided that the rent arrears amounted to £8,470.96, but
that was overtopped by the damages awarded on the counterclaim amounting to
£25,700. The judgment ordered that Bridgegrove should pay to the defendants
£17,230.04. No award of interest was made.
Bridgegrove served a notice of appeal
relying on no less than 11 grounds. It was argued on behalf of Bridgegrove that
the judge ought, at the end of the day, to have dismissed the counterclaim and
ordered payment of arrears of rent amounting to £12,370.96 together with
contractual interest at the rate of 4% above the base rate for the time being
of Barclays Bank plc.
In his judgment the judge found the
following further facts material to the matters argued on this appeal:
(1) Mr Ackerman, on behalf of
Bridgegrove, orally represented to the defendants in October 1991 that the
premises had planning permission for use for car repairs. In para 6 of the
defence to counterclaim it was admitted by Mr Ackerman that this was untrue and
that he knew that there had been no grant of planning permission. He denied,
however, making the representation. The position was that, as long ago as 1976,
the local authority had served an enforcement notice in relation to the
planning use of the premises. The judge found that the untrue representation
was made by Mr Ackerman and that the premises were not in fact legally usable
for car repair use.
(2) Mr Ackerman represented to the
defendants that the premises were ideally suited for car repairs. This was not
true. The premises were physically unsuitable for car repairs. The judge held
that ‘car repairs’ included, as Mr Ackerman was fully aware, repairs and
spraying to car bodies as well as repairs to car engines.
(3) The judge held that these
representations were made negligently ‘at the very least’.
(4) The defendants relied on the two
representations and, in reliance on them, entered into the tenancy agreement in
October 1991. They entered into that agreement on the basis, as represented by
Mr Ackerman, that car repair in the premises was a permissible activity. They
would not have entered into that agreement if they had known that the premises
had been the subject of an enforcement notice in 1976 or could not be used for
car repairs.
(5) The defendants suffered substantial
loss and damage. The judge described how, following complaints about the
spraying in the building, their business activities were severely restricted.
He described the procedure for the service of the statutory nuisance notices.
The judge found, on a consideration of the evidence, that the
rejected the claims for loss of income, holding that it was not established by
the evidence.
In resolving the sharp conflicts of fact
on the evidence, the judge stated that the defendants were more reliable
witnesses than Mr Ackerman. The judge found him to be a person who ‘would be
prepared to be careless with the truth in order to promote his interests or to
clinch a favourable deal’.
I shall deal first with the arguments
advanced on behalf of Bridgegrove on the counterclaim. There is no dispute
about the relevant legal principles. They are to be found in three cases: Royscot
Trust Ltd v Rogerson [1991] 2 QB 297, a decision of the Court of
Appeal; Downs v Chappell [1996] 3 All ER 344, another decision of
the Court of Appeal; and the recent decision of the House of Lords, Smith
New Court Securities Ltd v Citibank NA [1996] 3 WLR 1051.
The principles applicable to damages for
negligent misrepresentation are most conveniently stated in the judgment of
Hobhouse LJ in Downs v Chappell. First, at p358A, after reviewing
the authorities, Hobhouse LJ said:
These cases show that where a plaintiff
has been induced to enter into a transaction by a misrepresentation, whether
fraudulent or negligent, he is entitled to recover as damages the amount of the
(consequential) loss which he has suffered by reason of entering into the
transaction.
At p359C he said:
In general, it is irrelevant to inquire
what the representee would have done if some different representation had been
made to him or what other transactions he might have entered into if he had not
entered into the transaction in question. Such matters are irrelevant
speculations …
Later, at F on the same page, he dealt
with the question of mitigation in this way:
Where a party has been misled, it must
always be relevant to consider his position when he discovered the truth. Until
that time the misrepresentation will be continuing to affect him and he cannot
be expected to mitigate his loss.
Finally, at p361E, after referring to
further authorities, Hobhouse LJ said:
Causation and the assessment of damages
is a matter of fact. In a misrepresentation case, where the plaintiff would not
have entered into the transaction, he is entitled to recover all the losses he
has suffered, both capital and income, down to the date that he discovers that
he had been misled and he has an opportunity to avoid further loss.
The case of Royscot Trust Ltd v Rogerson
is authority for the proposition that, in a case of misrepresentation falling
within section 2 of the Misrepresentation Act 1967, the loss suffered as a
result of entering into the contract induced by the misrepresentation is to be
measured as if the misrepresentation had been made fraudulently. It was stated
by Ralph Gibson LJ at p309B that:
Liability as for a fraudulent
misrepresentation is to make reparation for all the actual damage directly
flowing from the fraudulent inducement.
The case of Royscot Trust Ltd v Rogerson
was referred to in two of the speeches of their lordships in Smith New Court
Securities Ltd v Citibank NA, but no view was expressed on the
correctness of the decision.
With those principles in mind, I turn to
the argument advanced on behalf of Bridgegrove in criticism of the judge’s
decision on the counterclaim. The first point concerned the meaning which the
judge placed on the expression ‘car repairs’, as used in the representation
made by Mr Ackerman. It was argued that the judge was wrong in the
interpretation of the representation as to the physical suitability of the
premises for car repairs. It was submitted that that expression covered a
variety of activities, but there was no necessary implication that it included
bodywork and paint spraying. The premises were not suitably located for that.
It was a basement with a mews yard and with residential tenants above.
In my view, the judge was right on this
point. As a matter of ordinary usage, the expression ‘car repairs’ includes
repairs to the body of a car, as well as to its engine, and repairs to the body
of a car include spraying it with paint.
The second point was more substantial.
The argument was on causation. It proceeded in this way. The original tenancy
agreement was for a period of six months from October 20 1991. The tenancy was
not protected by the Landlord and Tenant Act 1954, Part II. That tenancy came
to an end on April 19 1992 and thereafter the defendants were in possession,
holding over on a monthly tenancy. It was argued that no losses should have
been allowed to the defendants on their counterclaim for the period after the
expiration of six months. Any losses suffered after the creation of the monthly
tenancy were not causally limited to reliance on the representations of Mr
Ackerman in October 1991 as to the suitability of the premises for car repairs
or as to the situation on planning permission. The position was that the
defendants were free to leave in April 1992. But they elected to stay. They
made that choice, even though they had, during the six months, received
complaints about the paint spraying activities. It was not reasonable for them
to remain in possession after the complaints and after they had had to curtail
their activities in their business.
Putting it another way, it was contended
that losses after April 19 1992 were a consequence of entering into the monthly
tenancy, and that the monthly tenancy had not been induced by any
misrepresentation on behalf of Bridgegrove. The losses were not a consequence
of the original misrepresentation. The chain of causation had been broken by
the creation of a new contractual relationship. Any loss that the defendants
thereafter suffered was the result of their own decision to stay on under the
new monthly tenancy.
In my judgment, the judge was right to
reject these arguments. The answer is to be found in the decision of the Court
of Appeal in Esso Petroleum Co Ltd v Mardon [1976] QB 801. The
position is simply that the expiration of the fixed term and the start of the
monthly tenancy in April 1992 had no effect on the liability of Bridgegrove for
the negligent misrepresentations and the losses directly flowing from the
transaction which the defendants had been induced to enter into by those
misrepresentations.
Esso Petroleum Co Ltd v Mardon was a case
where the defendant had been induced by negligent representations to enter into
a written tenancy agreement in April 1963 for a petrol station. He sank all his
capital into the business and made losses. In September 1964 he entered into a
second tenancy agreement as a yearly tenant and the losses continued. The
plaintiff petrol company claimed possession of the premises and the defendant
counterclaimed for negligent misrepresentation. The Court of Appeal held that
the effect of the misrepresentation was not spent by the time that the
defendant had entered into the second tenancy agreement. He was acting
reasonably in an effort to mitigate the loss he had suffered. The loss suffered
by him after the date of the second tenancy agreement was attributable to the
original representation, which had induced him to enter into the first
agreement and was recoverable as damages from the petrol company.
I refer particularly to p821C-E in the
judgment of Lord Denning MR and to p829A-D in the judgment of Lord Ormrod LJ.
Ormrod LJ explained that September 1964, the date of the second tenancy, was
not a cut-off point. It was not unreasonable for the tenant in that case to
attempt to carry on business. He had been trapped by the losses he had suffered
and his only hope was to carry on in the hope of recovering what he could. His
loss was directly attributable to the original misrepresentation. He had not
failed to mitigate his loss. He was entitled to recover his capital losses down
to the time when his business finally closed. Shaw LJ reasoned in a similar
fashion at p833D-G, where he described the second tenancy agreement as an
extension of the first and the entering into it as a reasonable means of
mitigating the damage suffered as a result of the misrepresentations.
In my judgment, that reasoning applied to
the position of the defendants in this case. It was reasonable for them to
remain in possession of the premises after the expiration of the six-month
fixed
establishing a business at the premises. They would not have taken the premises
if the misrepresentation to them had not been made. They found themselves
locked into a position. As the judge held, they did not have the resources to
acquire and set up their own business with new equipment elsewhere. Bridgegrove
are not entitled to argue that the force of the misrepresentations made by Mr
Ackerman was spent by the end of the first six months. Even after then, the
defendants continued to suffer loss and damage directly flowing from their
having entered into the transaction under which they took possession of the
premises to establish their partnership business. It was not unreasonable for
them to carry on the business, in the difficulties in which they found
themselves, from April 1992 down to the date when possession was given up by
consent in June 1994.
That reasoning also answers other
arguments advanced on behalf of Bridgegrove. It was submitted that there were
other causes of loss which the judge had failed to take into account. The
defendants had prepared a business plan for the partnership. They had started
to spend money before the misrepresentation was made to them. The losses which
they had suffered resulted, to some extent at least, from their lack of
expertise and organisational ability in the conduct of the business. On this
point, as I understood it, reliance was placed on what was described as an
over-optimistic estimate of turnover for the first year contained in the
business plan: the estimated turnover was put in the region of £32,000, whereas
the accounts for the first year showed that the actual turnover was only
£3,684.20.
It was also contended that the judge had
failed to have regard to the fact that the absence of planning permission for
use for car repairs would not have absolved the defendants from the duty to
avoid committing a nuisance to other tenants of the premises and to neighbours.
The losses which they had suffered were in fact the result of the complaints of
nuisance made against them. These losses should not be laid at the door of
Bridgegrove.
In my view, these arguments do not
provide an answer to the fact that the losses suffered directly flowed from the
misrepresentations made to the defendants and on which they acted. Those
misrepresentations effectively caused the loss. The fact that it is possible to
speculate about other possible causes of loss does not enable Bridgegrove to
escape from the consequences of misrepresentation.
An argument was then advanced on matters
of proof and pleading. It was contended that the judge had found capital losses
when there was no proof that those specific losses had been suffered. The judge
allowed items of loss for which there was no documentary evidence and which
were not pleaded in the case.
I can deal with this point shortly. The
original pleading contained a claim for a far higher sum than was in fact
claimed at the trial. The claim in the original counterclaim was for £75,000.
Mr Roy Smith gave evidence as to the capital losses suffered. He did so by
reference to a document described as exhibit D5, originally dated May 31 1995
and revised as at June 2 1995. On the matter of proof, the judge was entitled
to accept the evidence given by Mr Smith about the various capital sums which
he claimed had been lost, as set out in exhibit D5. That gave details of loans,
of capital payments, of redundancy money and of running costs from personal
accounts. The judge disallowed some items, but allowed others. In my view, he
was entitled to do that on the evidence.
There is nothing in the pleading point.
The position is that exhibit D5 was produced at the trial as a substitute for
the original particulars of damage. It was treated by the judge as an amendment
by Mr Roy Smith, who was appearing in person in the county court, as he was in
this appeal. It was not objected to by counsel for Bridgegrove. There was no
application for an adjournment. There was no application for further discovery
under the headings of loss in D5. I would therefore reject the submission that
the judge was wrong to make his assessment of loss on the basis of the heads of
loss claimed in that document. The judge was entitled to arrive at the figure
of £27,500 on the evidence given by the defendants and in the documents.
For all those reasons, the appeal against
the counterclaim should be dismissed.
That leaves the appeal against the
judge’s decision on Bridgegrove’s claim for arrears of rent. Three points were
made by Bridgegrove: first, that the judge was wrong to hold that the
defendants had paid £7,800 rent. In calculating the amount of rent, the judge
referred to the judgment in Bow County Court for £4,300, already mentioned, and
the £400 recovered by the bailiffs in September 1992. Then he said:
Finally, there are the monies actually
paid in respect of rent. I accept the defendants’ evidence that this amounted
to £7,800 made up as follows. £3,900 admitted; £1,300 paid in cash when the
cheque dated the 20th of May, 1992, was not met; £1,950 being three payments in
cash, each of £650, evidenced by cheque stubs produced by Roy, and an initial
deposit of £650 which should be taken into account.
Mr Romie Tager QC, for Bridgegrove,
explained how the judge was muddled in his analysis of the way in which £7,800
was made up. His criticism of the judge’s make-up of the figure was accepted by
Mr Jonathan Gaunt QC, on behalf of the defendant Mr Richard Smith. The judge,
as is clear from Mr Tager’s helpful submissions on this point, mistakenly
double-counted sums. The items of £1,300 cash and of £1,950 (in three payments
of £650) were comprised in the admitted figure of £3,900. They were not
additional to that figure. Mr Tager pointed out that no other payments had been
pleaded or mentioned in affidavit evidence used as witness statements at the
trial. No other payments had been put to Mr Ackerman in cross-examination.
There was no documentary evidence for any payments in excess of £3,900.
On this point I accept the submission of
Mr Gaunt that, notwithstanding his mistake in analysing the make-up of the
figure of £7,800, the judge was entitled to find that the total sum of £7,800
had been paid by the defendants. Evidence was given to the judge by the
defendants that that was the sum paid by them. Evidence was given that some
payments were made in cash, sometimes through an agent acting for Mr Ackerman.
The judge preferred the evidence given by the defendants. His finding on this
is not vitiated by the absence of documentary evidence or by the mistake made
in analysing the figure of £7,800. I therefore reject the submission that the
judge’s finding on this point was not supported by evidence.
Second, a short point arises on the £650
paid by way of deposit, which the judge said should be taken into account. Mr
Tager referred to the provision in the lease governing the deposit. There is a
manuscript provision in clause 2(19) of the lease, which provides:
The Tenant shall on the date hereof
deposit with the Landlord the sum of £650 as security against any breaches of
the covenants herein contained. At the expiry or sooner determination of the
term the Tenant shall have returned to them the whole of the sum deposited
after deducting therefrom such sums (if any) as may be lawfully due to the
Landlord as compensation for such breach of covenant.
The decision of the judge that account
should be taken of the initial deposit of £650 was criticised on the basis that
the deposit was held not just for rent arrears but also against breaches of
covenant committed by the tenants. It was pointed out that breaches had in fact
occurred for which compensation was payable. Specific reference was made to
covenants in clause 2(4), (12), (15) and (16) of the tenancy agreement. It was
submitted that there was no obligation to return the deposit as it had not been
claimed by the defendants in their defence and counterclaim.
I reject this argument. The judge was
right. Under the terms of the covenant, £650 was returnable to the defendants.
Credit should have been given for it in the rent calculation without a pleading
or claim to this effect. It was for Bridgegrove to plead a reason for not
observing the covenant under which they agreed that the deposit would be
returned to the tenants at the termination of the term.
The third and final point affecting the
claim for arrears of rent is the point on interest. The judge refused interest
on the arrears of rent. It was submitted that he should have awarded
contractual interest at the rate which is provided for in clause 2(18) of the
tenancy agreement,
Barclays Bank plc, calculated from the date that such payment fell due until
the date it was actually paid. There was a dispute, which it is not necessary
to resolve, whether an election had been made by Bridgegrove at the hearing for
statutory interest rather than contractual interest. It was not clear from the
argument what difference it made on the figures whether it was statutory
interest or contractual interest. In any event, the point is academic because,
for the reasons already given, the amount of the counterclaim overtops the
arrears of rent.
For all of those reasons, I would hold
that the judge’s decision was correct both on the counterclaim and the claim
for arrears of rent. I would dismiss this appeal.
NOURSE and POTTER LJ agreed and did not
add anything.
Appeal dismissed.