by Mark Pawlowski
A tenant who wishes to qualify for protection under Part II of the Landlord and Tenant Act 1954 must bring his tenancy within the requirements of section 23(1), which provides that “… this Part of this Act applies to any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes”. In most cases, the tenant will be in personal occupation of the premises, but what is the position where he occupies not personally but through a third party such as an employee or a manager/agent, or even a company which is wholly owned and controlled by the tenant?
Occupation through an employee
In Chapman v Freeman [8] 1 WLR 1298, the tenant of a cottage used it to provide accommodation for staff employed at his nearby hotel. In proceedings by the landlord for possession of the cottage on the ground that it was a dwelling-house not occupied by the tenant, the tenant claimed that the tenancy was subject to Part II of the 1954 Act, as the cottage was occupied for the purpose of his hotel business within the meaning of section 23(1). The Court of Appeal held that to be “occupied for the purposes of a business” the premises had to be occupied for a purpose necessary to the furtherance of the business and not, as was the occupation of the cottage for the purpose of housing hotel staff, merely for the convenience of the business. In the words of Geoffrey Lane LJ (at p 1301):
One can imagine circumstances in which occupation similar to the occupation in the present case might very well fulfil the requirements of section 23 — where perhaps the servant has duties to perform in the hotel which require that he must be on hand at all times otherwise he will not be able to perform those duties. But that is not this case or anything like it. It was merely a matter of convenience that the [staff] should be housed in this particular cottage. That, to my mind, is not enough. The tenant must go beyond mere convenience and show that the occupation was in furtherance of his business activities — in other words, that it was for business reasons that he was occupying the cottage and not merely for reasons of convenience.
Occupation through a manager/agent
In Teasdale v Walker [8] 1 WLR 1076, business premises were near the front of a seaside resort and were used for mock auctions, being open only at Easter, Whitsun and from July to the end of September. During these periods in 1955 and 1956 the auctions were conducted by servants or agents of the tenant who received wages or commission, the tenant receiving the profits of the business. In 1957, the tenant made an agreement with one Glassman to the effect that she would for one year employ Glassman as manager at a salary computed on the basis that he should pay the tenant £750, retain the whole of the business profits, conduct the business as he thought fit and without her interference during the usual periods and discharge all expenses and outgoings including rent and rates. He also received an option to renew the agreement for 1958. Glassman conducted the business in accordance with the agreement and at the end of the season vacated the premises. The tenant applied for a new tenancy and the question arose whether she was in occupation of the premises for the purposes of business carried on by her. The Court of Appeal held that she had ceased to occupy the premises and Pearce LJ (giving the judgment of the court) said at p 1081:
Mr Curtis Bennett [for the landlord] argues that under her agreement with Glassman the tenant had no part in the carrying on or control of the business or in whether it made a profit or a loss. She was, therefore, not in occupation of the premises for any business purpose at all.
And at p 1083, Pearce LJ continued:
So far as it alleged that the tenant was the employer and Glassman was her manager, it seems to us that it was a mere fiction. She had no control whatever over Glassman’s method of conducting the business. She had expressly agreed not to interfere. She had no interest in the financial result. She had received her £750; and whether he made a profit or a loss did not concern her. It seems clear to us that it was cast in those misleading terms so that it might take a form that would preserve the tenant’s rights under the Act and avoid putting her in breach of clause 2(4) of the tenancy agreement. The plain effect of it was that she had sold to him for £750 the right to occupy the premises for his mock auctions for a year with an option for a similar arrangement the year following and he took over all liability in respect of outgoings during that year. Did she herself in spite of that remain in occupation of the premises for the purposes of a business carried on by her? In our view the answer must be No. It is true that she had a right to resort to the premises. It may be argued that technically she could have carried on some business activity that did not conflict with Glassman’s auctions, but the agreement certainly does not indicate that such a thing was ever contemplated by the parties. In fact she did not do so. It seems to us that during the agreement with Glassman such theoretical residue of occupation as remained in her was not sufficient to give to her the protection of the Act. Nor, if she had any such occupation, was it for the purposes of any business. What business can it really be said that she was carrying on? In our view none. She certainly was not carrying on the business of selling fancy goods by retail, which is alleged in her application, since Glassman was carrying on that business.
In France v Shaftward Investments, June 25 1981 (Court of Appeal, unreported), leases of two premises, which were both used as Chinese restaurants, had been granted by a company to a Mr France. When Mr France sought to renew the leases under the 1954 Act, the company claimed that he had sublet both premises and sought forfeiture of the tenancies. For his part, France asserted that he had not sublet but merely entered into agreements with “managers” at the restaurant premises and he had thereby remained in occupation of the premises and was entitled to new leases of them.
At first instance, Mr Vivian Price QC (sitting as a deputy judge) found that France knew nothing of the Chinese restaurant business and that the whole tenor of the agreements with the “managers” was that each occupant of the restaurants was to be in business on his own account, merely paying rent to France, the word “rent” being used in each agreement. The deputy judge held that the agreements were sham agreements in the sense that the occupants were mislabelled as managers, and in each case the reality of the grant of a subtenancy with payment of rent was made very plain. The Court of Appeal upheld this finding and held that France was not in occupation of either of the premises.
It is evident from the foregoing authorities that the question whether a tenant can be said to be occupying premises for the purposes of his business will depend inter alia on (a) whether he still retains a degree of control over the method of conducting the business, (b) whether he retains an interest in the financial result of the business, (c) whether he remains liable for a proportion of the outgoings in respect thereof, and (d) whether he maintains a right to resort to the premises.
Accordingly, it is possible for a tenant who no longer takes any active part in the day-to-day running of the business to continue to occupy the premises vicariously through his manager or agent to whom he has merely delegated the task of daily management. In this sense, the tenant continues to carry on the business for his benefit, being entitled to the profits therefrom and maintain his status of occupation through the medium of a third party (under his licence) for the purpose of carrying on a business belonging to him as tenant. The same would follow if the tenant shared his profits with his co-partner agent, since the tenant would still be in occupation for the purposes of his own business albeit in partnership with a third party.
As was said in Hills (Patents) Ltd v University College Hospital Board of Governors [6] 1 QB 90, while “possession in law is, of course, single and exclusive … occupation may be shared with others or had on behalf of others” (per Denning LJ at p 99): See also Cafeteria (Keighley) Ltd v Harrison (1956) 168 EG 668, where Denning LJ expressly declared that business premises could be occupied by an agent or manager. In Clift v Taylor [1948] 2 KB 394, the Court of Appeal held that business premises were none the less required for occupation by the landlord himself because he wanted to use them for occupation by the other members of his firm as well as himself.
Clearly, in the case of a partnership, each partner in a firm is an occupier jointly with his fellow partners of the partnership premises. The case of Clift was followed in In re Crowhurst Park [4] 1 WLR 583, where Goulding J held that the carrying on of a business by the landlord in partnership with his wife was carrying on of a business by the landlord himself within the meaning of section 30(1)(a) of the 1954 Act. It is equally clear that a tenant will satisfy the requirement of occupation if he shares occupation with another, albeit that the other is carrying on a separate business. In Willis v Association of Universities of the British Commonwealth [1965] 1 QB 140, the Court of Appeal held that a landlord company may establish that it intends to occupy the holding for the purpose of a business to be carried on by it therein, notwithstanding that another body will also be occupying the holding and that the landlord company is in liquidation, so long as its activities are being preserved and will continue for a substantial time.
In Ross Auto Wash Ltd v Herbert (1978) 250 EG 971, Fox J held that a tenant company could be in occupation of business premises even though another company was acting as its manager. In this case, the tenant company, Ross Auto Wash Ltd, appointed an associated company, Doranmoor, to act as manager of its business at a shopping precinct in the King’s Road, London. The tenant company, however, retained possession and control of the premises and carried on the business of granting licences to stallholders and providing a variety of services to them. Fox J held that the tenant company continued to occupy the premises for the purpose of a business carried on by it within the meaning of section 23(1). In the course of his judgment, he said (at p 974):
The business is a business of granting licences. Those licenses, I have found, are granted by the [tenant company]. The important matter of dealing with the problems of the licensees is conducted by Mr Sutherland as a director of the [tenant company] … The bulk of the services are provided directly by the [tenant company]. The management letter itself makes it plain that Doranmoor is a manager only, and that full possession and control of the premises remains in the [tenant company].
Occupation through a company
In Pegler v Craven [2] 2 QB 69, the plaintiff was the tenant of premises comprising living accommodation and a shop. The business of the shop was carried on by a company to which the landlord had assigned the goodwill at the request of the tenant, but the company paid no rent to the tenant and the shares of the company were held by the tenant and his wife, some relatives and friends and he was the managing director. He owned alone rather less than half the shares of the company. The Court of Appeal held that the plaintiff was not the occupier of the shop, since the business of the shop was the business of the company and was not the tenant’s business. Jenkins LJ said (at pp 74 and 76):
I quite agree that the concept of occupation is not necessarily and in all circumstances confined to the actual personal occupation of the person termed the occupier himself. In certain contexts and for certain purposes it obviously extends to vicarious occupation by a caretaker or other servant or by an agent. Clearly the tenant of a retail shop who through persons in his employment carried on business there for his own benefit under a tenancy with respect to which he was tenant, would properly be described as the occupier of the shop and the person carrying on business there, though not himself in actual personal occupation of it. But I cannot regard the word “the occupier of a shop” in section 10(1) of this Act as going so far as to include as occupier, within the meaning of the subsection, a tenant who is not himself carrying on business on the premises in question at all either personally or by a servant or agent, but who is tenant of premises, the shop portion of which is in fact wholly taken up with the stock and the business of a limited company, that is, of an entirely distinct and different legal person ….
In my view the context makes it reasonably plain that occupation by a third party under a licence otherwise than for the purposes of carrying on a business belonging to the tenant himself does not suffice to make the tenant the occupier of a shop under a tenancy within the meaning of the Act.
Lord Evershed MR in Pegler v Craven left open the question whether, in some circumstances, it could be argued that a company in actual occupation was but the alter ego of the tenant, particularly, where the tenant was the beneficial owner of all or substantially all the shares issued in the company so that the tenant remained in legal theory in occupation of the premises.
This point was taken up recently in Nozari-Zadeh v Pearl Assurance plc [7] 2 EGLR 91; (1987) 283 EG 457, involving the lease of an Indian/Bangladeshi restaurant which was assigned in the name of the appellant, Mr Nozari-Zadeh. When the landlords served notice terminating the tenancy, Mr Nozari-Zadeh applied for a new tenancy under Part II of the 1954 Act. The landlords first opposed the application on grounds (a) and (b) of section 30(1) of the Act (failure to comply with repairing obligations and persistent delay in paying rent) but, at a later stage in the proceedings, applied to strike out the application on the grounds that the tenant did not occupy the premises for the purposes of his business within the meaning of section 23(1). Since the assignment, five companies had carried on business at the premises, the last being Sharnaz Ltd. The tenant himself took only a minor part in the running of the restaurant although he held 50% of the shares in this last company and was its managing director. It was submitted that at least the last two companies were the alter ego of the tenant and that occupation by them could be regarded as occupation by him for the purpose of section 23. The observations of Lord Evershed MR in Pegler (supra), were cited in support of this view.
Nevertheless, the Court of Appeal held that the business carried on by the company could not be taken as a business carried on by the appellant. Consequently, the tenant could not be taken as occupying the premises for the purpose of his own business and was not entitled to a new tenancy although the Court of Appeal intimated that the position might have been different if Sharnaz Ltd had been merely the agent or manager of the appellant. Their lordships, however, felt constrained to follow the earlier decision of Cristina v Seear [5] 2 EGLR 128; (1985) 275 EG 898, where the alter ego argument had also been raised and rejected by the Court of Appeal. It is interesting to note that Slade LJ (giving the judgment of the court) felt considerable sympathy for Mr Nozari-Zadeh, who had apparently put a lot of energy and money into the restaurant business and was now to be deprived of much of the benefit of his expenditure by what might appear to him to be largely a legal technicality. However, his lordship reiterated the words of Danckwerts LJ in Tunstall v Steigmann [1962] 2 QB 593 (at p 607) where he said:
… if persons choose to conduct their operations through the medium of a limited company with the advantages in respect of responsibility for debts thereby conferred, they cannot really complain if they have to face some disadvantages also.
In the earlier decision of Cristina v Seear (supra), premises had been occupied and the business had been carried on there since 1983 by limited companies, all of which had gone into liquidation and had been succeeded by another. The tenants, Mr and Mrs Cristina, owned all the shares in the latter company and therefore controlled it. They argued that the company, which they controlled, was a mere vehicle or alter ego through which the business was carried on by them. Purchas LJ (giving the judgment of the Court of Appeal) applied the reasoning of Tunstall v Steigmann where the landlord intended to use the premises for a business to be conducted by a limited company of which he was a controlling shareholder and where the court held that, notwithstanding the fact that he had a controlling interest in the company and effectively controlled it, the company was still a separate legal entity and that, therefore, the landlord could not say that he required the premises for a business to be carried on by him.
Miscellaneous cases
Section 41 of the 1954 Act provides inter alia that when a tenancy is held on trust, occupation by all or any of the beneficiaries under the trust, and the carrying on of a business by all or any of the beneficiaries, shall be treated for the purposes of section 23 of the Act as equivalent occupation or the carrying on of a business by the tenant, Lord Evershed MR in Frish Ltd v Barclays Bank Ltd [1] 2 QB 541 at p 549 explained the effect of this subsection as follows:
It is to my mind, quite plain … that subsection (1) of section 41 is dealing, and dealing only, with the case where although the tenancy is vested in someone who is properly described as the tenant, nevertheless, it is found that the tenant himself happens to be a trustee and the premises are actually occupied by, and the business is actually carried on not by the tenant trustee himself but by the beneficiary, or beneficiaries, or one of them, for whom the tenant is a trustee.
This provision, therefore, may successfully be used to overcome the difficulty that arose in the Pegler, Cristina, and Nozari-Zadeh line of cases, but it is important to note that section 41 can be used only if the terms of the tenant’s lease permit the actual entry into occupation and carrying on of the business by the company. In this connection, while it is clear that a covenant against parting with possession of the demised premises is not broken, so long as the tenant retains legal possession thereof, by allowing a third party to use the premises either under a licence or under a declaration of trust (see Pincott v Moorstons Ltd (1936) 156 LT 139 and Chaplin v Smith [6] 1 KB 198), invariably a further covenant may exist prohibiting the tenant from permitting any other person to use the whole or any part of the premises.
However, where the tenant is a company, then if the company is a number of a group of companies, it may not need to rely on section 41 to enable another member of the group to occupy the premises and carry on a business, because section 42 of the 1954 Act provides inter alia that the occupation and carrying on of a business by one member of a group of companies of which the tenant is a member is deemed to be the occupation and conduct of the business of the tenant. For these purposes, a company is a member of another if it is a subsidiary of the other or of a third body corporate.