Landlord and tenant — Arrangements for operation of Chinese restaurant — Whether document between leaseholder and restaurant operator granted a tenancy — Document described as a licence creating a ‘management
The following
cases are referred to in this report.
Matchams
Park (Holdings) Ltd v Dommett (1984) 272 EG
549, [1984] 2 EGLR 143
Shell-Mex
& BP Ltd v Manchester Garages Ltd [1971]
1 WLR 612; [1971] 1 All ER 841, CA
Street v Mountford [1985] AC 809; [1985] 2 WLR 877; [1985] 2 All ER
289; [1985] 1 EGLR 128; (1985) 274 EG 821, HL
The plaintiffs
in this case, Dellneed Ltd and Mr Chung Yow Chan, sought a declaration that
they occupied premises at 37-38 Gerrard Street, London W1, which were the site
of the Loon Fung Chinese restaurant, as subtenants of the defendant, Mr James
Chin. A claim for specific performance of an alleged oral agreement by the
plaintiffs to purchase the defendant’s leasehold interest in the premises was
abandoned during the hearing. There was a counterclaim by the defendant for possession
and mesne profits.
Timothy
Jennings (instructed by Barnett, Alexander & Chart) appeared on behalf of
the plaintiffs; Patrick Ground QC and J W Haines (instructed by Gerard Dunne
& Co, of Lowestoft) represented the defendant.
Giving
judgment, MILLETT J said: This action concerns leasehold premises at 37-38
Gerrard Street, London W1, which consist of a ground floor and basement only,
the upper storeys having been demolished some years ago following the service
of a dangerous structures notice.
The premises
are held under a lease dated March 23 1964 and the term granted by the lease
will expire in March 1991. At all times material to this action the defendant,
Mr James Chin, has been the lessee, and the rent payable under the lease has
been £37,500 per annum.
The lease
contains the usual prohibition against assigning, subletting or parting with
possession of the demised premises, or any part thereof, without the landlord’s
consent.
The premises
are the site of a Chinese restaurant called the Loon Fung Restaurant, which was
formerly carried on by Mr Chin’s company, Loon Fung London Ltd, but which has
for the past four years been carried on by the first plaintiff, Dellneed Ltd,
pursuant to a so-called management agreement dated December 6 1982 and made between
Mr Chin and Dellneed. Dellneed is a company formed or acquired by the second
plaintiff, Mr Chung Yow Chan, for the purpose of operating the restaurant, and
all its issued shares belong beneficially to him.
By the action
Mr Chan originally sought specific performance of an oral agreement alleged to
have been made between himself as agent for and on behalf of Dellneed to
purchase the lease from Mr Chin for a sum of £180,000, of which it was alleged
no less than £157,100 had been paid to Mr Chin, all but £20,000 in weekly sums
of cash for which no receipt was sought or given. Further or alternatively
Dellneed seeks a declaration that it occupies the premises as a subtenant by
virtue of the management agreement as extended by a supplemental agreement dated
June 15 1985, such subtenancy not having been determined in accordance with the
provisions of Part II of the Landlord and Tenant Act 1954. Mr Chin denied that
there was an agreement for the sale and purchase of the lease or that any
weekly payment was made as alleged, and contends that the management agreement
and the supplemental agreement created a licence which has since been
determined and not a tenancy, and he counterclaims for possession and mesne
profits. At the conclusion of the plaintiffs’ case Mr Jennings very properly
abandoned the claim based on the alleged oral agreement. Mr Chan’s story,
improbable from the start, disintegrated in cross-examination. It was not, I am
afraid, restored by his wife’s attempt to corroborate it. It had long since passed
from the implausible to the incredible. I did not believe a word of it.
I have already
dismissed Mr Chan’s claim to enforce the alleged agreement and I must now deal
with what remains of the action and with the counterclaim which are concerned
with the management agreement. In doing so I prefer the evidence of Mr Chin and
his witnesses wherever it differs from that of Mr and Mrs Chan.
Mr Chin is a
Chinese businessman of considerable repute. He is life president of the Chinese
Chamber of Commerce in England, president of the Chinese Food Traders’
Association in the United Kingdom and honorary president of the China Town
Chinese Association of London. He has had more than 20 years’ experience as a
Chinese restaurateur. He has been concerned in the development of Gerrard
Street as the centre of modern China Town. In addition to the Loon Fung
Restaurant at 37-38 Gerrard Street Mr Chin or his company owns a Chinese
takeaway at 39 Gerrard Street and a craft shop at 31 Gerrard Street. His
company Loon Fung London Ltd also owns freehold premises at 42, 43 and 44
Gerrard Street, where Mr Chin runs the Loon Fung Supermarket on the ground
floor and, since February 1985, a Chinese restaurant upstairs called the New
Loon Fung Restaurant. From May 10 1982 the upstairs of these premises was
leased by Loon Fung London Ltd to a Mr David Chan by a formal lease for a term
of 2 1/2 years at a rent of £31,200 per annum payable at the rate of £600 per
week. Mr David Chan used the premises for the purposes of a Chinese restaurant
run by him which was then called the Peking Garden.
The Loon Fung
Restaurant has had an eventful recent history. In 1978 or 1979, after the upper
storeys had been demolished, there was a serious fire on the premises which
gutted them. The landlord had not maintained a fire policy and Mr Chin had to
reinstate and completely refurbish and re-equip the restaurant out of his own
pocket. In 1981 he brought proceedings against the landlord, claiming damages
in excess of £50,000 for breach of the landlord’s covenants to insure and to
repair the structure. Mr Chin withheld rent because of his claim and in 1983
the landlord brought proceedings to forfeit the lease, inter alia for
non-payment of rent. The landlord has since withdrawn the claim to forfeit the
lease, but the proceedings are still continuing as a claim for arrears of rent.
From June 1980
the restaurant was run by a Mr Bill Tang, whose company Lionbear Ltd had a
management agreement with Mr Chin for two years from June 29 1980. In January
or February 1982 there was a serious gang fight in the restaurant in which one
person was killed, and Mr Tang decided to give up the restaurant prematurely.
Mr Chan heard of this and approached Mr Chin for a similar management
agreement. Mr Chan, who is aged 51 and speaks no English, had no previous
experience of running a restaurant. He sold bean sprouts and bean curds to
Chinese restaurants and food stores, trading under the name of C Y Chan &
Co. The Loon Fung Supermarket was one of his customers and he had known Mr Chin
for some nine years. Mr Chin agreed to give Mr Chan a management agreement for
three years on financial terms which were virtually identical to those
previously enjoyed by Mr Tang. Mr Chan was to form a company and join in the
agreement as surety. Although the document was not executed until December 6
1982 the main terms were agreed in March 1982 and the first draft was forwarded
by Mr Chin’s solicitor, Mr Michael Tang, to Mr Chan’s solicitors on March 31
1982. Dellneed was acquired and took possession for the purpose of redecoration
on May 1 1982 and the restaurant officially opened under Dellneed’s management
on May 31 1982. Part of the delay in completing the management agreement was
due to a fire in the restaurant in July 1982 in which several lives were lost,
and which also burnt down Mr Michael Chan’s offices which were next door to the
restaurant. By a supplemental agreement dated June 15 1985 and made between the
same parties the terms of the management agreement were extended until December
31 1985 and an additional £5,000 deposit was also paid by Dellneed. By a letter
dated December 18 1985 Mr Chin, through his solicitors, informed Dellneed that
he was not willing to extend the agreement for a further period and would
require the premises to be vacated on December 31 1985 and the business and the
property to be returned to him on that date. Hence this action and
counterclaim.
The management
agreement and the agreement with Lionbear which preceded it were both prepared
by Mr Michael Tang, who gave evidence before me and told me that they
represented a form of agreement which was well known among the Chinese
community and was known as a Mai Toi Agreement, literally a table use or table
rent agreement. Mr Tang, who was English educated and speaks no Chinese, was
admitted a solicitor in 1970. He soon became aware of the nature of a Mai Toi
Agreement and how it was intended to operate. It was frequently used by Chinese
businessmen who owned property and was informal and flexible as the parties
well understood. It would normally be used between relatives or close friends
who trusted each other and where the parties had no long-term plans. It was
confined to the restaurant business. A young would-be restaurateur, often a
recent immigrant, perhaps with little or no knowledge of English, desirous of
running his own restaurant but without capital, contacts, ability to borrow,
experience or reputation would look to an established restaurant owner to give
him a start. The gist of the arrangement was that for a specified period,
usually fairly short, the owner would provide the newcomer with a restaurant,
fully furnished and equipped and ready for trade, and with an established name
and reputation. The newcomer would operate the business on his own account,
keeping the profits and bearing the losses. The newcomer would indemnify the
owner against all outgoings in respect of the property, and in addition would
pay a weekly sum which would reflect the fact that he had the use of a
restaurant fully equipped and decorated and with a good name and reputation. He
would also pay a deposit to secure his obligation to maintain the restaurant
and its equipment in good condition. The newcomer would look to the owner for
advice and assistance, and the owner would supervise the business at least in
the early stages. The extent of the owner’s supervision would depend on how
well the newcomer was doing. He would give advice on prices, menu and staff. To
the outside world it would appear still to be the owner’s restaurant. The owner
would still retain the keys and pay the rent and rates for which he would be
reimbursed. He would expect to eat in the restaurant without charge and to be
able to inspect the kitchen. He would be surprised if he could be excluded from
the premises. His family and associates would still regard it as his
restaurant. If things went well, by the end of the stipulated period the
newcomer would have enough capital and experience to move to other premises and
set up on his own. If things did not work out or serious disagreement arose the
owner would simply take back the restaurant fairly summarily. I have no doubt
that even where the arrangement was between relatives or friends who trusted
each other it was intended to create legal relations, but I have a strong
impression that the enforcement of the owner’s rights, while intended to be
effective, was expected to be primarily by extra legal means.
The management
agreement in the present case is a formal written document, executed by the
parties after its terms had been considered and negotiated by their respective
solicitors. The question whether it created a tenancy might therefore be
thought to be primarily a question of construction. As will appear, however,
the management agreement was designed to obscure rather than reveal the
parties’ true relationship, and this must therefore be discovered from their
conduct, the correspondence between them and the surrounding circumstances.
Lionbear had
had the use of the restaurant, together with its fixtures, fittings and
equipment, on payment of a deposit of £15,000 and a weekly sum of £400, and an
indemnity against the rents, rates and other outgoings of the premises other
than insurance. Mr Michael Tang told me that the Lionbear agreement was a Mai
Toi Agreement. He clearly recognised the difficulty in drawing up an agreement
which reflected the arrangements which the parties wished to make but which did
not create a tenancy. He adopted the device, which he admitted was artificial,
of splitting the agreement in two. First, there was a licence agreement by
which Mr Chin authorised Lionbear ‘to enter upon and use’ the premises for the
purpose of a restaurant upon indemnifying Mr Chin against outgoings, but which
reserved no licence fee or rent at all because, as Mr Michael Tang told me, ‘I
saw danger in that’. And, second, there was a consultancy agreement between
Lionbear and Loon Fung London Ltd (then Loon Fung Restaurant Ltd) under which
Lionbear agreed to pay £400 a week in return for the use of the equipment and
advice. Mr Michael Tang subsequently discovered that the Chinese community
preferred their Mai Toi Agreements to be contained in a single document and he
abandoned the device of having two documents.
Counsel for Mr
Chin invited me to approach the construction of the management agreement with
Mr Chan on the footing that it was also a Mai Toi Agreement intended to replace
a Mai Toi Agreement on virtually identical terms which had just come to an end.
I do so, but I must not be taken to assume that Mai Toi Agreements in general,
or the Lionbear agreement in particular, do not create a tenancy in law.
The terms
agreed between Mr Chin and Mr Chan were identical to those previously agreed
with Lionbear, save that Mr Chan agreed also to indemnify Mr Chin against the
insurance of the premises. Mr Michael Tang forwarded a copy of the draft
management agreement to Mr Ko, Mr Chan’s solicitor, under cover of a letter
dated March 31 1982. That letter included the following passage:
Our client
wishes to be absolutely certain that the landlord would not effectively be able
to take proceedings against him to terminate the lease as a result of this
management agreement. Obviously we refer specifically to the user covenant
against parting with possession. On counsel’s advice we suggest that in the
limited company which is to be incorporated our client takes and holds a
nominal shareholding in the company which he will then declare will be held by
him in trust for your client. The effect therefore will be that your client
will be the beneficial owner of the company.
Mr Chin had
also had a shareholding in Lionbear which he had held as nominee for Mr Bill
Tang. This was Mr Michael Tang’s idea. Mr Chin told me: ‘He thought that this
would protect my lease.’ Mr Chin told me
that he knew his landlord wanted to forfeit the lease so he had to be very
careful. He had no intention of seeking the landlord’s consent and, as will appear,
Mr Chan was aware of this.
On April 23
1982 Mr Chan saw his solicitor, Mr Ko, and handed him a copy of the lease of
the premises. According to Mr Ko’s attendance note Mr Ko took him through the
draft management agreement and explained its terms to him. He advised him on
the terms and conditions of the lease, particularly with regard to the
restrictions on assignment, subletting and parting with possession of the
premises. He told him that:
Although the
scheme of management agreement had been designed by Mr Chin’s solicitor to
bypass consent of the landlord there was always a possibility that the landlord
might start legal proceedings for breach of the covenant restricting
assignment, etc, of the premises without consent. Whether the landlord would succeed
in any such move was a separate question, but Mr Chan must be prepared to face
such a possibility.
According to Mr
Ko’s attendance note Mr Chan fully understood his position.
Mr Chin agreed
with Mr Chan that on payment of £5,000 towards the deposit of £15,000 provided
by the draft management agreement Mr Chan could go into occupation of the
premises for the purpose of redecorating them on April 30 1982. Mr Chin had
left for Canada and Hongkong shortly before the end of April 1982, but before
leaving he wrote out a form of receipt for his cousin, Mr Harold Chin, a
director of Loon Fung London Ltd, to sign. It was in the following terms:
April 30
1982, re-occupancy of premises at 37/38 Gerrard Street, W1. On receipt of
cheque amounting to £5,000 the keys to the above premises have been surrendered
to Mr C Y Chan of 88 Chatfield Road, Kenton, Harrow, Middlesex. He is given
full authority to decorate the above premises as he requires. Any dispute with
the landlord is solely his responsibility.
That was signed
Mr Harold Chin, pp James Chin, director.
The phrase
‘surrender the keys’ is not without significance. Mr Chin explained that the
last few words ‘Any dispute with the landlord is solely his responsibility’
were included because Mr Chan had told him that he wanted to enlarge the front
entrance of the restaurant. This would require the landlord’s consent, and Mr
Chin had no intention of asking for consent because, as he told me, he did not
think he would get it. He told Mr Chan that if the landlord made trouble as a
result Mr Chan would have to reinstate the former entrance.
Mr Chan paid
the £5,000 and collected the receipt and the keys on May 1 1982. He went into
possession and redecorated the restaurant. He had told Mr Chin what he wanted
to do. Mr Chin did not agree with all the changes that Mr Chan proposed. Many
of them he thought were unnecessary. But Mr Chan went ahead. According to
Dellneed’s audited accounts over £22,000 was spent on furniture, fixtures and
fittings and over £11,000 on equipment. This included over £4,000 on dim sum
trolleys which Mr Chin advised against. But Mr Chan insisted, so Mr Chin took
the opportunity to sell some to him.
On May 26 1982
Mr Michael Tang wrote to Mr Michael Ko concerning the draft management
agreement. One passage in his
following terms:
With regard
to clause 15(e) the intention behind this sub-clause is that our client should
be able to terminate the lease [sic] if it is necessary to protect the
lease should the landlord take action against our client for parting with
possession and in the unlikely event of this proving successful. In such an
event our client would wish to terminate the lease [sic] and put an end
to the landlord’s action.
The restaurant
was officially opened for business with a big party on May 31 1972. From then
on Dellneed paid a sum of £1,291 weekly in arrear to Mr Chin. Mr Chan described
it as rent. Dellneed’s audited accounts described it as ‘rent and rates’. In
the correspondence with Mr Ko Mr Michael Tang explained the breakdown. £831 was
for rent due under the lease, rates, water rates and the insurance premium on
the building, and would increase as they increased. And £400 was a ‘licence
fee’. The £400 was subsequently attributed to the hire of the equipment and an
extra £60 a week VAT was charged in consequence, making a weekly total of
£1,291. In his evidence Mr Chin was more realistic. The £400, he said, was for
the equipment, his advice and the use of the premises. In fact it was a
package. I find that the consideration was not £400 a week but £1,291 inclusive
of VAT, capable of increase as I have mentioned, and that it was paid for the
use of a fully furnished and equipped restaurant, and no doubt for Mr Chin’s
advice and assistance.
Dellneed
carried on the business on its own account, taking the profits and bearing the
losses. It consistently lost money. It lost £29,878 in its first year. After
three years’ trading it had accumulated losses of £88,989. It had a paid-up
share capital of only £100. At all material times it was insolvent.
I find as a
fact that Dellneed went into exclusive possession. Mr Chan was given the keys.
There is no evidence that Mr Chin retained a set of keys or exercised any
rights of possession. Mr Chin used to visit the restaurant and eat there
several times a week, but he paid for his meals. He used to inspect the
kitchens, but he was proposing to reserve the right to do so in the draft
management agreement and Mr Chan did not object. For a short period he
continued to store some possessions in an unused part of the basement, but this
seems to have been with Mr Chan’s permission. Mr Chin gave advice from time to
time and no doubt his experience and contacts were useful to Mr Chan. But the
decisions were Mr Chan’s to take. Mr Harold Chin, who spoke English, assisted
as an intermediary with a local environmental health officer and told Mr Chan
what that officer required to be done. When asked what was the difference
between Dellneed’s position and that of Mr David Chan (who it will be recalled
was granted a formal lease of the Peking Garden for 2 1/2 years) Mr Chin
replied that he was the freehold owner of the Peking Garden and did not have a
landlord on top of him. He added that Mr David Chan had some experience of the
restaurant business and needed less advice. But I was left with the impression
that this was added almost as an afterthought.
On July 18
1982 there was a serious fire on the premises. The premises were reinstated at
a cost of £24,290. The work was done to the order and at the expense of
Dellneed. The fire policy in respect of the premises was in the name of Loon
Fung London Ltd. Despite this Dellneed made a claim and obtained payment of a
sum of £20,000. The claim form was completed in the name of Dellneed Ltd
trading as Loon Fung London Ltd, which was incorrect and unauthorised. However,
there is no reason to think that anyone was misled. In correspondence the
insurance company referred to the policy as covering ‘the premises owned by Loon
Fung London Ltd and leased to Dellneed Ltd trading as Loon Fung Restaurant’. Mr
Harold Chin complained to the assessors that the payment had been made to
Dellneed without authority. It is clear, however, that his only concern was
that the apportionment between the parties of the global settlement in respect
of the various policies should not be prejudiced.
After the fire
Mr Chan decided to install a dim sum factory in the basement in order to make
dim sum for supply not to the restaurant but to shops and offices in the area.
This was a new venture, not part of the restaurant business. Mr Chin removed
the goods he had been storing in the basement in order to make room available
for this purpose. This episode provides further evidence, if evidence were needed,
that Dellneed’s occupation of the premises was not merely in order to carry on
the previous business of the restaurant.
The management
agreement was finally executed on December 6 1982. It was made between Mr Chin,
described as the licensor for the first part, Dellneed described as the
contractor of the second part and Mr Chan, described as the surety of the third
part. I must, I think, read virtually the whole of that agreement.
The first
recital recites:
Whereas the
licensor has up to the date hereof been operating a Chinese restaurant at the
premises (hereinafter called ‘the premises’) described in the first schedule
hereof under the style or name of Loon Fung Restaurant (hereinafter called ‘the
business’).
The first
schedule is in the following terms:
All those
premises situate on the ground floor and basement of 37/38, Gerrard Street in
the City of Westminster.
Recital 2
recites:
It has been
agreed that the contractor shall take over the management of the business on
the terms hereinafter appearing.
Clause 1
provides:
The
contractor shall take over and continue throughout the period referred to in
this clause the management, subject as herein provided, of the business at the
premises from the 15th day of June, 1982 [sic] until and including the
15th day of June, 1985.
Clause 2:
The
contractor shall pay to the company [sic]
that is an
obvious misprint for ‘licensor’
the fees and
other sums mentioned in the second schedule hereof for the use of chattels
referred to in clause 8 hereof payable weekly in advance [sic] save as
otherwise provided without any deduction whatsoever. The first such weekly
payment to be made on the 15th June, 1982 and subsequent weekly payments to be
on the Sunday of every week thereafter and the other said sums to be paid
within seven days of receiving notification thereof from the licensor. The
contractor shall pay to the licensor the sum of £15,000 by way of deposit
(hereinafter called ‘the deposit’) returnable to this agreement [sic]
again an
obvious misprint for ‘the contractor’
without
interest but subject to deduction by the licensor of any sum payable by the
contractor to the licensor by virtue of this agreement or its breach, the said
deposit being payable on or before the signing hereof.
(4a) The contractor shall maintain and improve the
reputation and goodwill of the business: (b) The contractor and the licensor or
their duly authorised representative shall meet on the premises from time to
time as either party may reasonably require for discussion on the conduct,
management and improvement of the business.
Clause 5:
As from the
15th day of June, 1982 the contractor shall be entitled to retain all money received
in the business over and above the weekly and other payments referred to in
clause 2 hereof and shall be responsible for all outgoings including but not
limited to rent payable under the lease, general and water rates, insurance,
rent and taxes and shall pay for all purchases and services including but not
limited to gas, electricity and telephone charges, cleaning, laundry,
refrigeration and laundry.
Clause 6:
The
contractor shall not redecorate or make any alterations or additions to the
premises without first submitting to the licensor details and plans for the
proposed work and obtaining the prior consent in writing of the licensor and
the contractor shall hand back to the licensor or as he may direct any existing
furniture and fixtures, decorative chattels or other items which are no longer
required as a result of such work.
Clause 7:
The
contractor shall employ and shall have power to dismiss as principal and not as
agent in the business whomsoever it wishes and on whatever terms provided that in
exercising such rights the contractor shall not damage the reputation of the
business.
Clause 8:
The
contractor shall have the use of the licensor’s furniture and furnishings,
fixtures, equipment and chattels at the premises as detailed in the inventory
agreed and signed by the parties on the date hereof and shall keep them in the
same condition as they are in on the 15th June, 1982 and shall make good repair
or restore or at the option of the licensor pay the value of all or any part of
the same which may be broken, lost damaged or destroyed, fair wear and tear and
damage by accidental fire excepted, and in such condition shall return the same
to the licensor at the termination of this agreement howsoever it may be
terminated and shall insure the same in the full value thereof comprehensively
against loss or damage.
Clause 9 (a):
The
contractor shall keep the premises, including by way of example and not of
limitation, the drains, heating, water and sanitary pipes, lift and apparatus,
gas pipes and fittings, electricity wiring and fittings and all other fixtures
and fittings in the same good condition as they are in on the 15th June, 1982,
fair wear and tear excepted, and in such condition shall return the same
to the licensor at the termination of this agreement howsoever it may be
terminated.
Clause 9 (b):
The
contractor shall at his own expense comply with all byelaws, whether relating
to cleanliness, hygiene, fire precaution, public safety or otherwise, and shall
at his own expense complied [sic] with any requirements of any local or
public authority relating to the maintenance and/or improvement of existing
facilities. (c) The contractor shall not do anything which would constitute a
breach of the lessee’s covenants and obligations under the lease. (d) The
contractor shall immediately notify the licensor if any writ shall be served
upon it or any other proceedings commenced against it and act therein as the
licensor shall direct.
Clause 10:
The licensor
and the contractor shall use their best endeavours to keep in force and renew
when necessary the justices’ licence granted to the licensor.
Clause 11:
The
contractor shall not change the name of the present business from that of Loon
Fung Restaurant.
Clause 12:
The licensor
is to be at liberty to enter the premises at any time and [sic] to
ensure that the business is operated in any efficient manner and that the
covenants on the part of the contractor herein contained are being observed.
Clause 13 (a):
This
agreement is personal to the contractor and the benefit of this agreement shall
under no circumstances be assignable by the contractor.
Clause 13 (b):
The directors
and shareholders of the contractor company shall be
and there were
six names inserted of which one is Mr Chan and another is Mr Chin.
And the
contractor may not without the prior written consent of the licensor change its
directors or shareholders other than to members of their immediate families or
between the directors and the shareholders themselves.
Clause 14:
Nothing in
this agreement shall be construed as creating a legal demise and it is hereby
agreed between the parties that this agreement confers no tenancy upon the
contractor and the possession of the premises is retained by the contractor [sic]
an obvious
misprint for ‘licensor’
subject
however to the rights created by this agreement.
Clause 15
provides for circumstances in which the agreement may be determined by notice
given by the licensor. I need not go through it in detail, but it includes the
failure to pay any payment due within seven days after becoming due whether
demanded or not, a failure to remedy breaches capable of remedy, and so on. But
clause 15 (e) is in the following terms:
‘If the
licensor will not give consent under clause 13 (b) hereof’ — that is to say to
the change of directors or shareholders of the contractor company.
Clause 16:
The licensor
agrees to pay any land charge that may be registered with the City of
Westminster up to the date hereof and to indemnify the contractor against any
claims, actions or legal proceedings in respect thereof.
Clause 17 was
an ordinary surety covenant.
The second
schedule is in the following terms:
From the 15th
day of June, 1982 until the 15th day of June, 1985 the fee of £400 per week and
all payments due from the licensor to the lessor under the lease and all other
payments of an annual or recurring nature payable by the contractor in respect
of the business.
I observe
first that the document is described as a management agreement, and the grantor
as a licensor, and that the draftsman has studiously avoided any words
indicative of a tenancy. Indeed, he has gone so far as to avoid even a grant of
the right to enter upon and use the premises, a right which had been granted in
the Lionbear agreement but which is conspicuously absent from the present
agreement. But it must obviously be inferred. How could Dellneed carry on the
business of a restaurant upon the premises, which it was not only entitled but
bound to do, or enjoy the right to use Mr Chin’s furniture and furnishings, fixtures,
equipment and chattels granted by clause 8 unless it had the right to enter
upon and use the premises? To leave the
primary right intended to be granted to be inferred in this way excites suspicion
that the document is drawn to mislead.
Next I observe
that any impression gained from the fact that the document is called a
management agreement or from recital 2 or from clause 1 that Dellneed was
merely taking over the management of an existing business owned by Mr Chin
would be quite false. Dellneed was starting up its own business on its own
account on premises and with equipment provided by Mr Chin and with the benefit
of the name, reputation and goodwill attaching to those premises. The fact that
Dellneed was placed under a positive obligation to carry on the business on the
premises is not of course inconsistent with the creation of a tenancy. On any
footing, Mr Chin retained a valuable interest in the premises and the goodwill
attaching thereto, and needed to impose such an obligation for its protection.
Next it is to
be observed that the premises in question are defined as the ground floor and
basement of 37-38 Gerrard Street, a self-contained defined area, the whole of
the premises now comprised in the lease, and obviously not an unsuitable
subject-matter for a demise. It is to be observed that under clause 2 the whole
of the payments and not merely the £400 is expressed to be for the use of the
chattels referred to in clause 8, but not the furniture, furnishings or
fixtures also mentioned in that clause. This is an extravagant notion. None of
the witnesses have suggested that anything beyond the £400 per week was paid
for the chattels and it will be remembered that VAT was charged on only £400. Even
the £400 was paid in part at least for the use of the premises and the
furnishings and fixtures thereof. In so far as clause 2 is intended to suggest
that the substance of the agreement is the hire of equipment it is misleading.
The chattels were not hired separately but as the equipment of the restaurant,
and were intended to be used in situ and nowhere else. As I have already
mentioned, not only the £400 but all the other payments were made weekly in
arrear and not as provided by clause 2.
Clause 4 in my
view is neutral on the question whether the document creates a tenancy. On any
footing Mr Chin retained a valuable interest in the reputation and goodwill of
the restaurant. But it is to be observed that the clause does not require
Dellneed to follow Mr Chin’s instructions on any matter. Clauses 5 and 7 show
that the business in fact belongs to Dellneed. Clause 6 is significant. It was
thought necessary to prohibit Dellneed not only from redecorating but from
making alterations or even additions to the premises without Mr Chin’s consent.
If Dellneed were a mere licensee or manager it would plainly not dream it had
the right to do so. I have already referred to clause 8, which entitles
Dellneed to the use of Mr Chin’s furniture and furnishings, fixtures, equipment
and chattels. This shows that Dellneed was to have the use and enjoyment of the
premises, though this was not expressly granted.
Clause 9 (a)
requires Dellneed to keep not only the drains, heating, water, sanitary pipes,
lift and apparatus and so on but the premises themselves in repair. This seems
to be an inappropriate obligation for a mere licensee or manager to undertake.
Clause 11,
which prohibits Dellneed from changing the name of the restaurant, is not
inconsistent with the creation of a tenancy for the reasons I have already
mentioned, but I observe that it is inconsistent with a management agreement. A
manager would have no right to change the name of the restaurant he was
managing and it would be unnecessary to prohibit him from doing so. On the
contrary, the owner would almost certainly insist upon reserving an express
right to change the name without the manager’s consent, which Mr Chin
significantly did not do.
Clause 12 is
another provision of great significance. Despite Mr Ground’s argument to the
contrary it is plain as a matter of construction in my judgment that the word
‘and’ is intrusive and should be disregarded. Properly read, the clause
reserves to Mr Chin the right to enter the premises at any time for the purpose
of ensuring that the business is operated in an efficient manner and that
Dellneed’s obligations are being performed. This is completely inconsistent
with a mere licence. The reservation of an express right to Mr Chin to enter
the premises for certain limited purposes only demonstrates in my view that
subject thereto Dellneed was being granted exclusive possession.
Clause 13 (a)
is an absolute prohibition of assignment. This is some indication that a
personal licence may have been intended, but it is not, of course, inconsistent
with the creation of a tenancy. Clause 13 (b) is part of the facade that this
is merely a management agreement. Its true purpose, which was frankly admitted
in evidence, was to protect Mr Chin’s lease by reducing the risk of forfeiture.
It was obviously designed to mislead the landlord, should he call for the
agreement under which Dellneed appeared to be in possession, into thinking that
Dellneed was merely a management company in which Mr Chin was interested, so
that any change in possession was merely
not, of course, disclosed by the management agreement.
Clause 14 is
an express declaration that the agreement is not to create a tenancy and that
possession of the premises is retained by Mr Chin. I have already stated my
finding that it was not in fact retained by Mr Chin, so that this is another
part of the facade to mislead the landlord.
Clause 15 (e)
was varied in correspondence. I have already referred to the letter dated May
26 1982 in which its purpose was explained by Mr Michael Tang. The parties’
respective solicitors agreed in correspondence as early as June 1982 that
clause 15(e) should in effect be capable of being invoked if, but only if, the
landlord should bring proceedings on the ground that Mr Chin had parted with
possession of the premises without consent, but that the clause should remain
as drawn. The reason for the suppression of the true ambit of clause 15 is too
obvious to need to be stated.
It is plain from
what I have already said that the management agreement does not represent the
true relationship between the parties and that one of its purposes was to
mislead the landlord should he make inquiries of the basis upon which Dellneed
was or appeared to be in possession. It is plain that what was paraded as a
management agreement was in truth nothing of the kind. Whatever the true
relationship of the parties created by the agreement, it was not the
relationship of owner and manager of a business. The business which Dellneed
was ‘to manage’ was its own.
In
Shell-Mex & BP Ltd v Manchester Garages Ltd [1971] 1 WLR 612
Buckley LJ said at p 618:
It is clear
on authority that in considering whether a transaction such as we have before
us in this case constitutes a licence or a tenancy the court is not to have
regard to the label which the parties give to the document or to the formal
language of the document but to the substance of the transaction.
The substance
of transaction in the present case was abundantly established by the evidence.
It was that for a period of three years Dellneed was to have the use of a fully
furnished and equipped restaurant, with an established name and reputation on
which to carry on its own restaurant business; that Mr Chin was to make his
advice and experience available to Dellneed; and that Dellneed was to pay to Mr
Chin the outgoings of the premises and an additional £400 a week so that Mr
Chin should receive this latter sum clear. I am quite satisfied that this
arrangement necessarily involved, did involve and was intended to involve the
granting of exclusive possession to Dellneed.
Mr Ground
submitted that Mr Chin retained the right to enter the premises at any time and
for any purpose, provided only that he did not derogate from the grant that he
had made of the right to run a restaurant on the premises. In my judgment not
only does that submission fly in the face of the express terms of clause 12 of
the management agreement as I construe them but it is a contradiction in terms.
The right granted to Dellneed to use the premises and the fixtures, fittings
and equipment for the purpose of running a restaurant was so extensive that I
find it impossible to conceive of the retention of any significant right of
possession by Mr Chin which would be consistent with it.
Mr Ground
submitted that even so Dellneed was not granted exclusive possession because,
he says, this was contrary to the intention of the parties. Mr Chin had a
difficult relationship with his landlord, who was looking for an opportunity to
forfeit the lease. The existence of a covenant against subletting or parting
with possession without the landlord’s consent was known to both parties, and
it was common ground that no application for consent would be made. Indeed I
would add it must have been obvious to both parties that any such consent would
be most unlikely to be granted. Dellneed was a new company with a paid-up share
capital of £100. Mr Chan had no experience of the business and had little in
the way of financial resources. Naturally, Mr Ground submitted, Mr Chin did not
wish to commit a breach of the covenants in his lease and accordingly must be
taken to have had no intention of granting a tenancy or parting with possession
of the premises; and Mr Chan, who was aware of this, must be taken to have
entered into the transaction on this basis. In my judgment, however, Mr Chin’s
intentions were more complex than those attributed to him by Mr Ground. His
primary intention was to grant to Dellneed the use of the premises, furniture
and equipment and all the rights necessary to enable it to run the restaurant.
If this could be done without committing a breach of covenant in the lease so
much the better. If not, he was still willing to go ahead, but in order to
protect himself he wanted to make it appear that no breach had occurred, and if
that did not work he wanted the right to terminate the arrangements and resume
possession.
Mr Ground also
relied upon the other unusual circumstances of the case as demonstrating an
intention on Mr Chin’s part not to grant exclusive possession. He cited the
fact that this was a Mai Toi Agreement made between personal friends, both
members of the Chinese community, and that Mr Chin’s advice and experience were
to be made available to Mr Chan. In my judgment none of these circumstances,
separately or cumulatively, are sufficient for the purpose. Mr Chin was not
required to provide services on the premises as, for example, the owner of a
lodging-house or old people’s home is, which would require him to retain
possession and control of the premises. A management or business consultant
does not need to have possession of the premises on which the business is
carried on in order to provide the services for which he is employed. In my
judgment the circumstances and the conduct of the parties show that Dellneed
was to have exclusive possession of the restaurant premises for a term at a rent.
Mr Ground also
relied upon the features I have mentioned as special circumstances negativing
an intention to create a tenancy despite the grant of exclusive possession. In
my judgment, this submission depends upon a misreading of the decision of the
House of Lords in Street v Mountford [1985] AC 809*. It is clear
from that case that once there is found to be a grant of exclusive possession
of premises for a term at a rent then whether the arrangements create a tenancy
or licence does not depend upon the parties’ intentions to create the one
rather than the other but upon the legal effect of the transaction into which
they have entered. The only intention which is relevant is the intention to
grant exclusive possession (see p 826 H). Mr Ground relied upon the recent
decision of the Court of Appeal in Matchams Park (Holdings) Ltd v Dommett
[1984] 272 EG 549, [1984] 2 EGLR 143, in which, despite the grant of exclusive
possession, the parties’ intention to create a licence rather than a tenancy
was apparently held to be decisive. In my judgment, that approach is
inconsistent and cannot stand with the even more recent decision of the House
of Lords in Street v Mountford (see, for example, the passage at
p 819 between E and F).
*Editor’s
note: Also reported at [1985] 1 EGLR 128.
In Street
v Mountford it was made quite clear that save in exceptional
circumstances the grant of exclusive possession of premises for a term at a
rent constitutes the grant of a tenancy. Only three examples of such
exceptional situations were given. First, where the circumstances showed that
there was no intention to create legal relations at all. Second, where the
possession was referable to some other legal relationship such as vendor and
purchaser, master and servant or, I might add, owner and manager of a
restaurant. Third, where the grantor had no estate or interest in the land out
of which a tenancy could be created, as in the case of a requisitioning
authority.
None of those
exceptional circumstances exists in the present case. It was not and could not
be suggested that the management agreement was not intended to create legal
relations. The transaction was a commercial one and contractually binding from
the start. Nor was there any legal relationship between the parties other than
that of owner and occupier of the land to which the occupier’s possession could
be ascribed. Nor, despite Mr Ground’s spirited argument to the contrary, was Mr
Chin’s position comparable to that of a requisitioning authority. Mr Chin had
capacity to grant a tenancy, he had an estate out of which a tenancy could be
granted and a grant by him would effectively vest an estate in the land in the
grantee. He had a motive for not granting a tenancy and a still more powerful
motive for not being found out, since it risked a forfeiture of the lease. The
Rent Acts and Part II of the Landlord and Tenant Act 1954 provide equally
strong inducements in many cases to landowners to avoid granting tenancies of
their properties, but if their desire to grant exclusive possession for a term
at a rent is acted upon they cannot point to such considerations to enable them
to escape the consequences of their own actions.
I am prepared
to accept Mr Ground’s submission that the categories of special circumstances
mentioned by Lord Templeman in Street v Mountford are
illustrative and not exhaustive and that the categories are not closed, but I
can find no exceptional circumstances in the present case which would justify
me in finding that despite the grant of exclusive possession there was no
tenancy created. It was conceded that Part II of the Landlord and Tenant Act
1954 applies to
therefore, that Dellneed has a tenancy of the premises for a period extended to
December 31 1985 subject to a break clause in the event of the landlord
bringing proceedings for possession on the grounds I have mentioned and that
the tenancy has not been determined in accordance with Part II of the Landlord
and Tenant Act 1954.
The furniture,
fittings and equipment were provided to Dellneed for use in the premises, and
by clause 8 of the management agreement Dellneed is not bound to redeliver them
to Mr Chin until the termination of that agreement. Accordingly, Dellneed
continues to be entitled to retain possession of those items.
