Landlord and tenant — Service charges — Parallel covenants to pay charges in lease and underlease — Effect of
determination of lease while underlease continued to subsist by virtue of Landlord and Tenant Act 1954 — Freeholders’ claim for £19,223.68 in respect of service charges paid by lessee — Question as to lessee’s right of indemnity from underlessee — Whether right of indemnity affected by determination of lease — Whether, if no contractual right to indemnity was available to lessee after determination of the lease, the amount could be recovered under principles of restitution — Appeal by lessee against county court judge’s dismissal of claim allowed
subject-matter of this litigation consisted of the ground floor and part of the
first floor of Britannica House, High Street, Waltham Cross — The problems
arose from the relationship between a lease, of which at all material times the
lessor (the freeholder) was Electricity Supply Nominees (ESN) and the lessee
was Thorn EMI Retail Ltd (Thorn), and an underlease, of which Thorn was the
underlessor and British Telecommunications plc (BT) was the underlessee — In
the lease Thorn covenanted to pay the lessor a service charge — In the
underlease BT covenanted to pay Thorn or the superior lessor a service charge —
It was common ground that this covenant, while it subsisted, enabled Thorn to
recover from BT the sums in respect of the service charges which Thorn was
bound by the headlease to pay to the lessor — Thorn’s tenancy expired on
December 24 1983 and was not continued under the Landlord and Tenant Act 1954 —
BT’s tenancy was, however, continued under the Act, thus persisting after the extinguishment
of Thorn’s superior tenancy
judgment against Thorn for £19,223.68 in respect of service charges under the
provisions of the lease — The difficulties, involving inquiry into arcane parts
of landlord and tenant law, arose when Thorn’s right of recovery or indemnity
in respect of the payment of these charges fell to be determined — Could Thorn
recover the amount from BT by direct obligation or could the recovery be
supported on principles of reimbursement or restitution — In considering this
matter the court referred to sections 139 and 141 of the Law of Property Act
1925 and a number of decisions
judgment considered, without expressing any concluded view, a suggestion that
it could hardly have been in accordance with Parliament’s intention that Thorn
should be deprived of its rights of indemnity merely because the headlease had
come to an end — ‘To deprive Thorn of the protection of the indemnity
specifically contracted for in the underlease seems wholly unjust’ — But the court
did not hear argument on this and their decision eventually turned on a
different principle
below had rejected the claim that Thorn was entitled to recover under the
heading of reimbursement or restitution — The Court of Appeal took a different
view — In the opinion of Fox LJ the analysis of the position was as follows —
ESN was entitled to sue either Thorn or BT for the amount of the service charge
— ESN chose to sue Thorn and recovered judgment for the amount due — Thorn paid
under compulsion, having no answer to ESN’s action — The payment discharged
BT’s liability to ESN — The case for the reimbursement of Thorn by BT, in the
court’s opinion, fell within the principle of Moule v Garrett and Exall v Partridge, in
whatever wording that principle should be formulated — Staughton LJ arrived at
the same result but by a somewhat different process of reasoning — Sir Denys
Buckley agreed with the reasoning of Fox LJ
was accordingly allowed and judgment given for Thorn to be reimbursed by BT
The following cases are referred to in
this report.
Bonner v Tottenham & Edmonton Permanent
Investment Building Society [1899] 1 QB 161
Duncan Fox & Co v North and South Wales
Bank (1880) 6 App Cas 1
Exall v Partridge (1799) 8 TR 308
Johnson v Wild (1890) 44 Ch D 146;
[1886-90] All ER Rep 539; 59 LJCH 322; 62 LT 537; 38 WR 500; 6 TLR 259
King, Re, Robinson v Gray [1963] Ch 459;
[1963] 2 WLR 629; [1963] 1 All ER 781; [1963] RVR 245, CA
Moule v Garrett (1872) LR 7 Ex 101
Webb v Russell (1789) 3 TR 393
This was an appeal by the defendant,
Thorn EMI Retail Ltd, in an action by the plaintiff, Electricity Supply
Nominees Ltd, concerning liability to pay service charges in respect of
premises on the ground floor and part of the first floor of Britannica House, High
Street, Waltham Cross, Herts. British Telecommunications plc, third party in
the action, was respondent to the appeal. The plaintiff in the action,
Electricity Supply Nominees Ltd, took no part in the appeal. The appeal was
from the decision of Judge Zucker QC, at the Mayor’s and City of London Court,
disallowing the appellant’s claim for reimbursement of service charges.
Michael Barnes QC and Jonathan Brock
(instructed by Roe & Maw) appeared on behalf of the appellant, Thorn EMI
Retail Ltd; Kim Lewison QC (instructed by the solicitor to British
Telecommunications plc) represented the respondent (third party); the plaintiff
in the action, Electricity Supply Nominees Ltd, did not appear and was not
represented.
Giving judgment, FOX LJ said: This
is an appeal by the defendant, Thorn EMI Retail Ltd (‘Thorn’), from a decision
of Judge Zucker QC at the Mayor’s and City of London Court.
The action is concerned with the
liability to pay service charges, under a lease, for the nine months from March
26 1983 to December 24 1983.
The premises with which the case is
concerned are the ground floor and part of the first floor of Britannica House,
High Street, Waltham Cross.
By a lease (‘the headlease’) of October
22 1962 between Seagull Holdings Ltd as lessor and the defendant Thorn EMI
Retail Ltd (‘Thorn’), which was then called Tucana Ltd, the premises were
demised to Thorn from December 25 1962 to December 24 1983.
By clause 2(2) of the headlease Thorn
covenanted to pay to the lessor a proportionate part of various costs and
expenses relating to Britannica House (‘the service charges’).
By an underlease (‘the underlease’) of
March 17 1975 made between Thorn and the third party in this action, British
Telecommunications plc (‘BT’), then called the Post Office, Thorn underlet the
premises to BT for a term from December 25 1973 to December 17 1983.
Clause 2(2) of the underlease contained a
covenant by BT to pay to Thorn or the superior lessor a proportion of the costs
and expenses therein specified. It is common ground that the terms of the
latter covenant enabled Thorn (as underlessor) to recover from BT (as
underlessee) the sums in respect of the service charges which Thorn was, by the
headlease, bound to pay to the headlessor. At all times material to the present
case, the headlessor was the plaintiff, Electricity Supply Nominees Ltd
(‘ESN’).
Thorn ceased to occupy the premises soon
after the underlease was granted and never re-entered into possession.
Accordingly, there was no question of Thorn being entitled to protection under
Part II of the Landlord and Tenant Act 1954. The position of BT was different.
It was a business tenant in occupation.
On July 15 1983 ESN served on BT a notice
under section 25 of the Landlord and Tenant Act 1954 to terminate BT’s tenancy.
On August 5 1983 BT served a counternotice indicating that it was not willing
to give up possession. Discussions followed between ESN and BT as a result of
which it was agreed that BT should be granted a term of one year only from
December 24 1983 and in relation to the ground floor only. The security of
tenure provisions of the Landlord and Tenant Act 1954 were to be excluded. That
was duly approved by the court under the provisions of the 1954 Act. BT vacated
the first floor on December 17 1983. Thorn’s tenancy expired on December 24
1983, but BT’s continued in existence under the provisions of the 1954 Act. I
should add that BT had duly issued an application under the Act for a new
tenancy. That was not withdrawn until November 16 1984.
On April 6 1990 ESN obtained judgment
against Thorn for £19,223.68 in respect of the service charges under the
provisions of clause 2(2) of the headlease.
Before the judge, three issues arose:
(1)
A claim by BT in respect of certain payments made by BT to
point was decided against BT and there is no appeal on that.
(2)
Whether Thorn could recover the amount of the service charges direct
from BT under the underlease. The judge decided that Thorn could not recover.
(3)
Whether Thorn could recover the amount from BT on restitution
principles. The judge decided that Thorn could not recover.
I will deal, in turn, with the second and
third issues (upon which BT appeals).
The claim by Thorn under the provisions
of the underlease
There are certain statutory provisions to
which I should refer.
Section 139 of the Law of Property Act
1925 provides as follows:
139.–(1)
Where a reversion expectant on a lease of land is surrendered or merged,
the estate or interest which as against the lessee for the time being confers
the next vested right to the land, shall be deemed the reversion for the
purpose of preserving the same incidents and obligations as would have affected
the original reversion had there been no surrender or merger thereof.
(2)
This section applies to surrenders or mergers effected after the first
day of October, eighteen hundred and forty-five.
At common law the surrender of a
headlease had the effect of:
(a) extinguishing the headlease;
(b) leaving the sublease in existence and
binding on the freeholder;
(c) rendering unenforceable all the covenants in
the sublease (see Webb v Russell (1789) 3 TR 393).
Section 139 (reproducing earlier
legislation) displaces the latter principle and preserves the covenants.
Section 139, however, applies only to
surrenders and mergers. What occurred in the present case was the determination
of the headlease while the underlease was still in existence. That, as I have
indicated, was the consequence of the provisions of Part II of the Landlord and
Tenant Act 1954 which extended the term of the underlease. The underlease was,
therefore, still in existence, though the superior lease which supported it was
extinguished by effluxion of time on December 24 1983.
That brings me to section 65(2) of the
Landlord and Tenant Act 1954, which provides:
(2)
In the case of a tenancy continuing by virtue of any provision of this
Act after the coming to an end of the interest in reversion immediately
expectant upon the termination thereof, subsection (1) of section one hundred
and thirty-nine of the Law of Property Act, 1925 (which relates to the effect
of the extinguishment of a reversion) shall apply as if references in the said
subsection (1) to the surrender or merger of the reversion included references
to the coming to an end of the reversion for any reason other than surrender or
merger.
Thus, this enactment prevents the
destruction of covenants in an underlease by virtue of the common law rule.
Section 139(1) of the Law of Property Act would not have preserved the
covenants, since the reversion expectant on BT’s sublease was not surrendered
and did not merge. It simply expired.
I come, then, to section 141 of the Law
of Property Act 1925, which provides as follows:
141.–(1)
Rent reserved by a lease, and the benefit of every covenant or provision
therein contained, having reference to the subject-matter thereof, and on the
lessee’s part to be observed or performed, and every condition of re-entry and
other condition therein contained, shall be annexed and incident to and shall
go with the reversionary estate in the land, or in any part thereof,
immediately expectant on the term granted by the lease, notwithstanding
severance of that reversionary estate, and without prejudice to any liability
affecting a covenantor or his estate.
(2)
Any such rent, covenant or provision shall be capable of being
recovered, received, enforced, and taken advantage of, by the person from time
to time entitled, subject to the term, to the income of the whole or any part,
as the case may require, of the land leased.
(3)
Where that person becomes entitled by conveyance or otherwise, such
rent, covenant or provision may be recovered, received, enforced or taken
advantage of by him notwithstanding that he becomes so entitled after the
condition of re-entry or forfeiture has become enforceable, but this subsection
does not render enforceable any condition of re-entry or other condition waived
or released before such person becomes entitled as aforesaid.
In Re King; Robinson v Gray
[1963] Ch 459 the question was whether a landlord who has assigned his
reversion to a lease can, after the assignment, sue the lessee in respect of
breaches of covenant which occurred before the assignment. The Court of Appeal
by a majority (Upjohn and Diplock LJJ) held that he could not. Diplock LJ at p 497
said:
Looked at purely as a matter of the
meaning of the words used in section 141 of the Law of Property Act, 1925, I
take the view that the effect of this section is that after the assignment of
the reversion to a lease, the assignee alone is entitled to sue the tenant for
breaches . . . occurred before or after the date of the assignment.
That result, I think, follows from
section 141(1), which provides that ‘the benefit of every covenant or provision
therein contained, having reference to the subject-matter thereof, and on the
lessee’s part to be observed or performed, . . . shall be annexed and incident
to and shall go with the reversionary estate in the land, or in any part
thereof, immediately expectant on the term granted by the lease . . .’.
Re King is binding on this court. But Mr Barnes,
for Thorn, says that it is a case of a fundamentally different kind from the
present. He says that Re King was a case of an assignment and that
section 141 is dealing only with assignments. The present, he says, is not a
case of assignment at all but one of extinguishment and there is nothing in
section 139 which converts it into an assignment.
The difficulty which I feel about the
contention that section 141 is dealing only with assignments is the very wide
language of section 141(3).
Thus section 141(2) provides that any
covenant shall be capable of being enforced by the person from time to time
entitled, subject to the term to the income of the land. Section 141(3) then
provides:
Where that person becomes entitled by
conveyance or otherwise, such . . . covenant . . . may be . . . taken advantage
of . . . [and enforced] . . .
It seems to me that the words ‘by
conveyance or otherwise’ are so wide that there is no restriction to
assignments. I think, however, that there may nevertheless be a question as to
the ambit of the rights which are intended to pass under section 141. The point
may be put as follows:
(1)
The headlease and the underlease are, in identifying the service charges
to be paid, in virtually the same terms save as to the parties and the duration
of the demise. Clause 2(2) of the headlease and clause 2(2) of the underlease
are in the same language — as are the terms of the schedules specifying the
costs and expenses which constitute the basis of the service charges.
(2)
Clause 2(2) of the underlease is a covenant by the underlessee ‘to pay
and contribute to the Lessor or the Superior Lessors a proportionate part (to
be determined in manner hereinafter described) of the costs and expenses,
outgoings and matters mentioned in the Third Schedule hereto. The amount of
such [costs, etc] shall be ascertained and certified by the Superior Lessors’
Managing Agents . . .’.
(3)
That covenant is, in substance, simply an indemnity to Thorn.
Immediately before the determination of the headlease the covenant by BT was a
fully effective contractual obligation binding BT.
(4)
At the determination of the headlease there was in respect of the period
of nine months to December 24 1983 a liability of Thorn to ESN in respect of
the service charges.
(5)
Thorn was entitled to be indemnified against that liability by BT.
(6)
It is difficult to believe that it can have been the intention of
Parliament that Thorn should be stripped of its right to indemnity merely
because the headlease determined. The determination of the headlease did not
affect Thorn’s liability to ESN. To deprive Thorn of the protection of the
indemnity specifically contracted for in the underlease seems wholly unjust.
Assignments may give rise to different considerations, since an assignor can
bargain for such terms for his own protection as he thinks fit. That does not
apply to the position arising on the expiry of a term when the cesser occurs
automatically.
(7)
The position becomes even more strange in that the benefit of Thorn’s
covenant would be taken away from it and given to ESN — the party against whose
claims the indemnity was intended to protect Thorn.
I mention this aspect of the case but we
did not hear argument upon it and I, therefore, take it no further and express
no concluded view upon it.
I turn to Mr Barnes’ argument on
reimbursement.
Reimbursement
The judge rejected the claim that Thorn
are entitled to reimbursement. He said that as between Thorn and BT the
indemnity was not that of one of them only. The liabilities arose under
different deeds and were distinct. They related to the same subject-matter but
were not the same debt. He accepted, as I understand it, the contention of BT
that both Thorn and BT were equally liable on their respective covenants and
there was no ultimate liability on BT to which the court could give effect. He
referred to the principle as stated by Lord Selborne in Duncan Fox & Co v
North and South Wales Bank (1880) 6 App Cas 1. In that case at p 13 Lord
Selborne said in reference to
cases in which there is, strictly
speaking, no contract of suretyship, but in which there is a primary and
secondary liability of two persons for one and the same debt, by virtue of
which, if it is paid by the person who is not primarily liable, he has a right
to re-imbursement or indemnity from the other . . .
Mr Barnes for Thorn on this appeal
approaches the matter somewhat differently. He relies on the authorities
relating to payments under compulsion. If a person makes a voluntary payment
intending to discharge another’s debt, he will discharge the debt only if he
acts with that person’s authority or the latter subsequently ratifies the
payment. Consequently, if the payee makes the payment without authority and
does not obtain subsequent ratification he normally has no redress against the
debtor.
The position where there is a payment
under compulsion, however, is different. Thus, in Moule v Garrett
(1872) LR 7 Exch 101 the plaintiff was the original lessee of premises and
claimed against the defendants, who were the ultimate assignees of the term.
The plaintiff sought to recover the amount which he had been compelled to pay
to the lessor for dilapidations which had occurred during the tenancy of the
defendants. It was held that he could recover. Cockburn CJ at p 104 cited Leake
on Contracts, p 41 as follows:
Where the plaintiff has been compelled by
law to pay, or, being compellable by law, has paid money which the defendant
was ultimately liable to pay, so that the latter obtains the benefit of the
payment by the discharge of his liability; under such circumstances the
defendant is held indebted to the plaintiff in the amount.
Cockburn CJ said that whether the
liability was put on the ground of an implied contract or of an obligation
imposed by law was a matter of indifference; it was such a duty as the law
would enforce.
Exall v Partridge (1799) 8 TR 308 is
another example of the principle. The goods of a stranger on the premises of
another were distrained by the landlord for rent in arrears. The stranger was
obliged to pay the rent in order to recover his goods. It was held the stranger
could maintain the assumpsit for money paid for the use of the lessees. Lord
Kenyon CJ said that the plaintiff could not have relieved himself from the distress
without paying the rent; it was not, therefore, a voluntary but a compulsory
payment. Under those circumstances, the law would imply a promise by the lessee
to repay the plaintiff.
Exall v Partridge, it is to be
observed, is, like Moule v Garrett, a case where the defendants
were relieved of a liability in consequence of the plaintiff’s payment. Neither
case involves the proposition that whoever is benefited by a payment made by
another is liable to recompense him.
Johnson v Wild (1890) 44 Ch D 146 which
at first sight appears contrary to the principle which I have stated is, I
think, not so in fact. A lessee of land assigned part of the land to A for the
residue of the term and the other part to B for the residue of the term less 10
days. A assigned his interest and it was vested in the plaintiff as assignee.
So the plaintiff stood in A’s shoes as assignee.
The defendants’ position was different.
They were sublessees of the other part of the land and not assignees. They were
accordingly under no liability to pay any rent under the original lease. By way
of precaution they took a covenant from the original lessee to pay the rent
under the original lease.
The original lessee got into financial
difficulties and could not pay the rent. The landlord, therefore, distrained
for rent against that part of the land occupied by the plaintiff. The plaintiff
in order to avoid the distress paid the entire rent due under the original
lease. In the action he claimed contribution from the defendants.
The claim failed. Chitty J said at p 150:
Now he [the plaintiff] does not demand
contribution from a person who is liable to a common demand, because the
Defendants are not liable for the rent; and the Defendants are not only not
liable for the rent, but nobody can sue them in respect of this supposed
liability unless it be the Plaintiff; whereas, in a common demand for which two
persons are liable, if one pays then there is a right of contribution on the
part of the one who makes the payment against the one who does not.
So far as concerns the principle which I
have stated above, the case was correctly decided, since the payment did not
discharge any liability of the defendants. That is because, the defendants
being sublessees, the lessor and the assignees could not recover rent from
them.
What, then, is the position in the
present case? By the underlease BT
covenanted with Thorn:
To pay and contribute to the Lessor or
the Superior Lessors a proportionate part (to be determined in manner
hereinafter described) of the costs and expenses, outgoings and matters
mentioned in the Third Schedule hereto [ie the service charges]. The amount of
such contribution shall be ascertained and certified by the Superior Lessors’
Managing Agents acting as experts and not as arbitrators once a year on the
Sixth day of April . . .
Disregarding the point to which I have
referred above as to the ambit of section 141, ESN was, from the date of the
determination of the headlease, entitled to sue BT direct in respect of the
covenants in the underlease (and whether relating to periods before or after
the determination of the headlease). Further, ESN was entitled to sue Thorn in
respect of the covenants in the headlease.
The result is that ESN was entitled to
sue either Thorn or BT for the amount of the service charges in question. In
fact ESN chose to sue Thorn and recovered judgment for the amount accordingly.
Stopping there, the position is as
follows. First, Thorn paid under compulsion. It had no answer to ESN’s action.
Second, it seems to me that the payment
discharged BT’s liability to ESN. BT could have been sued direct by ESN for the
full amount of the charges and would have had no answer to the claim. The claim
by ESN, though it would have arisen by virtue of the underlease and not by
virtue of the headlease, would have been for exactly the same amount computed
in exactly the same way and in respect of the same services as the amount
recoverable by ESN from Thorn. And if BT had been sued direct by ESN, it does
not seem to me that BT could have recovered anything from Thorn. The agreement
between BT and Thorn was that the ultimate burden of the service charges (in
relation to the duration of the sublease) should fall on BT.
The result, in my opinion, is that the
case falls within the principle of Moule v Garrett and Exall
v Partridge, so that Thorn is entitled to be reimbursed by BT. I would
see no reason to question that result as a matter of justice between the
parties.
I would therefore allow the appeal.
SIR DENYS BUCKLEY agreed and did not add
anything.
Also agreeing in the result, STAUGHTON
LJ said: I would allow this appeal and hold that the claim of Thorn against
British Telecom succeeds on the second of the grounds referred to in the
judgment of Fox LJ, that is to say reimbursement of money paid under
compulsion. For the purpose of considering this topic it is necessary to assume
that the obligation of British Telecom to pay service charges has, since
December 25 1983, been owed to Electricity Supply Nominees and not to Thorn.
There can be no doubt that, initially,
there were two separate and distinct debts in respect of service charges for
these premises: one was owed by Thorn to Electricity Supply Nominees, and one
by British Telecom to Thorn. Manifestly the payment of one would not have
discharged the other. Payment by Thorn to Electricity Supply Nominees was
indeed the very event in which Thorn would wish to enforce its debt against
British Telecom; and Electricity Supply Nominees would not have been in the
least satisfied by a payment to Thorn by British Telecom.
In that state of affairs the doctrine of
recoupment would not have applied: see Bonner v Tottenham &
Edmonton Permanent Investment Building Society [1899] 1 QB 161, Goff
& Jones on The Law of Restitution (3rd ed) pp 268-270.
But the position changed when, as I
assume for the purposes of this question, the liability of British Telecom to
Thorn was replaced by a liability of British Telecom to Electricity Supply
Nominees. Two debtors (Thorn and British Telecom) were then liable to
Electricity Supply Nominees in identical terms, albeit under different
instruments.
In the new circumstances it seems to me
plain that payment by either would have discharged the other. If one must
search for a legal explanation of this result, the answer is, in my view, that
there had been a merger of the two debts; they had become one debt owed by two
debtors. As between the two debtors, British Telecom and not Thorn were
primarily liable. And as Thorn have been compelled to pay, they are entitled to
the remedy of recoupment against British Telecom.
I would allow this appeal and give
judgment for Thorn against British Telecom in the third party proceedings.
The appeal was allowed with costs to the
Court of Appeal and below; application for leave to appeal to the House of
Lords was refused.
