Landlord and tenant — Whether lease void if tie provisions therein in breach of Treaty of Rome — Whether rent a reasonable rent under an implied periodic tenancy
Following an
assignment in June 1991 at a premium of £45,000 the defendants acquired the
20-year term of a lease dated November 7 1989 of a public house the reversion
to which was held by the plaintiffs. Schedule 1 to the lease contained tie
provisions by which the lessee was to purchase specified beers and drinks from
the lessor. The annual rent was reviewed to £18,500 pa on June 14 1991
following a partial release of the tie provisions. By reason of the defendants’
failure to pay the rent due on December 1 1991 and thereafter, the plaintiffs
issued proceedings claiming possession, arrears of rent and mesne profits. The
plaintiffs appealed against an order made by the judge below, on the
plaintiffs’ summons for interim payments under Ord 29 of the RSC, contending
that the amounts ordered should be larger. The judge having accepted the
defendants’ arguments that it was arguable that the tie provisions were not
severable so that the lease was void having regard to article 85 of the Treaty
of Rome, an implied periodic tenancy arising was at a reasonable rent and that
the reasonable rent was £10,000 pa. For the purposes of the appeal the
plaintiffs conceded that the tie provisions may be shown to be automatically
void under Article 85 of the Treaty of Rome.
provisions were clearly severable and the effect of the nullity upon the rest
of the lease is then a matter for the domestic law. The covenant to pay rent in
the lease should therefore be given full effect to as the defendants had not adduced
any evidence which could have given rise to an arguable case that the covenant
to pay rent was itself void under article 85(2) of the treaty as having as
object or effect the restriction or distortion of competition. The fact that
the agreed rent might be higher than the market rent does not provide by itself
an arguable case to that effect. The term in the lease that the invalidity of
the tie provisions should not affect the validity of the remaining provisions
was relevant in considering the submission that the lease was void because the
main purpose of the landlords in granting the lease had gone because the tie
provisions were a nullity.
The following
cases are referred to in this report.
Amministrazione
delle Finanze dello Stato v Simmenthal SpA (No
2: 106177) [1978] ECR 629; [1978] 3 CMLR 163, ECJ
Amoco
Australia Pty Ltd v Rocca Bros Motor Engineering
Co Pty [1975] AC 561; [1975] 2 WLR 779; [1975] 1 All ER 968, PC
Balli
Trading Ltd v Afalona Shipping Co Ltd (The
Coral) [1993] 1 Lloyd’s Rep 1
Bennett v Bennett [1952] 1 KB 249; [1952] 1 All ER 413; [1952] 1 TLR
400, CA
Bourgoin
SA v Ministry of Agriculture, Fisheries and Food
[1986] QB 716
British
& Commonwealth Holdings plc v Quadrex
Holdings Inc [1989] QB 842
Chemidus
Wavin Ltd v Societe pour la Transformation et
l’Exploitation des Resines Industrielles SA [1978] 3 CMLR 514; [1977] 5 WWR
155, Saskatchewan, CA
Home
& Overseas Insurance Co Ltd v Mentor
Insurance Co (UK) Ltd [1990] 1 WLR 153; [1989] 3 All ER 74; [1989] 1
Lloyd’s Rep 473, CA
IMA AG v Windsurfing International Inc [1984] 1 CMLR 1
Inntrepreneur
Estates Ltd v Mason [1993] 45 EG 130, [1993]
2 EGLR 189
Lobb
(Alec) (Garages) Ltd v Total Oil (Great Britain)
Ltd [1985] 1 WLR 173; [1985] 1 All ER 303; [1985] 1 EGLR 33; (1985) 273 EG
659, CA
Technique
Miniere v Maschinenbau Ulm GmbH [1966] CMLR
357; 4 CML Rev 197, European Ct
This was an
appeal by the plaintiffs, Inntrepreneur Estates (GL) Ltd, from the orders of
Judge Humphries (sitting as a judge of the High Court), who on March 4 1993 had
made orders under Ord 29 of the RSC for interim payments in proceedings for
possession of the Britannia Public House, Minehead, Somerset, and arrears of
rent against the defendant tenants, Kenneth Boyes, Patricia Boyes and Timothy
Williams.
Richard Field
QC and Nicholas Dowding (instructed by Masons) appeared on behalf of the
plaintiffs; Nicholas Merriman QC and Mark Brealey (instructed by Charles
Russell & Co, of Cheltenham) represented the defendants.
Giving the
first judgment at the invitation of Glidewell LJ, GIBSON LJ said: This
is an interlocutory appeal with the leave of the judge by Inntrepreneur Estate
(GL) Ltd, who are the plaintiffs in an action brought by them against Kenneth
Edward Boyes, Patricia Boyes and Timothy Williams, the defendants, to recover
possession of the Britannia Public House in Minehead, Somerset, together with
arrears of rent, mesne profits and interest.
The appeal is
from the order of Judge Humphries, sitting as a judge of the High Court, made
on March 4 1993 whereby he ordered the defendants to make certain interim
payments to the plaintiffs under Ord 29 of the Rules of the Supreme Court. By
their appeal the plaintiffs claim that the order should be varied to provide
for larger payments.
The appeal
raises questions of law with reference to the effect upon the validity of a
lease of a public house, and of the various covenants
provision, which requires the tenant to buy beer exclusively from the landlord,
is to be treated as void because it offends against article 85(1) of the Treaty
of Rome.
The main
questions are: first, whether it is the tie provisions alone which are in
breach of article 85(1) or whether the covenant to pay rent is also in breach;
and, second, if it is the tie provisions alone which are in breach of article
85, whether those provisions can properly be severed from the rest of the lease
so that the lease, without the tie provisions, is valid and enforceable.
Because this
is an interlocutory appeal under Ord 29, we are not concerned with whether
issues of fact have been proved but with whether contentions which are made on
the evidence on behalf of the defendants are arguable or not.
There have
been disputes between the plaintiffs and other tenants of public houses owned
by the plaintiffs and let upon leases in substantially the same terms, so far
as relevant to the questions of rent and severance, as those contained in the
lease of the Britannia to the defendants. A number of cases are now before the
court. In one, Inntrepreneur Estates Ltd v Mason*, Mr M Barnes
QC, sitting as a deputy judge of the High Court, considered the question of
severance of the tie provisions in such a lease for the purposes of deciding
what terms should be imposed upon an application to set aside a default
judgment. We have a copy of his judgment in which he considered the working of
the exemption provisions of article 85(3) and the proper approach of the
national court. This judgment has provided welcome assistance on the hearing of
this appeal.
*Editor’s
note: Reported at [1993] 2 EGLR 189 post; [1993] 45 EG 130.
The Britannia
was let by a lease dated November 7 1989 and made between Ushers Brewery Ltd,
as landlord, and Mr and Mrs Johns, as tenants, for a term of 20 years from May
31 1989 at an initial rent of £17,500 subject to upward review. The term was
assigned pursuant to a deed of June 17 1991 to the defendants. By that deed the
defendants covenanted with Ushers Brewery Ltd to pay the rent etc under the
lease and to perform the covenants. The assignment to the defendant was made on
a date in June 1991. They paid a premium of the order of £45,000 to the
assigning tenants. The freehold reversion has become vested in the plaintiffs.
The provisions
in the lease which are relevant to the issues on this appeal are as follows:
the particulars state the rent to be £17,500 pa subject to upward review.
Clause 1 defines the additional rent as including gross insurance premium
expended by the plaintiffs.
Clause 3: The
demise provides in ordinary terms that:
In
consideration of the Rent the Additional Rent and covenants on the part of the
Lessee the Company DEMISES to the Lessee the Premises . . . TO HOLD the
Premises unto the Lessess for the Term determinable as hereinafter provided and
otherwise SUBJECT to the terms of the Lease AND . . . the Lessee YIELDING AND
PAYING THEREFORE a proportionate part of the Rent in respect of the period from
the date of this Lease to the next Quarter Day to be paid on the date of this
lease and thereafter paying the rent by equal quarterly payments in advance and
FURTHER paying the Additional Rent on demand.
Clause 4
contains the lessee’s covenants, which are much as would be expected in such a
lease. Para 1 provides for payment of the rent. Para 2 provides for the payment
of rates etc. Para 4 provides for the payment of interest at the rate there
stated. Para 5 provides: ‘to insure and keep insured’ the premises.
Para 10
provides:
To put . . .
and keep in the Premises . . . in good and substantial repair.
Para 20
provides:
Not to assign
underlet share or part with the possession or occupation of part only of the
Premises.
Para 21
provides:
Not to assign
the whole of the Premises, save as therein provided.
Para 34
provides:
To comply at
all times with the terms of the First schedule . . .
That first
schedule contains the tie provisions, as they have been called. By para 2 the
defendants agreed to purchase from the company or its nominees and from no
other person all such specified beers and all such specified non-beer drinks as
they shall require for sale in the premises. The provisions are elaborate and
set out in detail in a number of paragraphs. The details do not matter.
Clause 5
contains the landlord’s covenants in ordinary form including the usual covenant
for quiet enjoyment.
Clause 6
contains provisos and mutual agreements. In clause 1:
The
invalidity (whether now or hereafter) of any provision of this Lease shall not
affect the validity of the remaining provisions.
Para 8
provides:
The Company
may at any time . . . by giving a release notice of not less than three months’
notice . . . release in whole or in part any purchasing obligation of the
Lessee and/or any obligation of the Lessess to stock and expose for sale
certain products and/or reduce the Required Beer Barrelage.
Para 9
provides that:
If at any
time . . . the Company shall serve any release notice . . . or for any reason
the Company shall be unable to enforce any of the purchasing obligations or any
obligation to stock and expose for sale any product or the Company or its
Nominees shall be required by law to vary its or their pricing structure as
regards lessees subject to an exclusive purchasing obligation or to vary . . .
THEN there shall be at the Company’s option an additional review of the Rent in
accordance with the provisions of the Third Schedule (and on the carrying out
of that review there) shall be disregarded for the purposes of that and any
subsequent Rent review to the intent that any reduction in rental value attributable
to any such provision shall be ignored.
That is
intended to have the premises treated as a free house in such circumstances.
Para 10 contains a forfeiture clause in elaborate but unsurprising terms.
The initial
rent under the lease of £17,500 pa was subject to upward review every five
years or earlier in the event of any release of the tie. The tie was partially
released in respect of certain drinks. The ensuing rent review led to an
increase in the rent agreed by Mr and Mrs Johns, the original tenants, on June
14 1991, bringing the annual rent to £18,500 pa. The rent was thereafter paid
at that rate.
There has
since the writ been a complete release of the tie following, as I understood
it, we were told a report of the Monopolies and Merger Commission. That has no
relevance to issues in this appeal.
Article 85 of
the Treaty of Rome provides as follows:
1. The
following shall be prohibited as incompatible with the common market: all
agreements between undertakings, decisions by associations of undertakings and
concerted practices which may affect trade between Member States and which have
as their object or effect the prevention, restriction or distortion of
competition within the common market, and in particular those which:
(a) directly or indirectly fix purchase or
selling prices or any other trading conditions;
(b) limit or control production, markets,
technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent
transaction with other trading parties, thereby placing them at a competitive
disadvantage;
(e) make the conclusion of contracts subject to
acceptance by the other parties of supplementary obligations which, by their
nature or according to commercial usage, have no connection with the subject of
such contracts.
2. Any
agreements or decisions prohibited pursuant to this Article shall be
automatically void.
3. The
provisions of paragraph 1 may, however, be declared inapplicable in the case
of:
— any
agreement or category of agreements between undertakings;
— any
decision or category of decisions by associations of undertakings;
— any
concerted practice or category of concerted practices;
which
contributes to improving the production or distribution of goods or to
promoting technical or economic progress, while allowing consumers a fair share
of the resulting benefit, and which does not:
(a) impose on the undertakings concerned
restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of
eliminating competition in respect of a substantial part of the products in
question.
At the time of
the making of the lease the landlords were aware of the possible impact of
article 85 of the tie provisions in the lease. It was uncertain whether the tie
provisions would be affected at all as this is a matter of judgment for the
commission. The plaintiffs assert that article 85 has no application to the
terms of the lease, but it has been conceded, both here and below, that there
is an arguable case, that it does apply.
The tie
provisions might fall within the exemptions declared by the commission under
article 85(3). A block exemption was set out in regulation 1984/83 made on June
22 1983.
Further, the
commission may issue specific or individual exemptions which may be
retrospective in effect to the date of the grant of the lease to which the
exemption relates: see article 9, para 1, of Council Regulation 17/62. It
appears from the judgment of Mr Barnes in the Mason case, to which I
have referred, that the plaintiffs made an application to the commission for an
individual exemption relating to Inntrepreneur leases such as the lease of the
Britannia in 1989. There has apparently been no formal decision upon that
application which was renewed on March 26 1991.
On December 1
1991 the defendants did not pay the rent due under the lease in the sum of
£5,353.44. Further sums due under the terms of the lease were not paid and on
September 11 1992, when the writ was issued, there was owing from the
defendants £11,467.71, a sum which, as I understand it, is reduced by certain
following payments.
The
plaintiffs’ claims in the action are:
(i) possession of the premises on the ground that
the lease has been forfeited for non-payment of rent;
(ii) the sums due for arrears of rent with
interest; and
(iii) mesne profits and interest thereon from the
date of the writ.
On February 4
1993 the plaintiffs applied by summons for interim payments under Ord 29 of the
Rules of the Supreme Court, r11(1)(c), 12(b) and 12(c) and
claimed:
(1) £19,617 said to be the then amount of rent
arrears plus interest to be paid forthwith; and
(2) thereafter £4,625 per quarter, the amount of
the contractual rent, (ie at the rate of £18,500 pa, including the increase in
respect of the partial release of the tie).
The
application was heard by the deputy judge on March 4 1993. The defendants did
not dispute the amount of rent, as reserved by the lease, which had not been
paid. Their defence served in December 1992 denied the plaintiffs right to
possession; set out in detail the tie provisions in the lease; and asserted
that by reason of them the lease contravened article 85(1). Such contravention
was not saved, it was said by EEC regulation 1984/83, because, among other reasons,
the plaintiffs had not accorded any special commercial or financial advantage
to the defendants within article 6(1) of the regulation. Therefore, the lease
was void and the plaintiffs were not entitled to enforce the provisions of it.
The case for the
defendants before the judge was that, since the lease was void, the defendants
held the premises under an implied periodic tenancy at a reasonable rent and
not the rent payable under the lease. The reasonable rent was no more than that
stated in the evidence of Mr Anthony Orchard [BSc FRICS ACIArb], an expert
valuer, who put the reasonable rent:
(i) at August 31 1989 in the sum of £8,500 free
from tie;
(ii) as at the partial release of tie on May 1
1990 an additional £500 only; and
(iii) before November 1 1992 at £4,000 pa after
that date at £7,000 pa.
That was the
date on which the whole of the tie was released by the plaintiffs.
The main case
for the plaintiffs was that, as a matter of law, the tie provisions in the
lease, if rendered void by article 85, were severable from the remaining
provisions in the lease which remained valid, including the covenant to pay
rent. The defendants therefore had no arguable defence to the claim for arrears
of rent and interest upon it.
It was not in
issue that the defendants had put forward an arguable case that the tie
provisions were void under article 85.
Judge
Humphries, in effect, although his order was differently worded, ordered the
defendant to pay by way of interim payment:
1. £5,372.92
for use and occupation of the premises for the period to the date of the writ,
that is at the rate of £10,000 pa; and
2. Sums in
respect of use and occupation of the premises during the pendency of the
proceedings at the rate of £833.33 per month (also at the rate of £10,000 pa)
on the first day of each month.
The reasons
given for making that order were:
(i) it was arguable that in law the tie
provisions in release were not severable so that the lease was void;
(ii) it was also arguable that the implied yearly
tenancy, arising from occupation and payment for occupation, is in law at a
reasonable rent and not the agreed rent; and
(iii) on the evidence the amount of that reasonable
rent, and therefore the level of mean profits, was not less than £10,000 pa.
By the notice
of appeal the plaintiffs sought an order of interim payments of £25,244 plus
interest and £4,625 per quarter (ie to say at the rate of £18,500 — original
rent and the increase for partial release of tie) during the pendency of the
action. The grounds of that claim were that the lease was not void but
enforceable in all its terms apart from, upon the disputed but assumed
application of article 85, the tie provisions and that, after forfeiture, a
figure for mesne profits much higher than £10,000 pa was proved on the
evidence. In this court, however, the only point argued has been that the sums
due for rent before service of the writ should be allowed at the rate set out
in the lease. For the period after the date of the writ it is acknowledged that
the judge was able on the evidence properly to set the figure for mesne profits
of £10,000 pa.
The
plaintiffs’ submissions, in summary, have been as follows:
(1) For the purposes of Ord 29, r11, the court
must be ‘satisfied’ that if the action proceeded to trial the plaintiffs would
obtain judgment for substantial damages and, if so satisfied, may order,
subject to para 2, payment of such amount as it thinks just. No point has been
taken as to the ability of the defendants to pay under para (2). That provision
was applicable to claims to mesne profits. As to the arrears of rent, the claim
is advanced under Ord 29, r12, which says, if:
. . . the
Court is satisfied —
. . .
(c) that, if the action proceeded to trial; the
plaintiff would obtain judgment against the defendant for a substantial sum of
money apart from any damages or costs,
The Court
may, if it thinks fit, and without prejudice to any contentions of the parties
as to the nature or character of the sum to be paid by the defendant, order the
defendant to make an interim payment of such amount as it thinks just . . .
The test to be
applied was considered in British & Commonwealth Holdings plc v Quadrex
Holdings Inc [1989] QB 842. In short it is submitted that the defendants
would have no defence in respect of the arrears of rent under Ord 14, or at
best the defendants could obtain conditional leave to delend and therefore the
court may properly order an interim payment of arrears of rent.
(2) As a matter of law on the undisputed evidence
the tie provisions are severable from the remainder of the lease. This court
was invited to adopt the reasoning of Mr Barnes in the Mason case. The
assumed breach of article 85 required that the tie provisions in the first
schedule be treated as void together with clauses 6(8) and 6(9) which related
to partial or total release of the tie and a rent review consequent upon that
release. The covenant to pay rent at the original amount of £17,500 pa remained
valid.
(3) Those void provisions can be severed, so as
to leave the remainder of the lease enforceable between the parties, because
the appropriate test for severance is satisfied. That test as stated by Mr
Barnes in his judgment was as follows:
(i) to ascertain the total consideration given
for the grant of the lease;
(ii) to excise that part of the consideration which
is void under article 85, ie the tie provision;
(iii) to determine whether the remaining
consideration is sufficient to support the reciprocal obligations of the
landlord to the other party.
Support for
the correctness of that test was to be found in Alec Lobb (Garages) Ltd
v Total Oil (Great Britain) Ltd [1985] 1 WLR 173* and Chemidus Wavin
Ltd v Societe pour la Transformation et l’Exploitation des Resines
Industrielles SA [1978] 3 CMLR 514, both decisions of this court.
*Editor’s
note: Also reported at [1985] 1 EGLR 33.
Mr Merriman’s
answer to those contentions began with a complaint that the plaintiffs were not
entitled procedurally now to make such a case. The plaintiffs have not sought
summary judgment under Ord 14 or Ord 14A: they had not asserted that there was
no defence to the action. They had sought only an order for interim payments.
The defendants had disputed the plaintiffs’ right to any such payment. The
plaintiffs had satisfied the judge that there was jurisdiction to order such
payments and the quantum of any payments was then for the judge’s
discretion. The argument now advanced for the plaintiff was, in effect, that
there should be judgment for the arrears of rent. That change, of course,
should not be permitted. Further, if a summons for summary judgment had been
issued the issues raised could not be suitable for summary judgment. Reference
was made to Home & Overseas Insurance Co Ltd v Mentor Insurance
Co (UK) Ltd [1989] 1 Lloyd’s Rep 473, per Parker LJ p483 and Lloyd
LJ at pp486, 487. The present issues involve, said Mr Merriman, difficult
points of law, requiring extensive citation of authority and protracted
argument. Reference was also made to The Coral [1993] 1 Lloyd’s Rep 1† .
† Editor’s
note: Balli Trading Ltd v Afalona Shipping Co Ltd (The Coral).
The further
arguments put forward by Mr Merriman for the defendants were in summary as
follows:
(i) The plaintiffs’ claim to the contractual rent
is contrary to European Community Competition Law which regulates tied houses.
A far lesser sum for rent should be payable and on that basis the defendants
are not in arrears. According to the evidence of their expert, Mr Orchard, the
rent under the lease of £10,000 was in excess of the proper market rent for the
Britannia if free of tie.
(ii) It is not in issue that the defendants have
an arguable case that at trial the tie provisions will be held to be void.
Although
tied-house agreements are likely to distort competition contrary to article
85(1), they are, it was acknowledged, viewed favourably by the European
Commission and may be exempt from the effect of article 85 either under the
block exemptions for exclusive purchasing agreements: see regulation 1984/83 or
on an individual basis under article 85(3).
Nevertheless,
where a landlord imposes a beer tie on the tenant the landlord must provide to
the tenant a ‘special commercial or financial advantage’, which it is said was
defined by the European Commission as being a discounted rent by comparison
with rent charged for a public house free of tie. This special commercial or
financial advantage is the quid pro quo for the imposition of the beer
tie: see recitals 15 and 16 of Regulation 1984/83; and is important because the
tenant invariably pays a higher price for beer under a tied-house agreement.
(iii) The national court is required effectively to
protect the defendant’s rights under article 85, which has direct effect: see Amministrazione
delle Finanze dello Stato v Simmenthal SpA (No 2: 106/77) [1978] ECR
629. Effective protection should include a remedy for past breaches as well as
future breaches: reference was made to the judgment of Oliver LJ in Bourgoin
SA v Ministry of Agriculture, Fisheries and Food [1986] QB 716 at
p771B. Therefore, these defendants must be protected against the past claims to
arrears of rent by disregarding any rule of law which would fix their liability
by reference to the contractual rent.
(iv) In addition to the tie provisions in the
first schedule and clause 6(8) and (9), clause 4(1), the covenant to pay rent
and additional rent is, it is said, unenforceable because it does not afford
the defendants any special commercial or financial advantage; because it
constitutes a distortion of competition within the meaning of article 85(1);
and because it is ‘tainted’ with the illegality of the beer tie since the
validity of the beer tie is dependent and conditional upon special commercial
or financial advantage being granted to the tenant.
(v) Further, the entire lease is null and void in
English law, by reason of the voidness of the tie provisions, because:
(a) What has been excised (ie tie provisions and
the covenant to pay rent) are together the main consideration: see per Lord
Cross in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co
Pty [1975] AC 561, at p578; per Dillon LJ in Alec Lobb (Garages)
Ltd v Total Oil (Great Britain) Ltd [1985] 1 WLR 173 at p180; and
was the main purpose of the plaintiffs in granting the lease: see per Somervell
LJ in Bennett v Bennett [1952] 1 KB 249 at p254.
(b) Alternatively, the contract contained in the
lease has fundamentally changed in its character so as not to be the sort of
contract that the parties intended to enter into at all: see per Buckley
LJ in Chemidus Wavin Ltd v Societe pour la Transformation et l’
Exploitation des Resines Industrielles SA [1978] 3 CMLR 514.
(vi) If the lease is null and void then, it was
said, an implied tenancy arises by virtue of use and occupation and the payment
of rent. Alternatively, the lease would continue with the market rent fixed as
at the date of the lease substituted it. By reason of public policy it would be
wrong to strike down the lease as contrary to Community law and for the law
then to imply an agreement which, for the past, has identical effects by
implying an agreement at the rate fixed by the lease. The defendants should not
be made to pay that excessively high rent under the implied tenancy for a
period of time when, it is said, the defendants were subject to the tie
provisions. The plaintiffs should be able to recover rent only at the level
permitted by Community law, ie a discounted rent with allowance for the special
commercial or financial advantage, otherwise no effective remedy is provided
for the breach of article 85.
Conclusion
For my part, I
would allow this appeal for the reasons which follow. I would vary the judge’s
order by directing that an interim payment be made in the sum of £11,467.71 as
a sum for which, if the action proceeds to trial, the plaintiffs will obtain
judgment in respect of their claim to arrears of rent down to the date of the
writ. We were given that sum by Mr Richard Field QC and I understand it to be
undisputed as to the amount. If I am wrong about that it will be necessary to
hear counsel in order to determine the correct sum. The objection based upon
procedural grounds has, in my judgment, no substance. The plaintiffs were
entitled to apply for an order for interim payments. In order to succeed it was
necessary, as explained in British & Commonwealth Holdings plc v Quadrex
Holdings Inc [1989] QB 842, for the plaintiffs to show, on the claim to
arrears of rent, that they would obtain judgment if the action proceeded to
trial, or that the defendants would obtain at best conditional leave to defend.
The argument addressed to the deputy judge was that there was no defence to
that part of the claim. The judge rejected that argument and held it was
arguable that the claim to arrears of rent could not exceed rent at the alleged
market value. If the judge was wrong to reject the argument his assessment of
the amount of the order was based on misdirection in law and this court can set
aside the order and reassess the quantum. The fact that there was no
claim to summary judgment is, in my view, no bar to this appeal. Further, the
issues argued seem to me to be suitable for decision on an appeal under Ord 29.
The point, if I am right, is neither excessively elaborate nor does it call for
overlong consideration of documents or authorities.
It is conceded
by the plaintiffs, although the fact will be disputed, that it is arguable that
the tie provisions in the lease may be shown at trial to be ‘automatically
void’ under article 85(2). Upon that supposition the automatic nullity under
article 85(2) applies:
. . . only to
those elements of the agreement which are subject to the prohibition, or to the
agreement as a whole if those elements do not appear severable from the
agreement itself. Consequently, all other contractual provisions which are not
affected by the prohibition, since they do not involve the application of the
Treaty, fall outside The Community law.
see Technique
Miniere v Maschinenbau Ulm GmbH [1966] CMLR 357 at p376.
Since the
automatic nullity under article 85(2) affects only those clauses which offend
article 85, the effect of that nullity upon the rest of the agreement is then a
matter for the domestic law which governs the particular contract: see Chemidus
Wavin Ltd v Societe pour la Transformation et l’Exploitation des Resines
Industrielles SA [1978] 3 CMLR 514 per Buckley LJ at p519 para 18,
and Goff LJ at p522 para 29.
The clauses
which offend article 85 were held by Mr Barnes in the Mason case to include the
tie provisions in the first schedule and clause 6(8) and (9) on the ground that
they depend upon the existence of the tie provisions.
Mr Field has
not disputed excision of clause 6(8) and (9), so that the rent covenant is
limited to the original rent of £17,500 pa. For my part, it is not clear to me
why clause 6(9) should be excised entirely as offending article 85. If the tie
provision is void then the parties could not have intended that a release
notice should have any effect: there is nothing to release. But clause 9 refers
also to an additional rent review:
If at any
time . . . the company shall be unable to enforce any of the purchasing
obligations or any obligations to stock, etcetera any product and on such rent
review those provisions of this lease . . . which shall have become
unenforceable shall be disregarded for the purpose of that rent review . . . to
the intent that any reduction in rental value attributable to any such
provision shall be ignored . . .
I can see an
argument that if the tie provisions were ‘automatically void’ from the making
of the agreement they may not be capable of being regarded as ‘having become
unenforceable’, but that would, I think, be a questionable construction. When
such a lease is made it is not known what decision will be made by the
commission as to the enforceability of the tie provisions, or when any decision
will be made. I see nothing improper or unfair in an agreement which
incorporates a tie provision which the landlord hopes and intends to be
enforceable and which provides for a review of the rent in the event that it
turns out to be unenforceable. On the facts of this case, however, it is not
necessary to consider further any continuing validity of clause 6(9).
It must be
noted that Mr Merriman disclaimed any contention that the assumed breach of
article 85 by the presence of the tie provisions causes the whole lease to be
unenforceable because containing an agreement to do or to cause the doing of a
criminal act or something contra bonos mores: see per Somervell
LJ in Bennett v Bennett [1952] 1 KB 249 at pp253-254.
As to the
covenant to pay rent, I can see no basis upon which in English law, giving full
effect to law of the community, that covenant can be held to be void.
The first
question is whether it is, as a separate term but considered in its context,
void under article 85(2) because it can be included within:
. . . all
agreements between undertakings, decisions by associations of undertakings and
concerted practices which may affect trade between Member States and which have
as their object or effect the provision, restriction or distortion of
competition within the common market,
and any of the
particular examples listed in paras (a) to (e).
Mr Merriman
asserts that there is an arguable case that the rent clause, ie the promise to
pay £17,500 pa, distorts competition because it is above the market rent and
denies to the defendants any special commercial or financial advantage in
return for the tie. If I understand the argument correctly, as finally
advanced, the distortion of competition is said to be worked by requiring the
tenants to pay more than they should be asked for rent and thus leaving the
tenants with less money available to them to trade with other producers or
competitors of the plaintiffs. In short, it was said that the level of rent put
upon the defendants extra costs and that distorted competition. This result was
said to come not merely from this one lease but from the wide-ranging practice
of the plaintiffs of setting the rent for their tied houses far too high. The
series or network of such agreements arguably distorts competition and,
moreover, competition within the common market.
Mr Merriman
further submitted that, if the rent clause, by reason of the excessive rent
required to be paid, is arguably shown to distort competition it was not
necessary to show further, in order to make out an arguable case for a breach
of article 85 by the rent clause, that that clause alone would distort
competition within the common market. It was conceded by the plaintiffs that
the tie provisions could arguably have that effect, and therefore it was
sufficient, to show an arguable case that the rent provision separately is void
under article 85, if that clause is shown arguably to distort competition in,
presumably, Minehead in Somerset or in such other places to which the suggested
network of agreements extends. For this proposition he relies upon the decision
of the Commission on Windsurfing International [1986] 1 ECR 643, in
particular at p644 and paras 95 to 97 inclusive.
For the
proposition that the setting of rent above the market value distorts
competition, Mr Merriman relied on the decision of the court in IMA AG v
Windsurfing International Inc [1984] 1 CMLR 1 and in particular para 93
there set out.
For my part, I
find this argument impossible of acceptance. The evidence of Mr Orchard, the
defendants’ surveyor, and there is no other relevant evidence, was directed to
three matters: to assess the market rent of the Britannia free from tie as at
May 31 1989, the date of occupation of the first tenants; to assess whether the
interim rent review of the additional £1,000 with effect from May 1 1990 was
based on market value; and to assess the proper level for mesne profits by
reference to market value. He stated his view of those matters. The market rent
on August 31 1989 was £8,500 and not the £17,500 which the tenant agreed to
pay; the rent review should have produced an increase of £500 not the £1,000
which the tenants agreed to pay; and, based on the profitability of the
business, a tenant would pay £4,000 a year before November 1 1992 and £7,000
after that date. There is no explanation as to why in 1991 these defendants
agreed to pay a premium of £45,000 or thereabouts for the lease at a rent of
£18,500. For the rest, the evidence of Mr Orchard was that the Britannia was
dependent upon local trade; and that the trading history with five tenants in
eight years showed that the business was difficult to make viable. There was
nothing to suggest that the rent charge has distorted or could distort
competition by the defendants with anyone else, or between the plaintiffs and
other suppliers for the custom of the defendants, either by reference to this
tenancy of the defendants or by reference to any other tenancies under which
the plaintiffs are the landlords. There is no reference to such other tenancies
in the evidence save to the number of other cases in which disputes have
arisen. Mr Widden, of the defendants’ solicitors, has said that these
proceedings are one of many in which the tenants have raised the defence that
the lease is void under article 85(1). He has said nothing about distortion of
competition by the existence of the covenant to pay rent at a level over market
value.
In my
judgment, therefore, this part of the defendants’ argument fails because it is
not supported by any evidence which could gave rise to an arguable case that
the covenant to pay rent is itself void under article 85(2) as having as
‘object or effect’ the provision restriction or distortion of competition. If
the expert view of Mr Orchard is approximately correct, the defendants agreed
to pay far too much as rent. They made less profit on their trading than they
would have made if the rent were lower. The high rent, however, did not by
itself, on the evidence before the court, distort competition in any way. Such
distortion of competition as there was was worked, while it was in existence,
by the tie provisions. As Buckley LJ said in Chemidus at p521:
I do not
think that this Article is aimed at bargains which turn out to be economically
adverse to the interests of either party to the contract. The Article is
concerned with agreements which have the object or effect of prevention
restriction or distortion of competition.
If that is
right, it is not necessary to consider or decide whether, if there was on the
evidence, arguably, distortion of competition from the covenant to pay rent, it
is correct in those circumstances that it need not be shown that the effect of
the covenant is arguably to distort competition also within the common market.
Further as to
the submissions based upon the assertion that, since exemption from article 85
in the case of a beer tie depends, so it is stated, on proof of a ‘special
commercial or financial advantage’ in the nature of a suitably reduced rent,
therefore, if that rent is not reduced below the market rent, the rent covenant
itself must be, or is more readily to be, regarded as void under article 85. I
do not accept, that an arguable case on the facts, that the rent reserved by
the lease was above the market rent at the date of the lease, provides by
itself an arguable case that the covenant for rent has either the object or
effect of a prevention restriction or distortion of competition. There is, as I
have said, no evidence to that effect.
The next
question is whether the assumed voidness of the tie provisions alone cause,
according to the law of this country, either the lease as a whole or the
covenant to pay rent to be void on the ground that the tie provisions cannot
properly be severed to leave the rest of the lease unimpaired.
Mr Merriman
relied in particular on the decision of this court in Chemidus and in Bennett
v Bennett. He acknowledged, I think, that, if the tie provisions are
excised, there would remain other considerations under the lease which could be
regarded as sufficient to support the reciprocal obligation of the landlords to
defendants. He submitted that that was not enough. In Chemidus, Buckley
LJ, at p520, said:
It seems to
me that, in applying Article 85 to an English contract, one may well have to
consider whether, after the excisions required by the Article of the Treaty
have been made from the contract, the contract could be said to fail for lack
of consideration or on any other ground, or whether the contract would be so
changed in its character as not to be the sort of contract that the parties
intended to enter into at all.
Further, in Bennett
v Bennett Somervell LJ held that agreement to be enforceable because the
main consideration, as he put it, moving from the wife was her promise not to
invoke the jurisdiction of the court and that promise was against public
policy.
So in this
case, said Mr Merriman, the main consideration for the purposes of the
plaintiff was the tie: and the excision of the tie arguably changes the
character of the whole agreement contained in the lease. That which is the main
purpose of the plaintiffs in this context is, he submitted, to be found not
merely from the terms of the contract itself but from the evidence to be given
at trial.
I cannot
accept this argument and, in my judgment, the tie provisions, upon the evidence
before the court, are clearly severable. In Alec Lobb Ltd v Total Oil
the question arose with reference to a petrol tie. As appears from the
headnote:
The first
plaintiff, a company whose only shareholders and directors were the second and
third plaintiffs, carried on the business of a garage and petrol filling
station. The defendants advanced moneys to the company and took mortgages on
its property as security. In 1969, while the company was in financial
difficulties and subject to a valid tie for some four years to accept petrol
supplies exclusively from the defendants, the plaintiffs, contrary to the
independent advice of their solicitors, entered into a transaction with the
defendants whereby the company granted a lease of the property to the
defendants for 51 years at a peppercorn rent plus a premium of £35,000,
representing the market value of the lease; and the defendants granted a
lease-back of the property to the second and third plaintiffs for 21 years at a
rent of £2,250 per annum, subject to a right to terminate the lease-back after
seven or fourteen years and subject to tie provisions for the defendants to
supply all the petrol for the business. With the plaintiffs’ concurrence the
defendants converted the property into a self-service filling station at the
cost of £19,000. By a writ issued in 1979, the plaintiffs claimed a declaration
that the transaction was void as an agreement in unreasonable restraint of
trade and, also, relief on equitable grounds. The deputy judge held that the
tie provisions were void as being an unreasonable restraint of trade but that
they were severable from the remainder of the transaction, and he dismissed the
plaintiffs’ claims.
Dillon LJ at
p180E said:
The appellants
support their case by reference to Amoco Australia Pty Ltd v Rocca
Bros Motor Engineering Co Pty Ltd [1975] AC 561, a petrol case where,
because of the restraints by way of tie to Amoco in the lease-back, the whole
of a lease/lease-back transaction was held to be void. The case is the less
helpful, however, in that Lord Cross of Chelsea did not find it necessary to
lay down any clear test for whether invalid covenants in restraint of trade
could be severed from the rest of the agreement or composite agreement in which
they appeared; he merely referred to several possible tests, and held that by
any of them the whole of the lease/lease-back arrangement in the Amoco case
was void.
In the Amoco
case, however, the invalid tie was the sole object or subject matter of the
contract, as was also the case in Vancouver Malt and Sake Brewing Co Ltd
v Vancouver Breweries Ltd [1934] AC 181. In such a case the whole
contract, or in the case of a lease/lease-back the whole of the composite
contract, must fall with the tie. That is not however the present case. I find
the most helpful test in the judgments of Somervell LJ in Bennett v Bennett
[1952] 1 KB 249 and Goodinson v Goodinson [1954] 2 QB 118. In the
former case, at p254, he posed the question whether the invalid promise was the
whole or main consideration for the agreement moving from the plaintiff, and,
finding that it was, he held the whole agreement void. In the latter case he
held, at pp123-124, that there was ample consideration to support the
agreement, apart from the void covenant, and so other covenants in the
agreement could be enforced. The judgment of Goff LJ in Chemidus Wavin Ltd
v Societe pour la transformation et l’Exploitation des Resines Industrielles
SA [1978] 3 CMLR 514, 523 approves a test to the same effect.
In the
present case, in July 1969 Total had no particular need to impose a petrol tie
on the property since they already held a valid tie with, as I have mentioned,
several years unexpired. The main object of the lease/lease-back transaction
was to refinance the company by the payment of the £35,000. The tie provisions
were, no doubt, in the eyes of Total an inevitable consequence but they were
not either the sole consideration for the tie or the sole object of the
transaction. The important consideration for Total was the grant of the 51-year
lease, on the value of which the amount of the premium had been calculated, and
with this went the agreement to pay rent under the lease-back which provided
Total with an essential financial return on its outlay. I have no doubt
therefore that in this case the tie provisions, if invalid would, as the deputy
judge held, be severable from the remaining provisions of the lease-back; these
remaining provisions and the lease itself remain valid.
The contract
is of course changed by the excision of the tie, and obviously Total would not
have granted a lease-back which did not contain such a tie. But I do not think
that is good enough to prevent severance and lead to the conclusion that the
whole of the lease and lease-back is void. A mortgage to a petrol company
containing a tie would, in my judgment, remain in all other respects valid
despite the invalidity of the tie as an unreasonable restraint of trade,
although the petrol company would not have contemplated making any advance on
mortgage to a dealer without a tie.
The judgments
of Dunn and Waller LJJ are not inconsistent with those statements of principle.
Upon the
evidence in this case this was, in my judgment, an ordinary lease of a public
house upon ordinary terms and containing a beer tie. The plaintiffs were both
brewers and landlords. They wanted to sell their beer and obtain a rent for the
public house. There was ample consideration to support the 20-year agreement
apart from the beer tie, in particular the promise to pay rent and to carry out
repairs. The fact, if it be the fact, that the plaintiffs would not have
contemplated granting a lease of the public house without the tie does not
cause the invalidity of the tie, so to change the nature of the agreement or so
to disappoint the main purposes of the plaintiffs that the tie provision can be
regarded in the law of this country as unseverable. Such a conclusion would, in
my judgment, be wrong and unjust upon any test for severance which has been
applied in the cases.
The term in
the lease in clause 6(1) which I have read, that the
affect the validity of the remaining provisions is, in my judgment, relevant to
this part of our decision. It could not, of course, prevail to save any
provision which is void for some independent and demonstrable reason such as
that the entire lease must be regarded as void because of criminal purpose.
Where, however, the argument on severance is based upon submissions as to the
main consideration of the lease, or the main purpose of the landlords in making
the lease, then the fact that the parties agreed, as I think they did, that
unenforceability of the tie provision should not avoid any other provision of
the lease may be regarded as decisive.
If that
conclusion is right the further points argued for the defendants by Mr Merriman
do not require to be decided, and in particular what, if any, implied tenancy
would arise in law by reason of the payment of the annual rent of £17,500 by
the defendants for use and occupation of the public house upon the assumption
that the lease was void; and whether the principle of effective protection by
the law of this country and the rights of the defendants under article 85,
which rights have direct effect, would require the court to set aside the rule
of our law which would otherwise fix the rent under the implied tenancy by reference
to the rent paid. Reference was made for these purposes to Simmenthal
106/77 [1978] ECR 629 and to Halsbury’s Laws vol 27, para 178.
For the
reasons which I have stated I would allow this appeal to the extent described
above.
GLIDEWELL and WAITE LJJ agreed and did not add anything.
Appeal
allowed.
