EEC Treaty — Tie provisions in public house lease — Application to set aside default judgment — Whether lease void for inclusion of tie provisions — Prospect of success in showing article 85 of Treaty applied to lease, but tie provisions are excisable
By a lease
dated May 5 1989 the defendants held a term of 20 years of a public house in
Crewkerne, Somerset. The lease contained tie provisions for the purchase of
specified beers and drinks, which were partially released in April 1990 and
fully released in November 1992. The rent was agreed in April 1990 at £16,000.
The plaintiffs brought proceedings claiming possession upon forfeiture of the
lease for arrears of rent. In appealing from a decision of the master setting
aside judgment in default of a defence, the plaintiffs submitted that at trial
they would contend that, contrary to the defendants’ defence, the lease was not
void by virtue of article 85 of the Treaty of Rome by reason of the tie
provisions, it was within the block exemption given by regulation 1984/83,
alternatively there was an application for an individual exemption for the
leases in this standard form under article 85(3) before the Commission of the
EEC; and that even if article 85(1) did apply, the tie provisions may be
excisable but the lease remained valid. However, if the lease were void, there
would exist an annual periodic tenancy by implication of law with the same
tenancy conditions as the actual lease including the forfeiture clause. For the
defendants it was argued that they had a real prospect of success at trial
because the lease was void by reason of article 85 of the Treaty of Rome, that
if the tie provisions alone are excisable the amount of the rent must be
replaced by a reasonable rent, but if the lease was void there existed an
implied annual tenancy with a reasonable rent of £10,500 pa.
judgment in default of a defence is whether the defendants can show a defence
which had a real prospect of success at trial; this they had in respect of the
following: that the tie provisions in the lease were void under article 85 of
the Treaty; because the lease was within article 85 of the Treaty, it is not
within the block exemption under article 85(3) and no individual exemption does
or necessarily will apply to the lease; and that the mesne profits should be at
a rate between £10,500 pa and £16,000 pa. The defendants had no real prospect
of success at trial of showing: the lease was void because what should be
excised from the lease is the tie provisions, and those only, leaving the
remainder of the lease, including the amount of the agreed rent standing and
enforceable between the parties; the rent of any implied annual tenancy would
be a reasonable rent because such a tenancy would be at the same rent as
actually agreed. Although the defendants had a real prospect of succeeding in
their defence to a trade debt, on the basis that it was owed to Courage Ltd and
not the plaintiff, in the exercise of the court’s discretion judgment in
relation to that debt was not set aside.
The following
cases are referred to in this report.
Alpine
Bulk Transport Co Inc v Saudi Eagle Shipping Co
Inc [1986] 2 Lloyd’s Rep 221, CA
Amoco
Australia Pty v Rocca Bros Motor Engineering Co
Pty [1975] AC 561; [1975] 2 WLR 779; [1975] 1 All ER 968, PC
Attwood v Lamont [1920] 3 KB 571
Bennett v Bennett [1952] 1 KB 249; [1952] 1 All ER 413; [1952] 1 TLR
400, CA
Chemidus
Wavin Ltd v Societe pour la Transformation et
l’Exploitation des Resines Industrielles SA [1978] 3 CMLR 514; [1977] 5 WWR
155, Saskatchewan
Evans v Bartlam [1937] AC 473; [1937] 2 All ER 654
Kelly v Kosuga (1959) 79 SCt 429
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
Mason v Provident Clothing & Supply Co [1913] AC 724
Prudential
Assurance Co Ltd v London Residuary Body
[1992] 2 AC 386; [1992] 3 WLR 279; [1992] 3 All ER 504; [1992] 2 EGLR 56;
[1992] 36 EG 129, HL
Ruben
Martinez Villena, The [1987] 2 Lloyd’s Rep 621
Technique
Miniere v Maschinenbau Ulm GmbH [1966] CMLR
357; 4 CML Rev 197, EC
This was an
appeal from the order of Master Turner given on December 17 1992 whereby he set
aside judgment entered in default of a defence by the plaintiff, Inntrepreneur
Estates Ltd, in a claim for possession and arrears of rent against the
defendants, Mr and Mrs Mason.
Richard Field
QC and Nicholas Dowding (instructed by Masons) appeared for the plaintiff;
Nicholas Merriman QC and Mark Brealey (instructed by Charles Russell)
represented the defendants.
Giving
judgment, MR MICHAEL BARNES QC said: This is an appeal from a decision
of Master Turner given on December 17 1992. The master set aside a judgment
which had been entered in default of defence on July 8 1992. He did so on terms
that the defendants paid the sum of £541 per month for their continuing use and
occupation of the premises, which are the subject-matter of the action.
The background
to the matter is as follows. By a lease of May 5 1989 Ushers Brewery Ltd let to
John Lindsay, Jean Lindsay and Christopher Lindsay premises known as the Castle
Inn, Crewkerne, Somerset. The premises are a public house on the outskirts of
Crewkerne. They contain a bar and other accommodation on the ground floor and
some residential accommodation on an upper floor. The lease was granted for 20
years from January 17 1989. The rent agreed was £15,000 pa and there was
provision for rent reviews at five-yearly intervals throughout the term. By
clause 4(34), of the lease, the tenants covenanted to observe the provisions
contained in the first and second schedules. The first schedule to the lease
contains an obligation on the tenants to purchase specified beers and other
drinks and products from the landlord or from a nominee of the landlord and not
from anybody else. It is therefore what is usually called, in the context of lettings
of pubs, a tie and created what is sometimes called a tied house.
Clause 6(8) of
the lease provided that the landlords could release the tie either wholly or in
part by serving notice. Clause 6(9) of the lease provided that if such a notice
were served then there should be a rent review of the rent. That rent review
would operate in addition to the regular five-yearly rent reviews. Clause 10 of
the lease contained a forfeiture clause or right of re-entry, which is in
ordinary terms. Clause 4(4) of the lease provided that the tenants should pay
interest on any sums due from them under the lease, but unpaid at a rate of 4%
above the National Westminster Bank base rate for the time being.
On October 23
1990 the lease was assigned to the present defendants, Mr and Mrs Mason. They
paid a premium of £37,000 in consideration of the assignment of the lease to
them. They therefore took over the lease and, of course, the business of the
public house. The reversion expectant upon the lease is currently vested in the
plaintiffs.
In April 1990
the tie provisions were partially released. In November 1992 the tie provisions
were fully released. The April 1990 partial release triggered off a rent review
and that was in due course agreed in the sum of an addition of £1,000 a year to
the rent so that the rent became £16,000 pa, not £15,000. A memorandum was
signed by the parties agreeing this matter on September 3 1991.
The 20-year
lease granted is a form of what is called an ‘Inntrepreneur lease’. It is a
standard form which was used by the landlords at the time of its grant. From
about October 1991 the defendants fell into arrears with the rent. The
plaintiffs in reliance upon that forfeited the lease. They did so by issuing a
writ on June 2 1992. In that writ they claimed four elements of relief. They
claimed an order for possession of the premises on the basis that the lease had
been determined by forfeiture. They claimed the sum of £12,314.25 as the rent,
which was due and unpaid together with interest on it. They claimed the sum of
£11,491.09, which was a trade debt and interest upon that. A trade debt means
an amount due for beers and other products supplied to the defendants and not
paid for. Fourth, they claimed mesne profits running from June 24 1992.
I am told that
on the first day of the hearing of this appeal before me, that is March 9 1993,
there was a total of £13,837.70 of rent due including interest, a sum of
£12,023.26 as the trade debt due and a sum of £12,179.02 as mesne profits due.
That assessment of mesne profits was at the rate which the plaintiffs contend
is correct, namely £16,000 pa. The total of that is £38,039.98.
I think it is
useful before coming to the issues in the case to summarise the two cases which
have been put forward. The plaintiff’s case is, of course, in support of the
proposition that the appeal from Master Turner should succeed and that the
judgment in default as entered should stand. They claim, as I have indicated,
forfeiture, ie possession on the grounds of forfeiture, they claim arrears of
rent, they claim a trade debt and they claim mesne profits.
They recognise
that one of the issues which arises or may arise in this case is the impact of
article 85 of the Treaty of Rome, the Treaty setting up what is usually called
the common market to which eventually this country became a party. I will have
to come back in detail to the terms of this article, but in general terms
article 85 para 1 prohibits certain agreements which restrict competition.
Article 85(3) provides for certain exceptions or exemptions to that
prohibition. Those exemptions are to be declared by the Commission of the
communities.
There exists a
block exemption which is contained in regulation 1984/83. In addition to block
exemptions the Commission may issue specific or individual exemptions. An
exemption so issued may be retrospective to the date of the grant of the leases
to which it may apply.
At trial of
this action, if it goes to trial, the plaintiffs will contend that the lease in
this case is not within the prohibition in article 85(1). They will further
contend that, if it is, then it falls within the block exemption. However, they
recognise that issues arise on these two points and they concede for the
purposes of this present interlocutory appeal before me that the defendants
have a real prospect of success in asserting the contrary to the plaintiffs’
case on those two points.
There has been
an application made on behalf of the plaintiffs for an individual exemption
relating to their inntrepreneur leases, including the lease of the premises at
Crewkerne. As yet there has been no formal decision of the Commission on that
application. However, the plaintiffs say that it is so likely that an exemption
will be given that the defendants have no real prospect of success in being
able to show that they can place reliance on article 85 as a whole.
The plaintiffs
go on to say that, even if article 85 does apply, all that it does is to render
void the tie provisions in the lease. They say that the remainder of the lease,
including the obligation to pay rent, may be severed off from the part void and
that the remainder of the lease remains. The plaintiffs go on to say that even
if the correct analysis is that the whole lease is void by reason of article 85
then there arose in this case an annual periodic tenancy by implication of law
and they say that that tenancy contains the same terms as the actual lease
granted so far as those terms are applicable to an annual tenancy, and they say
that those terms would include the amount of rent agreed and the forfeiture
clause.
The plaintiffs
contend that there is no defence to the trade debt claim and they say that
mesne profits are due from June 24 1992 at the rate of £16,000 pa, which is the
rate at which rent was payable under the lease at the date at which it came to
an end.
The
defendant’s case in summary is as follows. They, of course, accept the
concessions made as to article 85, para 1, and the block exemption for the
purposes of this appeal. They say that unless and until the Commission issue a
specific formal exemption under article 85, para 3, this court, as a national
and domestic court, must proceed on the basis that article 85, para 1, applies.
As to
severance, they contend that the whole lease falls that there cannot be any
severance. However, they say that if there is to be severance then what is to
be excised from the lease as void is not just the tie provisions but also the
amount of the rent. They say that in those circumstances the amount of the rent
must be replaced by a reasonable rent, which they say is the same as a market
rent and they contend that that is at a rate of £10,500 pa or of that order.
As to the
possibility of an implied annual periodic tenancy, they say that if that arises
the proper implication is that the rent payable under it is not the rent agreed
under the 20-year lease, but the market rent and that, as I have indicated,
they say is some £10,500 pa. They continue to say that mesne profits, if
payable, are payable only at the same rate, namely, £10,500 pa. They have a
short defence to the trade debt claim, namely that on a correct analysis of the
lease and what has actually happened any sums due as a trade debt are payable
not to the plaintiffs but rather to the company, Courage, which, as the nominee
of the plaintiffs, supplied the actual beer and other products.
In the light
of those contentions which I have summarised, the plaintiffs say that the
defendants have no real prospect of success on any of the defences which they
raise. The plaintiffs say that in those circumstances the default judgment
which they regularly obtained should stand.
The defendants
say that they have a real prospect of success at trial, if the matter goes to
trial, in relation to the claims for possession, the claim for rent, the claim
for the trade debt and the quantum of any claim for mesne profits. They
say that in those circumstances the decision of the master should be upheld and
the default judgment should be set aside.
I have been
told, and it appears to some extent from the affidavit evidence, that there is
a degree of other litigation between other parties proceeding in the courts
where the same or very similar points to those in issue in these proceedings
have arisen. I must bear that in mind so far as I have a discretion in the
order I make in this case. The defendants say, reasonably, that it might appear
hard on them if they are prevented from taking in this litigation points which
other parties will be able to take in other similar litigation. However, it
seems to me that primarily I must have regard to the facts of this particular
case and to what has happened in this case and to the arguments which have been
presented to me in this particular case.
In the light
of what I have summarised it appears to me that there are six issues or areas
of dispute which I must consider. The first is the correct approach to the
question of whether a judgment obtained regularly in default of some procedural
step should be set aside. The second is the impact and effect of article 85 of
the Treaty of Rome. The third is the whole question of severance if article 85
applies. The fourth is the matter of an implied annual tenancy and in
particular what rent is payable under such an implied tenancy. The fifth is the
trade debt claim and the sixth and last matter is the amount of mesne profits.
I intend to approach the matters under those headings and in the order which I
have mentioned.
Issue (1)
The first
matter therefore is the correct approach to apply. I have been referred to the
decision of the Court of Appeal in 1986 in Alpine Bulk Transport Co Inc
v Saudi Eagle Shipping Co Inc [1986] 2 Lloyd’s Rep 221. That was a case
in which the charterers of a vessel sued for damages for breach of a contract
to load the vessel. The writ was served with leave outside the jurisdiction and
judgment was signed in default of notice of intention to defend. The defendants
in that action sought to have that judgment set aside. Their defence was that
the wrong party had been sued.
The judgment
of the Court of Appeal, consisting of O’Connor LJ and Sir Roger Ormrod, was
delivered by Sir Roger Ormrod. He considered the general principles which
should apply to the exercise of its discretion by a court when there was an
application to set aside a judgment obtained in default. He considered in
particular the guidance obtained from the decision of the House of Lords in Evans
v Bartlam in 1937. At p223 Sir Roger Ormrod said as follows:
. . .
following ‘general indications to help the Court in exercising the discretion’ .
. . can be extracted from the speeches in Evans v Bartlam [1937]
AC 473, bearing in mind that ‘in matters of discretion no one case can be
authority for another’.
He then set
out the following principles:
(i) a judgment signed in default is a regular
judgment from which, subject to (ii) below, the plaintiff derives rights of
property.
(ii) the Rules of Court give to the Judge a
discretionary power to set aside the default judgment which is in terms ‘unconditional’
and the court should not ‘lay down rigid rules which deprive it of
jurisdiction’
(iii) the purpose . . . of this discretionary power
is to avoid the injustice which might be caused if judgment followed
automatically on default;
(iv) the primary consideration is whether the
defendant ‘has merits to which the Court should pay heed’ (Per Lord
Wright at p489), not as a rule of law but as a matter of common sense, since
there is no point in setting aside a judgment if the defendant has no defence
and if he has shown ‘merits’ the . . . Court will not, prima facie,
desire to let a judgment pass on which there has been no proper adjudication .
. .
(v) Again as a matter of common sense, though not
making it a condition precedent, the Court will take into account the
explanation as to how it came about that the defendant —
. . . found
himself bound by a judgment regularly obtained to which he could have set up
some serious defence.
Sir Roger
Ormrod continued:
In applying
these ‘general indications’ it is important in our judgment to be clear what
the ‘primary consideration’ really means. In the course of his argument, Mr
Clarke QC used the phrase ‘an arguable case’ and it, or an equivalent, occurs
in some of the reported cases (eg Burns v Kendel, [1977] 1 Lloyd’s
Rep 554 and Vann v Awford). This phrase is commonly used in
relation to RSC, 0 14, to indicate the standard to be met by a defendant who is
seeking leave to defend. If it is used in the same sense in relation to setting
aside a default judgment, it does not accord, in our judgment, with the
standard indicated by each of their Lordships in Evans v Bartlam.
All of them clearly contemplated that a defendant who is asking the Court to
exercise its discretion in his favour should show that he has a defence which
has a real prospect of success. (In Evans v Bartlam there was an
obvious defence under the Gaming Act and in Vann v Awford a
reasonable prospect of reducing the quantum of the claim.) Indeed it would be surprising if the standard
required for obtaining leave to defend (which has only to displace the
plaintiff’s assertion that there is no defence) were the same as that required
to displace a regular judgment of the Court and with it the rights acquired by
the plaintiff. In our opinion, therefore, to arrive at a reasoned assessment of
the justice of the case the Court must form a provisional view of the probable
outcome if the judgment were to be set aside and the defence developed. The
‘arguable’ defence must carry some degree of conviction.
It seems to me
that what is to be drawn from that is that the test to be applied in cases of
the present sort is that a defendant who wishes to have a judgment regularly
obtained set aside should show that he has a defence or defences which have a
real prospect of success.
I have been
referred to the later decision of Hobhouse J in The Ruben Martinez Villena,
a decision in the Admiralty Court reported at [1987] 2 Lloyd’s Rep 621. In the
course of his judgment, Hobhouse J considered what Sir Roger Ormrod had said in
the Saudi Eagle. He cites a part of the passage which I have read from
the judgment of Sir Roger Ormrod and then he adds as follows:
If in that
passage he is [that is Sir Roger Ormrod] intending to say that the Court must
do its best to predict the outcome of the action if the judgment is set aside,
and should only set aside a judgment if it is satisfied that the outcome of the
action will, on a better than 50-50 chance, be a judgment in favour of the
defendants, then I consider that statement goes beyond the law as it has been
laid down in the authorities. As it is an obiter dictum it is not binding on me
and I am under no obligation to follow it; but I doubt whether Sir Roger Ormrod
was intending to say that. He was presented with a case in which the suggested
defences involved just simple questions of law; they were questions of
construction; he considered that they were unarguable and, therefore, there was
no reason for setting aside the judgment.
One
observation that Hobhouse J makes is that the judgment of the Court of Appeal
on the present point in the Saudi Eagle case was obiter. I find
that not easy to understand since it seems to me that what the Court of Appeal
were doing was, first, to lay down the test which they were to apply and then,
second, to apply that test to the circumstances before them. It seems to me
that in those circumstances the definition of the test is probably a part of
the ratio decidendi of the judgment.
Nor does it
seem to me that Sir Roger Ormrod was saying that in order for a defendant to
have a judgment set aside he has to show a better than 50/50 chance of his
prospect of succeeding at trial. Sir Roger Ormrod does not say that in terms
and I do not think that such a mathematical analysis is to be derived from the
phraseology which he actually used.
Finally, it
seems to me that if a court is to exercise its discretion in matters of this
sort it must, as Sir Roger Ormrod says, form a provisional view of the probable
outcome if the judgment is set aside. It is only by forming such a provisional
view on the material before it that the court can know whether there is a real
prospect of success on the part of the defendants on the basis of one or more
of the defences which they set up.
In those
circumstances, on the matter of the correct tests to apply I intend to proceed
on the following basis. Where matters come before the court under Ord 14, or in
the case of an application for an interim payment under Ord 29, it will
generally be appropriate to consider whether the defendant has some arguable
case. However, where the matter comes before the court on application to set
aside a judgment which has been regularly obtained in accordance with the
rules, then the defendant must show a defence which has a real prospect of
success. It seems to me that that is a higher standard and there is a higher
burden on a defendant in the latter type of case. I think the Court of Appeal
in Saudi Eagle intended to lay down that there should be that higher standard.
At any rate, it is the standard on the test which I apply.
Issue (2)
With that in
mind I come then to the further issues. The second issue is to consider the
impact and effect of article 85 of the Treaty of Rome. Article 85(1) provides
as follows:
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 . . .
It continues
to set out five categories of such matters which are particularly within the
prohibition of article 85. Para 2 of the article provides:
Any agreements
or decisions prohibited pursuant to the Article shall be automatically void.
Para 3
provides:
The provisions
of paragraph 1 may, however, be declared inapplicable in the case of: —
any agreement
or category of agreement between undertakings;
and certain
other matters:
. . . 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 undertaking the possibility of
eliminating competition in respect of a substantial part of the products in
question.
It is clear
that only the Commission has power to declare that article 85 para 1 is
inapplicable pursuant to those provisions of para 3 of the article. That
appears from article 9 para 1 of Council Regulation 17/62. That article and
that paragraph provide:
Subject to
review of its decision by the Court of Justice, the Commission shall have sole
power to declare Article 85(1) inapplicable pursuant to Article 85(3) of the
Treaty.
As I have
said, the Commission have issued on June 22 1983 a block exemption. The
procedure for seeking and obtaining specific exemptions under article 85 para 3
is contained in regulation 17/62. The procedure has three stages. First, under
article 4 an agreement which has been entered into may be notified to the
Commission.
The next stage
is that if the Commission is minded to issue an exemption they are required to
publish a summary of the notification to them to all interested third parties
inviting such third parties to submit any observations that they wish. That is
the effect of article 19.
The third
stage is that having received observations if made and having considered them
the Commission makes its decision. It is clear pursuant to article 6 that if
the decision is in favour of an exemption that exemption may be retrospective
to the date of the commencement of the agreement in question. In this case it
would be retrospective to the date of the grant of the lease in 1989.
The Commission
have issued guidelines to assist national courts in applying the provisions of
article 85. They are published in the official journal of the European
Communities of February 13 1993. Para 7 of those guidelines reads as follows:
However, the
Commission pursuant to Article 19 of Regulation 17 has sole power to exempt
certain types of agreement decisions and concerted practices from this
prohibition. The Commission may exercise this power in two ways. It may take a
decision exempting a specific agreement in an individual case; it may also
adopt regulations granting block exemptions for certain categories of
agreements, decisions or concerted practices where it is authorised to do so by
the Council in accordance with Article 87.
Para 14 is
under the general head ‘The Exercise of Powers by the Commission’. It states as
follows:
The
Commission intends in implementing its decision making powers to concentrate on
notifications, complaints and own initiative proceedings having particular
political, economic or legal significance for the community. Where these
features are absent in a particular case notifications will normally be dealt with
by means of comfort letter and complaints should, as a rule, be handled by
national courts or authorities.
In the present
case the Inntrepreneur leases were notified to the Commission in April 1989. An
exemption under article 85 para 3 was sought. The application for exemption was
renewed on March 26 1991.
There has
been, as yet, no formal decision of the Commission on this application.
However, the Commission has issued two letters — one of January 29 1993 and the
other of February 8 1993 — which are of some importance in this case. The first
letter is written to the secretary of Inntrepreneur Estates Ltd and is signed
by Mr Rocca, who is the director general of competition of the Commission. He
sets out certain undertakings received on behalf of the applicants, that is
Inntrepreneur Estates Ltd. He continues:
On that basis
I can therefore confirm that, at this stage of the procedure, I have come to
the conclusion that the conditions for an individual retrospective exemption
under Article 85(3) appear to be fulfilled. However, such an individual
exemption will be limited in time to 28th March 1998 (in view of the
undertakings given on 19th March 1991 to the Office of Fair Trading).
Thus, it will
be proposed to the Commission to initiate a procedure under Article 6 of
Regulation 17 in order for an exemption pursuant to Article 85(3) of the Treaty
to be made. In this respect, my services are preparing, in conformity with the
application of Article 19(3) of Regulation 17, the publication of a summary of
your notification in order to invite all interested third parties to submit
their observations to the Commission.
The second
letter is also from Mr Rocca and in it he states that he considers that the
tenancy agreements that have been and will be concluded according to the
notified standard tenancy agreements are agreements to which the only parties
are undertakings from one member state and that such agreements do not relate
to imports or to exports between member states. He continues:
Therefore the
Commission can, according to Article 4.2(1) juncto Article 6 of Regulation
17/62, take a decision pursuant to Article 85(3) retroactively, ie from the
date of the agreements.
In the light
of that the recently issued guidelines which I have mentioned give further
advice to national courts. Para 25(a) reads:
The national
court is required to respect the exemption decisions taken by the Commission.
Consequently, it must treat the agreement, decision or concerted practice at
issue as compatible with Community law and fully recognise its civil law
effects. In this respect mention should be made of comfort letters in which the
Commission services state that the conditions for applying Article 85(3) have
been met. The Commission considers that national courts may take account of
these letters as factual elements.
Para 26(b)
reads:
Agreements,
decisions and concerted practices which fall within the scope of application of
a block exemption regulation are automatically exempted from the prohibition
laid down in Article 85(1) without the need for a Commission decision or
comfort letter.
Para 27(c)
states:
Agreements,
decisions and concerted practices which are not covered by a block exemption
regulation and which have not been the subject of an individual exemption
decision or a comfort letter must, in the Commission’s view, be examined in the
following manner.
Then three
subsequent paragraphs set out what is, in the guidance of the Commission, an
examination in the following manner:
28. The
national court must first examine whether the procedural conditions necessary
for securing an exemption are fulfilled, notably whether the agreement,
decision or concerted practice has been duly notified in accordance with
Article 4(1) of Regulation No 17. Where no such notification has been made, and
subject to Article 4(2) of Regulation No 17, exemption under Article 85(3) is
ruled out, so that the national court may decide, pursuant to Article 85(2),
that the agreement, decision or concerted practice is void.
29. Where the
agreement, decision or concerted practice has been duly notified to the
Commission, the national court will assess the likelihood of an exemption being
granted in the case in question in the light of the relevant criteria developed
by the case law of the Court of Justice and the Court of First Instance and by
previous regulations and decisions of the Commission.
Para 30
contains the following sentence:
. . . On the
other hand, if it [the national court] takes the view that individual exemption
is possible, the national court should suspend the proceedings while awaiting
the Commission’s decision . . .
It is plain
that the guidance contemplates that there is a substantial difference between
the situation where a comfort letter has been issued and a situation where no
such letter has been issued. In this context the first matter which I have to
consider is whether the two letters which I have mentioned, and I think, in
particular, the first of those letters of January 29 1993, is a comfort letter
within the meaning of the guidance. It is not, as I understand it, stated
anywhere in the community legislation what precisely is a comfort letter nor
does the guidance state in explicit terms what a comfort letter amounts to.
However, it
seems to me that para 14 of the guidance which I have just read out gives
valuable assistance in deciding just what a comfort letter amounts to. The
substance of that paragraph is plainly that the Commission intends as a matter
of administrative practice that it will act in one of two ways. One way is that
it will make a formal decision when the proceedings in question have particular
political, economic or legal significance for the community. The other way in
which the Commission will act is when that criteria is not fulfilled and it
will then deal with the matter by means of a comfort letter. I understand that
the saving in time and administrative cost in dealing with the matter by way of
a comfort letter is that it avoids the necessity of
a formal decision.
It seems to me
plain in those circumstances that what in the present context is meant by a
comfort letter is a letter issued after the procedure in the regulations has
been gone through, that is, in particular, after the procedure of inviting
observations and considering those observations has been completed. It is only
then that the Commission will deal with the matter either by a formal decision
or by issuing a comfort letter.
In the present
case that stage has not been reached. The letter from Mr Rocca makes it clear
that at the time when he wrote that letter that was the next step in the
procedure which was then to be initiated. Consequently, it seems to me that the
letters in question do not constitute a comfort letter or comfort letters in
the sense in which that expression is used in the guidance to which I have
referred.
The next
question is how should a national court proceed in the absence of either a
formal decision or a comfort letter? The
answer must, I think, be in accordance with the general guidance given in paras
28, 29, and 30 of the document which I have read which in terms applies when
there has not been an exemption decision or a comfort letter. It seems to me
that in relation to that plainly the letters in question can and should be
taken into account, notwithstanding that they do not have the formal status of
comfort letters.
What appears
to be critical in terms of common sense and in terms of para 29 of the guidance
is the likelihood of an exemption being granted in the case in question. That
means that in these interlocutory proceedings I would be required to form some
estimate of the likelihood of an exemption actually emerging at the end of the
day either by way of a formal decision or by way of a formal comfort letter.
That is a very difficult thing to do since I do not know what observations are
going to be made by interested third parties. Nor do I have any very clear
analysis of the matters which will be fully taken into account or the weight
which will be given to them by the Commission when it reaches its ultimate
decision.
Some criticism
has been made of the defendants not indicating what their observations will be.
However, they have not had a great deal of time to do that since the receipt of
the letters which I have mentioned. Furthermore, they can do so by way of
formal observations or representations to the Commission. Also there may be
other interested third parties who will wish to make observations on the
matter. The exemption, as I understand it, is being sought not just in relation
to this lease but to the type of Inntrepreneur leases in a general sense.
It appears to
me that I have no real means of knowing what is the real likelihood of an
exemption being granted. Obviously the prospect of such an exemption being
granted is increased by virtue of what Mr Rocca wrote in January, but that is
plainly not conclusive of the matter. The test which I have to apply is whether
the defendants have a real prospect of showing at trial that there will not
then be a decision or comfort letter of the Commission applying article 85(3).
It seems to me on the material which I have and in the light of the difficulty
of making these prognostications that there is a real prospect that the
ultimate decision of the Commission will be against the application of article
85 para 3. Consequently I approach the matter on that basis.
There is one
further matter I should mention. It is not entirely easy to know what comfort
letters are or what letters amount to comfort letters. The plaintiffs assert
that the letters of January and February 1993 are comfort letters. If, contrary
to the view I have taken, they are comfort letters then they place a national
court in some difficulty. On the one side there is the consideration that
comfort letters are not a formal decision. They are differentiated from a
formal decision. Yet, as I have mentioned, it is only the Commission which can
issue a formal decision declaring pursuant to article 85(3) that the
prohibition in article 85(1) does not apply. It is not the function of national
courts to arrive at any conclusion on that matter.
On the other
hand, it is clear that comfort letters are intended in many ways to be
equivalent to a decision. Para 25(a) of the guidance in its last sentence says:
The
Commission considers that national courts may take account of these letters
[that is comfort letters] as factual elements.
It may be that
what is intended by that guidance is that national courts are without further
ado to treat comfort letters as being in their legal effect equivalent to a
formal decision. The defendants say that even if the letters are comfort
letters they are not good enough in the absence of a formal decision.
I have been
referred to a book by Bellamy & Child on Common Market Law of
Competition, 3rd ed, in relation to this matter. At p471 the authors say as
follows:
If, however,
the national court considers that Article 85(1) might apply, the ‘comfort
letter’ will usually be an indication that the Commission would, if specifically
requested, be prepared to issue an exemption under Article 85(3) which it would
still have jurisdiction to grant with retroactive effect to the date of
notification. It appears that the Commission may be prepared to do this. In
such circumstances it seems likely that the national court would strive to find
a means of upholding the validity of the agreement, particularly if the
contents of the agreement had been published in the Official Journal
before the comfort letter was issued and no complaint had been made at that
time by any of the parties in the subsequent national proceedings. The national
court cannot, however, grant exemption itself; only the Commission can take the
positive step of granting an exemption.
It does not
appear to be very clear from those observations and from what is written there
how exactly the national court is to strive and how it would succeed in finding
the means of upholding the validity of the agreement in the circumstances which
are postulated.
In any event,
I remind myself again that the test I have to apply in this case is whether the
defendants have a real prospect of succeeding in a defence which they raise. It
seems to me that even on the basis that the letters in question are comfort
letters there is a real argument as to the effect of such comfort letters in
community law which is, of course, applicable as part of the law of this
country. Consequently even on that basis I would hold that the defendants have
a real prospect of succeeding in their contentions under article 85.
A good deal of
the argument in this case is centred around article 85 of the Treaty of Rome. I
reach the following conclusions on that issue. First, the defendants have a
real prospect of success in showing that the lease in this case is within
article 85(1); that point is, for present purposes, conceded. Second, the
defendants have a real prospect of success in showing that the lease is not
within the block exemption issued by the Commission under article 85(3). That
matter is also conceded for present purposes. Third, I conclude that the
defendants have a real prospect of success in showing that no individual
exemption does or necessarily will apply to their lease. I reach that
conclusion on the basis that the letters issued are not comfort letters, but,
as I have just indicated, I would reach the same conclusion even were I wrong
on that point and the letters are properly to be regarded as comfort letters.
If this issue
relating to article 85 were the only issue in this case then I would without
hesitation set aside the judgment and allow the matters relating to that
article to be ventilated and properly and fully argued at trial. However, as I
have attempted to show in the summary of the issues between the parties, the
issue relating to article 85 and its application is very far from being the
only issue.
Issue (3)
I must come on
to what I have described as issue three: the matter of severance. Two initial
points appear from the authorities and are not in dispute. One is that on a
proper construction of article 85 a part of an agreement may be void and the
remainder may be valid. The second point is that it is for a national court to
decide whether and to what extent the remaining parts of an agreement can
remain after a part of it has become void, or has been declared void, and is to
be severed.
In the
decision of the court of justice of the communities Technique Miniere v Maschinenbau
Ulm GmbH [1966] CMLR 357 the following appears at p376:
The automatic
nullity in question [that is 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.
It follows
that I have to consider two questions. First, what has to be excised from the
lease as void under article 85? The
second question is whether the remainder of the lease can remain extant and
valid with the void part or parts severed upon it?
As to
excision, it seems to me that what article 85 prohibits, renders void and
requires to be excised is the tie provision. That provision is contained in the
first schedule to the lease and consequently those provisions in the first
schedule would have to be excised. I think also excision would be required of
clauses 6(8) and 6(9). Those are the provisions relating to a partial or total
release of the tie and a rent review consequent upon that release. Those
provisions depend upon the existence of the tie provisions and plainly fall
with the toll of the tie provisions.
It may be that
a close perusal of every line of the lease may indicate other minor and
consequential excisions, but they have not been mentioned and I do not think
they bear upon the main points I have to consider.
Mr Nicholas
Merriman QC, on behalf of the defendants, says that the excision should go
beyond the tie provisions and should extend to the amount of the rent. I do not
agree. The amount of the rent can stand as an obligation to pay rent of a
specified amount by quarterly payments in advance on the specified days in its
own right. It may be that the amount so determined at the beginning of the
lease was influenced by the existence of the tie provisions, but that is not
the correct test. It seems to me therefore that there is no reason to excise
the obligation to pay rent of the stipulated and agreed amount.
I come to the
second question under this issue. Can the tie provisions be severed off so as
to the leave the remainder of the lease in being and enforceable between the
parties?
A number of
formulations have appeared of the appropriate test for a court to apply in
considering whether there should be severance. The decision in Amoco
Australia Pty v Rocca Bros Motor Engineering Co Pty is a decision of
the Privy Council reported in [1975] AC 561 in relation to an appeal from the
High Court of Australia. At p578 Lord Cross, giving the decision of the Privy
Council, pointed out that various tests had been formulated in respect of this
matter and that they might not, in every case, lead to the same result. One
test is whether that which is unenforceable is part of the main purport and
substance of the clause in which it appears. That derived from Lord Moulton in Mason
v Provident Clothing & Supply Co [1913] AC 724. Another test, which
derived from Lord Sterndale in Attwood v Lamont [1920] 3 KB 571,
is whether the deletion alters entirely the scope and intent of the agreement.
A further test deriving from Denning LJ, as he was, in Bennett v Bennett
[1952] 1 KB 249, is whether the deletion of the covenant leaves the rest of
the deed a reasonable arrangement between the parties. A further test deriving
from an American case, Kelly v Kosuga (1959) 79 SCt 429, is
whether what is left constitutes an intelligible economic transaction in itself
even though it furnished the occasion for the unenforceable restraint.
Faced with
these tests I am fortunate in that there have been two comparatively recent
decisions of the Court of Appeal which consider the matter. The first of these
is a decision in Chemidus Wavin Ltd v Societe pour la Transformation
et 1’Exploitation des Resines Industrielles SA [1978] 3 CMLR 514. That case
concerned an agreement under which royalties were payable for a licence to use
certain patented commodities. It concerned the effect of article 85 and it
concerned also an application to set aside a judgment obtained in that case in
default of appearance.
At p520
Buckley LJ said as follows:
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.
At p522 Goff
LJ, at the end of his judgment, said as follows:
In the
present case, once one adopts the construction which my Lord has placed upon
clause 1(a) of the agreement, a construction with which I entirely agree, then
it seems to me that clause 4 is an independent promise supported by
consideration and wholly unaffected by the invalidity, or possible invalidity,
of other provisions in the agreement, and it seems to me to fall plainly within
the principle laid down by Salter J in Putsman v Taylor: ‘If a
promisee claims the enforcement of a promise, and the promise is a valid
promise and supported by consideration, the court will enforce the promise,
notwithstanding the fact that the promisor has made other promises, supported
by the same consideration, which are void, and has included the valid and
invalid promises in one document.
On the basis
of that it seems to me that the correct approach must be as follows. I should
first consider the total consideration given for the grant of the present lease.
I should then excise that consideration which is void under article 85, in this
case the tie provisions. Finally, I should ask myself whether the remaining
consideration is sufficient to support the reciprocal obligations of the
landlords, the other party.
That approach
to the matter is taken forward and reiterated by the Court of Appeal in Alec
Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd [1985] 1 WLR
173*. That was a case in which the plaintiffs originally mortgaged a
petrol-filling station to the defendants. The plaintiffs got into financial
difficulty and the arrangements were rearranged. The result of the
rearrangement was that the plaintiffs granted a 51-year lease to the defendants
at a premium of £35,000 and a nominal or peppercorn rent. The defendants
granted back a 21-year underlease, also at a peppercorn rent, and that
underlease contained tie provisions requiring the purchase of petrol and
similar products from the defendants.
*Editor’s
note: Also reported at [1985] 1 EGLR 33.
It was held
that the tie was void being in unreasonable restraint of trade. It was further
held that the remainder of the lease and the underlease could be severed from
the unenforceable tie provisions so that the remainder of the documents
remained enforceable between the parties. The test in Chemidus was
applied.
In the Alec
Lobb case at p180 Dillon LJ said as follows:
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 & 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 with the present case. I find the most helpful
test in the judgments of Somervell LJ in Bennett v Bennett . . .
and Goodinson v Goodinson at p254. In the former case, . . . he
posed the question whether the invalid promise was the whole or main consideration
for the agreement moving from the plaintiff, and, finding of it was, he held
the whole agreement void. In the latter case he held, . . . 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 the Chemidus case approves a test to the same effect.
At p188 Dunn
LJ said:
The
preponderance of these authorities seems to me to indicate that if valid
promises are supported by sufficient consideration, then the invalid promises
can be severed from the valid even though the consideration also supports the
invalid promises. On the other hand if the invalid promise is substantially the
whole or main consideration for the agreement then there will be no severance.
In this case
the consideration given by the tenants for the grant of the 20-year lease
comprised three matters. They obliged themselves to pay the rent throughout the
term. They obliged themselves by way of the other covenants in the lease, for
example, the covenant in clause 4(10) to keep the premises in repair, and they
obliged themselves to observe the tie provisions. As I have indicated, I think
it is correct to
Rome. So the question is whether the tie provisions are the whole or the main
consideration given for the right to exclusive possession of the premises for
20 years. In my view, tie provisions are plainly not the whole or the main
consideration so given. The remainder of the obligations, in particular the
obligation to pay rent, are an extremely important and substantial part of the
total consideration.
I should add
on this matter that it is made clear in the Alec Lobb judgment of Dillon
LJ that it does not matter whether the parties would have entered into the same
or a somewhat different agreement if they had known that the provisions to be
excised could not validly form a part of it.
Consequently
on this matter I conclude that the tie is severable and that the remainder of
the lease remains. I note that in some ways the arguments in this case are
somewhat unusual on this point. In most cases what one would expect is that a
party who finds itself in a less advantageous position by reason of the excision
of a particular part of a contract would be anxious to assert that the whole of
the contact goes. However, it appears in this case that the removal of the tie
provisions render the rental value of the premises somewhat greater than they
would be if the tie provisions remain. I doubt whether that matters very much
in the end since the test has to be applied as a matter of law irrespective of
who puts it forward, or puts forward particular assertions.
In deference
to the extremely valuable argument which Mr Merriman addressed to the court
there are a few other points which he mentioned and with which I must deal. He
relied to an extent on the decision of the Privy Council in Amoco Australia v
Rocca Bros, which I have mentioned. In that case the respondents let a
service station to Amoco for 15 years at the rent of £1 a year. Amoco underlet
back the service station to the respondents for 15 years less one day also at
£1 per year. However, that underlease contained a tie relating to the purchase
of petrol products. It was held in the Privy Council that the tie was in
unreasonable restraint of trade and that it was not severable, so that the
whole of the lease and the underlease became unenforceable between the parties.
It seems to me
that on the test which I derived from the English Court of Appeal cases and
have applied that result would be reached. The reason is that in the Amoco
case if the tie was excised then the obligations which remained were in
substance an obligation to pay a rent of only £1 and that consequently the
substantial consideration for the grant of the underlease was the tie, not the
rent which was purely nominal.
I note that
Lord Cross said that the conclusion which he reached would have been the same
whichever of the various tests which he mentioned was to be applied. He
regarded the tie as the heart and soul of the agreement between the parties. I
do not think, therefore, that there is anything in the Amoco case which
is inconsistent with the test which I adopt or the conclusion which I reach.
I was also
referred by Mr Merriman to the decision of the Court of Appeal in Bennett
v Bennett [1952] 1 KB 249, which is one of the cases referred to by
Dillon LJ in the Alec Lobb case as justifying the approach which he
adopted. That was a case in which a husband and wife agreed an amount for the
payment of maintenance by the husband to the wife. It was held that this did
not oust the jurisdiction of the divorce court itself to consider the matter
under an application for maintenance payment. I do not see anything in what
Somervell LJ said in that case which affects the conclusion which I have
reached.
Mr Merriman
pointed out in reliance upon what Lord Cross said in the Amoco case
that, over the years and in the authorities, a number of tests had emerged as
that appropriate to apply to the question of severance. However, it seems to me
clear as a result of the Chemidus and the Alec Lobb cases what
the test currently is, and that I think is the test which would be applied in
any trial in the present litigation.
Then Mr
Merriman referred me to the possibility of evidence being adduced at a trial of
this action if it were to proceed which might have a material effect on the
questions. He supported that by something said by Lord Cross in the Amoco case.
To do this point justice I must refer briefly to the procedural background in
the Amoco case. It started before the judge of first instance in
Australia. That judge held that the covenants were not in unreasonable
restraint of trade. It went on appeal to the full court and then to the High
Court of Australia. They held that the covenants were in unreasonable restraint
of trade. However, when the matter went back to the full court the argument
which there proceeded was on the basis that the underlease fell in toto, but
that the headlease remained in full force. It was held by the full court that
both leases were wholly unenforceable.
It was only in
the Privy Council that it was first argued that the tie could be severed from
the remainder of the underlease so that the remainder or balance of the
underlease remained.
At p577H of
the report Lord Cross dealt with that matter in the following way:
On its appeal
to the Board counsel for the appellant adopted a totally different approach
from that taken on its behalf before the Full Court, for he placed in the
forefront of his argument the contention that clause 3(h) of the
underlease (which was, he submitted, the only offending covenant) should be
treated as deleted and that the underlease shorn of that covenant should be
left standing. This change of front places their Lordships in a position of
some difficulty. The point that the covenants in the underlease could be
severed was never strictly speaking ‘abandoned’ by the appellant since it never
took it and the point was in a sense before the Full Court in the shape of the
subsidiary argument on behalf of the respondent. On the other hand it is not a pure
point of law such as their Lordships would normally allow to be taken before
them, even if it had not been taken below, since it depends on a finding of
fact which the Full Court has not made. It does not in the least follow that if
the Full Court had found it necessary to give a decision on the question of
severance it would have held on the evidence which was before it that the
deletion of clause 3(h) would have sufficed to make the remainder of the
underlease unobjectionable. It might well have held that not only clause 3(h)
but also clauses 3(g) and (i) or one or other of them would have
to be deleted and their Lordships who have not the evidence before them have no
means of reaching any conclusion of their own on the point. In the end counsel
for the appellant was constrained to admit that this was so; but he submitted
that even on the assumption that clauses 3(g), (h) and (i)
were all deleted the rest of the underlease should still be left standing.
Their Lordships have no hesitation in rejecting this submission.
It seems to me
that what Lord Cross was there saying was that evidence would have been needed
and might be very relevant to the issue of what exactly should be excised.
However, the question of whether the remainder would stand after the excision
is, as I understand it, what Lord Cross considered to be, and described as, a
pure point of law which does not need evidence. It does not seem to me, in this
case, that any evidence could materially assist either on the question of what
it is to be excised or on the question of whether the remainder of the lease
can remain after the severance of the excised parts.
Finally, in
dealing with Mr Merriman’s points I come to what has been described as his
alternative submission. That submission is that the rent, as an amount, is
tainted by the tie and if there is to be excision then the amount of the rent
should also be deleted. He says that in that event the amount of the rent
should be replaced by an amount determined by the court as a reasonable or
market rent. It seems to me that there are two major difficulties in that
alternative submission. The first is that, as I have already indicated, in my
opinion the rent can and should remain and does not need to be excised.
The second
difficulty is that I have been referred to no authority in which the court has
decided to uphold the remainder of a document after an excision, but in order
to do so has in some way rewritten the remainder of the document which is to
remain in force. It seems to me that no such jurisdiction exists and that the
function of the court is simply to ask whether the remainder of the document as
written and as agreed can stand as enforceable between the parties and not to
change it or amend it in any way. Consequently, I do not think that Mr
Merriman’s submission is one which has any real prospect of success.
I reach the
following conclusions on the issue of severance. First,
6(9) must be excised from the lease. Second, it seems to me, that the remainder
of the lease including the amount of the agreed rent remains enforceable
between the parties. It seems to me that the defendants have no real prospect
of showing either that the whole lease falls or that the lease remains, but
with a reasonable market rent substituted for the agreed rent.
There is one
short footnote to mention on this issue. The judgment for the arrears of rent
is on the basis that from April 1990 the rent was increased from £15,000 to
£16,000 pa following the rent review consequent upon the partial release of the
tie. If the tie provisions are excised and the provisions for release and consequent
rent review are also excised it seems to me that the rent as agreed between the
parties must be taken to remain the initial rent of £15,000 pa, at any rate up
until the regular rent review after five years. It seems to me therefore that
the judgment for the arrears of rent should be on the basis of £15,000 pa being
payable throughout that period.
Issue (4)
I come to
issue four — the matter of an implied tenancy. Properly speaking this arises
only if there is no severance. If there is severance then, of course, the lease
remains with the excised parts severed from it. I think it is a general
proposition of law that if a person gives exclusive possession of land to
somebody else and that other person pays rent for it on an annual basis, which
is accepted, then the inference is, at any rate in the generality of cases,
that there arises by implication of law an annual periodic tenancy as between
the two parties. It is in the present case common ground that if the lease as a
whole is void then there is some implied annual periodic tenancy which arises
by implication of law. The plaintiffs say that the rent under that tenancy is
the contractually agreed rent. The defendants say that the proper implication
is that there should be a reasonable or market rent. It seems to me that on
this issue the plaintiffs are plainly correct. I have been referred to no
authority in which the implication is anything except the rent at the rate
actually paid or in some way agreed to be paid.
The
implication of a periodic tenancy in these circumstances depends on either the
occupier paying rent at a given rate or the occupier having agreed in some
shape or form to pay rent at a given rate. In the latter category the agreement
may fall into a number of instances. One is a tenant holding over at the end of
the lease. In such a case there is a rent agreed under the expired lease.
Another instance is a tenant allowed into possession under an agreement for
lease in advance of the grant of the actual lease. In that case there is a rent
agreed under the terms of the agreement for lease. A final instance is where a
tenant has entered under a void lease. In that case there is, of course, a rent
agreed as a term of the lease which is void.
Mr Merriman
says that this last instance comprises only cases where the lease is void
because of some procedural defect. An example would be a lease which was void
to pass any estate at law because it was granted for a term exceeding three
years, but there was not present the deed which is required by the Law of
Property Act 1925. However, I do not think that instances of the last type
which I mentioned are confined to procedural defects. Mention was made of the
recent decision of the House of Lords in Prudential Assurance Co Ltd v London
Residuary Body [1992] 3 All ER 504*. In that case as long ago as 1930 a
lease had been granted of a strip of land; the lease was to last until the land
was required for road-widening purposes. That lease was held void for lack of a
certain duration. However, the tenant had entered, enjoyed the premises and had
paid the agreed rent of £30 pa for many years. It was held that there arose an
implied annual periodic tenancy at a rent of £30 pa. The defect in that case,
as it seems to me, was in no sense procedural. The defect went to the very
heart of the requirements for the existence of the lease. It is a matter of
substance not of procedure. As Lord Templeman pointed out, that substantive
requirement had been part of English law for centuries.
*Editor’s
note: Also reported at [1992] 2 EGLR 56.
Consequently
on this question I conclude that, if any periodic tenancy arises in this case
because the whole of the actually agreed lease was void, then it would be a
periodic tenancy at the agreed rate of £15,000 pa, and since that rent was by
agreement, for whatever reason, increased to £16,000 pa, I think the proper
implication is that from the date of that increase the rent would be £16,000
pa.
It is common
ground that such an implied tenancy would include a forfeiture clause and upon
this basis it seems to me that if such an implied tenancy is the proper
ultimate analysis of the situation there is still no real prospect of defence
either to the claim to possession or the claim for arrears of rent.
Issue (5)
I come to
issue five, the matter of the trade debt, which stands by itself. This is a sum
claimed for beers and other products supplied to the defendants. It is agreed
that the products were supplied and it is not disputed that the sums claimed as
the price or the balance of the price has not been paid.
The
obligations relating to this matter are contained in the first and second
schedules of the lease. In para 14 of the first schedule there is an obligation
on the part of the landlord which, so far as relevant, is as follows:
The company
[that is the landlord] shall during the term of the lease use its best
endeavours to supply the lessee with or procure the supply to the lessee by its
nominees at the prices shown in the company’s current price list of such
quantities of specified beers and specified non-beer drinks as he may require
and be ready and able to pay for . . .
In para 8(1)
of the second schedule there is contained the obligation of the tenant to pay.
It states, so far as is relevant:
To pay and
settle up on demand with the company or its nominees as defined in the first
schedule for all goods and services supplied by them at the prices shown in the
company’s or the nominees’ current price list . . .
The
defendants’ defence is simple. They say that the actual supply to them was not
by the landlord, but was by the firm of Courage, which was the landlord’s
nominee. Consequently, they say any sum that is due is due to Courage not to
the plaintiffs.
This defence
was first raised at the hearing of this appeal before me. It owes much, I
think, to the ingenuity of counsel for the defendants in putting it forward. As
he accepts, it is not a point which, on the face of it, is one which is likely
to attract any court. A short answer to the point would, if correct, be that
where the goods are supplied by a nominee of the plaintiffs, that nominee acts
as the agent of the plaintiffs for the supply. In those circumstances the
payment would have to be to the plaintiffs as the principal.
However, Mr
Merriman says that it is not correct to regard this as an agency situation or,
at any rate, he says that there is a good argument that it is not an agency
situation. He points out that the nominee is not described in the lease as an
agent and he puts the matter in more general terms. If A has an obligation to C
to procure that B supplies some product to C at a price then, he says, the
natural inference is that B does so not as the agent for A, but in his own
right as a principal.
It would be
tempting to deal with a point which, on the face of it, is so unattractive by
holding that on the basis of such an argument of agency the point has no real
prospect of success. However, I think the matter must be looked as one of cold
law and it does seem to me that there is a real prospect of the point raised by
Mr Merriman succeeding as a point of cold and strict law.
That is not
the end of the matter on this issue. A defendant who comes before the court and
seeks to have set aside a judgment regularly obtained under the rules must show
two things. First, he must show a real prospect of success in some defence,
but, second, he must also show that the discretion which the court has should
be exercised in his favour. It is clear from, for example, the Saudi Eagle
case that the fact that the decision not to give notice of intention to defend
was deliberately taken, as was the fact in that case, is relevant to the
ultimate discretion of the court on an application to set aside
relation to a claim it would follow that the court should exercise its
discretion so as to set aside a judgment and allow that point to be fully
developed and argued at trial.
However, it
seems to me that in this case to set aside the trade debt judgment would in the
end be purposeless. It would be possible for Courage to bring proceedings for
the debt or get themselves joined into the current proceedings in some way, and
the defendants would then have no defence to one or other of the two claims for
the money brought against them. Furthermore, the plaintiffs have undertaken to
indemnify the defendants against any claim which Courage may in the future
assert in respect of money paid to the plaintiffs under their present trade
debt claim. It seems to me that in those circumstances, in the end, the
defendants could achieve nothing if the judgment was set aside. It seems to me
further that in so far as there is any theoretical risk of detriment to the
defendants under the present judgment, ie the theoretical possibility that they
could be sued again by Courage, that possibility of detriment is met by the
undertaking offered which I have just described.
In those
circumstances this does seem to me one of those exceptional cases in which the
court should refuse to exercise its discretion to set aside a judgment, even
though the conclusion is reached that there is some point albeit a technical
point, which has some real prospect of a success. The reason to do so is that,
as I have indicated, it would, in my view, be in the end purposeless to set
aside that aspect of the judgment. Consequently, I conclude that that judgment
in respect of the trade debt should not be set aside.
Issue (6)
The final
matter or issue is that of mesne profits. Where a tenant of property holds over
and remains in possession after the end of the lease he does so as a trespasser
and without any right or entitlement as against his landlord. In those
circumstances he must pay damages for his trespass. That particular aspect of
damages for trespass is usually called mesne profits. The mesne profits are
normally calculated as the market rental value of the premises in respect of
the period during which the tenant wrongfully holds over. The reason is that
that is what the owner is deprived of by the wrongful holding over.
Where a lease
ends and rent is payable under the lease it will often be inferred that that
rent is the market rent and so constitutes the basis for the mesne profits
assessment. However, that conclusion may be displaced by evidence. There may be
many cases where the rent under the lease is lower than the true market value
at the end of the lease. For example, if it is a rent agreed some long time ago
when rents were very much lower. There may be circumstances in which the rent
under the lease is higher than the market rental value at the end of the lease.
That could occur if the tenant had made a very bad bargain. It could occur if
rental values had fallen between the date on which they were agreed and the
date on which the lease ends. One supposes that in current property and
economic circumstances that last possibility may apply more frequently than it
has in the past.
In this case
the defendants have provided, by way of affidavit, expert evidence of value.
They rely on the evidence of a deponent, Mr Anthony Orchard [FRICS]. He says
that, in his expert opinion, the market rent at the end of the lease is not
£16,000 pa but only some £10,500 pa. He arrives at that conclusion on the basis
of a calculation relating to the turnover and the profits of the business. The
plaintiffs have their own evidence of Mr Allan Cumberland [ARICS] and they say
that the evidence of Mr Orchard is in any event thoroughly implausible. They
say that if the market rent is only £10,500 why was a rent of £15,000 agreed in
1989 at the beginning of the lease? They
ask why in those circumstances was a premium at £37,000 paid for an assignment
of the lease. The premium is only normally paid where the rent under the lease
is lower at the time than the true market rent of the premises. They point out
that the defendants agreed to the rent review increasing the rent to £16,000 a
year when, at the time, the defendants must have known about trading conditions
at the premises.
These may, of
course, all be cogent points. No doubt if this matter goes to trial on this
point all of them will be put to Mr Orchard and it will be a matter of interest
to see what answer he gives to them. Equally, of course, Mr Cumberland and his
views would be open to cross-examination.
However, it
seems to me that a question of this sort, namely whether the market value of
premises at a given date is about £10,000 or £11,000 or is about £16,000, is
something which cries out for oral evidence and cross-examination in the usual
way. It seems to me that on this the defendants have a real prospect of
showing, on the basis of their expert evidence, that the true market rent is
less and perhaps substantially less than the sum of £16,000 pa. It seems to me
that in those circumstances the test which I apply in all justice requires that
the defendants should be able to defend the quantum of the mesne profits
claim in so far as it is above a rate of £10,500 pa.
I am urged by
the plaintiffs to consider or set a rate at a figure rather nearer to theirs
than that of Mr Orchard for the defendants, but I do not feel able to do that
in the absence of full evidence and cross-examination on the point.
Consequently
it seems to me that the judgment for mesne profits from June 24 1992 should be
reduced so as to run at the rate of £10,500 pa. If the plaintiffs decide that
it is proper and in their interest to proceed for the balance then, of course,
they are perfectly entitled to do so. I think in those circumstances and if
that is the only issue which is to remain it is proper that that question
should be tried by a master and I so direct.
Conclusions
It remains
only for me to summarise my overall conclusions on this matter. First, it seems
to me that the test to be applied is whether the defendants can show a defence
which has some real prospect of success.
Second, it
seems to me that the defendants do have a real prospect of success in showing
that the tie provisions in the lease are void under article 85 of the Treaty of
Rome.
Third, on that
basis what should be excised from the lease is the tie provisions, and those
only, leaving the remainder of the lease including the amount of the agreed
rent standing and enforceable between the parties. I do not think there is any
real prospect of the defendants on that point being able to show otherwise.
Fourth, even
if the whole lease is void it seems to me that any implied annual periodic
tenancy which arises would be at a rent which is the same as the rent actually
agreed and paid between the parties. Again, I think the defendants would have,
on that point, no real prospect of showing otherwise.
Fifth, I think
the defendants do have a real prospect of showing that their obligation to pay
the trade debt is due to Courage and not to the plaintiffs. I am far, of
course, from saying that they would succeed in doing so, but the test is not
whether they would succeed, but whether they had some real prospect of
succeeding. However, for the reasons which I have mentioned I decline to
exercise my discretion to set aside the judgment so far as it relates to the
trade debt.
Sixth, and
finally, I conclude that the defendants have a real prospect of showing that
the mesne profits should be at some rate between £10,500 pa and £16,000 pa.
In those
circumstances and in the light of those summarised conclusions I allow this
appeal from the order of Master Turner. I direct that the judgment for
possession stands. I direct that the judgment for arrears of rent stands save
that it should be reduced to that sum which is reached by applying a rate of
£15,000 pa throughout the period in question. I direct that the judgment for
the trade debt stands and I direct that the judgment for mesne profit stands,
but reduced to that payable if the correct rate is £10,500 pa payable throughout
the relevant period. If the plaintiffs wish to continue with their claim for
the balance of the mesne profits then that matter should be tried by a master.
I am very
grateful for both counsel for providing such succinct and expert assistance on
these points. I think that the substance of what I order is clear, but the most
useful way of dealing with it is if junior
presented to the court and for me to sign. In the unhappy event of that not
being possible then the court will have to settle it itself.
Appeal
allowed.
