Part II of Landlord and Tenant Act 1954–Grant of new lease–Option to purchase freehold reversion included in county court judge’s order for new lease–Whether jurisdiction to do so by virtue of section 32(3) or section 35 of Act–Original lease had contained an option to purchase but it had lapsed–Held that there was no jurisdiction to include such an option as a term of the new lease–The purpose of the Act was to protect the tenant in respect of his business, not to place a new saleable asset in his hands–Appeal allowed
This was an
appeal by Arthur Johnson, Edward Johnson and William Jess Johnson, lessors of
the ‘Three Ways Filling Station,’ Burstwick, North Humberside, against part of
an order by Deputy Judge Davey at Hull County Court. The part of the order
against which the appeal was brought included in the new lease in favour of the
respondent, Alwyn Kirkwood, an option to purchase the freehold reversion.
Derek Mallard
(instructed by Warren, Murton & Co, agents for Stamp, Jackson &
Procter, of Hull) appeared on behalf of the appellants; W D Ainger (instructed
by Payne & Payne, of Hull) represented the respondent.
Giving
judgment, ORR LJ said: This is an appeal by the lessors of business premises
known as the ‘Three Ways Filling Station’ at Burstwick, North Humberside,
against that part of an order made on March 16 of last year by His Honour
Deputy Judge Davey in the Hull County Court, whereby, in granting to the
respondent under the provisions of Part II of the Landlord and Tenant Act 1954
a new lease of those premises, he ordered that the lease should include an
option for the respondent tenant to purchase the reversion expectant on the new
lease on terms similar to those, to which I shall later refer, contained in
clause 8 of the original lease, save that the price payable on the exercise of
the option was increased from £12,500 (less a percentage of the gross rent paid
by the tenant to the landlord during the term) to £20,000 (less a similar
percentage of the rent). The sole ground of appeal is that the judge erred in
law in holding that he had jurisdiction to order that a fresh option to
purchase the reversion be incorporated in the new lease. In the circumstances I
do not find it necessary to refer to the facts of the case in any detail. It is
enough to say that the original lease of the premises dated September 1 1972
was made between three brothers, Arthur, Edward and William Johnson, as
lessors, and the respondent, Mr Kirkwood, as lessee and was for a term of a
little over five years from March 20 1972 until May 31 1977 at a rent
increasing in defined stages from £10 per week to £27.50 per week. The judge
was satisfied on the evidence that the respondent by entering into the lease
had agreed to take on a derelict filling station and to operate it at an
increasing rent on the basis that if he could succeed in that venture he would
be entitled to acquire the freehold with some of the rent back, and that he had
in fact worked very long hours at a small return in order to make a success of
the business.
The option for
the respondent to acquire the freehold was, by the terms of clause 8 of the
lease, exercisable by notice to be given not less than three calendar months
prior to the termination of the term, but by an error, not that of the lessee,
that option was not exercised by the due date. There were certain other options
contained in the lease with which we are not concerned, since the respondent
did not seek their incorporation in the new lease.
A notice to terminate
the lease on November 14 1977 was given by the landlords in May 1977 and on
September 6 the respondent made application for a new tenancy which he proposed
should be a five-year tenancy at a rate of £1,820 per annum. On September 26
1977 the lessors gave notice that they did not oppose the grant of a new lease
but objected to the rent proposed and to the renewal of the option. The
tenant’s application came before the deputy judge on March 7 last year, when,
having heard the evidence of the parties’ valuers and the arguments of counsel,
he granted a new lease in the terms already mentioned, including the option to
acquire the freehold.
The Landlord
and Tenant Act contains the following provisions with regard to the terms that
may be included in a new lease under that Act.
Section 32(3)
provides:
Where the
current tenancy includes rights enjoyed by the tenant in connection with the
holding, those rights shall be included in a tenancy ordered to be granted
under section twenty-nine of this Act.
Section 35
provides:
The terms of
a tenancy granted by order of the court under this Part of this Act (other than
terms as to the duration thereof and as to the rent payable thereunder) shall
be such as may be agreed between the landlord and the tenant or as, in default
of
the court shall have regard to the terms of the current tenancy and to all
relevant circumstances.
In his
judgment the judge, having referred to these provisions and also to the
judgment of Upjohn J (as he then was) in Re No 1 Albemarle Street [1959]
Ch 531, came to the conclusion that the right here in question could be
included in a new lease under section 35 of the Act, but not under section
32(3), since it did not in his view touch and concern the lease itself, and
before turning to the rival arguments on this appeal it will be convenient to
refer to the Albemarle Street case, the facts of which were that, by the
terms of clause 7 of a 21-year lease of business premises expiring on December
25 1957, the lessor authorised the lessees to maintain during the continuance
of the lease certain signs in their existing positions on the outside of a
building comprised in the lease. By its terms the tenancy expired on December 25
1957 and the lessors gave notice terminating it on that date but it was
continued, by virtue of section 64 of the Act, until the expiration of a period
of three months beginning with the date on which the tenant’s application was
finally disposed of. Upjohn J in his judgment expressed the view that section
32(3) deals with terms connected with the holding and requires rights enjoyed
by the tenant in connection with the holding to be included in any tenancy
granted under section 29, but that section 35 deals with other terms of the
tenancy as to which it confers on the court what he described as the ‘widest
possible discretion.’ In the exercise of
that discretion he ordered that the new lease should contain a clause in the
same terms as clause 7 of the original lease.
That case is
therefore authority for the proposition that where a discretion arises under
section 35 it is a very wide one, but the question at issue in the present case
is whether the court had power to confer, by way of a new tenancy under Part II
of the 1954 Act, a fresh option for the tenant to acquire the freehold, and it
is common ground that the answer to that question must be found in the terms of
the Act itself.
Mr Mallard,
for the appellants, submits that the object of Part II is to provide security
of tenure for business tenants, and that it is implicit in Part II that the
court can only include in a new tenancy such terms as will preserve or protect
the tenant’s enjoyment of the premises and of the business conducted thereon.
Alternatively, he advances a narrower argument that the court has no power to
grant a fresh option to acquire the reversion collateral to and outside the
relation of landlord and tenant; and additionally he submits that it is
surprising, if Parliament contemplated a grant of such option under Part II of
the Act, that no guidance is given in the Act as to such matters as title to
the reversion, the ascertainment of the price payable for the reversion and for
the option itself, or the mode of exercise and conditions attached to the
exercise of the option.
For the
respondent, Mr Ainger submits that it is sufficient compliance with the objects
of the Act that the terms should be consistent with security of tenure, and he
points to the circumstances of this case in which the tenant, if he was to
prosper, would have to invest capital for which the option would be an
inducement. He also disputes that this option was a fresh one, and he relies on
the very wide words of section 35.
In support of
his arguments, Mr Mallard relied on the statement made by Denning LJ (as he
then was) in the case of Gold v Brighton Corporation [1956] 1 WLR
1291 that nothing in the Act enables the court in exercising its jurisdiction
under the Act to create a new saleable asset for the tenant and on the judgment
of this court, delivered by Stamp LJ in the case of G Orlik (Meat Products)
Ltd v Hastings & Thanet Building Society (1974) 29 P & CR
126, where the tenant sought to have incorporated in a new lease under section
32(3) or section 35 of the 1954 Act a right to park two vans in an agreed
position partly on the landlord’s premises, and the county court judge upheld
that claim, but this court on appeal concluded that the tenant had not had any
right of parking such as was claimed and allowed the landlord’s appeal. Stamp
LJ in the judgment of the court observed as follows on p 133:
The object of
Part II of the Act is to give security of tenure to business tenants by, inter
alia, conferring power on the court to order a new tenancy of the property comprised
in ‘the holding,’ that is to say (see s 23(3)), of the property comprised in
the existing tenancy excluding any part not used for business purposes, and,
however widely expressed, section 35 cannot, in our judgment, consistently with
the scheme found in Part II, be construed to enable the court to enlarge the
holding, for example, by ordering the grant of an easement over the landlords’
land or by conferring rights over the landlords’ land not hitherto enjoyed.
That reasoning
is binding on this court and, considered in conjunction with the terms of the
1954 Act and the observations to which I have earlier referred of Denning LJ
(as he then was) in Gold v Brighton Corporation, has satisfied me
that the judge in the present case had no jurisdiction to insert in the new
lease an option to acquire the freehold. It is true that in the present case
the original lease had contained such an option but, in my judgment, it is
impossible to say that the fresh option confers on the tenant nothing that he
did not have under the original lease. The effect of the order was to extend
the right to acquire the freehold for a further five years. In that respect, in
my judgment, it confers on him, in the words of Denning LJ, ‘a new saleable
asset’ and also, in the words of Stamp LJ, ‘enlarged the holding.’
For these
reasons I would allow this appeal and delete the option from the new lease.
Agreeing,
ORMROD LJ said: I agree. This case raises a point under the Landlord and Tenant
Act 1954 which has not hitherto been considered by this court. The question is
whether the court has jurisdiction under Part II of that Act to include in an
order for a new lease an option for the tenant to purchase the freehold. The
fact that this point has not arisen in the 25 years since the Act was passed
suggests at least the answer to the question.
Mr Mallard
submits that there is no such power in the Act. He says quite simply that such
a term was outside the contemplation of Parliament altogether, since the
purpose of the Act was to provide security of tenure for business tenants, not
to enable them to purchase the reversion of their premises or to obtain
additional rights to those which they had before the order was made. The force
of this submission no doubt explains the absence of any previous decision of
this court upon the point.
There is no
express provision in the Act relating to options to purchase, so that the
power, if any, to create such an option must be found by some process of
implication, but, in my judgment, there is no basis for such implication. It is
common ground that such power can only be derived either from section 32(3) and
section 35. It is unnecessary to decide the precise meaning of the former
subsection because, on any view, the current tenancy in this case did not
include a right to exercise an option to purchase the reversion, such right
having lapsed three months before the term expired on May 31 1977. Nor could
the tenant be said to be enjoying such a right at the time the matter came before
the court. In any event, therefore, the option is not preserved by section
24(1). What the position might have been had there been no time-limit on the
option is a question which need not be decided in this case. It is enough to
say that the reasoning of Cross J in Longmuir v Kew [1960] 1 WLR
862, to which Mr Ainger called our attention, by analogy may not be very
helpful to a tenant in such a position as the tenant in this case.
Mr Ainger is
therefore left with section 35. To succeed on this appeal he, as he concedes,
is forced to argue that the discretion given to the court by this section is
wide enough to enable the court to create a new option to purchase where none
had previously existed. That is a proposition, in my judgment, which has only
to be stated to be rejected. So far-reaching an interference with a landlord’s
property rights would undoubtedly require express statutory provision. In
support of his argument, Mr Ainger relied on the decision of Upjohn J in Re
No 1 Albemarle Street [1959] Ch 531. In my judgment, however, that decision
was based on the fact, or at least it was an important factor in the decision,
that the tenants were still enjoying the right in question, that is, to display
certain signs on adjacent property belonging to the landlord at the date of the
application to the court. This court in G Orlik (Meat Products)
Ltd v Hastings & Thanet Building Society [1974] 29 P & CR
126 seems to have so regarded it. Moreover, the judgment in that case, and in Gold
v Brighton Corporation [1956] 1 WLR 1291, indicates that the purpose of
the Landlord and Tenant Act is to protect the tenant in respect of his business
and not to put a new saleable asset in his hands.
I therefore
agree that this appeal should be allowed.
Also agreeing,
GEOFFREY LANE LJ said: It is not in dispute that in the lease of September 1
1972, by clause 8 thereof, the landlords gave to the tenant an option to
purchase the holding subject to certain conditions. Likewise, it is not in
dispute that that option was never exercised and accordingly lapsed, no notice
having been given to the landlords (as the clause required) not less than three
calendar months prior to the termination of the terms. So, by March 1977, no
option remained alive. Does section 32(3) of the 1954 Act apply in these
circumstances? I think not. The current
tenancy at the date of the hearing did not include rights enjoyed by the tenant
in connection with the holding. The court was being asked to create or recreate
a fresh right in favour of the tenant when none at that time in fact existed.
The decision in G Orlik (Meat Products) Ltd v Hastings & Thanet
Building Society [1974] 29 P & CR 126 is authority binding on us that
that is not permissible.
The other
possibility advanced by the tenant, namely, section 35, is in my view equally
of no avail to him. The decision in the Orlik case makes that clear, as
the passage already cited by Orr LJ makes apparent. I do not accept Mr Ainger’s
submission that Orlik was decided per incuriam on the basis that
the court had overlooked the effect of section 62 of the Law of Property Act
1925 on section 32(3). I agree that the judge’s order should be varied
accordingly as my Lords have indicated.
The appeal
was allowed with costs. The judge’s order to be varied by deletion from the new
lease of the option to purchase the freehold.
