Agricultural land – Mortgagor granting long lease to company belonging to herself and her husband – Bank claiming not to be bound by lease – Mortgagor claiming that contractual restriction on leasing removed by section 99(13A) of the Law of Property Act 1925 – Mortgagor conceding that transaction artificial – Whether lease to be disregarded as a sham – Whether purported lease violated rule against leasing to oneself
Since their marriage in 1975, the defendants (H and W) had carried on a farming business from two properties in Powys, the larger of which, consisting of a house and approximately 179 acres of pasture land, belonged to W (the farm). In January 1990 W created a mortgage over the farm in favour of the claimant bank as security for all moneys owing from time to time by herself and H. Clause 6 of the mortgage deed (the leasing restriction) prohibited W from exercising her statutory powers of leasing without the written consent of the bank. In August 1998 H consented to the mortgage up to a limit of £323,000. The defendants fell into serious financial difficulties, and, in March 1999, the bank made a formal demand to W for the payment of £332,852.
Shortly thereafter, the defendants were professionally advised that, since the mortgage was a mortgage of agricultural land made after 1 March 1948, the leasing restriction had been rendered inapplicable by section 99(13A) of the Law of Property Act 1925 (inserted by section 31 of the Agricultural Tenancies Act 1995), and that the bank would, accordingly, be bound by a lease that, in compliance with the power otherwise given by the section, reserved the best rent reasonably obtainable and contained the required forfeiture clause.
Acting upon that advice, in April 1999 the defendants granted to a company wholly owned by themselves a 20-year lease of both the farm and the smaller property belonging to H. The lease contained a standard forfeiture clause and reserved an annual rent of £18,420, of which a £1,000 “basic rent” was to rise to, and remain at, £4,276 for the last 15 years of the term. The balance was subject to three five-year (upwards or downwards) reviews to the prevailing market rent. The defendants took no steps to recover the agreed rent from the company.
The bank, claiming that it was not bound by the lease, took proceedings in which it submitted, inter alia, that: (i) the leasing restriction remained effective; (ii) the lease was bad for being an attempted grant to the defendants themselves; and (iii) the lease should be disregarded as a sham transaction.
Held: The bank’s submissions were rejected.
1. As regards the otherwise unrestricted power to let under section 99 of the 1925 Act, there was no evidence that the letting was below market value. Nor was it an objection that the lease had been made solely in order to benefit from a statutory provision (section 99(13A)) without which the transaction could not have been effected at all. Although the transaction could be described as artificial, in the sense employed in revenue cases, such as WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, an artificial transaction was not the same as a sham transaction: see the observations of Lord Templeman in AG Securities v Vaughan [1988] 2 EGLR 78; [1990] AC 417 at p462.
2. There were two independent reasons for rejecting the second submission. First, the fact that the company was owned and controlled by the defendants afforded no reason for disregarding its separate legal existence. There was no case for piercing the corporate veil: see Ingram v Inland Revenue Commissioners [1999] 2 WLR 90; [1998] EGCS 181, upholding a tenancy granted to a person to hold the same on bare trust for the grantor. Second, even if the defendants had taken the two properties as joint lessees, their interest would be quite different from their respective interests in the separately-owned reversions.
3. While the admitted artificiality of the lease could be taken into account in deciding whether it was a sham, the defendants had not done anything that was intended to give to third parties or to the court the appearance of creating legal rights and obligations different from those they actually intended to create: see per Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 766 at p802. Although the subsequent inaction on the part of the defendants could be adduced as evidence of their state of mind when granting the lease, the bank had failed to establish that they were engaged in the necessary pretence: see per Sir Thomas Bingham MR in Belvedere Court Management Ltd v Frogmore Developments Ltd [1996] 1 EGLR 59; [1997] QB 858 at p876. The fact that they had simply not given thought to their future rights and obligations did not mean that they had no intention of going through with a leasing transaction.
Editor’s note: The bank eventually succeeded on the ground that, because the basic rent had failed to reflect the full marriage or ransom value, the defendants had effected a transaction that was significantly at an undervalue for the purpose of section 423 of the Insolvency Act 1986, as considered in Agricultural Mortgage Corporation plc v Woodward [1995] 1 EGLR 1.
Georgina Middleton (instructed by Addleshaw Booth & Co, of Manchester) appeared for the claimant; Stephen Jourdan (instructed by Burges Salmon, of Bristol) appeared for the defendants.
Alan Cooklin, barrister