Landlord and tenant — Forfeiture — Disclaimer of lease — Application by underlessee for vesting order — Forfeiture of headlease by peaceable re-entry — Whether underlessee entitled to be restored to possession pending outcome of application for vesting order under section 146(4) of the Law of Property Act 1925
On October 6
1970 Metropolitan Estates Property Co Ltd granted David Lavender a 50-year term
of 63 Molton Street, London W1, from December 25 1969 (‘the lease’). By 1986
the lease had been assigned to L Ltd. On July 28 1989 L Ltd granted a 16-year
term of the shop and basement part of the building to the first plaintiff at a
rent of £75,000 pa (‘the underlease’). A receiver was appointed for L Ltd in
March 1992 and the first plaintiff thereafter paid the receiver a reduced rent
of £800 per week previously agreed with L Ltd. On August 10 1992 L Ltd went
into voluntary liquidation owing rent arrears of £11,932.33 under the lease. In
October 1992 the first plaintiff ceased paying rent. In early January 1993 the
first plaintiff received a notice under section 6 of the Law of Distress
(Amendment) Act 1906 requiring him to pay direct all future payments of rent
until L Ltd’s arrears were duly paid. On January 21 1993 the liquidator filed
notice of disclaimer of the lease. On June 23 1993 Mr Lavender sought a vesting
order in respect of the lease under section 181(2) of the Insolvency Act 1986;
on July 18 the first plaintiff made a similar application in respect of his
part of the premises to which the defendant indicated that it would not play
any role. On February 11 1994, when the arrears under the lease were
£90,945.47, the defendant’s bailiffs re-entered the building. The plaintiffs
challenged the validity of the defendant’s forfeiture and sought an order to be
restored to possession claiming that by reason of the application by the first
plaintiff for a vesting order under the Insolvency Act 1986 the right of
forfeiture was suspended pending the outcome of that application.
existence of an application for a vesting order, the defendant’s indication
that it would not oppose it, or the steps taken under the 1906 Act. The
forfeiture gave the first plaintiff an independent right to apply for relief
under section 146(4) of the Law of Property Act 1925. If a vesting order were
to be made, it was not retrospective; accordingly, until it was made an
applicant who remained in possession was a trespasser liable to pay mesne
profits. The first plaintiff had been removed from possession and there was no
arguable defence to the right of the defendant to retain possession until the
making of a vesting order.
The following
cases are referred to in this report.
A E
Realisations (1985) Ltd, In re [1988] 1 WLR 200;
[1987] 3 All ER 83
Finlay,
In Re, ex parte Clothworkers’ Co (1888) 21 QBD 475
Hill v East & West India Dock Co (1884) 9 App Cas 448
Official
Custodian for Charities v Mackey [1985] Ch
168; [1984] 3 WLR 915; [1984] 3 All ER 689
This was an inter
partes application by motion by the plaintiffs, Luciano Pellicano and
Recordlook Trading Ltd, to be restored to possession of premises following
peaceable re-entry by the defendant, MEPC plc.
Edward Cousins
(instructed by Robert Gore & Co) appeared for the plaintiffs; Guy
Fetherstonhaugh (instructed by Reynolds Porter Chamberlain) represented the
first defendant; the second defendant, the Sherriff of Greater London did not
appear and was not represented.
Giving
judgment, KNOX J said: These proceedings are brought by Mr Luciano
Pellicano, who is underlessee of the shop and basement (‘the shop and
basement’) at 63 South Molton Street, London W1, and Recordlook Trading Ltd,
which is a company controlled by Mr Pellicano and his wife which trades from
that shop and basement in ladies’ fashion wear, against, first, MEPC plc, the
landlord of a superior lease and, second, the Sheriff of Greater London, who
has taken no part in the argument before me and I need not deal further with
his position.
There is
before me a motion inter partes, which seeks the continuation of ex
parte relief granted by Evans-Lombe J on February 12 last, whereby he
restrained MEPC from entering upon the shop and basement, save pursuant to an
order or with the leave of the court.
The chronology
of the matter is as follows. There is a headlease to MEPC or its predecessor,
which is not affected by these proceedings and I propose to ignore its
existence in the course of this judgment. At the top of the chain of leases and
underleases comes the lease (‘the lease’), which was granted by Metropolitan
Estates Property Co Ltd on October 6 1970 to a Mr David Lavender of the whole
of the premises at 63 South Molton Street, both the shop and basement and the
other floors. The term was one of 50 years from Christmas 1969. There was
provision for an upwards-only rent review every seven years and the evidence is
that there was in 1986 a review to £43,000 pa rent and that the rent was varied
by a deed of variation on April 8 1988 to a figure of £48,000 pa. In 1986 that
lease was vested in Linewool Ltd (‘Linewool’) (pursuant to a licence in that
behalf granted by MEPC) by an assign of Mr Lavender. I need not trace the
devolution of the lease at earlier stages from Mr Lavender to Linewool. On
February 6 1989 Linewool underlet the first, second and third floors to a
company called Periplan Ltd. More significantly, on July 28 1989 by an
underlease (‘the underlease’) Linewool underlet the shop and basement to Mr
Pellicano for a term of 16 years from Lady Day 1988 at a rent of £75,000 pa,
with an upwards-only rent review provision at four-yearly intervals. Mr
Pellicano, in his affidavit in this matter, says about that:
There should
have been a rent review in March 1992 but nothing was formally agreed. I went
to see Linewool Ltd because I could not afford to continue paying £75,000 pa
and they agreed to accept £800 pw plus VAT.
That works out
at £41,600 pa plus VAT.
In March 1992
a receiver was appointed of Linewool. The evidence is that Mr Pellicano paid
him that rent of £800 pw plus VAT. Mr Pellicano says:
In about
March 1992 a receiver, Healey & Baker, was appointed by Barclays Bank plc
in respect of the underlease and so far as I recall I was asked to and did pay
rent of £800 pw plus VAT to the receiver from approximately March to October
1992, but in about October 1992 I was informed by somebody in the offices of
Healey & Baker that there was little point in continuing to pay rent to the
receiver, so I stopped.
That, so far as
the evidence goes, is the present position with regard to the payment of rent
by Mr Pellicano.
On August 10
1992 Linewool went into creditors’ voluntary liquidation and at that point of
time the arrears of rent under the lease were some £11,932.33.
In October
1992, as I have mentioned, Mr Pellicano accepts that he ceased paying rent and
in early January 1993 notices under section 6 of the Law of Distress
(Amendment) Act 1906 were served both on Mr Pellicano and on Periplan Ltd. They
asked this. First of all there was a statement that there was due to MEPC, as
superior landlord of 63 South Molton Street, from Linewool the sum of
£33,382.18 due and owing in respect of arrears of rent for those premises and
the requirement both to Periplan Ltd and to Mr Pellicano was that as
undertenant of the premises, or some part of them,
to make to it
direct at MEPC’s office all future payments of rent whether now accrued or to
accrue during the future from you to the said Linewool Ltd until such arrears
have been duly paid.
The arrears
referred to are obviously the arrears under the lease.
On January 21
1993 the liquidator of Linewool filed a notice of disclaimer of the lease. It
is not clear exactly when or if formal notice of disclaimer was given to Mr
Pellicano. He clearly knew about it at the latest in April of that year,
because he says in his affidavit:
It was only
when the first defendant commenced proceedings against me in about March or
April
— and the
context shows that that meant 1993 —
that I was
given notice that the liquidator had disclaimed the under-lease.
The disclaimer
was of course in fact of the lease, not of what I am calling the underlease.
On March 25
1993 MEPC sued Mr Lavender for arrears of rent under the lease in the sum of
£33,480 and obtained summary judgment, but it remains unsatisfied. Similarly on
April 21 1993 MEPC sued Periplan Ltd for sums due under the lease, by then some
£47,500. There was a defence served by Periplan Ltd on June 21 1993 that the
disclaimer made MEPC unable to recover under the covenants in the underlease as
against Periplan Ltd and a similar defence was advanced by Mr Pellicano against
whom proceedings were started a month later by MEPC on May 21 1993, Mr
Pellicano’s defence being in the same terms as Periplan Ltd’s, namely that the
disclaimer rendered the covenants no longer directly enforceable against him.
On June 23
1993 Mr Lavender, by originating application in the Companies Court, applied
for a vesting order pursuant to section 181(2) of the Insolvency Act 1986 in
respect of the whole premises at 63 South Molton Street and on July 18 Mr
Pellicano in turn issued an originating application seeking a vesting order
pursuant to section 181(2)(b) of the Insolvency Act 1986 in relation to
the shop and basement.
On July 14
1993 there was written by the solicitors, then acting for MEPC, to the
solicitors then acting for Mr Pellicano, a letter in response to a letter from
Mr Pellicano’s solicitors, who were also actually acting for Periplan Ltd and
had indicated their intention to seek a vesting order. In the solicitors for MEPC’s
letter of July 14 the following passage is included:
We note your
intention is to seek a vesting order in favour of your client [Mr Pellicano].
We would stress that provided we receive an assurance from yourselves that it
is not your intention to seek any form of relief against MEPC plc, that we will
not be playing any active role in the question of a vesting order, it would not
be our intention to attend upon the application of David Lavender returnable on
the 19th July, nor for that matter would it be our intention to attend on any
application made on your client’s behalf. Therefore we await your confirmation
by return that no relief is sought against MEPC plc. With regards to the
question of an adjournment of Mr Lavender’s application for a vesting order, we
confirm that we have no objection to your seeking an adjournment.
On February 4
1994 the rent arrears under the lease had risen to £90,945.47. On the 11th of
this month MEPC’s bailiffs claim peaceably to have re-entered the premises. The
solicitors then acting for both Periplan Ltd and Mr Pellicano negotiated a
reoccupation by Periplan Ltd of the upper floors, but there was no such
negotiation in respect of the shops and premises and Mr Pellicano has changed
his solicitors and is now represented by a different firm.
The following
day (Saturday) there was made by Evans-Lombe J the order to which I have
already referred. That was a short-term order to hold the position until the
matter was argued before me inter partes earlier this week. There was a
waiver of any question of lack of full notice, as required by the rules, for an
inter partes hearing and I treated the matter as fully before me inter
partes.
There is one
further collateral matter that I should mention regarding Mr Pellicano. That is
that there is evidence from MEPC that in other premises in South Molton Street
there was a lease vested in Mr Pellicano between July 1990 and August 1992,
when he surrendered it to MEPC, during which period arrears of rent and service
charge in the sum of £92,094.60 accrued as at March 16 1993. That figure is not
as such challenged by Mr Pellicano’s evidence. The only materiality of this
claim, which I emphasise does not affect the
to Mr Pellicano’s financial position.
Finally, so
far as the factual background is concerned, there is evidence before me that
the chattels, mainly stock, on the shop and basement premises do not belong to
Mr Pellicano, but belong to the second plaintiff, Recordlook Trading Ltd, which
is the entity that trades from those premises.
On these facts
the question arises — what is the locus standi of Mr Pellicano as
regards the shop and basement at 63 South Molton Street?
Assuming the
disclaimer of the lease by the liquidator of Linewool is effective, and it is
not clear how Mr Pellicano is in a position to challenge this given, first,
that he has relied upon it in his defence to the action brought by MEPC to
recover arrears of rent consequent upon the failure to comply with the notice
under section 6 of the Distress for Rent (Amendment) Act 1906 and, second, that
he has on foot an originating application for a vesting order in his favour,
then Mr Pellicano was entitled to possession under the underlease in his favour,
notwithstanding the disclaimer of the lease, but subject to the right of MEPC
to re-enter for non-payment of rent. That this is the effect of a disclaimer by
a liquidator or a trustee in bankruptcy of a headlease is clear from, inter
alia, In re A E Realisations (1985) Ltd [1988] 1 WLR 200 where at p211B Mr
Vinelott J described the position of an underlessee where the headlessee’s
trustee in bankruptcy had disclaimed the lease in the following terms:
The
underlessee did not become bound by any privity of contract or of estate to the
lessor but was entitled to remain in possession of the property during the term
of the underlease and so long as the lease would, apart from the forfeiture,
have remained in existence.
That was said
in terms of the provisions of section 55(2) and (6) of the Bankruptcy Act 1883,
but those provisions are substantially re-enacted by section 178(4) and
sections 181 and 182 of the Insolvency Act 1986 and the principles applicable
remain as stated in the authorities referred to by Vinelott J in In re A E
Realisations (1985) Ltd, notably Hill v East & West India
Dock Co (1884) 9 App Cas 448 and In re Finlay, ex parte Clothworkers’ Co
(1888) 21 QBD 475. In the latter case Lindley LJ, at p486, said this of the
situation where there was a lease and a sublease and the lessee/underlessor
became bankrupt:
We must next
consider the case as between the original lessor and the sub-lessee . . . the
sub-lessee, although freed from his covenants to his own immediate lessor, must
perform the covenants of the original lease or he will be liable to be
distrained upon and to be ejected by the original lessor. That is obviously his
position.
That, in my
judgment, is applicable here. Mr Pellicano’s rights under his underlease remain
subject to MEPC’s right to distrain and forfeit for non-payment of rent.
Second, Mr
Pellicano also had the benefit of his application for a vesting order. Mr
Edward Cousins, on his behalf, argued that the existence of this application,
in respect of which it is claimed MEPC were out of time in filing their
evidence, should freeze the operation of any proceeding for forfeiture for
non-payment of rent. Mr Guy Fetherstonhaugh, for MEPC, submitted that the two
processes: (1) application for a vesting order under section 181 of the
Insolvency Act 1986; and (2) forfeiture of a lease for non-payment of rent are
independent of each other and that there is no provision requiring the latter
to be stayed or otherwise held up because of the pendency of the former. I
prefer this analysis, given that Mr Cousins was not able to point to any
provision in the Insolvency Act 1986 or authorities upon it, or indeed
elsewhere, in support of his submission regarding the freezing of forfeiture
provisions during the pendency of an application for a vesting order. I am also
unpersuaded that there was anything in the nature of a waiver of MEPC’s rights
in the letter from which I have read an extract, written by MEPC’s solicitors
on July 14 1993. At most that letter stated MEPC’s position at that stage in
relation to the application for a vesting order. It did not, in my view, affect
or prejudice their right some seven months later, in the absence of any
payments of rent under the headlease, to take steps to recover possession. If
the disclaimer was for some reason not effective, it is not easy to see how
that could improve Mr Pellicano’s position, since it must on that view remain
possible for MEPC to take the normal steps by way of forfeiture for non-payment
of rent. Equally, I do not regard the steps taken under section 6 of the
Distress for Rent (Amendment) Act 1906 as affecting MEPC’s rights to forfeit
the lease. That seems to me to be a quite separate matter, which has in fact
run into the sand at least for the time being, but it does not affect, in my
view, the position as between MEPC and Mr Pellicano in relation to the exercise
by MEPC of its rights under the lease.
The situation
regarding MEPC’s right to re-enter for non-payment of rent is that Mr Pellicano
has an independent right to apply for relief against forfeiture under section
146(4) of the Law of Property Act 1925. In Woodfall Landlord and Tenant
at p17/77, para 17.163 one finds regarding subsection (4);
This
subsection is an independent enactment which is not dependent on relief being
available to the lessee. Accordingly it extends to cases where the headlease
has been forfeited for bankruptcy or for non-payment of rent, which are
excluded from the general operation of section 146.
Mr Pellicano
is seeking to exercise that right and has included a prayer for such relief in
the writ which has now, pursuant to the undertaking given to Evans-Lombe J,
been issued.
The practice
of the court on such applications for relief by an underlessee is stated in Woodfall
at p17/82, para 17.170, in terms which include the following:
Discretion
to grant relief to sub-tenant
Whether
relief should be granted to a sub-lessee, and on what terms, are matters for
the discretion of the court. The jurisdiction to grant relief should be
exercised sparingly, because its effect is to thrust upon a landlord a person
whom he has never accepted as tenant and creates privity of contract between
them. The factors to be taken into account will include those applicable to a
case between landlord and tenant. In addition the following factors to be
considered are . . .
Then there is
a long list from (a) to (i) of factors of which I need only refer
to two:
(b) whether the property sub-let is capable of
convenient occupation under a lease divorced from the remainder of the property
comprised in the head-lease;
. . .
(g) whether the breach can be remedied and if
there are breaches of the headlease, whether the sub-tenant is willing to
remedy them.
The relevant
relief under section 146(4) of the Law of Property Act 1925 is, on the
authorities, not retrospective. Until an order is made an undertenant, where
the headlease has been forfeited is, strictly speaking, a trespasser. That
appears most clearly from the decision in Official Custodian for Charities
v Mackey [1985] Ch 168 at p181. That decision was concerned with the
position of mortgagees of a lease or leases, but the same principle applies to
underleases. The plaintiffs were the lessors and the relevant defendants were
mortgagees of a forfeited lease. Scott J said at p181:
I now turn to
the second point in this case, namely the question whether an order can be made
under section 146(4) with retrospective effect.
The mortgagees
contend that they will in due course, if the lease stays forfeited, obtain
relief from forfeiture under section 146(4). Such relief, they submit, can,
and, in the circumstances of this case, would, be given retrospective effect so
as to restore them to the position in which they would have been had the lease
not been forfeited.
Mr Mowbray,
for the plaintiffs, concedes that the defendant mortgagees will, if the lease
remains forfeited, all succeed in obtaining relief under section 146(4). He
concedes that, if the court has power under subsection (4) to make an order
with the retrospective effect to which I have referred, it would make such
order. But he contends that on the true construction of subsection (4), the
court has no such power. He submits that the relief contemplated by subsection
(4) must take the form of the grant of a lease for an appropriate term and on
appropriate conditions to the applicant and that such lease cannot do other
than take effect from the date of the order.
If it is
correct that the power of the court under subsection (4) is thus limited, the
result is, as it seems to me, unfortunate and may well work injustice to
under-lessees and mortgagees in some cases. Under-lessees and mortgagees cannot
apply for relief from forfeiture of the head-lease until the head-lease has
been forfeited. There is, therefore, bound to be a lapse of some time before
the applications for relief can be dealt with. In a case like the present,
where the forfeiture of the lease is hotly contested by the lessee up to House
of Lords level, the lapse of time is likely to extend over a period of years.
An under-lessee can obtain relief under section 146(4) against forfeiture of
the lease. But, if Mr Mowbray’s point is right, an under-lessee who remains in
actual occupation is necessarily a trespasser vis-a-vis the freeholder and
liable to pay mesne profits accordingly from the date of forfeiture down to the
date on which the subsection (4) relief is granted. This may not matter in a
case where the under-lessee is a tenant at a rack rent, but in a case where the
original lease and the under-lease have been granted at substantial premiums
and nominal rents, the windfall to the freeholder and the detriment to the
under-lessee may be very considerable. In the present case, at the date of the
Court of Appeal order, the rent reserved by the lease was £27,500 per annum
while the rents being received from the various occupiers and sub-lessees by
the receivers were not far short of £700,000 per annum. As I have said, Mr
Mowbray accepts that the court would, if it had power to do so under section
146(4), restore the mortgagees to their security as if the lease had not been
forfeited. The question is whether the court has such power under that
statutory provision.
He went on to
hold that the court had in fact no such power as is there mentioned.
There is in
the case before me no specific challenge to the efficacy of the physical
re-entry by MEPC, although it is referred to by Mr Pellicano in his affidavit
in the phrase ‘the first defendant purportedly peaceably re-entered upon the
premises, which were then secured by means of locks and shutters’. No specific
ground was advanced in argument for holding that the re-entry was unlawful or
otherwise ineffective.
Mr Cousins
relied on the balance of convenience and the maintenance of the status quo.
But, as Scott J in Official Custodian for Charities v Mackey at p
187 observed, those considerations arise only where there is an arguable
defence to the plaintiff’s claim. He said at p186:
The court
has, in my judgment, no power under section 146(4) to attach to such vesting
order an order that the plaintiffs pay over to the mortgagees mesne profits
received by the plaintiffs since the forfeiture but before the date of the
vesting order, nor to relieve the recipient of any such mesne profits from the
obligation to account therefor to the plaintiffs, nor to relieve the actual
occupants of the property from their obligation to pay mesne profits to the
plaintiffs in respect of their occupation.
And later:
Accordingly, a
defence to the plaintiffs’ claim in this action based on the proposition that
the plaintiffs will, by an order made in due course on the section 146(4)
applications, be deprived of their proprietary rights in respect of the period
before such order is made is, in my view, misconceived.
It follows,
further, that in my opinion the only obstacle the defendants can present to the
success of the plaintiffs’ claim in the present action is the possibility that
the House of Lords may, in the forfeiture action, reverse the Court of Appeal
or by interlocutory order suspend the operation of the Court of Appeal order.
In these
circumstances, I was invited by Mr Nugee (counsel for some of the mortgagees)
‘to apply the principles of American Cyanamid Co v Ethicon Ltd [1975]
AC 396. He submitted that I should consider the balance of convenience and that
that balance came down strongly in favour of maintaining the status quo under
which the first and second defendants are collecting the rents of the property
and managing it. I do not, however, think that this is a case to which the Cyanamid
principles can be applied. Those principles are not, in my view, applicable to
a case where there is no arguable defence to the plaintiffs’ claim.
The position
regarding possession of the shop and basement seems to me somewhat stronger in
favour of MEPC than it was in favour of the plaintiffs in Official Custodian
for Charities v Mackey, because there is nowhere near the certainty
which was conceded in Mackey’s case that relief would be granted under
section 146(4). Mr Pellicano, on the evidence before me, seems to me a somewhat
dubious asset as a tenant at a substantial rent. He has paid no rent at all
since October 1992 and, although it was accepted on his behalf that he might be
required to pay the appropriate fraction of the rent under the lease of £48,000
pa pending the hearing of his application for relief under section 146(4), no
offer with regard to the arrears since October 1992, when Mr Pellicano had been
enjoying the premises, has been forthcoming. I appreciate, of course, that
there was no receiving hand available to Mr Pellicano in the period between
October 1992 and the present. But, in my judgment, there is no arguable defence
to MEPC’s claim to possession pending the hearing of an application under
section 146(4). Even if, contrary to my view, there was such an arguable
defence, I should be disposed to allow Mr Pellicano to continue in possession
of the basement and ground floor only on terms that he pay within 14 days £20,000
towards the arrears of rent since October 1992 and that he continue to pay
during his occupation, pending the hearing of the application under section
146(4), the appropriate fraction of the rent reserved by the lease attributable
to the basement and ground floor. If necessary I would have directed an inquiry
or further evidence to ascertain what that appropriate fraction would be. That
should not prove a particularly difficult problem, since there were underleases
granted at closely connected dates of the two parts in which the premises have
in the past been underlet.
However, on
the view that I take, that does not arise and I decline, therefore, to make an
order on this application.
