Landlord and tenant — Whether subtenancy determines when notice to quit served by headtenant on landlord
holdings — Case E notice to quit — Subtenancy granted in breach of tenancy —
Whether landlord would suffer material prejudice because on determination of
tenancy landlord might be forced into direct relationship with undesirable
subtenant
In 1991 the
appellant tenant entered into an arrangement with a limited liability company
for the farming of his agricultural holding. On February 5 1992 the respondent
landlord served a Case E notice to quit, which the tenant required to be
arbitrated. The arbitrator found that the arrangement was a subletting; the
subletting being an irremediable breach of the tenancy agreement. He also held
that for the purposes of Case E there was material prejudice to the landlord
because, if the tenant gave notice to quit, the landlord would be forced into a
direct relationship with the subtenant, a company, which, unlike an individual,
will never die. The landlord would accordingly lose the opportunity of
possession on the death of the tenant. On a case stated to the county court by
the tenant the court agreed with the arbitrator. Before the arbitrator and the
county court it was accepted on behalf of the tenant that, upon the service of
a notice to quit by the tenant, the subtenancy would remain binding on the
landlord. Upon that point the tenant appealed.
by a tenant to his landlord will determine the subtenancy; it falls within the
general rule that a subtenancy perishes with the tenancy that supports it.
There was no basis in authority or otherwise for the concession by counsel in Mellor
v Watkins (1874) LR 9 QB 400, a case involving a
surrender, that an upwards notice to quit would not determine a subtenancy. The
decision of Hilbery J in Brown v Wilson (1949) 156 EG 45 overruled; there were compelling grounds for deciding that a tenant
should not be able to foist his subtenant upon his landlord.
The following
cases are referred to in this report.
Brown v Wilson (1949) 208 LT 144; 93 SJ 640; 156 EG 45
Doe d
Beadon v Pyke (1816) 5 M&S 146
Fairweather v St Marylebone Property Co Ltd [1963] AC 510; [1962] 2 WLR
1020; [1962] 2 ALL ER 288, HL
Gisborne v Burton [1989] QB 390; [1988] 3 WLR 921; [1988] 3 All ER
775; [1988] 2 EGLR 9; [1988] 38 EG 129, CA
Harrison v Wing (1988) 56 P&CR 358
Mellor v Watkins (1874) LR 9 QB 400
Phipos v Callegari (1910) 54 SJ 635
Piggott v Stratton (1859) 1 De GF&J 33
Sherwood v Moody [1952] 1 All ER 389; [1952] 1 TLR 450
Sparkes v Smart [1990] 2 EGLR 245
Webb v Russell (1789) 3 TR 393
This was an
appeal by the tenant, Harold Pennell, against the decision of Recorder Heath in
Grimbsy County Court, who on August 27 1993 dismissed an appeal by way of a
case stated by the tenant from the award of the arbitrator appointed to
determine the validity of a notice to quit served by the landlords, George
Rodney Payne and another.
Paul Morgan QC and Martin Rodger (instructed by
Bridge McFarland, of Louth) appeared for the appellant; Andrew Gore (instructed
by Wilkin Chapman, of Grimsby) represented the respondents.
Giving
judgment, SIMON BROWN LJ said: This is an agricultural tenant’s appeal
with the leave of this court against the order of Grimsby County Court on
August 27 1993, dismissing his application to set aside an arbitrator’s award
made on July 30 1992 in favour of the respondent landlord.
The appeal
raises a pure question of law which can be stated thus: where a headtenant
serves an upwards notice to quit, ie a notice upon his landlord, is the
landlord thereupon entitled to possession against a subtenant irrespective of
whether that subtenancy was granted within the terms of the headlease?
Although the
point is one of general principle and application in the law of landlord and
tenant, it is nevertheless right to indicate the factual context in which it
arises upon the present appeal.
The first
respondent is the landlord and the appellant the tenant of a farm known as
Bridge Inn Farm, Grainthorpe, Louth, Lincolnshire. The farm comprises 128 acres
and includes a dwelling-house. The tenant holds the farm under a tenancy
agreement granted on April 22 1971 on terms prohibiting him from subletting the
farm without the landlord’s consent. The tenancy is of an agricultural holding
within the Agricultural Holdings Act 1986. The Act provides security of tenure
for tenants by restricting the circumstances in which an effective notice to
quit can be given during the tenant’s lifetime.
In 1991, the
appellant tenant entered into a transaction with R Caudwell (Produce) Ltd for
the working of the land. This transaction was subsequently held by the
arbitrator to amount to a subletting of the farm.
On February 5
1992 the first respondent landlord served on the appellant a notice to quit
expiring on April 6 1993, relying on section 26(2) and Case E in Schedule 3 to
the 1986 Act. Case E is one of those cases where the consent of the tribunal to
the operation of the notice to quit is not required under sections 26(1) and 27
of the Act. It reads:
CASE E
At the date
of the giving of the notice to quit the interest of the landlord in the
agricultural holding had been materially prejudiced by the commission by the
tenant of a breach, which was not capable of being remedied, of any term or
condition of the tenancy that was not inconsistent with the tenant’s
responsibilities to farm in accordance with the rules of good husbandry, and it
is stated in the notice that it is given by reason of the said matter.
On February 20
1992 the appellant required arbitration on the efficacy of the notice to quit
pursuant to article 9 of the Agricultural Holdings (Arbitration on Notice)
Order 1987. On April 22 1992 the second respondent was appointed arbitrator.
Before the
arbitrator, two issues arose: first, did the tenant’s agreement with the
company in 1991 amount to a subletting? (If so, it was accepted that it
constituted an irremediable breach of covenant.) As stated, the arbitrator
found it did and that finding has not since been challenged. Second, if so, had
the landlord suffered material prejudice as a result? The arbitrator found that
he had, on the basis that he might, upon certain contingencies, be forced into
a direct relationship with the subtenant, a company, which, unlike an
individual, will never die. The landlord would accordingly lose the opportunity
of possession on the death of the tenant and his reversion would thereby be
postponed indefinitely.
The tenant
applied to the county court pursuant to para 27 of Schedule 11 to the 1986 Act,
seeking to set aside the arbitrator’s award. First, he alleged misconduct on
the part of the arbitrator. That allegation failed, is not now pursued and need
not be mentioned again. The other issue raised before the county court was
whether the arbitrator was right in deciding that the landlord had suffered
material prejudice as a result of the subletting of the farm. The recorder
agreed with the arbitrator. Before both, let it be made plain at this stage, it
was accepted on behalf of the tenant that if he served an upwards notice to
quit, thereby determining the head tenancy, the subtenancy, albeit unlawful,
would as a matter of law become binding on the landlord. That, I repeat, is the
sole point now at issue in this appeal. Paradoxically, it is the landlord who
argues that he would be bound by
Just before
turning to this point, I should dispose of what really amounts to a preliminary
submission by the landlord. It is that, irrespective of the position arising
following the service of an upwards notice to quit, in the present case he has
suffered material prejudice through being unable to accept a surrender of the
headlease, it being common ground that a surrender does indeed have the effect
of promoting the subtenant to become the landlord’s own tenant. Mr Andrew Gore
argues that even if the appellant is correct on the new point he now raises,
nevertheless the question of surrender remains. The landlord, he suggests, may
be faced with a stark choice between continuing with an unsatisfactory tenant
he does not want or accepting a surrender on such terms as the tenant will
offer him.
Contrary to Mr
Gore’s contention, I cannot accept that the question of surrender formed an
independent ground of the arbitrator’s decision. Nor certainly was it the basis
of judgment in the county court. Rather the recorder found that:
The material
prejudice occurred as soon as the landlord found himself in a position as a
result of the tenant’s breach of covenant that the tenant could by serving a
notice to quit foist upon the landlord a tenant who was not an individual, but
a company.
More
important, however, the argument is in any event unsustainable: the landlord
can always refuse the offer of surrender and, if the appellant is right upon
this appeal, can invite instead the service of an upwards notice to quit. The mere
inability to accept a surrender cannot, in my judgment, constitute the material
prejudice necessary to make good a claim for possession under Case E.
I turn to the
point at issue. Let me first put it in its general context in landlord and
tenant law. At common law, the general rule is that, when the head tenancy
comes to an end, any subtenancy derived out of it also automatically and
simultaneously comes to an end. This general rule applies without question when
the headtenancy comes to an end by effluxion of time, by a landlord’s notice to
quit or by forfeiture. It is equally beyond question that the general rule does
not apply in cases of surrender and merger.
As to whether
an upwards notice to quit falls within the general rule or the exceptions to it,
counsels’ arguments have ranged far and wide. They have discussed the juridical
basis for the exceptions, the effect of the authorities, the views of legal
commentators, and a variety of competing policy considerations for deciding the
point one way or the other.
Let me start
with the juridical basis for the exceptions to the rule. The common law
exception relating to surrender is stated in Coke upon Littleton, vol
II, 338B in these terms:
Having regard
to the parties to the surrender, the estate is absolutely drowned … but having
regard to strangers, who were not parties or privies thereunto lest by a
voluntary surrender they may receive prejudice touching any right or interest
they had before the surrender, the estate surrendered hath in consideration of
law a continuance.
The present
position is summarised in Lord Denning’s speech in Fairweather v St
Marylebone Property Co Ltd [1963] AC 510 at p546:
At common
law, if a leaseholder made an underlease and afterwards surrendered his term to
the freeholder, then the freeholder could not evict the underlessee during the
term of the underlease: see Pleasant (lessee of Hayton) v Benson.
But this was not because there was any assignment from surrenderer to
surrenderee. It is clear that, upon the surrender, the head term was determined
altogether. It was extinguished completely, so much so that the freeholder
could not sue the underlessee on the covenants or enforce the proviso for
re-entry: see Webb v Russell [1789] 3 Term Rep 393. The
underlessee could enjoy the property without payment of rent and without
performance of the covenants and conditions until the end of the term of the
underlease: see Ecclesiastical Commissioners for England v Treemer [1893]
1 Ch 166. This was remedied by the Statutes of 1740 [this is a mistake for
1730] and 1845, which have been re-enacted in sections 139 and 150 of the Law
of Property Act, 1925. Under those Statutes, on a surrender of the headlease,
an underlessee becomes a direct tenant of the freeholder on the terms of his
underlease. So that the surrender does operate as if it were an assignment of
the surrenderer’s interest.
The case of Webb
v Russell (1789) 3 TR 393 there referred to was in fact one of merger.
That, of course, is essentially the converse of surrender: the tenant acquires
the freehold reversion so that the headlease becomes ‘drowned’ in the superior
interest, the subtenancy being unaffected.
Section 139 of
the Law of Property 1925, substantially re-enacting section 9 of the Real
Property Act 1845, gives rise to important considerations on this appeal. It
provides:
(1) Where a
reversion expectant on a lease of land is surrendered or merged, the estate or
interest which as against the lessee for the time being confers the next vested
right to the land, shall be deemed the reversion for the purpose of preserving
the same incidents and obligations as would have affected the original
reversion had there been no surrender or merger thereof.
Section 150 of
the 1925 Act, re-enacting section 6 of the Landlord and Tenant Act 1730, deals
with other consequences of surrender and merger. I need not set it out.
Mr Paul Morgan
QC, for the appellant, contends that the exceptions must be confined to
surrender and merger where the headlease is, by agreement between landlord and
tenant, ‘. . . determined altogether . . .’. The legal incidents of a
termination of a periodic tenancy by an upwards notice to quit are, he points
out, different in character from those of termination by surrender. On
surrender, the lease is immediately extinguished; on notice to quit, only when
the notice expires. In the event of a joint tenancy, one joint tenant alone can
serve an upwards notice to quit; all are required to join in a surrender.
Mr Gore, for
the respondent, argues for a wider principle of exception to the general rule.
It is unnecessary, he submits, for the termination to be immediate and
consensual; the exception applies so as to leave the subtenancy intact whenever
the head tenant by his own voluntary act determines the head tenancy, whether
consensually or unilaterally. The principle underlying the exceptions is, he
contends, this: that a tenant cannot, by putting an end to his own tenancy,
destroy the interest he has granted to his undertenant; he cannot derogate from
his grant.
Turning to the
authorities, the first appearance of the wider principle for which Mr Gore
contends is to be found in Mellor v Watkins (1874) LR 9 QB 400.
(I reject his submission that clear hints of it emerge from the earlier
decisions in Doe d Beadon v Pyke (1816) 5 M&S 146 and Piggott
v Stratton (1859) 1 De GF&J 33.)
Mellor v Watkins concerned the effect of a surrender of a lease on
the interest of a sublessee. There was no dispute that the common law exception
applied to surrender. The two points before the court were whether the
subtenant had effectively been given notice to quit by the tenant and whether a
licensee was entitled to notice of determination of the licence. Nevertheless,
counsel for the plaintiff, Sir Henry James QC, stated in argument:
It must be
admitted that it has been decided that no voluntary act of a lessee in surrendering,
or otherwise putting an end to his tenancy, can affect the interest of his
under-tenant.
Cockburn CJ
said, at p404:
If Allen had
continued lessee, the Defendant’s interest could not have determined except by
a notice to quit and the surrender of Allen’s lease leaves the Defendant’s
underlease untouched. Sir H James admitted that there had been no notice to
quit and, moreover, that Allen could not by giving notice to his landlord
determine the underlease.
Blackburn J
said at p405:
Allen had no
power to derogate from his landlord’s rights. Subject to those rights, he had a
right to sub-let; and by doing that he could not prevent the landlord from
giving a notice to quit in invitum, which would have determined both
Allen’s and the Defendant’s interests. But no voluntary act on the part of
Allen, by which his own interest might be determined, could put an end to the
interest which he had created in the Defendant.
Lush J
concurred. Despite the exhaustive researches of counsel on both sides, no basis
in authority or otherwise has been found for Sir Henry James’ concession that
an upwards notice to quit would not determine the underlease, a concession
quite unnecessary for the determination of that surrender case. Certainly,
nothing in the 9th ed of Woodfall on Landlord and Tenant [1867],
published just seven years earlier, contained anything to support the
concession. Clearly, however, this concession influenced the judgments of the
court and, as will appear, those in turn came to influence later decisions.
The next
authority of note is Phipos v Callegari (1910) 54 SJ 635. That
case, too, involved a surrender of the head tenancy and thus the
straightforward application of the common law exception. However, Warrington J
considered (obiter) what the position would have been had the head
tenancy been determined by the headtenant serving notice on his landlord
pursuant to a break option in that lease. The judge indicated that he would
treat such determination as having the same effect as determination by surrender:
But … there
remained this further very important question whether, assuming that the notice
was sufficient as between the lessor and lessee, the lessee could give an
effectual notice to determine the lease after having granted the underlease to
the Plaintiff. It was clear that the provision for determination by notice was
inserted for the benefit of the lessee and of the lessee only. It was clear
also that a voluntary surrender of the term of the lessee does not affect the
interest of the under-lessee for the reason that the under-lessee has acquired
an interest in the term which cannot be affected without his concurrence. The
question here was whether, though this could not be done by surrender, it could
be effected by a determination of the term by the exercise of the power of
determining it contained in the lease, or whether the lessee was deprived of
the right to give the notice determining it without the concurrence of the
lessee … the exercise of the power to determine was for all practical purposes
the same as determination by surrender, so that it ceased to be competent to
the lessee after the execution of the under-lease to determine the lease
without the concurrence of the under-lessee.
A tenant’s
exercise of his right to determine a lease under a break clause is precisely
equivalent to his determining a periodic tenancy by notice to quit: in each
case a term which would otherwise have continued by operation of law is being
voluntarily determined.
I come next to
Brown v Wilson, the only authority directly in point, a
decision of Hilbery J at Stafford Assizes on July 5 1949, not fully reported
although summarised at (1949) 208 LT 144, (1949) 93 SJ 640 and (1949) 156 EG
45. The case concerned a head tenancy and subtenancy of a farm. The head tenant
gave notice to quit to the landlord and it was held that the subtenancy
remained binding on the landlord. Both Mellor v Watkins and Phipos
v Callegari were cited. Hilbery J rejected the landlord’s argument that:
… surrender
is an act independent of and outside the terms of any lease, and as a matter of
separate bargain between the head lessor and his lessee, and that it was for
this reason that the Courts had held that a surrender of the headlease could
not affect the rights of the underlessee.
He held rather
that:
An
examination of the cases shows that such has never been the reasoning given for
these decisions. The principle underlying the decisions seems to be a much
broader one than this, namely, that the law will not allow a man, by an act
done between him and another, to impair or destroy the rights which he has
granted to a third party.
The judgment
concluded thus:
In my opinion
it is settled law that a lessee cannot by a voluntary act put an end to his
term and thereby impair or destroy the rights he has granted to his
underlessee.
Brown v Wilson is the sole authority clearly decided in favour of
the wider principle. No later case has directly had to consider the point
although two have touched upon it in brief obiter dicta. In Lord
Denning’s speech in Fairweather appears:
The reason
for the difference [between the position of an underlessee and a trespasser on
the surrender of the headlease] is because the underlessee comes in under a
grant from the lessee; and the lessee cannot, by a surrender, derogate from his
own grant: see Davenport‘s case and Mellor v Watkins, by
Blackburn J.
In Harrison
v Wing (1988) 56 P&CR 358 a subtenant sought to rely on Brown
v Wilson, but failed on grounds which involved no consideration of its
correctness. The Court of Appeal merely noted that:
The effect
and ratio of Mellor v Watkins was discussed and applied in Brown
v Wilson.
Clearly,
therefore, there is no authority binding on this court as to the effect of an
upwards notice to quit. The issue raised on this appeal can accordingly be
restated thus: should Brown v Wilson be upheld or overruled?
Our attention
has been directed to the views of a number of legal commentators and
text-books. For the most part they appear to accept Brown v Wilson as
good law. Some — Muir Watt’s Law of Agricultural Holdings 13th ed
prominent among them — expressly approve it, perhaps increasingly as it has
become fortified by the passage of time. Some, however, put its correctness in
doubt, notably Foa’s General Law of Landlord and Tenant 8th ed (1957), Barnsley’s
Land Options 2nd ed (1992), and the current edition of Woodfall,
which happens to be edited by Mr Paul Morgan QC.
Clearly a
decision which has stood for 45 years commands respect. Equally clearly,
however, it has not attracted universal approval and it is difficult to suppose
that many will have entered into their tenancy arrangements in specific
reliance upon it.
In deciding
the point today it is accordingly necessary to examine the policy
considerations in play and, above all, the necessary consequences of a decision
either way.
One policy
consideration urged by Mr Gore in support of his argument is that, were Brown
v Wilson to be overruled, the way would be open to landlords and tenants
to engage in collusive arrangements to circumvent tenancy protection. He
envisages landlords letting to compliant tenants who would underlet and then,
when the landlord desired it, serve an upwards notice to quit with a view to
destroying the only true interest, the underlease. I find this wholly unpersuasive.
That there is ample scope for collusion whatever the outcome of this appeal is
plain from existing authorities — Gisborne v Burton [1989] QB
390* and Sparkes v Smart [1990] 2 EGLR 245 are two in point. So
far from collusion being more easily concealed by the scheme Mr Gore envisages,
the opposite seems to me the case. It must be remembered that, assuming this
appeal succeeds, service of an upwards notice would in all cases (unless only
the tenant can lawfully terminate the subtenancy) expose the tenant to a
liability to his subtenant in damages for breach of his express or implied
covenant of quiet enjoyment. Of course, as Mr Gore points out, the tenant may
be impecunious and so unable to meet a judgment under that covenant. But the
very fact that he incurs the liability would make the concealment of collusion
difficult indeed — more difficult certainly than, for example, were he to seek
the same collusive end by failing to serve an appropriate notice on his
landlord.
*Editor’s
note: Also reported at [1988] 2 EGLR 9.
Next, Mr Gore
invited our attention to a series of statutes which over the years have
controlled agricultural holdings — now the 1986 Act. Close examination of these
provisions, he suggests, points to a number of problems and anomalies that
could arise were an upwards notice effective to terminate an agricultural
subtenancy. I have no doubt that problems could indeed arise — as they already
have with regard to a landlord’s notice: see Sherwood v Moody [1952]
1 All ER 389. But Mr Morgan suggests the possibility of anomalies the other way
also. And in any event anomalies can be cured by legislation; perhaps, indeed,
by order under existing provisions: see section 29 and para 7 of Schedule 4 to
the 1986 Act. In the end I have not found fruitful Mr Gore’s incursion ever
deeper into the interstices of these statutes: a common law principle cannot,
in my judgment, be adequately tested and determined by reference merely to the
niceties of one particular area of legislation upon which it impinges.
I come
finally, therefore, to what seems to me the determinative area of debate — what
I may call the common law consequences of the competing contentions. Clearly,
certain disadvantages attend each position. In urging the disadvantages of
overruling Brown v Wilson, Mr Gore restates the wider
principle for which it stands: that a tenant should not be permitted
voluntarily to destroy an underlease and thereby derogate from his grant. True,
the underlessee would have a right to damages for the premature determination
of his holding, but that might prove worthless and in any event his true
interest lies in land, not money. The argument is not negligible. In my
judgment, however, it is overwhelmed by Mr Morgan’s response.
If Mr Gore is
right, landlords would be in a vulnerable position indeed. A tenant, by the
unilateral act of giving an upwards notice to quit, could force his landlord
into a direct legal relationship with a stranger. That would be so, indeed,
even had the subtenant’s interest been granted in breach of a covenant in the
headlease. True, in this latter circumstance, a landlord might be entitled to
forfeit and thereby pre-empt what would otherwise be the effect of an upwards
notice. But forfeiture is attended by its own problems and the right to it is
often lost. Moreover, not only would a tenant be able to foist an unwelcome
subtenant upon his landlord but the selfsame problems would also then arise
with regard to enforcing the terms of the subtenancy as in earlier centuries
arose upon surrender or merger — problems which the legislature has long since
solved in those contexts, but which remain unsolved with regard to an upwards
notice to quit. The problem would, indeed, be altogether more acute: even
before the 1845 Act landlords were well able to guard against finding
themselves saddled with tenants against whom they had no rights. Surrender,
after all, required their consent. The legislation, therefore, simply made
automatic what otherwise could and generally would have been achieved
consensually. Against an upwards notice to quit, however, landlords are
defenceless: they are in no position to ensure that they become entitled to the
benefit of the subtenant’s covenants.
Finally, and
perhaps most tellingly of all, is this consideration. If Mr Gore is right, a
tenant from year to year can perfectly lawfully exploit his position in the
most remarkable way. Take this example, suggested by Hoffmann LJ in the course
of argument: he can grant a 99-year subtenancy for a large premium at a
peppercorn rent and immediately then exercise his right to give an upwards
notice to quit. This will leave his landlord subject to that subtenancy,
entitled to no redress against his own tenant and, indeed, for want of any
equivalent to section 139 of the 1925 Act, unable even to recover the annual
peppercorn rent.
This is no
mere idle possibility: there are many implied periodic tenancies, brought into
existence by conduct. They will contain no prohibition against subletting.
There would thus be nothing to prevent the tenant from acting precisely as
supposed.
In short, I
have reached the clear conclusion that Mr Morgan’s arguments must prevail — the
considerations against allowing a tenant unilaterally to foist his subtenant
upon the landlord are in total compelling. Brown v Wilson should
be over-ruled. In the result, the tenant’s unlawful subletting here occasioned
the respondent landlord no material prejudice. The tenant’s appeal should
accordingly be allowed.
HOFFMANN and LEGGATT
LJJ agreed and did not add
anything.
Appeal
allowed.
