Agricultural Holdings Act 1948 and section 140 of Law of Property Act 1925 — Severance of the reversion — Effect of vesting part of the reversionary estate in trustees for sale — Whether a conveyance of part of the reversionary estate to bare trustees operated as a severance of the reversion or whether severance required a disposition of the beneficial interest as well as of the bare legal estate — In the present case the validity of a notice to quit given to a tenant of a farm in respect of a small portion of the land which was required for housing development (planning permission having been granted) turned on whether there had been an effective severance of the reversion — The reversion in the whole farm (including this small portion) had previously been split between two sets of owners and about half of the development land lay in the territory of each set — By agreement, and admittedly as a device to enable a notice to quit to be given to the tenant under section 24(2)(b) of the 1948 Act (Case B in section 2(3) of the Agricultural Holdings (Notices to Quit) Act 1977), both sets of owners conveyed their respective reversionary estates, so far as they related to the development land, to trustees for sale — The trustees then obediently gave notice to quit to the tenant — The county court judge held that the notice was invalid as given for part of a holding, on the ground that a legal estate is not severed where one element remains in the beneficial owner and the other element is held by bare trustees for, and subject to the direction of, that owner — Held by Court of Appeal, dismissing the appeal, that the conveyances to the trustees did not effect a severance — Section 140 of the 1925 Act contemplated a ‘real’ conveyance of the reversionary estate as a matter of substance — View expressed obiter that the words ‘contained in the lease’ in section 140(1) of the 1925 Act did not apply to the preceding phrase ‘every condition or right of re-entry’, but, even if they did, the common law right to determine a tenancy by notice to quit is apportioned and remains annexed to the severed parts, although the right is not expressly mentioned in the lease — Appeal dismissed
This was an
appeal from a decision of Judge Goodall at Exeter County Court, on a special
case stated by an arbitrator, holding that certain conveyances were not
effective in law to cause a severance of the reversion so as to enable a notice
to quit to be served in respect of part of an agricultural holding. The notice
to quit related to a small part, of about 2 acres, of an agricultural holding
known as Court Barton, Kentisbeare, Devon. The appellants were William and Mary
Persey and the respondent a Mr Bazley, the landlords and the tenant
respectively.
Peter
Langdon-Davies (instructed by Amery-Parkes & Co, agents for Every &
Phillips, of Honiton) appeared on behalf of the appellant landlords; P M H
Mottershead QC and J Craven (instructed by Stephens & Scown, of Exeter)
represented the respondent.
Giving the
judgment of the Court, MAY LJ said: This is an appeal by landlords from a
judgment of Judge Goodall given in the Exeter County Court on March 17 1982. In
it the learned judge, answering a question by an arbitrator in a special case
stated under the legislation relating to agricultural holdings, held that two
conveyances of September 28 1977, to which I shall have to refer in detail
shortly, were not effective in law to sever the reversion in the material
holding and thus to enable the landlords to serve a valid notice to quit in
respect of the part severed.
The facts of
this case need setting out in a little detail. By an agreement in writing of
September 2 1939 one Lucas let agricultural premises comprising a farm,
cottages, buildings and land known as Court Barton, Kentisbeare, Devon (to
which I shall refer as ‘the farm’), to the present respondent as tenant on a
yearly Michaelmas tenancy from September 29 1939. The respondent has ever since
remained and still is in occupation of the farm as tenant under this agreement.
By clause 22 of the agreement the parties agreed
that should
the landlord at any time or times require any portion or portions of the land
hereby let for building purposes then he shall be at liberty to take same on
giving one month’s notice to the Tenant of his wish to do so and the Tenant shall
be allowed a fair allowance of rent in respect of same.
The
reversionary estate in the farm subject to the tenancy became vested in one
William and Mary Persey, to whom I shall hereafter refer as ‘Mr and Mrs
Persey’. In 1975 these 2 then conveyed the reversionary estate in part of the
farm to themselves and four members of their family as tenants in common in
certain specified shares. Thus the reversionary estate in part of the farm then
became vested in Mr and Mrs Persey, and in the remainder in Mr and Mrs Persey
and the first two of the other transferees under the 1975 conveyance as
trustees on trust for sale.
On April 27
1976 the local planning authority granted planning permission for a small part
of the farm comprising some 2 acres or thereabouts for residential development
(to this small part of the farm I shall hereafter refer as ‘the development
land’). It so happened that approximately one half of the development land lay
in that part of the farm the reversion to which remained vested in Mr and Mrs
Persey alone, and that the remainder of the development land lay in the other
part of the farm the reversionary estate to which was held after 1975 by the
four trustees on trust for sale to whom I have just referred.
On September 9
1976 agents for Mr and Mrs Persey purported to give the respondent notice to
quit the development land on September 29 1977. The notice expressly stated
that it was given for
section 24(2) of the Agricultural Holdings Act 1948 as subsequently amended,
namely that the development land was required for a use other than agriculture
for which permission had been granted under the relevant town and country
planning enactments for residential development by the local planning
authority. It is then sufficient to say that in reply the respondent served a
proper counternotice under the relevant legislation disputing the validity of
the notice to quit and that thereafter arbitration proceedings were started
between the parties. However, after the tenant’s case in the arbitration had
been served, on advice Mr and Mrs Persey withdrew the notice to quit of
September 9 1976. I have no doubt that those advising them and considering
clause 22 of the original agreement took into account the decision in Coates
v Diment [1951] 1 All ER 890.
In these
circumstances, after the Persey family had been further advised, and admittedly
as a device, not merely to overcome the legal difficulty which I have just
mentioned, but also the general common law rule that a notice to quit part of
the land comprised in a demise is bad, two further conveyances were executed,
each dated September 28 1977. By them the reversionary estates in both parts of
the development land were conveyed by Mr and Mrs Persey on the one hand, and by
the trustees holding on trust for sale to whom I have referred on the other, to
the present appellants. Thus the reversionary estate in the whole of the
development land then became vested in them. The only other relevant provision
in the two conveyances was that the appellants should hold the two parts of the
development land as bare trustees for sale for the two sets of transferors
respectively. Thus although from a conveyancing point of view the legal title
to the reversionary estates in the development land was vested after September
28 1977 in the appellants, nevertheless they held it merely as bare trustees
for those who had been beneficially interested in the respective parts prior to
the two conveyances. Acting in such capacity the appellants were bound, among
the other things, to do the lawful bidding of the respective beneficial owners
— for instance to reconvey the two parts of the development land as and when
required.
Nevertheless,
the contention of the appellants was and has thereafter been that by the two
conveyances of September 28 1977 there was a sufficient severance of the
reversionary estate in the two parts of the development land from the
reversionary estates in the remainder of the farm within section 140 of the Law
of Property Act 1925. In so far as is material to the present appeal this
provides as follows:
(1) Notwithstanding the severance by conveyance .
. . of the reversionary estate in any land comprised in a lease . . . every
condition or right of re-entry, and every other condition contained in the
lease, shall be apportioned, and shall remain annexed to the severed parts of
the reversionary estate as severed . . . in like manner as if the land
comprised in each severed part . . . had alone originally been comprised in the
lease.
(2) In this section ‘right of re-entry’ includes
a right to determine the lease by notice to quit or otherwise . . .
In the light
of these provisions and as the reversionary estate in the whole of the
development land had become vested in the appellants, they contended that they
were entitled to give an appropriate notice to quit to the tenant in respect of
that development land. They argued that as such a right was included in the
phrase ‘right of re-entry’ by virtue of subsection (2) of section 140 then
this, on severance of the reversionary estate in the development land by the
two conveyances, remained annexed to it as if that land alone had originally
been comprised in the relevant lease.
Consequently,
after but on the same day as, the two conveyances of September 28 1977, the
appellants gave the respondent notice to quit the development land on September
29 1978, again expressly stating that the notice was served under section
24(2)(b) of the Agricultural Holdings Act 1948 as subsequently amended: similar
provisions are now contained in Case B of subsection (3) of section 2 of the
Agricultural Holdings (Notices to Quit) Act 1977. Once more the tenant gave the
appropriate counternotice under the relevant provisions of the 1948 Act as
amended intimating that he wished to contest the reason stated in the notice to
quit and that he required the question to be determined by arbitration. At that
time the statutory instrument governing such arbitrations was the Agriculture (Notices
to Remedy and Notices to Quit) Order 1964 (SI 1964 no 706), but this has now
been repealed and replaced by the Agricultural Holdings (Arbitration on
Notices) Order 1978 (SI 1978 no 257).
On March 2
1979 the planning permission in respect of the development land was renewed.
In the
arbitration on the second notice to quit the tenant’s principal contention was
that as no beneficial interest was intended to or did pass by virtue of the two
conveyances of September 28 1977, but that thereafter the present appellants
merely held the property on the bare trusts to which I have referred, there was
no effective severance of the reversion to the development land. Thus the
second notice to quit also was invalid, ineffective and bad in law. When the
matter came before the arbitrator the facts which I have outlined were agreed
and on the request of both sides the arbitrator stated a special case under the
provisions contained in Schedule 6 to the 1948 Act as amended for the opinion
of the county court. The question of law posed in the case was whether or not
the two material conveyances were effective in law to sever the reversion in
the holding so as to enable the landlords to serve good notice to quit as to
the development land alone. It was this special case raising this question
which came before Judge Goodall at the Exeter County Court on March 17 1982. By
his judgment he held that the two conveyances were not effective to achieve a
severance of the relevant reversion within section 140 of the 1925 Act.
In these
circumstances the principal question raised by this appeal is the same as that
posed by the arbitrator in the case stated and answered in the negative by the
learned judge in the court below. In the latter’s opinion the two conveyances
were in effect the vehicle for a wholly artificial transaction designed to get
round the common law rule that a notice to quit part only of the land comprised
in a demise is never effective, save in the four exceptional instances to which
he specifically referred. In his opinion, to come within section 140 of the
1925 Act a ‘severance’ must be constituted by an irrevocable, and not a
revocable, separation. He took the view that a legal estate cannot properly be
said to be severed where one part remains in the beneficial owner and the other
part is held by a bare trustee in trust for that beneficial owner. In such
circumstances de facto control is not severed: the beneficial owner can
at all times direct the trustee to reconvey the land: if he does so direct,
then the bare trustee must do the bidding of the beneficiary.
This view of
the learned judge was supported by counsel for the respondent in argument
before us. He contended that in section 140 of the Act Parliament must have had
in contemplation a real severance of the reversionary estate as a matter of
substance. Parliament, he suggested, was intending to deal with the incidental
effect of a true disposal of the reversionary estate. In the present instance
there was no real substance in the material conveyances: they were merely
executed to gain the power, which the landlords otherwise did not have, to give
a notice to quit of only part of the holding. In effect, the
trustee/transferees were mere agents for the transferors: they stood in the
shoes of the latter: thus there could not be said to be any true separation of
the reversionary estates in the individual parts.
Mr
Langdon-Davies for the appellants submitted on the other hand that a tenant,
like a purchaser, is concerned only with the person who holds the legal estate
to the reversion. As the learned judge below accepted, the reference to
reversionary estate in section 140 of the 1925 Act means the legal estate in
the freehold reversion having regard to the definitions in section 1 of the Act
and in particular in section 1(8). To argue that one can look behind the legal
effect of the two conveyances in the present case, which were not ‘shams’, runs
contrary to one of the basic principles embodied in the 1925 legislation,
namely that trusts or beneficial interests are to be kept ‘behind the curtain’.
It is true that in the instant case it was clear on the face of the conveyances
that the transferees were merely bare trustees for the transferors. However,
precisely the same transactions could entirely properly, and indeed perhaps
from a conveyancing point of view rather more correctly, have been effected by
deeds merely conveying the legal estate to the transferees and containing no
reference to the trusts upon which the lands so conveyed were to be held. Such
trusts could perfectly properly have been set out in separate documents which
the tenant would never have seen; indeed he would have had no right to see
them.
Counsel for
the respondent drew our attention to the case of Quennell v Maltby
[1979] 1 WLR 318 and invited us, in the same way as did the court in that case,
to look behind the formal legal relationship of the parties and discover the
true substance of the matter. Quennell’s case, however, is clearly
distinguishable from the instant case in at least one respect. The facts of the
former were that
material house otherwise than bona fide and reasonably for the purpose
of enforcing her security. The court pointed out that in such cases equity had
for a long time stepped in to mitigate the rigour of the law and to protect
those in possession of mortgaged property. No similar or other equity exists
which would affect the conscience of the transferee-landlords in the present
case.
As the learned
judge below recognised, the underlying question in this appeal is not peculiar
to agricultural holdings only. It concerns all tenancies and leases. This
notwithstanding, counsel for the respondent also argued the point raised in the
second paragraph of the respondent’s notice, namely that the device, if
properly so-called, of conveying part of a reversionary estate to a bare
trustee was contrary to the policy of the legislature in respect of
agricultural holdings and to public policy generally. Without intending any
disrespect to counsel’s argument, I do not propose to consider it in detail. It
was based upon an alleged incompatibility between the device and the consequent
ability to give a notice to quit on the one hand and the compensation
provisions in the relevant statutes on the other. It is sufficient for me to
say that I was not convinced by the argument. Indeed I prefer the contrary
argument of counsel for the appellant that had the tenant not taken the legal
point which succeeded in the court below and allowed the notices to quit to
operate, he would have been entitled both to compensation under the Act and to
a reduction of rent.
The stark
question in this appeal, subject to a secondary point with which I will deal
hereafter, is whether the ‘device’ of conveying a reversionary legal estate to
only part of the land comprised in a demise to a bare trustee for the
transferor is a sufficient severance of that estate within section 140 to
enable a notice to quit to be given in respect of the part, notwithstanding the
fact that once such a notice has been given the transferor-beneficiary can forthwith
require the transferee-trustee to reconvey the reversionary estate back to him.
As I have said, it was accepted that the transaction was entered into as a
device to overcome the basic common law rule. Although no sham, properly
so-called, I have already mentioned the fact that once the notice to quit has
been given the status quo ante can be restored by reconveyance to the
original transferor at his direction. For my part, I would be slow to uphold
the efficacy of such a device unless I felt driven to do so. On the other hand,
if no sham, then the legal estate does pass from the transferor to the
transferee by the material conveyance, albeit perhaps for only a few days.
Further, a tenant is concerned only with the person in whom the legal estate is
vested, namely that person who is entitled to give him whatever notice to quit
may be legal and practicable in the circumstances. As I have said, even the
limited trusts affecting the bare trustee in the present case could well have
been kept off the conveyance and behind the curtain.
This is by no
means an easy problem to resolve. I agree that not only is the tenant in these
cases not bound but indeed not entitled to seek information about the nature of
any underlying beneficial transaction behind the conveyance of the reversionary
legal estate. Nevertheless, if he does come to know the nature of the
underlying transaction, then unless he is prevented by law, I see no reason why
he should not seek to take advantage of this knowledge.
Further, I
think it a good general principle that once a court knows the true factual
position in a case it should not, save where otherwise bound, hold the law to
be such as to produce a result effectively inconsistent with it.
Here the
transferees as bare trustees were effectively the nominee for the transferor
(see Lewin on Trusts, 16th ed, p 6). They were bound to do what they
were told by the beneficial owners and only what they were told. The
relationship between the transferors and the transferees was analogous to, if
not the same as, that between principal and agent, which, be it remembered, is
in any event of itself a fiduciary one.
Notwithstanding
the formal passing transfer of the legal estate as a result of the conveyances,
I do not think that a transaction of this nature is properly described as a
‘severance’ within section 140 of the Law of Property Act 1925. I am quite
satisfied, had the mind of the draftsman been directed to the circumstances
which have arisen in this case, that he would not have intended section 140 to
apply. In my opinion this section was intended to deal with the situation where
there has been a real conveyance from the original reversioner and thus a
severance. It would be unwise, and I do not propose to try, to define what is
meant by the word ‘severance’ in section 140 of the Act. Each case will have to
be dealt with on its merits as and when it arises. It is sufficient for the
purposes of deciding the present appeal for me to say that in my opinion the
two conveyances of September 28 1977 did not effect such a severance.
If I am wrong
in this view, and even if there was a severance by virtue of the conveyances
within the meaning of section 140 of the 1925 Act, counsel for the respondent
made submissions in support of the other contention raised in the respondent’s
notice herein. This was that even if there has been a sufficient severance,
nevertheless notices to quit could not be given by the transferees because the
original lease to the respondent of September 2 1939 did not ‘contain’ any
valid provision entitling the landlords to determine the demise in respect of
the whole, still less of part of the land originally comprised in it. Clause 22
of the original agreement was void — see Coates v Diment supra.
He submitted that the words ‘contained in the lease’ in section 140(1) applied
to the earlier words — ‘every condition or right of re-entry’ — and that on a
proper construction the words ‘contained in the lease’ meant contained
expressly in it.
In answer,
counsel for the appellant first contended that on a proper construction of the
subsection the words ‘contained in the lease’ did not apply to the earlier
phrase. Secondly, and in any event, counsel submitted that even if they did the
phrase ‘contained in the lease’ did not mean that the condition or right of
re-entry under consideration had expressly to be contained in the original
lease. It was sufficient if such condition or right of re-entry were impliedly
so contained. Unless expressly excluded or modified there is always at common
law a right to determine a periodic tenancy by notice to quit; by virtue of
section 140(2) this is included in the phrase ‘right of re-entry’: clearly the
intention must have been to apportion this right upon a severance: one must
therefore construe the relevant phrase to cover a right of re-entry, as defined
by subsection (2), either expressly or impliedly contained in the relevant
lease. Further, the definition of lease in section 54 of the Act includes an
oral tenancy and counsel submitted that this also supported the construction of
the material parts of section 140(1) to which I have referred.
As a matter of
pure construction, having regard to the punctuation in section 140(1), I agree
with the respondent’s counsel’s contention that the words ‘contained in the lease’
do not apply to the preceding phrase — ‘every condition or right of re-entry’.
If I were wrong, then having regard to the terms of subsection (2) of section
140 and section 154 I am quite satisfied that the right to determine a periodic
tenancy by a notice to quit is apportioned and remains annexed to the severed
parts of the reversionary estate as severed even though that right was not
expressly stated in the lease. If this were not so, then in so far as notices
to quit were concerned, section 140(1) would be of very little use: in my
experience the right to determine a letting by a notice to quit is very seldom
expressly stated in a periodic tenancy in writing and never in such a tenancy
created orally.
As I have
said, however, this subsidiary point arises only if on the facts there was a
severance in this case within section 140. For the reasons that I have given, I
do not think that there was and would therefore dismiss this appeal. On the
other hand, if I were wrong and there was a sufficient severance within the
statute, then I think that the landlord-transferors were able to serve notices
to quit the development land alone even though there had been no valid express
power in the original lease of 1939.
WATKINS LJ
expressed his agreement with the judgment.
The appeal
was dismissed with costs. Leave to appeal to the House of Lords was refused.
