Landlord and tenant — Landlord and Tenant Act 1954 — Security of tenure — Section 38 exclusion order — Lease entered into differed in terms from lease authorised by court — Whether tenant held tenancy protected by Part II of 1954 Act — Lease contained break clauses — Whether lease was for ‘a term of years certain’ within meaning of section 38(4)
The appellant receiver is the freehold owner of
land held as a possible site for a new court or police purposes. In May 1993 a
lease of the land was granted to the respondent tenant for a term of five
years. Prior to the grant, the parties obtained a court order authorising them
to enter into an agreement in the form of a draft lease annexed to the order,
which excluded the security of tenure provisions of the Landlord and Tenant Act
1954; the draft had a number of blanks that were later filled in when the lease
was completed. Under the draft and the executed lease, rent was payable, by
implication of law, annually in arrear. Shortly after the court order, the
parties agreed that rent was payable quarterly in advance.
In 1998 the tenant served a request for a new
tenancy under section 26 of the 1954 Act. In the court below, the judge held
that the tenant was entitled to the protection of the 1954 Act; it was not
possible to alter the terms of the lease as authorised by the court. The
agreement the parties entered into was different from the document authorised by
the court because of the agreement that rent was payable quarterly in advance
and not annually in arrear. The receiver appealed. By a respondent’s notice,
the tenant contended that the court, in 1993, had no jurisdiction to authorise
the lease as it contained a break clause, alternatively was for five years and
then from year to year, and was not to be granted for a ‘term of years certain’
within the meaning of section 38(4)(a).
allowed. The court hearing the joint application was neither empowered nor
entitled to consider the fairness of the bargain, as such, that the parties
proposed to make. The reference to ‘that tenancy’ in section 38(4)(a) of
the 1954 Act, in relation to an application to the court for an exclusion
order, required the terms of the final lease to bear a substantial similarity
to that before the court when authority was given. A change in the terms may
be, in appropriate cases, a relevant factor for the purposes of section 38(4)(a).
Whether the rent was payable in advance or in arrears was not relevant in this
particular case. The presence of a break clause did not prevent the term being
a term of years certain for the purposes of section 38(4) of the Act. The lease
was for a term of years certain, notwithstanding the terms it contained for
termination.
This was an appeal by the landlord, the Receiver
for the Metropolitan Police District, against a decision of William Barnett QC,
sitting in Central London County Court, giving judgment to the tenant,
Palacegate Properties Ltd, in proceedings by the landlord for possession and by
the tenant for a new tenancy.
Kim Lewison QC and Edward Cole (instructed by
Winckworth Sherwood) appeared for the landlord; Stephen Jourdan (instructed by
Jay Benning & Peltz) represented the tenant.
Giving judgment, PILL LJ said: This is an appeal against the judgment of
Judge William Barnett QC, sitting at Central London County Court on 30 July
1999, in which he held that a lease of commercial premises executed on 12 May
1993 was not excluded from the security of tenure provisions of the Landlord
and Tenant Act 1954 (the 1954 Act) Part II, by an order made at the Mayor’s and
City of London Court under section 38(4)(a) of the Act on 23 April 1993.
Facts and section 38(4)(a) of the 1954 Act
The Receiver for the Metropolitan Police District
(the landlord) is the freehold owner of land adjoining the Roundhouse at
Primrose Hill, Chalk Farm Road, London. The land is held as a possible site for
a new court or for police purposes. Pending the emergence of a scheme, the land
has been occupied on tenancies or licences. The disputed lease to Palacegate
Properties Ltd (the tenant) was for five years, and allowed the tenant to use
the land as a car park and for the storage of vehicles and materials used in connection
with the Roundhouse.
The parties made a joint application to the court
under section 38(4)(a) of the Act. As originally enacted, section 38
provided that: ‘Any agreement relating to a tenancy to which this Part of this
Act applies…shall be void in so far as it purports to preclude the tenant from
making an application or request under this Part of this Act…’. Part II is
entitled ‘Security of Tenure for Business, Professional and other Tenants’ and
provides, in sections 24 to 28 and other sections, for the continuation of
business tenancies and a procedure for the renewal of tenancies.
Section 38(1) of the Act was amended by the Law of
Property Act 1969 section 5, so as to provide circumstances in which agreements
under the section are not void. Section 38(4) provides:
The court may —
(a) on the joint application of the
persons who will be the landlord and the tenant in relation to a tenancy to be
granted for a term of years certain which will be a tenancy to which this Part
of this Act applies, authorise an agreement excluding in relation to that
tenancy the provisions of sections 24 to 28 of this Act; and
(b) on the joint application of the
persons who are the landlord and the tenant in relation to a tenancy to which
this Part of this Act applies, authorise an agreement for the surrender of the
tenancy on such date or in such circumstances as may be specified in the
agreement and on such terms (if any) as may be so specified;
if the agreement is contained in or endorsed on
the instrument creating the tenancy or such other instrument as the court may
specify; and an agreement contained in or endorsed on an instrument in
pursuance of an authorisation given under the subsection shall be valid
notwithstanding anything in the preceding provisions of this section.
A draft of the lease was submitted to the district
judge when application was made on 23 April 1993. Gaps were left in the draft
for the date of the lease, the date for commencement of the term and the date
of the proposed exclusion order. The draft lease reserved a rent of £22,000 pa,
but made no express provision for the dates upon which the rent was to be paid.
The parties appeared before the district judge by
solicitors, and the district judge made the following order:
UPON THE JOINT APPLICATION of the applicants IT
IS ORDERED pursuant to section 38(4) of the Landlord and Tenant Act 1954 (as
amended by section 5 of the Law of Property Act 1969) that the applicants be
authorised to enter into an agreement to exclude the provisions of sections
24-28 (inclusive) of the Landlord and Tenant Act 1954 in the form of clause
4(6) to be contained in a Lease of the above described property intended to be
granted by the first applicant as landlord to the second applicant as tenant a
draft whereof is annexed to the originating application and to exclude the said
provisions.
On 12 May 1993 the lease was completed in the form
of the draft, with the blanks filled in and an alteration (not said to be
material for present purposes) to the address of the registered office of the
tenant.
It is common ground that under the written
agreement in draft and as executed, rent was payable, by implication of law, annually
in arrear. However, it is also common ground that at all times the agreement
was that the rent would be payable quarterly in advance. Solicitors for both
parties gave evidence to that effect at the trial. On 7 May 1993 Mr Owston, the
landlord’s solicitor, wrote a letter to Mr Peltz, the tenant’s solicitor,
recording that they had agreed that the rent would be paid quarterly in
advance, and, for present purposes, that can be treated as a term of the lease.
On 12 February 1998 the tenant served a request
for a new tenancy under section 26 of the 1954 Act. It was thereby asserted
that the tenant was entitled to security of tenure and a new lease pursuant to
the Act. The tenant commenced proceedings for the grant of a new tenancy. The
landlord commenced proceedings for possession on the ground that the lease had
ended and the tenant was trespassing. The actions were consolidated and the
judge agreed to try preliminary issues that are the subject of this appeal.
It should be added that, by a respondent’s notice,
it is submitted that, on its true construction, the lease created a term for
five years and thereafter from year to year. It is submitted that, for that
reason, it is not a term of years certain for the purposes of section 38(4) of
the Act. It is also submitted that the term of five years was, in any event,
subject to break clauses and was not, for that reason, a term of years certain.
Submissions on section 38(4)(a)
The argument for the tenant, which succeeded
before the judge, was that reliance can only be placed by the landlord on
section 38(4) when the lease is in the same terms as the draft placed before
the judge. The judge held:
what one cannot do is to alter the terms as
authorised by the court. You could, it seems to me, if you want to and if the
court would do it, authorise an agreement to be entered into merely referring
to the bare bones of the agreement: in other words, identifying the tenancy,
identifying the rent and identifying the period. It may well be that the court
could say that as long as those terms are in an agreement, the parties could
decide for themselves what they wanted to do. But that would then be what the
court authorises. Here I am quite satisfied that the document which was
authorised by the court was an entirely different agreement to the one that was
entered into, namely the difference between an agreement where the rent was to
be paid annually in arrear, which anyone reading it who knew about these things
would think to be the situation, as opposed to one where the rent was to be
paid quarterly in advance.
The judge had previously referred to the draft
before the district judge when the order pursuant to section 38(4) had been
made as ‘the lease…approved by the Court’ and stated that the court giving the
section 38(4) approval ‘has to have matters before it which it expressly
authorises and that is why it normally is the lease itself’. The judge drew an
analogy, with approval by the court, of infant settlements in personal injury
cases.
In seeking to uphold the judge’s finding, Mr
Stephen Jourdan relies upon the words ‘in relation to that tenancy’ in section
38(4)(a). The protection for tenants that the section contemplates can
be provided only if, when authority is given, the court has the actual terms of
the proposed lease before it. The tenant must know what he is giving up in
relation to a specific tenancy and in relation to the tenancy as a whole.
For the landlord, Mr Kim Lewison QC contrasts the
brevity of section 38(4) with the detailed procedure laid down in sections 24
to 36 in the different situation in which a new tenancy is under consideration.
He submits that the judge was wrong to regard the procedure in section 38(4) as
an approval by the court of a lease. What the court is doing is authorising, on
the joint application of the parties, an agreement excluding the provisions of
sections 24 to 28 of the Act. That approval does not require an analysis of the
terms of the lease. If the approval is given, the lease need not be in the same
terms as the draft before the judge. The judge needs only to know, when giving
an authorisation under section 38(4)(a), the matters specified in the
paragraph, that is the identity of the persons who will be landlord and tenant,
the identity of the premises to be demised, that the lease is to be for a term
of years certain within the meaning of that term in the section and that the
agreement is ‘contained in or endorsed on the instrument creating the tenancy
or such other instrument as the court may specify’.
Mr Lewison referred to Friends Provident Life
Office v British Railways Board [1996] 1 All ER 336*, where it was
held in this court that, in construing a deed of variation of a lease, the
court would give effect to the intention of the parties unless it was compelled
by the nature of the changes made to hold that the effect of the deed was to
bring about a surrender and regrant by operation of law. Such an effect would
only occur where the variation affected the legal estate and either increased
the extent of the premises demised or the term for which they were held.
* Editor’s note: Also reported at [1995] 2 EGLR
55; [1995] 48 EG 106
Mr Lewison argues, by analogy, that a deed of variation,
the effect of which is to make the rent payable quarterly in advance, instead
of annually in arrear, would not prevent the lease being the same one before
and after the variation. For the purposes of section 38(4), it should be
treated as the same lease. Mr Jourdan understandably submits that if the
analogy is a good one, it must involve an acceptance that a change in the
extent of the premises demised or the term for which they are held would make
the lease a different one, a submission that Mr Lewison is not prepared to
accept. Mr Lewison submits that he is concerned only to establish that the
change in the present case, which does not go either to the extent of the
premises or the term, is immaterial. The issue raised does, however, with respect,
require the court to adopt a principled approach to section 38(4). Mr Lewison’s
submission as to the principle governing the operation of the section is that
the court giving authority is not concerned with the fairness of the bargain or
whether it is fair to have an exclusion clause. The court is concerned only
with whether there is an informed consent to the exclusion of protection. As
long as a tenant knows that he is giving up protection with respect to the
proposed tenancy, the parties may thereafter agree such terms as they see fit.
Conclusion on section 38(4)(a)
I agree with Mr Lewison that the court hearing the
joint application is neither empowered nor entitled to consider the fairness of
the bargain, as such, that the parties propose to make. The subsection is not
intended to empower the court to dictate to the parties to a lease what the
terms of the lease should be. Had parliament intended, under section 38(4), a
court to investigate the fairness of bargains, a more specific and detailed
procedure would have been laid down. Such a procedure has been laid down, when
a protected tenant requests a new tenancy, in Part II of the Act, including
sections 33 to 35. I accept that the purpose of section 38(4)(a) is to
enable a court to satisfy itself that the prospective tenant understands that
he is foregoing the protection of section 24 to 28 of the Act. However, effect
must be given to the words ‘in relation to that tenancy’ in the subsection.
Attractive though it may be, in terms of freedom of contract, to limit the
effect of the subsection in the manner advocated by Mr Lewison, I do not
consider that a section that provides that an agreement to waive protection
needs the sanction of the court gives a green light to a landlord to make
wholesale changes to the draft tenancy submitted to the court when approval was
sought. The words ‘that tenancy’ in section 38(4)(a) require its terms
to bear a substantial similarity to that before the court when authority was
given. In particular, changes material to the need for protection may nullify
the authority granted. For example, the length of the term would be a material
consideration in the case of a lease that contemplated substantial capital
expenditure by the tenant. A court authorising an agreement excluding protection
would be expected to make greater inquiry as to the proposed tenant’s consent
if the term is a short one than if the term is a long one, and a change that
substantially shortens the term would be material. A court may be expected to
satisfy itself that the prospective tenant knows what he is giving up, and the
extent of the inquiry will depend upon the terms proposed. It follows that a
change in the terms may be a relevant factor for the purposes of section 38(4)(a).
I do not find the Friends Provident
principle helpful to a consideration of section 38(4), and Mr Lewison does not
need to rely on it. In my view, analysis of section 38(4) and its purpose need
not involve consideration of the distinction between when a lease is varied and
when there is a surrender and regrant.
Mr Jourdan frankly accepts that there is no merit
in this tenant being permitted to resile from an agreement freely made on the
ground that the draft lease before the court giving approval had the effect of
inaccurately providing for what the parties had agreed as to the dates on which
rent was payable. The fact that the draft before the court was in this respect
different from the terms of the lease does not invalidate the authorised
agreement by which the provisions of sections 24 to 28 were excluded. I would
have reached the same conclusion even had the agreement that rent was payable
in advance been made subsequent to the court approval. In the present context,
that could have had no bearing upon whether or not the court should grant
authority. The court is concerned with whether the tenant understands he is
giving up protection. Whether the rent is payable in advance or in arrears has,
in present circumstances, no bearing whatever upon that function.
Term of years certain
By a respondent’s notice, the tenant submits that
the court had no jurisdiction on 23 April 1993 to authorise the agreement
because the tenancy was not to be granted ‘for a term of years certain’.
Reliance is placed upon the admitted presence of a break clause or clauses in
the lease.
There is no definition of the expression ‘term of
years certain’ in the interpretation section (section 69) of the 1954 Act. The
researches of counsel have not discovered any clear authority as to the meaning
of the expression at common law. Section 205(1)(xxvii) of the Law of Property
Act 1925 provides that a ‘term of years absolute’ means ‘a term of years…either
certain or liable to determination by notice, re-entry, operation of law, or by
a provision for cesser on redemption, or in any other event (other than the
dropping of a life, or the determination of a determinable life interest);…’.
While the definition does distinguish ‘certain’ from ‘liable to determination
by notice’, it does not appear to me to throw light on the meaning of the
expression in the 1954 Act, of which it is a creature.
Mr Jourdan accepts it is clear that in other
sections in the 1954 Act a ‘term of years certain’ does include leases subject
to break clauses. However, he submits that it should bear a different meaning
in section 38(4) because of the legislative purpose of that subsection. It
seeks to prevent the withdrawal of protection in cases where the tenant does
not know, in advance, the period during which he would be guaranteed the right
to remain in the property, provided he paid the rent and performed his
obligations. The principle of consistency should not be permitted to subvert
the policy of the subsection. Parliamentary draftsmen do sometimes make
mistakes: see R v Lynsey [1995] 3 All ER 654. Parliament cannot
have intended that protection was capable of being given up when, by reason of
a break clause, there could be an early termination of a lease, and termination
at a time impossible to predict. In section 38(4) the expression meant a fixed
term.
Reference was made to Scholl Manufacturing Co
Ltd v Clifton (Slim-Line) Ltd [1967] Ch 41. The case turned on
whether a landlord could exercise a right to break a lease by serving a notice
under section 25 of the Act (Termination of tenancy by the landlord), and the
present point did not arise for decision. In a recital of facts at the
beginning of his judgment, Harman LJ referred to the date of expiry of the
lease and added that ‘this, however, was not a term certain because’ of the
break clause. In his judgment, at p49C Diplock LJ stated:
Under the common law, apart from surrender or
forfeiture, a tenancy may come to an end by effluxion of time, if for a term of
years certain, or by notice given by the tenant to the landlord or by the
landlord to the tenant, if a periodic tenancy, or a tenancy for a term of years
certain subject to a break clause.
Winn LJ agreed with both judgments, but added
that, had there been any need, he would have tried to deal with the matter ‘on
the same lines as Diplock LJ has followed and to have expressed the same views
as those he has expressed’.
Mr Lewison relies upon the speech of Lord
Templeman in Prudential Assurance Co Ltd v London Residuary Body
[1992] 2 AC 386*. It was concerned with a memorandum of agreement, which provided
that ‘the tenancy shall continue until the…land is required by the Council for
the purpose of the widening of’ the highway. The lease purportedly created
under that memorandum, being for an uncertain period, was void possession, and
the land was held on a yearly tenancy created by virtue of the tenant’s and
payment of yearly rent.
* Editor’s note: Also reported at [1992] 2 EGLR
56; [1992] 36 EG 129
Lord Templeman referred to section 1(1) of the
Validation of War-time Leases Act 1944, which provided that an agreement that
purported to grant a tenancy for the duration of the war ‘shall have effect as
if granted or provided for the grant of a tenancy for a term of 10 years,
subject to a right exercisable either by the landlord or the tenant to
determine the tenancy, if the war ends before the expiration of that term, by
at least one month’s notice in writing given after the end of the war;…’. Lord
Templeman stated that parliament had granted ‘the fixed and certain term which
the agreements between the parties lacked in the case of tenancies for the
duration of the war’. Lord Templeman added at p395A:
A lease can be made for five years subject to the
tenant’s right to determine if the war ends before the expiry of five years. A
lease can be made from year to year subject to a fetter on the right of the
landlord to determine the lease before the expiry of five years unless the war
ends. Both leases are valid because they create a determinable certain term of
five years.
I accept the reservations of Mr Jourdan, first,
that Lord Templeman uses the expression ‘certain term of five years’ and not
‘term of years certain’, and, second, the submission on the policy of section
38(4), but both Lord Templeman in Prudential and Diplock LJ in Scholl
find no inconsistency between the certainty of a term and the presence in the
lease of a break clause. If Harman LJ in Scholl was using the expression
‘term certain’ as a term of art, I would respectfully prefer the opinion of
Diplock LJ.
In my judgment, the presence of a break clause
does not prevent the term being a term of years certain for the purposes of
section 38(4) of the Act. The term must be construed in the context of the Act.
Section 69(1) defines ‘notice to quit’ as meaning a notice to terminate a
tenancy (whether a periodical tenancy or a tenancy for a term of years certain)
given in accordance with the provisions (whether express or implied) of that
tenancy. In the context of a term of years certain, the only notice to quit
that can be given is a notice exercising a right to break. The statutory
meaning of notice to quit covers a notice exercising a break clause and clearly
contemplates that a fixed term tenancy determinable by such a notice is still a
‘term of years certain’. On the same basis, as Mr Jourdan accepts, the
expression ‘term of years certain’ must include a tenancy subject to break
clauses in other sections of the Act: sections 24(3), 26(1), 27(1), 27(2) and
33. There is a strong presumption that it bears the same meaning in section
38(4) of the Act. That meaning is consistent with the use of the word ‘certain’
in the other cases to which I have referred. That sense is not, in my judgment,
proscribed by assigning to the subsection a statutory purpose that, in my
judgment, cannot be assumed.
Mr Jourdan also referred to Garston v Scottish
Widows Fund & Life Assurance Society [1998] 3 All ER 596†. That case
turned upon the construction of the proviso to section 26(2) of the Act
(Tenant’s request for a new tenancy) and whether the proviso contemplates ‘one
relevant date only in respect of a given tenancy’. It was held that it did, and
that the relevant date in the case of a lease for a term of years was the date
on which the lease would have come to an end by effluxion of time. The right to
request a new tenancy when the tenancy ‘could be brought to an end by notice to
quit given by the tenant’ was held not to apply to a lease for a term of years.
That is not inconsistent with a lease containing a break clause being for a
term of years certain.
† Editor’s note: Also reported at [1998] 2 EGLR
73; [1998] 32 EG 88
Construction of lease
Mr Jourdan makes the further submission that, on
its true construction, the lease created a term of five years and thereafter
from year to year, and, as such, was not for a term of years certain. The
landlord contends that the lease created a fixed term of five years commencing
on 23 April 1993 and ending on 22 April 1998. The habendum provides:
To hold the same unto the tenant for the term of
five years commencing on 23rd day of April one thousand and ninety three (‘the
Term’) and thereafter determinable by six months prior written notice on the
part of the landlord taking effect at any time after 1st June 1995 as
hereinafter provided…
Clause 4(5) provides:
The landlord or the tenant shall be entitled to
determine the term hereby granted by giving to the other party hereto not less
than six months notice in writing expiring at any time after 25th December 1994
whereupon this lease shall absolutely determine but without prejudice to any
claim that the parties hereto may have in respect of any antecedent debt or
obligation.
Mr Jourdan submits that if the landlord had a
right under clause 4(5) to determine the term on six months’ notice, taking
effect at any time after 25 December 1994, he would not need a separate right
to determine the term on six months’ notice taking effect at any time after 1
June 1995. On that footing, the clause 1 right would be otiose. If the lease
did create a tenancy for five years and thereafter from year to year, it was
not for a ‘term of years certain’: see Nicholls v Kinsey (1994)
69 P&CR 438*.
* Editor’s note: Also reported at [1994] 1 EGLR
131; [1994] 16 EG 145
Given that an ambiguity must be construed in the
tenant’s favour (Dickinson v St Aubyn [1944] 1 All ER 370), it is
submitted that the landlord’s right in clause 1 should be construed as applying
after the expiry of the term of five years, with the tenancy continuing as a
yearly tenancy unless and until terminated by notice to quit. The word
‘thereafter’ in clause 1 means after the expiry of ‘the term of five years’.
I do not accept that submission. The court must
try to give effect to the intention of the parties as expressed in the lease.
Clause 1 contemplates written notice being given after 1 June 1995, which is
well within the five-year term. That being so, the word ‘thereafter’ refers not
to a time after the term of five years, but a date after 23 April 1993. The
presence of a separate right to terminate in clause 4(5) does not go to defeat
that construction.
In my judgment, the judge was correct upon the two
points raised in the respondent’s notice, and his conclusion that the tenant
enjoyed the protection of sections 24 to 28 of the 1954 Act cannot be upheld on
the grounds raised in the respondent’s notice. For the reasons given earlier in
this judgment, however, I would allow the appeal and hold that the lease
expired by effluxion of time on 22 April 1998 and that the landlord is entitled
to possession.
MUMMERY LJ and SIR RONALD WATERHOUSE agreed and did not add anything.
Appeal allowed.
