Restaurant EC3 Ltd v Tavor Holdings Ltd

Landlord and tenant – Forfeiture – Mesne profits – Respondent landlord issuing winding-up petition for arrears of rent and re-entering premises – Appellant tenant claiming damages for trespass/breach of covenant of quiet enjoyment and mesne profits for alleged unlawful forfeiture – Whether appellant having set off/cross claim against petition debt – Whether respondent’s re-entry constituting unlawful trespass entitling appellant to mesne profits – Appeal dismissed The respondent was the freehold owner of restaurant premises in Cornhill, Birchin Lane, London EC3. The appellant company was the commercial tenant. The respondent issued a winding-up petition for substantial arrears of rent. Before doing so, the respondent had forfeited the lease by re-entering the premises and changing the locks, on the basis of non-payment of rent due under the lease. After the winding-up petition was issued, the appellant brought county court proceedings, contending that the respondent was not entitled to forfeit and, alternatively, seeking relief from forfeiture. The appellant also claimed damages for trespass and/or breach of the covenant of quiet enjoyment; and “mesne profits” arising from the alleged unlawful forfeiture. In the winding-up proceedings, the appellant contended it had a genuine and substantial set-off or cross-claim against the petition debt. By then it had admitted in the county court proceedings that any business in the premises had been carried on not by the appellant but by two related companies. The judge therefore held that the claim for damages for loss of profits, wages and redundancy costs did not give rise to a genuine dispute. The judge made a winding-up order concluding, amongst other things, that the appellant’s claim for mesne profits had no value (because there would have to be a deduction to reflect the passing rent the appellant would have to pay) and the petition debt was therefore due in full. The appellant appealed. Held: The appeal was dismissed. (1) Damages assessed by reference to the value of the use wrongfully made of property (user damages) were readily awarded at common law for the invasion of rights to tangible moveable or immoveable property (by detinue, conversion or trespass). The rationale of such awards was that the person who made wrongful use of property, where its use was commercially valuable, prevented the owner from exercising a valuable right to control its use, and should therefore compensate him for the loss of the value of the exercise of that right. He took something for nothing, for which the owner was entitled to require payment. Accordingly, damages for trespass were compensatory: One Step (Support) Ltd v Morris-Garner [2018] EGLR 26 applied. Ministry of Defence v Ashman [1993] 2 EGLR 102 considered. (2) The judge in the present case was correct to conclude that, on the facts alleged by the appellant, there was no substantial claim for mesne profits. The claimant was not entitled to a restitutionary remedy. In cases of wrongful use of valuable property rights, the court might assess the loss to the claimant by requiring the payment of a reasonable price or fee for that use. The right to control such use was a valuable asset. Damages were paid to compensate the owner for the loss of the right to obtain the economic value of the use. The law compensated for the loss suffered, but no more. In a case where the owner was freeholder or long leaseholder for a premium, the loss was likely to be measured as the open market rent for the use of the land. The freeholder or long leaseholder owned the land and was entitled to decide whether to use it or rent it out. A trespasser on the land interfered with that right and had to pay. (3) In the case of a lease for a rack rent (as in the present case) the tenant was entitled to exclusive possession of the land in return for rent. The two were interdependent. If the tenant did not continue to pay the rent it would lose its right to occupy the land as against the landlord (leaving aside issues of relief from forfeiture etc). In order to place a reasonable economic value on the rights which had been invaded, one had to take account of the cost to the company of maintaining those rights. It was asserting a continuing right of possession against the landlord. That depended on the continued payment of rent, and to assess the economic value of the right, one had to assume that it would have had to continue paying rent. Otherwise, the company would be overcompensated. It would be receiving a price for the loss of an ownership right which it would only have enjoyed by continuing to pay the rent. (4) Damages payable by a landlord to a tenant who was liable to pay a rack rent ought to reflect the rent which would have been payable to the landlord during the period the tenant was out of possession. That approach placed a reasonable value on the economic rights of the company as “owner” of the land. Its continuing ownership rights arose only under the lease and it was a precondition of those rights that it paid a continuing rent. The economic rights could not be valued for the purposes of damages by crediting it with a reasonable fee payable by the landlord as trespasser, while disregarding what it would have cost the company to continue to have the benefit of those rights: Inverugie Investments Ltd v Hackett [1996] 1 EGLR 149 considered. (5) There might be cases with a fact pattern similar to the present one but where the open market rental value of property exceeded the passing rent under the lease. Mesne profits would be payable for the difference. Moreover, in many if not most commercial leases, the tenant was able to claim damages for loss of business and disruption. This was an unusual case in that no such losses were suffered by the tenant. The court also had power to grant an injunction to prevent an unlawful eviction. The present question was whether, in assessing damages for trespass, a notional deduction was required of the rent that would have been payable. The appellant’s claim for mesne profits was not substantial as the economic value of the lease required consideration of the rent payable. There was no basis for an adjournment to enable the appellant to pay the petition debt, as the appellant had failed to demonstrate its ability to pay even a reduced amount within a reasonable time. Accordingly, the appeal would be dismissed. Tom Morris (instructed by Teacher Stern LLP) appeared for the appellant; Adam Rosenthal KC and Jonathan Titmuss (instructed by Memery Crystal) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Restaurant EC3 Ltd v Tavor Holdings Ltd