Agricultural Holdings Act 1948 and Partnership Act 1890 — Interaction of rights and obligations under Acts — Plaintiff and defendant carried on a farming business in partnership in pursuance of an agreement which provided inter alia that on the dissolution of the partnership otherwise than by death the plaintiff was to be entitled to purchase the defendant’s share in the capital and profits of the partnership — The farm which was to be the subject of the present litigation was demised to the plaintiff and defendant and became a partnership asset — Subsequently the defendant became entitled, on the death of her husband, to the freehold reversion expectant on the determination of this tenancy — In her capacity as landlord she gave the partnership notices to quit, the first of which was invalid as not purporting to terminate the tenancy on the correct date, but the second was correct in point of form — She also gave notice of intention to terminate the partnership — The plaintiff gave notice of his intention to exercise his rights under the partnership agreement to purchase the defendant’s share of the partnership assets, including the tenancy if it continued — No counternotice was served in response to the second notice to quit but the parties agreed that no objection would be taken on the ground of the time-limit — On the issue of an originating summons by the plaintiff the judge, Judge Finlay QC sitting as a High Court judge, decided that the plaintiff was entitled to acquire the tenancy, which was a partnership asset, under the provision in the partnership agreement; that the service of any notice to quit by the defendant would be a breach of her obligation of good faith as a partner; and that she should be ordered to concur in the service of a counternotice under section 2(1) of the Agricultural Holdings (Notices to Quit) Act 1977 — On appeal by the defendant, the Court of Appeal held (1) that despite the reference to ‘capital and profits’ in the purchase provision, the respondent (plaintiff) was entitled to acquire the tenancy in pursuance of that provision, (2) that the second notice to quit served by the appellant (defendant) was not invalid, but (3) on the respondent giving a bona fide notice of intention to exercise his rights of purchase (which would make him the beneficial owner of all the partnership assets, including the tenancy) the appellant came under a duty as a trustee to comply with a request to join in the service of a counternotice under section 2(1) of the 1977 Act — The court thus upheld Judge Finlay’s decision, but on slightly different grounds — Appeal dismissed
This was an
appeal by Edna Lydia Land from a decision of Judge Finlay QC, sitting as a High
Court judge, in favour of Kenneth William Sykes, the plaintiff in proceedings
by originating summons seeking various declarations in relation to a tenancy of
Grange Farm, Wyverstone, Suffolk.
Nigel Hague QC
and J Ross Martyn (instructed by Rustons & Lloyd, of Newmarket) appeared on
behalf of the appellant; TLG Cullen QC and John Mullholland (instructed by A F
& R W Tweedie, agents for Banks Ashton & Co, of Bury St Edmunds)
represented the respondent.
Giving the
first judgment at the invitation of Oliver LJ, Fox LJ said: This is an appeal
from a decision of Judge Finlay QC, sitting as a judge of the High Court. It is
concerned with the devolution of the tenancy of a farming partnership upon
dissolution of the partnership and with the duties of the partners inter se in
relation to the tenancy.
On April 7
1968 the defendant, Mrs Land, and the plaintiff, Mr Sykes, entered into a
written agreement (‘the partnership
under the name of ‘Land and Sykes’.
The material
provisions of the partnership agreement were as follows:
Clause 1
The
partnership business is that of farmers and shall be carried on at Grange Farm
Wyverstone and at such other places as the Partners may from time to time
agree.
Clause 2
The
Partnership having commenced on the first day of April 1968 shall continue until
either of the Partners shall die or until one partner shall give the other six
months notice in writing to determine the partnership.
Clause 4
The Capital
of the Partnership shall consist of the Live and Dead Farming Stock on Grange
Farm and other properties owned by J H Land together with the sum of Five
thousand pounds (5,000) and shall be credited to the Partners in equal shares.
Clause 9
If the
Partnership is dissolved by the death of either Partner the survivor shall be
entitled to succeed to the deceased partner’s share in the Capital and profits
of the Partnership including Goodwill on payment of the amount standing to the
credit of the Capital Account of the deceased as shown by a Balance Sheet to be
drawn up as at the date of the death.
Clause 10
If the
Partnership is dissolved otherwise than by the death of a Partner the said
Kenneth William Sykes shall be the continuing Partner and shall be entitled to
purchase the share in the Capital and profits of the Partnership including
Goodwill if any of the said Edna Lydia Land by paying to her the amount
standing to the credit of her Capital Account as shown by a Balance Sheet to be
drawn up as at the date of dissolution together with interest thereon at the
rate of six per centum per annum less Income Tax from the date of dissolution
to the date of payment.
By a lease
dated August 1 1968 (‘the lease’) John Henry Land demised Grange Farm and other
lands to Mr Sykes and Mrs Land (described in the lease as ‘together carrying on
the business of farming under the style or title of Messrs Land and Sykes’) for
the term of 14 years from April 1 1968 at a yearly rent of £1,200 together with
certain additional rents in respect of improvements carried out by the landlord.
By clause 2(x)
of the lease, Mr Sykes and Mrs Land, as tenants, covenanted with the landlord
as follows:
not without
the previous consent in writing of the Landlord to assign underlet or part with
possession of the farms or any part thereof except that cottages may be let to
workers employed on the farms.
I mention here
that the provisions of section 19(1) of the Landlord and Tenant Act 1927 (which
imported a proviso into covenants by lessees not to assign, underlet, charge or
part with the possession of the demised premises without the consent of the
landlord, that such consent is not to be unreasonably withheld) do not apply to
tenancies of agricultural holdings within the Agricultural Holdings Act 1948.
Mrs Land was
the wife of John Henry Land. Mr Sykes (who was born in 1921) was brought up in
the house of John Henry Land, who was his uncle and acted as father to him; Mr
Sykes himself was an illegitimate child. Until he married Mrs Land in 1950,
when he was already in his 60s, John Henry Land was a bachelor. Prior to John
Henry Land’s marriage, Mr Sykes had acted as his farm manager at Grange Farm;
John Henry Land was the tenant of a public house at Wyverstone called the
Plough Inn, where he lived until his marriage. Mr Sykes’ evidence is that at the
time of John Henry Land’s marriage it was agreed that he (Mr Sykes) should
cease to be the farm manager and should farm Grange Farm in partnership with
Mrs Land. There were no children of the marriage between John Henry and Mrs
Land.
After the
partnership was entered into, it seems that the actual farming was conducted by
Mr Sykes and that Mrs Land was, in effect, the farm secretary.
John Henry
Land died in June 1973. By assents of May 16 1975 Mrs Land, as his personal
representative, assented to the vesting in herself of the freehold reversion
expectant upon the determination of the lease.
On February 2
1982 Mrs Land’s solicitors wrote to Mr Sykes’ solicitors stating that Mrs Land
proposed to determine the partnership and the lease as from October 1 1982.
On March 30
1982 Mrs Land served upon the partnership a notice to quit Grange Farm and the
other properties comprised in the lease on October 1 1983.
The
Agricultural Holdings (Notices to Quit) Act 1977 provides by section 1 that a
notice to quit an agricultural holding or part of such a holding
shall
(notwithstanding any provision to the contrary in the contract of tenancy of
the holding) be invalid if it purports to terminate the tenancy before the
expiration of twelve months from the end of the then current year of tenancy.
It is common
ground that the notice to quit was invalid at common law because it did not
purport to terminate the tenancy at a date when it could properly have been
terminated, that is to say at the expiration of a year of the tenancy. The year
of the tenancy commences on April 1 and the notice to quit purported to
determine the tenancy on October 1. Before the judge, Mrs Land sought to escape
from that by certain contentions as to waiver and estoppel which are not now
proceeded with.
Section 2(1)
of the Agricultural Holdings (Notices to Quit) Act 1977 provides as follows:
Where —
(a) notice to quit an agricultural holding or
part of an agricultural holding is given to the tenant thereof; and
(b) not later than one month from the giving of
the notice to quit the tenant serves on the landlord a counternotice in writing
requiring that this subsection shall apply to the notice to quit,
then, subject
to subsection (2) below, the notice to quit shall not have effect unless the
Tribunal consent to its operation.
On March 30
1982 Mrs Land’s solicitors wrote to Mr Sykes’ solicitors stating that Mrs Land
withdrew any implied authority that Mr Sykes might have as partner under
section 2(1)(b) of the Act of 1977 to serve a counternotice.
On April 28 1982
Mr Sykes gave notice to Mrs Land that he required section 2(1) of the
Agricultural Holdings (Notices to Quit) Act 1977 to apply to the notice to quit
of March 30 1982. That was intended to be a counternotice under the Act.
On March 16
1983 Mrs Land gave to Mr Sykes six months’ notice to dissolve the partnership.
On March 31
1983 Mr Sykes’ solicitors informed Mrs Land’s solicitors that if the lease
continued to subsist he intended to exercise his rights under clause 10.
Mrs Land’s
advisers having doubts about the validity of the notice to quit of March 30
1982, Mrs Land on April 29 1983 served a new notice to quit expiring on April 1
1985 or at the end of the year of the tenancy which would expire next after the
end of the 12 months from the date of service of the notice. It is not in
dispute that, so far as its form is concerned, this was a valid notice to quit.
No
counternotice to that notice to quit has yet been given. The parties are agreed
that no objection as to delay will be taken in relation to that.
The
originating summons was issued by Mr Sykes on April 5 1982. It sought, inter
alia, the following relief:
(i) A declaration that the
first notice to quit was invalid.
(ii) A declaration that the
counternotice of April 28 1982 was an effective counternotice under the 1977
Act.
(iii) A declaration that the
lease is a partnership asset.
(iv) A declaration that in
serving the notice to quit or any further notice to quit Mrs Land was or would
be in breach of her obligation of good faith as a partner toward Mr Sykes.
(v) A declaration that in
refusing or failing to sign the counternotice or any further counternotice that
might be given Mrs Land was or would be in breach of her aforesaid obligation
of good faith.
(vi) A declaration that Mr
Sykes is entitled to acquire the lease under the provisions of clause 10 of the
partnership agreement.
The judge
decided that:
(a) The lease was an asset of the partnership and
was subject to the provisions of clause 10 of the partnership agreement.
(b) Mr Sykes was entitled to acquire the lease
under the provisions of clause 10.
(c) The service of the notice to quit of April 29
1983 was and the service of any further notice to quit would be a breach of Mrs
Land’s obligation of good faith to Mr Sykes as a partner.
(d) That Mrs Land do concur with Mr Sykes in
serving a counternotice upon her for the purpose of section 2(1) of the 1977
Act.
From that
decision Mrs Land appeals.
The first
question to which that appeal gives rise is whether the lease falls within the
provisions of clause 10 of the partnership agreement. Mr Hague, for Mrs Land,
contends that it does not. He
not part of ‘the capital and profits of the partnership including goodwill’,
which is all that clause 10 entitles Mr Sykes to acquire. In support of that
construction Mr Hague points to clause 4 of the agreement which states:
The capital
of the partnership shall consist of the Live and Dead Farming Stock on Grange
Farm and other properties owned by J H Land together with the sum of £5,000 and
shall be credited to the Partners in equal shares.
The lease, it
is said, is plainly not capital of the partnership within that definition; and
it is for the partners to agree what is the capital of the partnership (see Lindley
on Partnership 13th ed, p 347) and they have not chosen to include the
lease. As far as profits are concerned, it is said that the lease is not a
profit of the partnership, or property representing a profit; it is simply
property which John Henry Land chose to grant to the partnership.
In my opinion,
that approach is unduly technical and does not give effect to the true
intention of the parties. Clause 10 is dealing with a situation where partners
are carrying on a business and the partnership comes to an end. Clause 10
provides that one of the partners, Mr Sykes, shall be:
the
continuing Partner and shall be entitled to purchase the share in the Capital
and profits of the Partnership including Goodwill
of the other
partner. The expression ‘the continuing partner’ is not accurate in terms of
partnership law, but it is not unusual in partnership agreements and, in my
opinion, it indicates the essence of the matter, namely that the continuing
partner can acquire the business and carry it on himself in continuation of the
partnership business. It is, in my view, quite unreal in the case of a farming
partnership to suppose that the continuing partner was to have the stock and
goodwill but not the premises on which the business was being conducted. It is
said that Mr Sykes could farm somewhere else. Suitable farms are not always
available and the nature and situation of the farm may affect the goodwill. It
is accepted on Mrs Land’s behalf that clause 10 extends to every asset of the
partnership other than the lease. I can see no sufficient reason in the
language and context of the agreement for such a result. In business terms it
is not sensible. And as to the language of the agreement, Mr Hague’s argument
rests largely on clause 4. But clause 4 is merely looking at the position as it
was at the outset of the partnership. The lease had not then been granted.
Clause 10 is undoubtedly wider than clause 4, since it includes goodwill; and I
read the word ‘including’ in clause 10 as merely explanatory of the words
‘capital and profits of the partnership’ and not as being an artificial
extension of them. In my judgment the correct reading of the language of clause
10 is that it extends to the whole of the assets of the partnership. I think
that as a matter of language clause 10 is amply wide enough for that. The words
‘capital and profits’, must, I think, in this context include property for the
time being representing capital and profits, and it has to be kept in mind that
either capital or profits of the partnership have, down the years, been
expended on paying the rent under the lease, without which the lease could have
been forfeited.
The
construction which I have adopted makes sense of clause 10. It also makes sense
of clause 9. The expression ‘capital and profits of the partnership’ must have
the same meaning in both clauses, but if the construction contended for on
behalf of Mrs Land is correct then upon the death of a partner the other would
be left with the legal estate in the lease and a half share in the beneficial
interest in the lease together with the entirety of the interest in all the
other assets of the partnership, but the deceased’s half share in the
beneficial interest in the lease would be left outstanding in his or her
estate. Such a situation seems to me to be pointless in practical terms and
cannot, I think, have been intended. In my view both clause 9 and clause 10 are
dealing with the entirety of the assets of the partnership and for the same
reason, namely that the continuing or surviving partner is to be able to take
over the existing business as a continuing concern.
In my view,
therefore, the judge came to the right conclusion and the lease is included in
the provisions of clause 10.
The next
question is whether, by reason of the partnership agreement there is any
impediment to the service of a notice to quit by Mrs Land. Prima facie,
a landlord is entitled to exercise his powers as such notwithstanding his
status as a partner (Brenner v Rose [1973] 1 WLR 443). The judge
held, however, that, in the circumstances of this case, the notice to quit was
bad since, he said, it brought about the
impossibility
of performance of the contract constituted by the partnership deed and in
particular Clause 10 thereof. Not only is that something which, by virtue of
the quite wide proposition stated by Lord Atkin (in Southern Foundries
(1926) Ltd v Shirlaw [1940] AC 701) she (Mrs Land) is not entitled
to do but it is, in my judgment, something the doing of which would constitute
a breach of the obligation of good faith towards the plaintiff her co-partner.
The
proposition of Lord Atkin in Southern Foundries (1926) Ltd v Shirlaw to
which the judge refers is that on p 717, where he says:
The
arrangement between the parties appears to me to be exactly described by the
words of Cockburn CJ in Stirling v Maitland (1864) 5 B & S
840, at p 852: ‘If a party enters into an arrangement which can only take
effect by the continuation of an existing state of circumstances’; and in such
a state of things the Lord Chief Justice said: ‘I look on the law to be that .
. . there is an implied engagement on his part that he shall do nothing of his
own motion to put an end to that state of circumstances, under which alone the
arrangement can be operative’. That proposition in my opinion is well
established law. Personally I should not so much base the law on an implied
term, as on a positive rule of the law of contract that conduct of either
promiser or promisee which can be said to amount to himself ‘of his own motion’
bringing about the impossibility of performance is in itself a breach.
In my opinion,
the situation there contemplated by Lord Atkin is not the same as that which
would arise on the service of a notice to quit in the present case. The service
of the notice to quit will not bring about the impossibility of performance of
any provisions of the partnership agreement. It will only do so if no
counternotice under section 2(1) of the Agricultural Holdings (Notices to Quit)
Act 1977 is duly served. If such a notice is served, the notice to quit is of
no effect (unless the tribunal consents to its application, and there is no
reason to suppose that it would).
By serving a
notice to quit, therefore, Mrs Land is not of her own motion bringing about
impossibility of performance. The crucial matter is not whether Mrs Land can
serve notice to quit (I think she can) but whether she can refuse to join in
the service of a counternotice under the Act of 1977; it is common ground that
a counternotice served by one only of the joint tenants would be invalid. To
that latter question I now turn.
Upon Mr Sykes’
completing the purchase of Mrs Land’s share under the provisions of clause 10
he will, on the view which I have taken as to the construction of clause 10,
become the absolute beneficial owner of the entirety of the assets of the
partnership including the lease. Section 26(3) of the Law of Property Act 1925
provides that trustees for sale under statutory trusts (which the trusts of the
lease are)
shall so far
as practicable consult the persons of full age for the time being beneficially
interested in possession in the rents and profits of the land until sale and
shall, so far as consistent with the general interest of the trust, give effect
to the wishes of such persons . . .
In pursuance
of that provision it seems to me that Mrs Land and Mr Sykes as trustees would,
as from the completion of the purchase, be required to give effect to the
wishes of Mr Sykes as to the service of a counternotice. Such service would
certainly be in the general interests of the trust since it would preserve
trust property.
The provisions
of section 26(3) may not in practice be a complete answer to the question
because of the time problem. The right given by clause 10 is a right ‘to
purchase . . . by paying the amount standing to her credit’ etc. Until payment
is made there may be no contract of purchase; and payment might not take place
within the one month specified by section 2 of the 1977 Act. However, I do not
think the point is of consequence. In general, it must be the duty of trustees
to preserve the trust property for the benefit of the ultimate beneficiaries
and not let it be destroyed. And if Mr Sykes, having given a bona fide
notice of his intention to exercise his rights under clause 10, required Mrs
Land to consent to the service of a counternotice, I think it would be her duty
as a trustee to comply, and that if necessary the court in the exercise of its
general jurisdiction over trustees would order her to do so.
It is said
that the service of a counternotice may impose on Mrs Land unreasonable burdens
in that it will have the effect of continuing the existence of the lease under
which the trustees, as tenants, have obligations. I do not think there is
substance in these objections. The tenants, of course, have obligations to the
landlord. But the landlord at present is Mrs Land herself; so she is exposed to
no risk. In any event, she can rid herself of future liability by consenting to
the assignment of the lease to Mr Sykes alone (who, as I understand, is willing
to accept an assignment). It is suggested that an assignment might be difficult
because of restrictions in the mortgage of the freehold which Mrs Land has
granted. The matter was not investigated in detail before us and I am not
certain that any difficulty really exists. But, be that as it may, so long as
Mrs Land is the landlord she is not exposed to liability and if she sells, as I
gather she may, the
mortgagee would no longer be a problem. She can then make it a term of the sale
that the purchaser consents to an assignment of the lease to Mr Sykes. I cannot
think that would be depreciative of the value of the land. Accordingly, I am
not satisfied that Mrs Land has demonstrated any significant risk to herself in
consequence of joining the giving of a counternotice.
The result, in
my view, is that (a) the lease is part of the capital and profits of the
partnership for the purposes of clause 10 and is subject to the provisions of
that clause; (b) that the second notice to quit is a valid notice; and (c) upon
Mr Sykes’ undertaking to purchase Mrs Land’s share of the assets of the
partnership under the provisions of clause 10, Mrs Land should join with him in
serving a counternotice under the Act of 1977.
Agreeing, SIR
DENYS BUCKLEY said: I have had the advantage of reading the judgment of Fox LJ
in this case, with which I am in entire agreement. I do not wish to add
anything.
OLIVER LJ also
agreed and did not add anything.
The appeal
was dismissed with costs.
