Judgments - Cadogan Estates Limited v. Mcmahon (A.P.)

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    This view accords with the decision of the Court of Appeal in Paterson v. Aggio [1987] 2 E.G.L.R. 127 where it held that a proviso for re-entry similar to the proviso in this case contained "an obligation" on the tenant not to become a bankrupt. The decision related to the provisions of section 52(1)(a) of the Housing Act 1980 and not to the provisions of the Rent Act 1977, but I agree with the opinion of Laws L.J. in the Court of Appeal in this case [1999] 1 W.L.R. 1689, 1693E that it would be anomalous to hold that a proviso for re-entry in the event of bankruptcy, contained in a tenancy which has become a Rent Act 1977 statutory tenancy, creates no obligation when there is a decision by the Court of Appeal that a proviso in similar words in a tenancy which is a shorthold tenancy creates an obligation. There is further support for the view that such a proviso creates an obligation in the dictum of Johnston J. in In re Drew [1929] I.R. 504, 508:

    "The tenant here has broken one of the conditions of his tenancy by allowing himself to be adjudicated a bankrupt, and therefore he is no longer entitled to possession, even as a statutory tenant."

    The second question which then arises is whether the obligation not to become a bankrupt was applicable to the statutory tenancy so that the appellant was in breach of it, or whether by virtue of section 3 of the 1977 Act the appellant was not required to observe that obligation because it was inconsistent with the provisions of that Act.

    On behalf of the appellant Mr. Griffiths advanced two arguments in support of his submission that, assuming that the proviso for re-entry contained an obligation, the obligation was not applicable to the statutory tenancy. One argument was that the obligation not to become a bankrupt was linked to the demise created by the 1979 lease, the demise terminated with the end of the contractual tenancy and the statutory tenancy merely had a personal right to remain in possession of the dwelling house. Accordingly as the demise had terminated so also had the obligation which was linked to it. I am unable to accept that submission because section 3 of the 1977 Act and paragraph (b) of Case 1 clearly contemplate that obligations contained in the original lease will continue to apply to the statutory tenancy provided that they are not inconsistent with the provisions of the 1977 Act.

    Mr. Griffiths' second argument was that the proviso for re-entry containing the obligation was inconsistent with the provisions of the 1977 Act because under the proviso the landlord had power to re-enter, whereas under section 98(1) of the Act the landlord can only regain possession if the Court considers it reasonable that he should do so. I am also unable to accept that argument. The proviso consists of two elements, the obligation not to become a bankrupt and the power of the landlord to re-enter if the obligation is broken. The power to re-enter is inconsistent with the provisions of the Act, but the obligation contained in the original lease will continue to bind the statutory tenant provided that it is not inconsistent with the provisions of the 1977 Act, and a breach of it is a ground for an order for possession under paragraph (b) of Case 1. Having regard to the safeguard provided by section 98(1) that an order for possession will not be made unless the court considers it reasonable to do so I consider that there is nothing inconsistent with the provisions of the Act in continuing as an obligation of the statutory tenancy the obligation contained in the lease not to become a bankrupt.

    Accordingly I would dismiss this appeal.

LORD MILLETT

My Lords,

Where a proviso for re-entry is contained in a lease, it is clearly a term or condition of the tenancy. But it does not survive the determination of the term granted by the lease so as to become a term or condition of a statutory tenancy. There are two reasons for this. In the first place, it is inconsistent with the concept of a statutory tenancy. The proviso for re-entry gives the landlord a right to resume possession of the property comprised in the tenancy; the Rent Acts give the tenant a statutory right to remain in possession.

    In the second place, a proviso for re-entry is inapplicable to a statutory tenancy. It is concerned with the forfeiture of an existing term and can have no application after the contractual term has expired: see Brewer v. Jacobs [1923] 1 K.B. 528. It is a true proviso; that is to say, it operates as a qualification of or in derogation from what has gone before. A proviso for re-entry in a lease is a derogation from the term previously granted. It provides that in certain events (which usually include but need not be confined to breach of the tenant's obligations) then, notwithstanding and in derogation of the term previously granted, the landlord may enter into possession of the property and determine the term. There is no room (and no need) for such a provision once the contractual term has expired. Its purpose is to remove the only self-imposed obstacle to the landlord's right to possession if the tenant turns out to be unsatisfactory. Without it, the landlord would be saddled with an unsatisfactory tenant for the remainder of the term however long. Once the contractual term has expired, no such obstacle remains. This is why the proviso is not found in a weekly or other periodic tenancy which is determinable by reasonably short notice.

    A proviso for re-entry in the normal form does not impose any obligation, express or implied, on the part of the tenant not to cause or suffer anything which would entitle the landlord to exercise his right of re-entry. It may well import an implied obligation on the part of the tenant to give up possession if the landlord chooses to exercise his right; but as the term is brought to an end by the landlord's re-entry this only replicates the tenant's express covenant to yield up the demised premises at the end of the term, and both are inconsistent with his statutory right to remain in possession.

    The proviso in the present case contains no express obligation on the part of the tenant not to become bankrupt. It merely confers on the landlord a right to retake possession if he does. No such obligation is implicit in the existence of the landlord's right. A correlative obligation is usually implicit in the conferment of a right, but the only obligation which is correlative to the landlord's right of re-entry is the obligation to give up possession if he exercises it. An obligation not to cause or suffer anything which would allow the landlord to exercise his right is not implicit in the conferment of the right but needs to be separately expressed. It is not necessary to imply such an obligation in order to give business efficacy to the contract. All the landlord needs is the right to bring the tenancy to an end, and this is given to him expressly. Even if an undertaking not to become bankrupt were compatible with public policy (which I doubt) it is impossible to see how such an undertaking could be enforced or what remedy (other than the determination of the term) could be granted in the event of breach.

    It follows that I do not agree with the reasoning of the Court of Appeal in Paterson v. Aggio [1987] 2 E.G.L.R. 127. The question in that case was whether the tenancy in question was a protected shorthold tenancy and thus outside the Rent Acts. This depended on the definition of such a tenancy in section 52(1)(a) of the Housing Act 1980, which included the requirement that it should be incapable of being brought to an end by the landlord before the expiry of the term

    "except in pursuance of a provision for re-entry or forfeiture for non-payment of rent or breach of any other obligation of the tenancy…"

The Court of Appeal held that the inclusion of a provision for forfeiture in the event of the tenant's bankruptcy did not prevent the tenancy from being a protected shorthold tenancy because, while as a matter of strict construction

    "the requirement not to become a bankrupt was not an "obligation" on the tenant, this would . . . defeat the plain intent of the legislature."

    Although the point is probably merely a semantic one, the reference to the "requirement" on the part of the tenant not to go bankrupt would seem to beg the question. I do not accept that there is any such requirement. There is simply a provision that, if he does (which he is at liberty to do), the landlord may exercise the right to determine the tenancy.

    It does not, of course, follow that the case was wrongly decided. Indeed I think that it was plainly right. A protected shorthold tenancy must be granted for a term certain, and as such would normally contain a proviso for re-entry. If the inclusion of a proviso for re-entry in the standard form, that is to say one which included a right for the landlord to re-enter in the event of the tenant's bankruptcy, prevented the tenancy from being a shorthold tenancy, it would exclude the great majority of tenancies. This would obviously defeat the intention of Parliament. Moreover, there is no reason why Parliament should have sought to exclude such a provision from a protected shorthold tenancy. In my opinion, however, this did not compel the conclusion that the tenant's bankruptcy constituted a breach of an obligation of the tenancy.

    The case turned on the true extent of the exception, and this turned on whether the concluding words:

    "for non-payment of rent or breach of any other obligation of the tenancy"

were words of limitation or merely descriptive. Had the exception contained some limiting words, or had it omitted the words "in pursuance of a provision", then its meaning would have been beyond doubt. But the concluding words are ambiguous. They can be read as merely descriptive of the usual proviso for re-entry (without necessarily being a full or complete description) rather than words of limitation, and I would myself read them in this way in order to give effect to the obvious intention of Parliament. Some support for this construction may be found in section 146(1) of the Law of Property Act, 1925 (replacing section 14(1) of the Conveyancing Act of 1881), which uses the words "breach of any covenant or condition" in reference to a proviso for re-entry, but extends to a condition for forfeiture on the bankruptcy of the lessee: see subsections (9) and (10). The word "breach" is not felicitous, but the reference to the proviso in subsection (1) can be read descriptively. It is unlikely that Edward Wolstenholme (who drafted the Conveyancing Act, 1881) or Sir Benjamin Cherry (who drafted the greater part of the Law of Property Act, 1925) would have been guilty of referring to a condition of forfeiture as a breach of obligation, and it is noticeable that the draftsman of subsections (9) and (10) took care not to do so.

    The question in the present case, however, turns on the meaning of the words "obligation of the previous protected tenancy. . . .has been broken or not performed" in Case 1 of Schedule 15 to the Rent Act 1977. The Respondents submit that the word "obligation" should be construed as extending to any term or condition of the tenancy even though it is not strictly speaking an obligation of the tenant. But the statutory language must be construed as a whole, and it requires there to be (i) an obligation of the tenancy (ii) which is applicable to the statutory tenancy and (iii) which has been broken or not performed (sc. by the tenant). In my opinion none of these requirements is satisfied by the bankruptcy of the tenant, though in the past they must usually have been satisfied when the rent remained unpaid following the bankruptcy.

    In the first place, the Act uses the word "obligation" not condition", and their meaning is not the same. "Condition" is wider than and includes "obligation", so that an obligation is a condition, but a condition does not necessarily import an obligation. This is why Sir Raymond Evershed M.R. was able to say in R.M.R. Housing Society Ltd. v. Combs [1951] 1 K.B. 486 at p. 493 that "for present purposes" (my emphasis) no useful or valid distinction could be made between "obligation of the tenancy" in Case 1 and "terms and conditions of the original contract of tenancy" in what is now section 3(1) of the Rent Act 1977. I should add that the actual decision appears to lend some support to the Appellant's argument. The tenant was in breach of an express obligation properly so-called (and therefore of a term or condition of the original tenancy agreement); but it was a personal obligation and not an obligation of the tenancy. The Master of the Rolls was not suggesting that there was no distinction between "terms and conditions" and "obligation", but rather that both expressions excluded personal obligations so that there was no difference which was relevant to the case before him.

    In the second place, as I have already explained, the proviso for re-entry is not applicable to a statutory tenancy. In the present case Laws LJ sought to meet this objection by distinguishing between the consequences of the breach (forfeiture of the term) and the obligation itself. This, of course, assumes what has to be demonstrated - the existence of a free-standing obligation. But the tenant's bankruptcy is not free-standing. It is attached to the landlord's right of re-entry as a condition precedent to its exercise, and is found only in a term or provision of the contractual tenancy which is not carried over into the statutory tenancy.

    In the third place, the expression "broken or not performed" is the classic way to refer to breaches of negative and positive obligations respectively. A condition cannot be broken; it can only be satisfied or performed. The Respondents rightly placed no reliance on the words "not performed", since while they are appropriate to describe an obligation on the part of the tenant which has not been performed they are singularly inapt to describe a condition precedent to the exercise of a right by the landlord which has been performed.

The Rent Acts were enacted in haste and in places badly drafted, and have greatly perplexed judges of the greatest distinction over many decades. They contain many passages where it has been found necessary to do some violence to the statutory language in order to give effect to the policy of the legislation. But unless the words used are inconsistent with the policy of the Acts they must be given their natural meaning. Since the proviso for re-entry has no possible application to a statutory tenancy, there is no policy reason to distinguish between a statutory tenancy which follows the determination of a contractual tenancy which contains such a proviso and a statutory tenancy which follows the determination of one which does not.

    Moreover, the position of the parties to a statutory tenancy is not significantly different from the position of the parties to a contractual tenancy containing a proviso for re-entry where the landlord has exercised the right. In either case the tenant has no legal interest in the property and no contractual right to remain in possession. In one case the landlord has an immediate right to possession but cannot obtain an order for possession if the tenant applies for relief and the Court considers that it is reasonable that he should have it. In the other he cannot obtain possession unless there is a breach of an obligation on the part of the tenant and it is reasonable to make an order for possession. I do not accept that the breach of a trivial obligation, such as placing a flower pot on the window-sill in breach of a term of the contractual tenancy, would justify the Court in making an order for possession against a tenant who, for quite unconnected reasons, was unsatisfactory. A breach of some obligation is necessary to give the Court jurisdiction, and unconnected circumstances may tilt the balance against the tenant and make it reasonable to make an order of possession, but it is not reasonable to seize upon a trivial and remediable breach to evict a tenant from his home if he could not be evicted without it.

    In the case of a contractual tenancy, section 146(10) of the Law of Property Act 1925 enables the Court to give relief from forfeiture if the tenant's interest is sold within a year of the bankruptcy. The subsection is intended for the protection of the tenant's creditors rather than the tenant himself, but it indicates what Parliament considered to be a fair balance between the interests of the landlord on the one hand and the tenant or his creditors on the other. The landlord's interest lies in the continued payment of rent and performance of the tenant's obligations. So long as the tenant's trustee in bankruptcy maintains the payment of rent and continues to observe the other terms of the tenancy and disposes of the property within a year to a satisfactory tenant, the landlord cannot take advantage of the bankruptcy to obtain possession.

    It is not at all obvious what the fair balance should be where there is a statutory tenancy. The tenant has no interest in the property, so there is nothing to preserve for the benefit of his creditors. On the other hand, the Rent Acts are concerned with protecting tenants and their families from being evicted from their own homes. Plainly the landlord should be entitled to possession if following the bankruptcy the rent is unpaid or there is a breach of the tenant's obligations and it is reasonable to make the order. But what if the rent continues to be paid and the tenant continues to perform the obligations of the tenancy? Why should the tenant and his family lose their home on bankruptcy if this makes no significant difference to the position of the landlord? The landlord of controlled premises subject to a statutory tenancy has seldom had much security for the rent; his real security has always lain in his ability to obtain an order for possession if it is not paid. The provisions for the transmission of a statutory tenancy on the death of the tenant suggest that Parliament has given a higher priority to the family's security of tenure then to the landlord's security for rent. It cannot have been the policy of Parliament that the tenant's daughter in the present case should be evicted from her home because her father had become bankrupt but not if he had died instead. It is no answer to say that the tenant's protection lies in the requirement that it must be reasonable to make an order for possession. That is only one of the statutory requirements. There must also be a breach of an obligation of the tenancy.

    In the past, the question is unlikely to have arisen with any frequency, for bankruptcy would usually be followed by non-payment of rent. But today the bankrupt tenant will usually be able to obtain housing benefit payable direct to the landlord. Since the policy of the Rent Acts does not compel a particular answer (though I think that it suggests one), the safest as well as the proper course is to apply the statutory language according to its natural meaning.

    This is not a case in which there has been a long history of consistent (if erroneous) understanding of the legal position on which parties have ordered their affairs; nor is it a case in which the inability to create new statutory tenancies makes the point academic. The line of authorities relied upon by the Court of Appeal is in fact remarkably weak. They consist of an obiter dictum of Johnston J at first instance in the Irish case of In re Drew [1929] I.R. 504; a passing remark of Sir Raymond Evershed M.R. (correct on any view) in R.M.R. Housing Society Ltd. v. Combs; and the decision of Goulding J. in Halliard Property Co. Ltd. v. Jack Segal Ltd. [1978] 1 W.L.R. 377. In re Drew was referred to without adverse comment in successive editions of Megarry on the Rent Acts, though the latest edition adds the words "in Ireland", which may be the author's equivalent of "sed quaere". More to the point, perhaps, it is referred to in a section dealing with the terms of the statutory tenancy; it is not mentioned in the relevant passages at pp. 398-400 which list the kinds of conduct which will ground an order for possession. It is noticeable that the bankruptcy of the tenant is not included. Halliard was a decision on section 146 of the Law of Property Act, 1925. I have no doubt that it was rightly decided, but so far as relevant at all it is a case on "breach" rather than "obligation". There is no evidence, and no reason to believe, that statutory tenants who became bankrupt but who continued to pay the rent and perform their obligations under the tenancy were regularly evicted from their homes, and it is noticeable that whenever the point has arisen for decision it has been in a completely different context.

    I do not, with respect, consider that any help can be derived from the language of the 1919 Act, which re-enacted a provision in similar terms in an Act of 1915. These were emergency war-time Acts which limited the rent and prevented eviction during the currency of the contractual tenancy. They did not give security of tenure once the contractual tenancy had determined. The concept of the statutory tenancy first saw the light of day in the 1920 Act, which is generally regarded as the first of "the Rent Acts". The fact that the 1920 Act sometimes adopted the language of the earlier legislation but used it in a very different context adds little to the argument.

    

 
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