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|Judgments - Cadogan Estates Limited v. Mcmahon (A.P.)
HOUSE OF LORDS
Lord Bingham of Cornhill Lord Steyn Lord Hoffmann Lord Hutton Lord Millett
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
CADOGAN ESTATES LIMITED
ON 26 OCTOBER 2000
LORD BINGHAM OF CORNHILL
I have had the advantage of reading in draft the opinions prepared by my noble and learned friends Lord Hoffmann and Lord Millett. As their differing analyses and conclusions show, the issue raised in this appeal, though short, is by no means simple to resolve.
There is great logical force in the reasoning of my noble and learned friend Lord Millett, and had this question come before the House many years ago in the absence of any authority or understanding I should have been inclined to accept it. If one contracting party grants the other a right to act in a certain way if a given event shall occur, he is not ordinarily understood to promise (i.e. to assume an obligation) that such event will not occur.
There is, however, nothing to suggest that Parliament intended to make any change of substance when the reference to "conditions of the tenancy" in section 1(1) of the Increase of Rent &c (Amendment) Act 1919 was replaced by a reference to "obligation of the tenancy" in section 5(1) of the Increase of Rent and Mortgage Interest (Restrictions) Act 1920. It was shortly thereafter held in In re Drew (A Bankrupt)  I.R. 504 that a tenant subject to a re-entry clause similar to the present who had gone bankrupt had broken an obligation of his tenancy. This decision was cited by Sir Robert Megarry in his work on The Rent Acts for many years without any expression of dissent. In R.M.R. Housing Society Ltd v. Combs  1 K.B. 486 at 493 Evershed M.R. thought it unnecessary to distinguish between obligations and terms and conditions of a tenancy. In Paterson v. Aggio  2 EGLR 127 the Court of Appeal held that bankruptcy of a tenant who had granted his landlord a right of re-entry on bankruptcy had broken an obligation of his tenancy: while this ruling was given in construing section 52 of the Housing Act 1980 and the correct construction of Case 1 of Schedule 15 to the Rent Act 1977 need not be the same, it is not desirable that the same expression should be held to have different meanings in two statutes governing the relationship of landlord and tenant. If the Rent Acts had been drafted with the precision ordinarily to be found in Acts of Parliament it might be right to give "obligation" its most natural meaning, but judges have for many years noted the lack of such precision. It is not in my view a big step to hold that bankruptcy, which may undoubtedly be a breach of a condition in a lease, is a breach of an obligation. So to hold does not expose the tenant to a risk of undue hardship, since no order for possession will be made unless it is reasonable to make it. I can see no reason why Parliament should have wished to free a statutory tenant of a risk to which he had been subject under the tenancy agreement into which he had voluntarily entered.
Compelling though I find the analysis of my noble and learned friend Lord Millett I am on balance persuaded that the judge and the Court of Appeal reached the right decision for the reasons given by Lord Hoffmann. I would therefore dismiss the appeal.
The issue is whether the court is entitled to make an order for possession under Case 1 of Schedule 15 to the Rent Act 1977. On the present facts such jurisdiction only exists if the appellant has broken or not performed an "obligation" of the previous protected tenancy which is applicable to the statutory tenancy. The question is whether the proviso imposes an obligation on the tenant not to become bankrupt. The proviso is to the effect that in the event of the bankruptcy of the tenant "it shall be lawful for the lessor . . . to re-enter and thereupon this demise shall absolutely determine." On the plain meaning of the proviso there is no obligation created: the proviso simply creates a conditional right in favour of the lessor.
It is, of course, sometimes possible to depart from the plain meaning of the words in an instrument. A theoretical possibility is to imply words into the lease. My understanding is that nobody in the majority supports this idea. I am also persuaded by the judgment of Lord Millett that resort to the legislative history, and the fragile strands in the case law, does not justify the bold step of saying that under the lease bankruptcy is a breach of an obligation. Consequentialist arguments are often valuable. But in the present case a decision giving effect to the plain meaning will produce no absurd or undesirable consequences. On the contrary, the success of Cadogan Estates in a case where the tenant's daughter was continuing to pay the rent is hardly a just solution. This tends to suggest that policy considerations militate against the view of the majority rather than in favour of it.
My Lords, I regard the judgment of Lord Millett as entirely convincing. But it is not every disagreement with a majority view which must be pressed to dissent. Reluctantly, I assent to the order proposed by Lord Hoffmann.
The appellant Mr McMahon occupies a flat near Sloane Square. He took an assignment of the short residue of a lease granted by the Cadogan Estate for 14 years from 25 March 1979. The lease created a "protected tenancy" for the purposes of the Rent Act 1977. When it expired in 1993 Mr McMahon became a statutory tenant. The lease contained a covenant to pay the rent quarterly in advance. But Mr McMahon was constantly in arrear. On several occasions the landlords had to take him to court. Three orders for possession were made but suspended. On two such occasions, a warrant for possession was actually issued but withdrawn when the rent was eventually paid.
In 1997 Mr McMahon took an expensive holiday but failed to pay the travel agent's bill. When he also failed to satisfy a judgment for the debt, he was made bankrupt on 17 March 1998. The result was that his assets vested in his trustee in bankruptcy. But the statutory tenancy, which is not an asset but merely a personal status of irremovability, was unaffected. His daughter, who lives with him in the flat, continued to pay the rent. There were no arrears when, on 30 April 1998, the landlords commenced fresh proceedings for possession. They claimed an order solely on the ground that Mr McMahon had been made bankrupt.
Section 98(1) of the Rent Act 1977 provides:
The landlords rely on the following provisions in Case 1 of the Schedule:
The landlords' case is that it was a condition of the 1979 lease that the tenant should not become bankrupt. Section 3(1) of the Act provides:
The landlords say that there was nothing inconsistent with the Act in applying the same condition to the statutory tenancy. It was therefore an obligation of the protected tenancy, applicable to the statutory tenancy, which had been broken or not performed.
His Honour Judge Cotran accepted this submission and also decided that in view of Mr McMahon's record as a tenant, it was reasonable to make an order for possession. There has been no challenge to the latter finding but Mr McMahon appealed on the ground that the bankruptcy did not fall within Case 1. The Court of Appeal (Stuart-Smith and Laws L.JJ. and Jonathan Parker J.) dismissed the appeal. He now appeals to your Lordships' House.
The lease is in the traditional form. After the demise and reddendum, there are 25 paragraphs of covenants by the tenant. He covenants to pay the rent, repair, lay carpets, not to put flower pots outside the windows or allow his children to loiter in the lifts and many other things. But they contain no reference to bankruptcy. There follow the covenants by the landlords. Then comes the re-entry clause:
Mr Griffiths, who appeared for Mr McMahon, submitted that the lease did not create any obligation not to become bankrupt. The covenants imposed obligations to do many things but said nothing about becoming bankrupt. The re-entry clause does not impose any obligations. It merely specifies the events which will entitle the landlord to re-enter and determine the tenancy. One of them is bankruptcy, but that is not at all the same thing as an obligation not to become bankrupt.
My Lords, if the Act was an ordinary conveyancing statute, I would see much force in this argument. The re-entry clause is expressed as a series of conditions, rather than obligations. Furthermore, the sole purpose of the conditions is to specify the events in which the landlords will be entitled to re-enter and resume possession. But such a right would not be consistent with a statutory tenancy, under which the right to possession is restricted by section 98. If the right of re-entry cannot be applicable to the statutory tenancy, how can the disembodied conditions be applicable? They would be the grin without the cat.
But this is not an ordinary statute. It is the Rent Act, a consolidation of a remarkable sequence of enactments which go back to the First World War. The provisions with which we are concerned come, with minor verbal changes, from the Increase of Rent and Mortgage Interest (Restrictions) Act 1920. Section 15(1) of that Act provided, like section 3(1) of the Act of 1977, that:
And section 98(1) of the Act of 1977 and Case 1 of the Schedule are derived from section 5(1) of the Act of 1920:
The judiciary soon found that they could not interpret the Rent Acts in the same way as ordinary legislation. Sir Robert Megarry's great work on the Acts, first published in 1939, contains in its most recent (1988) edition, at pp. 14 to 18, an anthology of judicial comments on the peculiar difficulties of construction to which they have given rise. They include the observations that the Acts had "not been framed with any scientific accuracy of language" (Sargant L.J. in Roe v. Russell  2 K.B. 117, 138) and that it was essential "that, wherever possible, [they] should be construed in a broad, practical, common-sense manner so as to effect the intention of the Legislature" (McCardie J. in Read v. Goater  1 K.B. 611, 615.)
It therefore seems to me necessary to consider what could have been the broad policy of the legislature in providing that the statutory tenant should be required to "observe . . . all the terms and conditions" of the original contract of tenancy and that a breach or non-performance of an obligation of the tenancy should remove the restriction on the landlord's right to recover possession. In one of the earliest cases on the Acts, Remon v. City of London Real Property Company Ltd  1 K.B. 49, Scrutton L.J. said (at p. 57):
The tenant was to be entitled to retain possession though his tenancy had expired, whether by the effluxion of a fixed term or a period of notice. But the Acts were not initially intended to enable a tenant to retain possession against a landlord who was entitled to forfeit the tenancy for breach of a covenant or condition of the lease. Later, in the Rent and Mortgage Interest Restrictions (Amendment) Act 1933, it was provided that even in such cases, the judge must consider it reasonable to make the order. But we are presently concerned with the construction of the threshold requirement in the Act of 1920.
This policy must be viewed against the distinction made in the law of landlord and tenant between two ways in which the landlord could put an end to the tenancy before it would otherwise have expired. One was by the exercise of an option to terminate contained in the lease. It would usually be exercisable by notice to the tenant, sometimes upon a specific date during the tenancy or upon the happening of some event, such as the landlord obtaining planning permission to demolish and reconstruct the premises. Such an option was called a break clause. The other way was by forfeiture pursuant to a right of re-entry contained in the lease, such as the re-entry clause in this case. Forfeiture would usually be for non-payment of rent or breach of covenant, but, as in this case, the right of re-entry might also be expressed to arise in other events, such as bankruptcy or an arrangement or composition with creditors. The two methods of termination were treated differently in various respects: for example, exercise of the right of re-entry or forfeiture "under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease" required the prior service of a notice under section 146 of the Law of Property Act 1925, which was first enacted as section 14(1) of the Conveyancing Act 1881. The exercise of a break clause did not require any such prior notice. The court had certain powers, both at common law and under statute, to grant relief against forfeiture but not to restrain the exercise of a break clause.
In some cases it may be difficult to say whether a provision in a lease is only an option to terminate conditional upon the happening of some event or whether it is truly a re-entry under a forfeiture. This borderline country was discussed by Goulding J. in Halliard Property Co. Ltd v. Jack Segal Ltd  1 W.L.R. 377, where the lease contained a proviso for re-entry if the tenant or either of his sureties should commit an act of bankruptcy. On the bankruptcy of one of the sureties, the landlord brought an action for possession without having served a notice under section 146 of the Act of 1925. He argued that the bankruptcy of the surety, being an event entirely outside the control of the tenant, was not a ground for forfeiture but simply an event entitling the landlord to terminate the lease in the same way as under a break clause. Goulding J. decided that it fell on the forfeiture side of the line. The bankruptcy of the tenant himself had always been regarded as a "breach of a condition in the lease" within the meaning of section 146. Subsections (9) and (10) made specific provisions qualifying the application of the section to forfeitures for bankruptcy. The judge held that re-entry on the bankruptcy of a surety was also a forfeiture within the meaning of section 146.
The position therefore was that when the Rent Acts were first enacted, forfeiture for bankruptcy of the tenant was treated (subject to the qualifications in section 146, which are not for present purposes relevant) in the same way as forfeiture for breach of covenant. If, therefore, the policy of the Acts was to allow the tenant to retain possession despite the expiry of his lease but to preserve the landlord's right to recover possession by forfeiture, there would be no reason to distinguish between forfeiture for bankruptcy and forfeiture for breach of covenant.
My Lords, I entirely accept that to speak of a breach or non-performance of an "obligation of the tenancy" is not an accurate way of describing what happens when a tenant becomes bankrupt. But then, neither is the expression "breach of a condition in the lease" in section 146 of the Act of 1925 and, as I have said, those words have always been construed to include forfeiture for bankruptcy. In R.M.R. Housing Society Ld. v. Combs  1 K.B. 486, 493, Sir Raymond Evershed M.R. said that he could see "no valid or useful distinction" between the phrase "obligation of the tenancy" and the phrase "terms and conditions of the original contract of tenancy" in section 15 of the Act of 1920. Mr Griffiths drew your Lordships' attention to the fact that in section 1(1) of the Increase of Rent &c (Amendment) Act 1919, a temporary Act which preceded the Act of 1920, Parliament had provided that no order for possession could be made "so long as the tenant continues to pay rent at the agreed rate and performs the other conditions of the tenancy." He said that the different language used in the Act of 1920 shows that a different and narrower meaning was intended. I find this very improbable. Why should Parliament have decided in this obscure way to exclude bankruptcy forfeitures as a ground for a possession order? It seems to me rather to confirm Sir Raymond Evershed's view that the various phrases were regarded as equivalent to each other.
There is very little authority on the point. In the Irish case of In re Drew  I.R. 504, 508 Johnston J. said that a tenant who had gone bankrupt was not protected from an order for possession by the Irish equivalent of section 5 of the Act of 1920 because he had "broken one of the conditions of his tenancy." On the other hand, there is no authority the other way and in successive editions of Sir Robert Megarry's book In re Drew was cited for the proposition that a statutory tenant is "subject to the burden of a condition of forfeiture on bankruptcy". This in itself is weighty evidence of contemporary opinion at a time when the Rent Acts were daily before the courts.
In Paterson v. Aggio  2 EGLR 127 the Court of Appeal had to consider whether a tenancy was a "protected shorthold tenancy" within the meaning of section 52 of the Housing Act 1980 and therefore excluded from the protection of the Rent Act 1977. The section provided that such a tenancy was to be for "a term certain of not less than one year nor more than five years" and satisfy various conditions, including
The intention of Parliament was to require that the tenant under a protected shorthold tenancy should have security of tenure for at least a year and to prevent this requirement from being evaded by the grant of a tenancy for a longer period but subject to a break clause which enabled the landlord to terminate the tenancy earlier. On the other hand, it was not intended that a tenancy should be excluded from the definition by the presence of a normal forfeiture clause. The tenant argued that the tenancy failed to comply with condition (a) because it could be forfeited for bankruptcy and that this was not a breach of an "obligation of the tenancy". The Court of Appeal rejected the argument. May L.J. said that "although on a strict construction" it could be said that "the requirement not to become a bankrupt was not an 'obligation' on the tenant", this would defeat the plain intention of the legislature.
My Lords, I accept that the legislation of 1920 should not be construed according to what Parliament appears in 1980 to have thought was meant by the term "obligation of the tenancy". But May L.J. based his judgment partly on an analogy with the meaning of the same phrase in the Rent Acts. He referred to In re Drew  I.R. 504 and the passage from the judgment of Sir Raymond Evershed M.R. in R.M.R. Housing Society Ld. v. Combs  1 K.B. 486, 493. He said that he agreed with the submission of counsel for the landlord, which included the observation that :
Mr Griffiths submitted that May L.J. was not necessarily agreeing with every step in counsel's argument, but he seems to me to have recited it all with approval. I would therefore find it very difficult to accept the "strict construction" of Case 1 without saying that Paterson v. Aggio  2 EGLR 127 was wrongly decided. For my part, I think that it was plainly right.
In my opinion Judge Cotran and Laws L.J. reached the right conclusion for the right reasons. I would dismiss the appeal.
The proviso for re-entry in the lease of 15 August 1979 provided:
Section 3(1) of the Rent Act 1977 provides:
Section 98(1) of the 1977 Act provides:
Case 1 in Part I of Schedule 15 to the 1977 Act provides:
The first question which arises on this appeal is whether the proviso for re-entry contained an obligation on the part of the tenant. On a literal construction of the proviso the appellant can advance an argument of considerable force that the proviso contained no such obligation. He can point to the wording of the proviso and to the distinction which it draws between the failure or neglect of the tenant to perform or observe any of the covenants agreements and stipulations in the lease and the tenant becoming a bankrupt. He can also point to the absence of words which expressly impose an obligation on the tenant not to become a bankrupt and can contend that the tenant becoming a bankrupt is merely an eventuality which permits the landlord to exercise his power to re-enter. However it was clearly a condition of the original protected tenancy that the tenant should not become a bankrupt and this condition has been broken by the appellant, Goulding J. stating in Halliard Property Co. Ltd. v. Jack Segal Ltd.  1 W.L.R. 377, 381H with reference to the provisions of a proviso for re-entry that: "forfeiture on the bankruptcy of the lessee is considered as a case of breach of condition."
The authorities make it clear that the Rent Acts are to be construed in a broad and commonsense way, and Megarry on the Rent Acts, 11th ed. (1988), at p. 14 cites a number of judicial comments to this effect on the language of the Acts:
Section 1(1) of the Increase of Rent etc. (Amendment) Act 1919 provided that, save in certain specified circumstances, no order to recover possession should be made against a tenant so long as he continued to pay the agreed rent and performed "the other conditions of the tenancy". Section 5(1) of the Increase of Rent and Mortgage Interest (Restrictions) Act 1920, which replaced the 1919 Act, provided that no order to recover possession should be made against a tenant unless any rent lawfully due had not been paid "or any other obligation of the tenancy" had been broken or not performed. In my opinion it is more probable that the draftsman of the 1919 and 1920 Acts used the terms "the conditions of the tenancy" and "the obligations of the tenancy" interchangeably, rather than with the intention of drawing some distinction between them. In R.M.R. Housing Society Ltd. v. Combs  1 K.B. 486, 493 where Sir Raymond Evershed M.R. was considering the term "any other obligation of the tenancy" in paragraph (a) of Schedule 1 to the Rent and Mortgage Interest Restrictions (Amendment) Act 1933 he said:
I further think that, using language in a non-technical way, there would be nothing unnatural in saying that the tenant under the lease was "obliged" not to become a bankrupt if he wished to remain in possession of the house let to him. Therefore I consider that if, whilst the lease was subsisting, the tenant became a bankrupt, he broke an "obligation of the previous protected tenancy", within the meaning of paragraph (b) of Case 1.