Adair and another v Murrell

Rent Act 1977, section 120 — Premium charged on assignment of protected tenancy by tenant’s trustee in bankruptcy — Premium unlawful in part and in part lawful under section 120(3)(b) in respect of expenditure incurred in carrying out structural alterations or in providing improved fixtures — Unlawful part of premium recoverable by assignees under section 125 — Evidence as to amount of payment lawfully required — Question as to whether judgment against trustee in bankruptcy should be limited to amount of bankrupt’s estate still in trustee’s hand — Amount still in hand £7,350, but amount of unlawful part of premium £17,658 — Court had no discretion enabling it to limit amount recoverable to sum remaining in trustee’s hand — Judge would not have placed such a limitation on the amount recoverable if he had discretion — Judgment for assignees against trustee for £17,658 This was an action by George Graeme Blenworth Adair and Heather Adair, his wife, against the defendant Vernon Charles Murrell, a certified accountant, sued both in his own capacity and as trustee in bankruptcy of Cecil Edward John Cox. The plaintiffs claimed the return of a payment made on the assignment to them of the residue of a tenancy of Lynt Bridge House Farm, at Inglesham, Wiltshire, by the defendant. It was agreed that the property had been vested in the bankrupt for a protected tenancy under the Rent Act. It was alleged that the payment made on the assignment to the plaintiffs was in part an illegal premium by virtue of section 120(1) of the Rent Act 1977. D N Barnard (instructed by Payne, Hicks Beach & Co) appeared on behalf of the plaintiffs; C J Brougham (instructed by Peard, Son & Webster, of Croydon) represented the defendant. Giving judgment, SKINNER J said: In this action the plaintiffs claim against the defendant, as trustee in bankruptcy of a Mr John Cox, the return of a premium which they paid upon the assignment to them of the lease of Lynt Bridge House Farm, Inglesham in Wiltshire. They do so on the grounds that it was an unlawful payment by virtue of section 120(1) of the Rent Act 1977. It is common ground that part of the premium paid was an illegal payment and part could legitimately have been charged under the provisions of section 120(3)(b), but the first difference between the parties, which has narrowed considerably during the course of the case, is as to how much of the premium was a legitimate payment. At the end of the evidence, Mr Brougham, quite rightly in my view, abandoned other defences to the claim, which were pleaded in paragraphs 8, 9 and 10 of the defence, so that the only remaining issue after deciding how much of the premium was an unlawful payment is to decide whether, and if so by how much, the defendant’s liability should be limited to the amount of the estate in his possession. The background of the case is simple. The bankrupt, Mr Cox, was granted a lease of Lynt Bridge House Farm at Inglesham for 21 years from June 24 1970 by New College, Oxford. Before the lease was granted it is now common ground that a new roof had been put on the farmhouse by the college in 1968. The lease itself is in the agreed bundle of correspondence and the terms which are relevant are that it was to be rent free until December 25 1970, thereafter the rent would be £350 a year on full repairing covenants and there was a schedule of works attached to the lease. Those works were to be completed before June 24 1972, in other words during the first two years of the 21-year term. The bankrupt went into possession. He did most of the works referred to in the schedule and after a few years he allowed his friends, a Mr and Mrs Jeffries, to occupy the premises, apparently rent free; but during the period 1970 to 1977 he over-extended himself financially and on May 10 1977 he was adjudicated bankrupt. The defendant, Mr Murrell, was appointed his trustee. Mr Murrell is a certified accountant practising in Croydon who specialises in bankruptcy and liquidation. He thereupon embarked upon a series of actions to obtain possession of the premises from Mrs Jeffries who was then occupying them. That took some time, with a number of actions and appeals, and it was not until early in 1979 that he finally obtained possession. New College had apparently brought forfeiture proceedings but had discontinued them and Mr Murrell, as trustee, did not disclaim the lease but proceeded to attempt to dispose of the balance of the term remaining. In order to do so he consulted a Croydon estate agent, Mr M J Holdsworth, who was a partner in a firm known at that time as Gibson, Holdsworth & Partners, now Best, Gibson, Holdsworth, in Croydon. He asked Mr Holdsworth to dispose of the balance of the term. Apparently they went round the premises together. As a result Mr Holdsworth drew up the particulars. In the particulars he set out terms of the lease and asked for, as one sees under the paragraph ‘Terms’: The sum of £8,250 subject to contract is required for the residue of the lease, and in addition the sum of £2,400 is required for landlord’s fixtures and fittings. A total of £10,650, in other words, for the balance of the term. The availability of the premises was advertised in the Sunday papers and, once the matter was advertised, to use Mr Holdsworth’s phrase, all hell broke loose and he was inundated with people interested in what was obviously a very attractive proposition. As a result, instead of disposing of it, as he hoped, by ordinary private treaty, the matter was opened to tender. I will come back to the details of that a little later. One who inquired and tendered was Mr Adair; I say Mr Adair because, although he and his wife were concerned in what followed and he and his wife are plaintiffs, to all intents and purposes he did the negotiation and made the relevant inquiries. Mr Adair is a retired estate agent who apparently engages in a little property dealing. At the time he and his wife were living on a farm at Chagford in Devon which they had both run and improved for a gentleman who was a wealthy property dealer and a sort of client of Mr Adair. They had obtained an advantageous sale of the farm at Chagford, but in order for it to go through smoothly they had to find other premises quickly. They were going to be assisted financially to do so by the client who owned the farm at Chagford. They had to give up possession of that farm by October 1 1979. In the summer of 1979 they looked at a lot of different properties. They wanted a property that was nearer London; they wanted one with some78 stabling and some grazing land round it for their family’s horses. They had been, so far, unsuccessful, certainly with the money at their disposal. Mr Adair showed interest when this property was first advertised, and when it was put out to tender he rang Mr Holdsworth. He discussed with Mr Holdsworth the potential of the property — he had obviously seen it by this time — and he was told by Mr Holdsworth that the property was protected by the Rent Acts, or could be protected by the Rent Acts. He was told that he could apply for registration of a rent and that he would have security at the end of the term. (I omitted to mention that one of the terms of the lease was that there was to be a rent review in the fairly near future and, according to Mr Holdsworth and Mr Adair, that was at the basis of the discussion between them.)  What Mr Adair was concerned with was protection against an unreasonable rent review when that arrived and again security at the end of the term. The fact he could apply for protection, as he was told, put his mind at rest about both those matters. Mr Holdsworth had spoken to the solicitors who were acting for the trustee. He consulted them about the applicability of the Rent Act to the premises in August 1979 and a letter reads, so far as it is relevant: Further to our telephone discussions when we were able to agree that the existing full repairing lease on the above property could readily and simply be converted into a protected tenancy by any purchaser of the lease, I would enquire what your opinion of the repairing liability would be if that course of action was taken. and then he goes on to say that he was worried what would happen once the tenancy became, what I think he was trying to say, a statutory tenancy. He got a reply on the telephone to that, according to him, but he did not have a reply in writing until September 5 which, with respect to the defendants’ solicitors, seems fairly typical of their speed of action. In that the solicitors say: So far as your letter of August 7 is concerned, I confirm that the lease appears to create a protected tenancy which would continue after the expiry of the term as a statutory tenancy on the repairing terms set out in the lease, which are not overridden by the Housing Act because the lease is for a term of more than seven years. Mr Holdsworth says that that was really all that concerned him at that time and he did not apply his mind at all to the lawfulness or otherwise of the amount that was proposed to be charged as a premium. I will return to that matter later. The plaintiffs, in the end, tendered the sum of £27,550; that was accepted as the best tender. New College, the landlords, agreed to the assignment and on September 14 1979 the assignment was completed and the plaintiffs took possession of the farm. Mr Adair did some work on the farmhouse hoping to be able to resell it at a profit. He said that although it may seem a fairly high price to pay for the lease, he was convinced that with suitable presentation and a bit of extra work he could make quite a substantial profit on the reassignment or the assignment on of the premises. There is no doubt that neither he nor his wife wanted to stay there as a permanent home and, indeed, Mrs Adair told me that she was looking at other premises within a matter of days or at least weeks of their arrival at Lynt Bridge House Farm. In early 1980, because of the advantages of possible protection under the Rent Act, the Adairs considered assigning either to one of their children or a son-in-law or to a nephew. As a result Mr Adair wrote to Mr Holdsworth inquiring about the rateable value and then was advised by his then solicitors, Dawson & Co, that they had in error, at the time of the assignment, failed to advise Mr Adair of the limitations on the payment of premiums for property with the rateable value of this property which, it is common ground, is within the Rent Act. It is from that moment forward that Dawson & Co initially, and then Mr and Mrs Adair’s present solicitors, pursued the claim against the defendant. It was suggested to Mr Adair that this was a deliberate ploy on his part, that he knew very well that the amount he was paying as a premium was illegal and he fully intended, once he got possession of the premises, to get it back. That was not pursued by Mr Brougham during the course of the argument, but it may be relevant to one question which I have to decide later and I accept what Mr Adair told me. I think as a witness he was a completely sound and honest man and he said that he had only a limited knowledge of the Rent Acts from the days when he was practising as an estate agent and did not deal with and had no experience of lawful or unlawful premiums. He said that at that time he never thought of the (I am summarising his evidence) lawfulness or unlawfulness of the premium. He was advised by solicitors that the price that was required for the equity and the price that he paid was one that they thought they could increase and he made the offer that he did purely on a commercial basis. He said he formed the impression that the property could become protected but it did not occur to him that it was already protected. As I say, the lawfulness or otherwise of the premium, I am satisfied, was not anything which was present in his mind at any material time. However, after his solicitors had made a claim against the defendant’s solicitors, proceedings commenced. Mr and Mrs Adair made it clear in open correspondence that they were willing to go back to the status quo, as it were, by rescinding the assignment so long as they were compensated for the work that they had done; but that came to nothing and therefore the matter came for trial before me. The plaintiffs’ claim initially depends on sections 120 and 125 of the Rent Act 1977. Section 120, so far as it is material, reads as follows: (1)  . . . any person who, as a condition of the assignment of a protected tenancy, requires the payment of any premium or the making of any loan . . . shall be guilty of an offence. (2) Subject to section 121 of this Act, any person who, in connection with the assignment of a protected tenancy, receives any premium shall be guilty of an offence. (3)  Notwithstanding anything in subsection (1) and (2) above, an assignor of a protected tenancy of a dwelling-house may, if apart from this section he would be entitled to do so, require the payment by the assignee or receive from the assignee a payment — (a)  . . . (b)  of a sum not exceeding the amount of any expenditure reasonably incurred by the assignor in carrying out any structural alteration of the dwelling-house or in providing or improving fixtures therein, being fixtures which, as against the landlord, he is not entitled to remove; (c)  where the assignor became a tenant of the dwelling-house by virtue of an assignment of the protected tenancy, of a sum not exceeding any reasonable amount paid by him to his assignor in respect of expenditure incurred by that assignor, or by any previous assignor of the tenancy, in carrying out any such alteration or in providing or improving any such fixtures as are mentioned in paragraph (b) above and then it goes on to deal with business premises. In other words, any assignor of a lease which is protected by the Act can only recover on assignment any expenditure reasonably incurred by him or his predecessors as lessees in doing the works referred to in subsection (3)(b). It is to be noted that the wording is ‘expenditure incurred’ and, in my judgment, the words ‘any expenditure reasonably incurred’ include liabilities which have been incurred in providing the improvements or alterations referred to in the paragraph even though those liabilities have not actually been discharged. That is relevant here because the bankrupt had paid for certain of the work carried out by him which comes within the paragraph and there were liabilities in respect of a considerable amount outstanding at the time he was adjudicated bankrupt. Then in section 125 a statutory cause of action is provided to anybody who has paid an unlawful premium in the following words: Where under any agreement (whether made before or after the commencement of this Act) any premium is paid after the commencement of this Act and the whole or any part of that premium could not lawfully be required or received under the preceding provisions of this Part of this Act, the amount of the premium or, as the case may be, so much of it as could not lawfully be required or received, shall be recoverable by the person by whom it was paid. Here, as I say, it is common ground that part of the premium is unlawful and the defendant could only lawfully require or receive a sum not exceeding the expenditure reasonably incurred within the section. It is also common ground that it is for the defendant to establish what that sum was. In order to do so the defendant has called evidence from two79 sources. His own evidence, producing the proofs in bankruptcy along with evidence from his file, which has not been challenged, of sums credited to claimants before the bankruptcy. Those consist of Liddiards, who were the principal builders concerned with the alterations. It is common ground that they had been paid £4,000 before the bankruptcy and the trustee himself paid a further £4,245, which was a secured debt, making a total of £8,245. There was a firm called Longdown Engineering to whom £1,478 had been paid before the bankruptcy and a further £662 is outstanding. Then, lastly, a firm called Edwards & Goddy, who submitted a bill for £169 in respect of relevant work. The total comes to £9,892 which, the defendant says, was clearly expenditure incurred on the premises, and reasonably incurred. The second source of evidence came from inspection by Mr Holdsworth. The inspection on which his evidence was based was (I am relying on his own evidence about this) ‘recent and hurried’. It was carried out in September 1981, within three weeks or so of the matter being in the list. He says himself that he did not have the opportunity to consider it carefully, as he normally would, and check it. He had done his best but there is inevitably quite a large amount of guesswork in what he has put into his estimate. Some of the matters that he has included in his estimate of expenditure are plainly inaccurate. His charge in respect of the driveway, for instance, was plainly a fairly wild and totally inaccurate guess. His charge of £300 for connection charges in respect of electricity was something that could easily have been checked, and was not, and is plainly not an expenditure which was in fact incurred. What is more he gave his estimate at 1979 prices; the work had to be carried out, according to the lease, between June 1970 and June 1972. Mr M A E Casey [of Rylands & Co, of Cirencester], for the plaintiffs, has taken 1971 as the mean time to estimate the expenditure and I agree with him about that. It is common ground that Mr Holdsworth’s prices have to be scaled down by a factor of 3.1 in order to arrive at 1971 values, and that has been done, so that his original figure of £50,496, scaled down to 1971 values, was brought down to £16,289. But in that £16,000 plus was included the price of providing a new roof and some indication of the care with which the defendant’s case has been prepared lies in the fact that no inquiries had been made from the landlords as to when the new roof had been put on. After a series of short adjournments and telephone calls, it was not until about 10.15 this morning that we were told that the information from New College was that the new roof had been installed by them two years before the bankrupt’s term began. Therefore, £11,000 plus of Mr Holdsworth’s estimate of £50,000 had to come off — I would have thought a telephone call in September would have effected that quite easily — which brought his 1971 price down, including fixtures, such as cupboards, to £12,519. The plaintiffs had to rely solely on evidence of the sort which Mr Holdsworth gave. They instructed Mr Casey to inspect the premises for them. I found Mr Casey a far more impressive witness than Mr Holdsworth. I think he was, although limited by the amount of time he had, more thorough than Mr Holdsworth, and wherever they differ I have no hesitation in accepting Mr Casey in preference to Mr Holdsworth. Of course, he was suffering from the same disadvantage as Mr Holdsworth in having to infer what work had been done from what he saw on the ground now. In the end he, first of all for himself, put the 1971 value of the expenditure incurred by the bankrupt at no more than £9,500, including such fitted cupboards and fixtures as there were on the premises. That compared with Mr Holdsworth’s £12,519. But Mr Holdsworth’s £12,519 included a number of items, like the charge for the connection charges for electricity, which plainly had not been incurred. Mr Casey in the copy of his proof, which was put before me by consent, has carefully analysed Mr Holdsworth’s estimates and has come to the conclusion that certain items were overcharged and in certain cases, like the electricity connection, should not have been charged at all. If one applies Mr Casey’s tests to Mr Holdsworth’s figures one comes to a total of £9,903 as the expenditure legitimately incurred. Those tie in remarkably closely, the £9,500 and £9,903, with the actual expenditure which the trustee has been able to establish — £9,982. I have already said that I have confidence in Mr Casey’s evidence. I much prefer his evidence to Mr Holdsworth’s and I conclude that the only expenditure that has been proved within section 120(3)(b) is the £9,982 for which the trustee, the defendant, has factual concrete evidence. Therefore, prima facie, the plaintiffs are entitled to recover from the defendant as an illegal premium the excess above that figure, in other words, the sum of £17,658 (if my calculations are correct). But the defendant asks me to limit the judgment against him to the amount of the estate he still has in hand. He has made a fairly substantial distribution since he received the proceeds of the premium including £7,403 to himself, for his pay and expenses which were no doubt earned, and capital gains tax on this transaction of £3,098, part of which will no doubt be recoverable as a result of my judgment. They were the two major items apart from paying Liddiards, the builders, their secured debt plus costs amounting to very nearly £7,000. So that the amount still in hand is £7,350. As I say, Mr Brougham, on behalf of the trustee, asked me to limit the judgment to that amount. Asked for his authority for that proposition, he found it somewhat difficult. He very properly referred me to a passage in Halsbury’s Laws of England, 4th ed, vol 3, para 552, which deals with the position of the trustee as a litigant. That reads as follows: Where a trustee brings or defends an action as a litigant, he is, as between himself and the other parties to the action, in the same position as any other litigant; that is to say, he must pay any debt, damages or costs which the other litigants recover against him out of his own pocket, and must obtain reimbursement, if he is entitled to it, out of the estate. Consequently, a prudent trustee should, before embarking on litigation as plaintiff or defendant, see that he has sufficient assets in hand for his indemnity, or else obtain an indemnity from the creditors. That seems to give no discretion to the court in limiting the amount of the judgment against a trustee. However, Mr Brougham referred me to rule 92(3) of the Bankruptcy Rules 1952 (SI 1952 No 2113). Rule 92 comes under the heading ‘Costs and Taxation’ and rule 92(3) reads: (3)  Where an action is brought against an Official Receiver or trustee in bankruptcy as representing the estate of the debtor, or where an Official Receiver or trustee in bankruptcy is made a party to any proceedings on the application of any other party to the proceedings, he shall not be personally liable for costs unless the court otherwise directs. But it seems to me that one has to look at the application of those rules and in rule 3 it says: These rules shall, subject to the provisions of section 131 of the Act, apply to all matters arising under the Act in other words the Bankruptcy Act or any previous Bankruptcy Acts and to all proceedings taken in any such matter, whether commenced before or after the day on which these Rules come into operation then there is a proviso which does not appear to me to be relevant. It seems to me therefore in those circumstances that I have no discretion to limit the judgment in this case to the amount which the trustee has in hand. However, I have reached a clear view of what I would do if I had a discretion and therefore it might assist if I say what I would do, because it involves findings of fact that are essential to anybody who would wish to exercise their discretion in this matter. I have no doubt that I would exercise my discretion against the trustee and order that the judgment for the full sum should be given against him. I do this because I do not think that Mr Holdsworth was labouring under any mistake about what he was doing at any material point. Mr Holdsworth, who was the agent for the trustee, in my judgment knew all the facts and the legal consequences of those facts. He knew in particular that the lease which we are dealing with conferred a protected tenancy upon the tenant and he knew that there was a limit to the amount that could be charged as a premium on the assignment of that lease. I suspect that the asking price in the original particulars, totalling £10,650 for the lease and the fixtures, was based on the expenditure which had been discovered by the trustee during the course of his investigations because there is no doubt that within a very short time after the assignment the trustee himself, the defendant, was well aware of actual expenditure incurred by the bankrupt. That appears in his correspondence with the inspector of taxes. There he was arguing to the inspector of taxes that he had no better figure than £9,723 for the cost of improvements, which is basically the figure he gave me today, with one other matter which had been omitted, and he also mentioned a charge on the property in favour of Williams & Glyn’s Bank for £3,000 which had been lent in September 1976. I am not satisfied that that has any direct connection with the expenditure with which I am concerned but I mention this to show that the defendant himself was well aware of the actual expenditure and it may well be that the original asking price was based on that. But once the demand for the property was realised — once all hell broke loose, as Mr Holdsworth put it — Mr Holdsworth having taken advice from the trustee’s solicitor, who I have not heard in the witness box, decided to take a risk and get the best price possible. I think he did so in the hope that nobody would question it. I am not satisfied that Mr Murrell knew that what was being done was illegal because Mr Murrell relied entirely on professional advice from Mr Holdsworth and his solicitor, and, as Mr Brougham pointed out, there was a cride coeur in Mr Murrell’s evidence on that score. He told me that he was advised by solicitors and counsel in various proceedings relating not only to this matter but to the possession proceedings. He says: ‘I was never advised by anybody that the demand for a premium would be illegal and at no stage was it ever suggested to me by my advisers that this premium was illegal.’  That, I think, is a true statement of Mr Murrell’s position. But if what he tells me is right he plainly has a good cause of action against both his solicitors and/or Mr Holdsworth to recover any sums that he may have to pay from his own pocket in the present action and it is for that reason that, if I had a discretion, I am afraid I would not exercise it in his favour. I say that, of course, taking into account what I have already found about Mr Adair’s position. Let me just make it perfectly clear. Mr Adair was told that the property could be protected by an application to the rent officer. I am satisfied that he did not understand the consequences at that time and did not realise that the payment he was making was illegal. I say that for the reasons I have already given and because he plainly wanted to be able to recover at least the amount he paid for the assignment and he hoped to make a substantial profit by the improvement and presentation of the property later. Obviously he could not do that if he himself was going to be subject to the limitations imposed by section 120 of the 1977 Act. All Mr Adair’s calculations, I am satisfied, were based upon the open market value or capitalised profit rental of the premises and on that basis he stood to make a profit on resale whereas, of course, if he was limited he stood to make a loss. I am satisfied that he would not have offered the sum which he did, without inquiry as to the actual expenditure by Mr Cox, if he had suspected that he was going to be limited in the future by the provisions of section 120(3)(b). In those circumstances there will be judgment for the plaintiffs for £17,658. Judgment was given in favour of the plaintiffs for £17,658, with interest at 14% per annum from October 2 1979 and costs. The order was made against the defendant in his capacity as trustee in bankruptcy.