Brann v Westminster Anglo-Continental Investment Co Ltd

Protected tenant of flat sublets at less than two-thirds of rateable value so as to be able legally to take a premium–An assignment of his lease to the subtenant would make the latter a protected tenant by merger of the subtenancy in the lease–Landlords entitled to refuse consent to this transaction–General observations on refusal of consent to an assignment which creates a protected tenancy This was a claim by R H Brann against Westminster Anglo-Continental Investment Co Ltd for a declaration that their refusal to permit him to assign his lease of flat 3, 21-22 Dunraven Street, London W1, to a Mr Fitzpatrick of that address was unreasonable. R H Bernstein QC and G N N Huskinson (instructed by George & George, of High Wycombe) appeared for the appellant, and Miss S Solomon (instructed by Jones & Son, of Dovercourt) represented the respondents. The court did not call upon Miss Solomon to argue. Giving judgment, CAIRNS LJ said: This is an appeal from a decision of His Honour Judge Stockdale given at the Westminster County Court on October 31 of last year. He had before him an originating application by the appellant, tenant of a flat, for a declaration that the respondent landlords had unreasonably withheld consent to an assignment of the lease of the premises. He refused the application, holding that the respondents had not been shown to be unreasonable in so withholding consent, because the effect of an assignment would have been to create a protected tenancy under the Rent Act 1968 and the proposed assignment was a device to secure that result. The tenant now appeals from the learned judge’s refusal of his application. The reason why the assignment would have had the effect mentioned was this. The rateable value of the flat on the appropriate day was £597. Under the Rent Act 1968 a dwelling-house in London with a rateable value of more than £400 on that day was outside the Act (section 1 (1) (a)). But by the Counter-Inflation Act 1973, which came into force on March 22 of that year, that limit was raised to £1,500. The rent under the lease is £600 a year, so in March 1973 the appellant became a protected tenant. However, he wanted to change his residence. If he had then obtained the landlords’ consent to an assignment and assigned the residue of the lease he could not have lawfully obtained a premium from his assignee (section 85 (1) of the 1968 Act). With the advice of his solicitors he evolved a legal way of obtaining a premium. With the landlords’ consent he granted an underlease to a Mr Fitzpatrick for three days less than the term of his lease at a rent of £390 a year. Because this was less than two-thirds of the relevant rateable value, the underlessee did not become a protected tenant (section 2 (1) (a) of the Act of 1968), and the appellant could obtain a premium on the assignment. This had an advantage for the respondents as well as for the appellant, because there was now no protected tenancy: Fitzpatrick had no protected tenancy, because of his low rent, and the appellant had none, because he was no longer using the flat as his residence. There had, however, unknown to the respondents, been an arrangement between the appellant and Fitzpatrick that after the underlease was granted the appellant would assign the lease to Fitzpatrick. The underlease would then merge in the head lease; Fitzpatrick, if he continued to live in the flat, would have a protected tenancy, and the advantage which the respondents had expected to get from the underlease would be taken away from them.73 The learned judge held that it was not unreasonable for the respondents to withhold consent to the assignment in those circumstances. He set out the history fully in a very careful judgment and I shall give only a summary. The lease was granted on May 23 1960 by the then owners of the premises, the City Prudential Building Society, to one Rosedale. It was a lease of flat 3, 21-22 Dunraven Street, London W1, for 21 years from March 25 1960 at a rent of £600 a year. It contained a covenant in a common form, clause 2 (11), by which the tenant covenanted not to ‘assign underlet or part with the possession of the said flat or any part thereof without the consent in writing of the landlord which consent shall not be unreasonably withheld in the case of a responsible assignee or tenant.’  Rosedale assigned the lease to the appellant in 1960, and the building society assigned the reversion to the respondents at some time before 1973. There was considerable correspondence in 1973 and 1974 between the appellant’s solicitors and the respondents’ property managers, Beacon Investments Ltd, about various schemes to enable the appellant to deal with his leasehold interest in a way that would be financially satisfactory to him. The lease had about eight years to run. The first proposal, contained in a letter from the appellant’s solicitors to Beacon Investments of May 14 1973, was for the appellant to underlet at £398 a year rent, and in order to assure the respondents of getting their full rent of £600 a year the appellant would pay in advance a lump sum of £1,600, being the total difference over eight years between the two rents. They further proposed that the appellant should surrender his head lease to the respondents for £20,000. The letter explained the advantage to the respondents of getting a tenant at a low rent so that his tenancy would not be a protected one. This proposal was favourably considered by the respondents, and there were negotiations in later letters about the consideration for the surrender and other matters. The respondents’ advisers were, however, dilatory in the matter (whether it was the solicitors’ dilatoriness or that of Beacon Investments, I do not know), and it was not until January 1974 that agreement was reached, subject to contract, for the transaction to go through, with the consideration for the surrender, together with something for fixtures and fittings, being agreed at £15,500. Thereafter the respondents withdrew from the transaction because of some internal difficulty in connection with raising the money. The withdrawal was notified in a very apologetic letter from Beacon Investments dated February 1 1974, written to Mr Brann, in which they said: ‘We feel in the way you have been messed about we have no alternative but to say you are at liberty to proceed with the transfer of your lease and we of course must take pot luck as to whether it is available when we are ready.’  What exactly is meant by that sentence is not very clear to me. There was a further letter on February 4, written to the appellant’s solicitors by Beacon Investments, in which the writer said: ‘I am in the process of trying to rectify this internal position but I said to Mr Brann I realise he must consider himself free to dispose of his lease to his best advantage but if by chance he has not got the same tied up and cares to come back to us we shall be happy to re-open negotiations if we are in order on our own side.’  It was not suggested by Mr Bernstein, on behalf of the appellent, that those letters constituted a licence to assign, and although the word ‘transfer’ and the expression ‘dispose of’ are used, I am quite satisfied that they were used very loosely, and that the respondents had no idea of inviting the appellant to assign as distinct from underletting. Certainly the matter was so understood by the appellant’s solicitors, who wrote on February 5 treating Beacon Investments’ letter as an agreement in principle to the subletting. The next stage was the suggestion of an underlease to a lady whom the appellant was intending to marry, but this came to nothing. In March 1974 Mr Fitzpatrick came on the scene, and on the 26th of that month his solicitors wrote to the appellant’s solicitors saying that their respective clients had agreed, subject to contract, for the lease to be assigned to Mr Fitzpatrick, and certain fixtures and fittings to be sold to him for £14,900. In their reply dated March 28 the appellant’s solicitors said that they had applied for a licence to sublet and saw no reason why they should not apply for a licence to assign. They did not however do so. On April 3 they wrote again to Fitzpatrick’s solicitors explaining, very properly, that they could not advise their client to accept what was obviously an inflated price for the fixtures and fittings, which would land him in trouble under sections 88 and 89 of the Rent Act. It was for that reason that a sublease was proposed. By April 5 the appellant and Fitzpatrick had agreed to a sublease at something under £400 a year for a premium of £11,900 (£3,000 to be paid for fixtures and fittings, so getting back to the original total of £14,900), with a so-called gentlemen’s agreement whereby at a later stage the appellant would assign the lease to Fitzpatrick. On the same day the appellant’s solicitors wrote to the respondents’ solicitors complaining of the delay in giving consent to subletting and now asking for a licence to sublet to Fitzpatrick. I ought to say that there has never been any objection to Fitzpatrick as a responsible person. After some further correspondence the appellant’s solicitors on May 9 wrote one letter to Fitzpatrick’s solicitors saying, ‘We have immediately asked the landlords’ solicitors to proceed with the preparation of the formal licence to assign,’ and another letter to the respondents’ solicitors returning a slightly amended draft of a licence to sublet, with no reference whatever to any licence to assign. We were informed that the two letters were written by two different people in the solicitors’ office. Whatever the explanation, it is deplorable that such contrasting letters should emerge from that office both on the same day. By June 18 1974 the underlease had been entered into, the licence for it having been granted. It had been a term of the contract for the underlease that if the appellant wished to assign his head lease he would offer it to Fitzpatrick, and so there was an exchange of letters on June 20 and on July 5 between solicitors, one intimating a wish to assign and the other expressing a desire to acquire the lease. The learned judge described this as ‘a charade.’  Having regard to what had gone before, I think that was a not inapt description. On July 19 the appellant’s solicitors wrote to the respondents’ solicitors asking for the first time for a licence to assign. The reply, dated July 15, was as follows: ‘We refer to your letter 9th inst and are instructed that our clients will not agree to an assignment of your client’s lease. Our clients originally only agreed to the grant of the underlease by your client, since your client who would not be in beneficial occupation would not become a protected tenant at the expiration of the underlease. It appears that an assignment will contravene our client’s original intentions and for this reason our clients cannot agree thereto.’  This was amplified in a further letter written on August 5 saying: ‘We refer to your letter of the 22nd ultimo, and are instructed that our clients cannot agree to your client assigning his interest to his own subtenant, since this would be contrary to the spirit of the agreement by our clients with you. In your letter dated March 21 1974 you yourselves confirmed that your own client would have no protection under the Rent Acts, since he would not be in occupation. The subtenant herself would have no protection, since her rent was less than two-thirds of the rateable value.’  That was at the stage when the subletting was proposed to the appellant’s fiancee. The letter goes on: ‘If your client now assigns his interest74 to the subtenant, then the subtenant’s interest will merge in your client’s head leasehold interest, but we are instructed that your client’s own rent is more than two-thirds of the rateable value. Therefore your client’s subtenant would then have the protection of the Rent Acts, which defeats the whole purpose of the original arrangement. For this reason, we feel sure you will agree that our clients’ refusal in this case could not possibly be considered to be ‘unreasonable’.’ Mr Bernstein has conveniently enunciated six propositions which summarise his case for the appellant. (1) If at the outset the tenant had asked for a licence to assign and the landlords had refused on the sole ground that the landlords’ chance of regaining possession at the end of the term would be diminished, that would have been unreasonable. (2) If at the outset the application had been made both for a licence to underlet and for a licence thereafter to assign to the underlessee, the position would have been the same. (3) The end result to the landlords is the same whether consent to the assignment was requested at the same time as consent to the underletting or subsequently. (4) Hence a refusal of the subsequent request is as unreasonable as of a simultaneous request. (5) Representations as to benefits to the landlords of an underletting are irrelevant because their only effect was to procure a consent to an underletting that the landlords could not lawfully have refused without them. (6) The court should look at the substance of the matter and not penalise the tenant for mishandling by his solicitors. I will assume that the first of those propositions is correct. Mr Bernstein said that he was prepared to produce authority for it, but when I intimated to him that I was willing to make that assumption he did not present his authorities, and therefore it would be wrong for me to proceed in any other way than on the assumption that that is a correct proposition. It is of course only an assumption, because we have not heard Miss Solomon on it. It by no means follows, to my mind, that proposition (2) is correct. I do not think that it would be unreasonable for a landlord to refuse to consent to the grant of an underlease which was never intended to be effective for any substantial period, but was merely entered into with no other object than to enable the tenant, in effect, to assign his lease for a large premium without breaking the law, conferring no benefit on the landlord, but leaving him with a tenant who was more likely to continue as a protected tenant than the original tenant was. But if I am wrong on that, and if the tenant proceeds in such a way that he does bring about at one stage a result which is fair to both him and the landlord, in that both of them have gained something from the operation, then whether he has done it in that way, making no reference to any further parts of the scheme, either by guile in order to persuade the landlord to commit himself, or by carelessness on his own part or that of his solicitors, I can see no injustice in saying to him, ‘It is not unreasonable for your landlords now to refuse to let you deprive them of the benefit which they had derived from your scheme at your invitation.’  If therefore proposition (2) is to be accepted, I reject proposition (3), and propositions (4), (5) and (6) do not arise. Mr Bernstein has not followed the example of his learned junior in the court below in presenting a very interesting argument as to the circumstances in which a refusal by a landlord to consent to an assignment which would have the effect of leaving him a statutory tenant could be held as a matter of law to be unreasonable. He did, however, just touch upon the law on the matter by citing to us a passage from Megarry J’s book The Rent Acts, 10th ed at p 176. I read from part 3 (a) on that page: ‘A landlord’s refusal of consent may be reasonable if the assignment would instil into the contractual tenancy a capacity for producing a statutory tenancy which did not exist before.’  The author then cites the example where the original tenant is a limited company and the proposal is to assign to an individual. Then in paragraph (b) he goes in: ‘A refusal of consent to an assignment is also reasonable if the tenancy is nearly at an end (eg with but 12 days to run) and it is plain’–and I note these next words–‘as a matter of fact, even though not of law, that in the absence of an assignment no statutory tenancy would arise, owing to the tenant being out of residence and most unlikely to return. For in substance what would be assigned would be not a mere contractual term but a contractual term coupled with a right to become a statutory tenant which otherwise would not exist. The same will usually apply to a mere weekly tenancy. Even if the contractual term has some seven weeks to run when permission to assign is sought, and the tenant is still in possession when he assigns the tenancy’–and I note those words–‘the same principle applies if ‘the sole purpose of the assignment is to give to the assignee statutory protection which the assignor does not want and does not intend to get for himself’; and it seems that an assignment during the currency of a notice to quit would normally be in like case. But these considerations will usually not apply to a term with over seven months to run.’  I stress the word ‘usually.’ It seems to me that this question of ‘reasonableness’ or ‘unreasonableness’ is essentially a question of fact depending upon the circumstances of each case, and I regard those propositions in Megarry J’s book as being propositions of commonsense rather than of law. A doctrine seems to have grown up that the likelihood of creating a statutory tenancy is not a reasonable ground for refusing permission to assign in a ‘normal’ case, but is in an ‘abnormal’ case. The learned judge so approached the matter, analysed the authorities that had been cited to him and the facts, and reached the conclusion that this was an abnormal case. I think the most helpful citation that was referred to by Megarry J is a short quotation from the judgment of Romer LJ in the case of Thomas Bookman Ltd v Nathan and another [1955] 1 WLR 815. The learned Lord Justice said at p 821: ‘It seems to me that if it is established that the object of the assignment is to enable the assignee to remain in occupation under the Rent Restrictions Acts, then it will almost inevitably follow that the landlord would be justified in withholding his consent because the result of the assignment would be, and intended to be, to bring about what Tucker LJ described in Lee v K Carter Ltd [1949] 1 KB 85 as ‘a contractual relationship pregnant with future possibilities’.’  This, indeed, would have been a pregnant relationship if it had been brought about. Again I think that Romer LJ was stating a commonsense view about what was reasonable rather than stating a proposition of law. But whichever it is, I am sure it is right. If the matter depends on normality, I say that this proposed assignment was abnormal in the extreme. If, as I prefer to do, we go back to the simple words of the covenant and ask ourselves whether any reasonable man would regard this landlord’s refusal of permission to assign as unreasonable, I would unhesitatingly answer no. So the learned judge answered it, and I would dismiss this appeal. JAMES LJ: I hope Mr Bernstein will acquit me of discourtesy if I do not deal with his argument in any great detail. In my judgment, Judge Stockdale was right to refuse the declaration sought by the applicant in this case, and I agree with the judgment just delivered by Cairns LJ. I am prepared to assume on the facts of this case that Mr Bernstein’s first proposition is well founded, and that had the tenant asked in the first instance for a licence to assign it would have been an unreasonable withholding of consent if the landlords had withheld consent solely on the ground that to give consent would reduce their chances of obtaining possession of the premises at the end of the term. But the question whether consent to assign was unreasonably withheld must be answered according to the circumstances at the time the request was made. By that time in this case the landlords had consented to an underlease which had been granted to Mr Fitzpatrick. The situation was then that neither the appellant nor Mr Fitzpatrick was likely to be in a position to claim a statutory tenancy at the end of the term. There had been brought about a situation in which the appellant had legally managed to obtain for himself a fair award in the form of premium, and he had done so on the basis that secured to the landlords the advantage of the probability that no one would be able to claim a statutory tenancy. This is quite clear from the letters before us. In the letter of February 5 1974 the appellant’s solicitors had written in terms that made it clear to the landlords that they were assuming that consent would be given to an underletting which would result in the advantages which they had outlined in their first letter of May 14 1973. The so-called ‘gentlemen’s agreement’ that was subsequently made between the appellant and Mr Fitzpatrick was not communicated to the landlords. I do not think it matters what the reason for that was: whether it was fault or pure carelessness, or whether it was deliberately concealed from the landlords. The fact is that it was not communicated to the landlords, and it was designed to take away the very advantages which the landlords derived from the underletting. The whole purpose of the assignment that was sought was to create a situation in which a statutory tenancy could be claimed by Mr Fitzpatrick if he wanted to do so at the end of the term, and that was in fact his desire. I, too, regard the propositions that are put forward in the textbook to which we were referred as propositions rather of fact than of law. But I think one can really go, as my Lord did, to the words of the covenant in the particular case and ask, in the light of those words, would an ordinary man regard this withholding of consent as a reasonable or unreasonable act in these circumstances?  I am sure the ordinary man would regard the landlords’ attitude in July, when the application was made for a licence to assign, as acting reasonably in refusing that licence. I agree that the appeal must be dismissed. SHAW LJ: I agree also, and I add only this because, if he will allow me to say so, I find Mr Bernstein’s argument on the facts of this appeal very much more instructive than persuasive. It seems to me that if one applies the test of normality, the transaction upon which his client had embarked was a manifestly abnormal one. It involved an underletting of an unusual character, in as much as the underlease carried a rent which was less than the head lessee was obliged to pay for the remainder of his contractual tenancy. The fact that the proposed assignment anticipated the end of the contractual tenancy by some years does not appear to me to distinguish the position in principle from the line of cases where a licence to assign was sought shortly before the end of the contractual tenancy. What the tenant was doing was to adopt a device–and I do not use that expression in a pejorative sense, but because it represents the actuality of the situation–in order to bring about a position which conferred an advantage upon him, in that he was able to obtain for the underlease a premium which otherwise would not be available, and which correspondingly gave rise to a potential disadvantage to the landlords. For those reasons, I too would dismiss this appeal. The appeal was dismissed with costs.