Hilton v Plustitle Ltd and another

Rent Act 1977, section 2 — ‘Company let’ — Scheme to take advantage of rule that a limited company, as a corporate body, could be a protected but not a statutory tenant for the purposes of the Rent Act — The arrangement, made between the owner of a flat, the present respondent, and the proposed occupier, the appellant, was that the latter should set up a company, that the flat should be let to the company as tenant, and that the company should nominate the appellant as the person to reside in the flat — Appellant purchased a company ‘off the shelf’ for £150 (Plustitle Ltd) and became shareholder and director — In accordance with this arrangement an agreement was made between the respondent as landlord and the company for a six months’ letting to the company, the agreement giving the company the right to nominate the occupier of the flat — The agreement was for six months, later extended by a further three months; the agreement was signed on behalf of the company by the appellant as managing director, and she entered into occupation — Subsequent difficulty arose about an increase of rent, the landlord sought possession, the appellant refused to leave and the present litigation began — The landlord claimed possession on the basis that this was a company letting — The appellant submitted that the letting to the company was a sham and that in reality she was the tenant, entitled to security of tenure The county court judge upheld the landlord’s claim for possession — He held that it was the clear intention of both parties, with full knowledge of all the implications, that the flat should be let to the company and not to the appellant personally — He rejected the suggestion of a sham, there being no evidence to support such an interpretation — He applied the law as stated by Diplock LJ in Snook v London & West Riding Investments Ltd The Court of Appeal agreed with the judge — They considered and distinguished the case of Gisborne v Burton, on which the appellant had relied — In the present case the letting both in form and substance was to the company as both parties intended — In Gisborne v Burton the documents were never intended to be acted on — The device there of including the landlord’s wife meant that she was in effect acting as her husband’s agent — In the present case the company was not the landlord’s agent — The transaction here was deliberately intended to avoid, but not to evade, the Rent Act — It was not a sham and was within the rule which, on the authorities, enabled parties to arrange their affairs to the best advantage — Appeal dismissed The following cases are referred to in this report. Aldrington Garages Ltd v Fielder (1978) 37 P&CR 461; [1978] EGD 347; 247 EG 557, [1978] 2 EGLR 70, CA Antoniades v Villiers [1988] 3 WLR 139; [1988] 1 EGLR 59; [1988] 17 EG 122; CA Dando (SL) Ltd v Hitchcock [1954] 2 QB 317; [1954] 3 WLR 76; [1954] 2 All ER 335, CA Donald v Baldwyn [1953] NZLR 313 Firstcross Ltd v East West (Export/Import) Ltd (1980) 41 P&CR 145; [1980] EGD 380; 255 EG 355, [1980] 2 EGLR 85, CA Furniss v Dawson [1984] AC 474; [1984] 2 WLR 226; [1984] 1 All ER 530, HL Gisborne v Burton [1988] 2 EGLR 9; [1988] 38 EG 129, CA Hiller v United Dairies (London) Ltd (1934) 1 KB 67 Johnson v Moreton [1980] AC 37; [1978] 3 WLR 538; [1978] 3 All ER 37; (1978) 37 P&CR 243; [1978] EGD 21; 247 EG 895, [1978] 2 EGLR 1, HL Ramsay (WT) Ltd v IRC [1982] AC 300; [1981] 2 WLR 449; [1981] 1 All ER 865, HL Shell-Mex & BP Ltd v Manchester Garages Ltd [1971] 1 WLR 612; [1971] 1 All ER 841, CA Snook v London & West Riding Investments Ltd [1967] 2 QB 786; [1967] 2 WLR 1020; [1967] 1 All ER 518, CA Street v Mountford [1985] AC 809; [1985] 2 WLR 877; [1985] 2 All ER 289; [1985] 1 EGLR 128; (1985) 274 EG 821, HL This was an appeal by Miss Helen Rose, the second defendant in an action by the plaintiff, Mr Robert Hilton, the present respondent, against the first defendants, Plustitle Ltd, and Miss Rose, in which the plaintiff claimed possession of a flat at 45 Priory Road, London NW6. Miss Rose appealed against the order for possession made by Judge Dobry QC, at Bloomsbury County Court, in favour of Mr Hilton. Philip Walter (instructed by S Newman & Co) appeared on behalf of the appellant; Christopher Coney (instructed by Graham Harvey & Co) represented the respondent. Giving the judgment of the court, CROOM-JOHNSON LJ said: If a dwelling-house is let to a limited company, the company cannot become a statutory tenant under the terms of the Rent Act 1977, section 2, on the termination of the tenancy. This has been so since Hiller v United Dairies (London) Ltd [1934] 1 KB 57. This rule has remained unchanged during re-enactments of the Rent Acts ever since. If a tenancy is granted to one person (eg a company) on terms that someone else is to reside in the house, there will be no statutory tenancy in favour of that other person: S L Dando Ltd v Hitchcock (1954) 2 All ER 335. In Firstcross Ltd v East West (Export/Import) Ltd [1980] 255 EG 355, [1980] 2 EGLR 85 the tenants’ nominee was their director and was actually named in the agreement: it was held he acquired no statutory tenancy. Accordingly, if a landlord does not want to be saddled with a statutory tenant he lets on what is known as a ‘company let’. The plaintiff in this action, Mr Hilton, is a civil engineer who has in recent years reconstructed a number of premises in London and therein created flats which are high-quality flats. They also contain built-in furniture made in his own workshop. They are let not at excessive but market rents for flats of that quality. He is a good landlord who provides value for money. His policy is to let only as company flats, and his flats are advertised as such. The defendant, Miss Rose, is an actress. She saw in an evening newspaper on August 8 1986 an advertisement referring to one of Mr Hilton’s flats. The advertisement made it clear that it was to be a company let. She knew what that meant. She got in touch with Mr Hilton and saw several flats. Eventually she saw one at 45 Priory Road, London NW6. Miss Rose, as an actress, had no need for a company, but Mr Hilton made it clear that any letting would have to be a company let and that the rent would have to be guaranteed by a third party. He gave her the name and telephone number of his120 accountant, who would be able to provide her with a company which could become the tenant and then nominate her as the person who would reside in its flat. As the judge found, Mr Hilton told her that the letting to the company would be for a limited period, with a possibility of renewal if everything was satisfactory. Miss Rose did not go to the accountant. She took advice from her solicitors and went to a firm called Jordans, from whom she bought a company off the shelf. It was called Plustitle Ltd. It cost her £150. She became a shareholder and a director. On September 1 1986 Plustitle entered into a written agreement with Mr Hilton to take the flat for an initial term of six months at a rent of £345 per month. Miss Rose signed the agreement as managing director of Plustitle. The agreement gave Plustitle the right to nominate the occupiers of the property, who would pay no rent. The agreement contained all the usual tenant’s covenants. The landlord consented to maintain the services in good condition. The rent and fees to be paid by Plustitle were guaranteed by John Rose, who is Miss Rose’s brother. Before that agreement was made, Mr Hilton obtained a banker’s reference for Miss Rose for an amount which was the obligation to pay the monthly rent of £345. In February 1987 the term was by mutual agreement extended for three months till May. It was followed by an offer for a further three months’ extension. There was a dispute about a slight increase in the rent and so the offer was withdrawn by Mr Hilton. He asked for possession. Miss Rose sought legal advice and refused to leave. The result has been the present proceedings, in which Mr Hilton has asked for an order for possession on the basis that this was a company letting. Miss Rose defends the claim on the basis that the letting to Plustitle was a sham. That has been the only issue before the court. The judge found the defence was not made out and made an order for possession. He gave a long and careful judgment. He found that Miss Rose fully understood what she was doing and acted after obtaining legal advice. After moving in she paid the rent by her personal cheques, the company not having a bank account. After reviewing all the evidence, the judge said: . . . I find without the slightest hesitation that it was both parties’ clear intention with all knowledge of what this involved that the flat should be let to a company and not to Miss Rose personally. I find as a fact having heard the evidence, and having noted submissions made on behalf of Miss Rose in that respect. On p 11 of his judgment he listed 16 items of fact, all of which indicated that Miss Rose entered into the whole transaction with the intention that this was to be a company let in the normal way and that in the agreement there were no provisions inconsistent with the letting being to a company and not to Miss Rose. The judgment concluded: . . . the reality was indeed the factual matrix that the company was the tenant and Helen Rose was not liable personally for anything at all. There is no disagreement between the parties that at all material times the plaintiff insisted upon a limited company as his tenant. It is quite plain upon the construction of the written agreement that its object was to create a letting to a company. The defendant has the burden of showing that this prima facie construction is either deliberately deceptive or in any way wrong. There is no evidence before me and I mean no evidence, to support that contention, thus in the end on the basis of the agreement itself and also the factual matrix I find this was a letting to a limited company which came to an end and that the contention that this was a sham fails in limine. At no time did the landlord purport to create or create any rights in Helen Rose. Counsel for Miss Rose says that the employment of the company was a sham in that it was a device to prevent Miss Rose from being the tenant, and so far from her being the company’s nominee, the company was her agent. Accordingly, he submits, the reality of the letting was that it was to her and not to the company. The mere fact that the purpose of the legal arrangement was to prevent the creation of the statutory tenancy is by itself not enough. In Aldrington Garages Ltd v Fielder (1978) 37 P&CR 461* at p 468 Geoffrey Lane LJ said: there is no reason why, if it is possible and properly done, agreements should not be entered into which do not fall within the Rent Acts, and the mere fact that those agreements may result in enhanced profits for the owners does not necessarily mean that the agreements should be construed as tenancies rather than as licences. *Editor’s note: Also reported at (19178) EG 557. At p 473 in the same case Roskill LJ said: persons are entitled to arrange their affairs to their best advantage so long as the law allows it. That has long been the position in tax cases, and equally long been the position in Landlord and Tenant and Rent Act cases. This subject was given a detailed summary by Bingham LJ in Antoniades v Villiers [1988] 3 WLR 139 who, at p 147, added to the quotations from Geoffrey Lane and Roskill LJJ his own observation: it is not a crime, nor is it contrary to public policy, for a property owner to license occupiers to occupy property on terms which do not give rise to a tenancy. Nevertheless, as Bingham LJ stated, the court should be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy and to evade the Rent Acts: see Street v Mountford [1985] AC 809 at p 825H. He went on to say that the court has to be especially wary and especially careful to see that things like premiums are not being used to conceal payments of rent. ‘Shams’ must be considered in many contexts. The accepted definition, to which the judge in the present case was referred, is that given by Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at p 802: As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a ‘sham’, it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and prejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure (1882) 21 ChD 309, CA and Stoneleigh Finance Ltd v Phillips [1965] 2 QB 537), that for acts or documents to be a ‘sham’, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. As Bingham LJ expressed it in Antoniades: ‘Put more shortly, a sham exists where the parties say one thing intending another: Donald v Baldwyn [1953] NZLR 313, 321, per F B Adams J.’ In the present case the judge found as a fact that it was the intention of both parties, with all knowledge of what this involved, that the flat should be let to the company and not to Miss Rose personally. This finding has not been challenged. Directing himself in accordance with the law as stated by Diplock LJ in Snook, he held that this transaction was not a sham. We do not find it possible to fault this reasoning. Once the letting has been found not to be a sham, the lease has to be construed. In Street v Mountford [1985] AC 809 at p 825 Lord Templeman said that the Rent Acts must not be allowed to alter or influence the construction of an agreement. In Shell-Mex & BP Ltd v Manchester Garages Ltd [1971] 1 WLR 612 Buckley LJ said at p 619: it may be that this is a device which has been adopted by the plaintiff company to avoid possible consequences of the Landlord and Tenant Act 1974, which would have affected a transaction being one of landlord and tenant; but, in my judgment, one cannot take that into account in construing such a document to find out what the true nature of the transaction is. In the present case, as the judge pointed out, the only construction of the lease was that the letting was to Plustitle and not in any way to Miss Rose. Counsel for Miss Rose has relied on the decision in Gisborne v Burton [1988] 38 EG 129, [1988] 2 EGLR 9. In that case, in order to circumvent the provisions as to security of tenure conferred on the tenant of an agricultural holding under the relevant legislation, the owner of a farm intending that it should be let to Mr Burton first let it to his own wife, who on the same day sublet it to Mr Burton. When a notice to quit was served on the wife by the husband’s personal representatives, she served no counternotice. Her lease therefore came to an end and so did the sublease in accordance with common law. The Court of Appeal, Dillon and Russell LJJ (Ralph Gibson LJ dissenting) held that the headlease to the wife was a sham and that the subtenant was in reality the tenant and he was entitled to the protection of the Agricultural Holdings Acts, notwithstanding that he had fully understood that the whole purpose of the transaction was to avoid his having such security. Dillon LJ dealt with the facts as being analogous to those in Johnson v Moreton [1980] AC 37. In Johnson’s case the agricultural tenant had entered into a covenant not to serve a counternotice under121 the Agricultural Holdings Act 1948. The House of Lords held that to allow such a covenant to be effective would be contrary to public interest as defeating the purpose for which the Act had been passed. It was not possible for tenants to contract out of the protection which Parliament had intended that they should have. The covenant was therefore unenforceable — Dillon LJ compared Gisborne’s case with Johnson’s case. He concluded that the inclusion of the landlord’s wife in the series of leases had the effect at the highest of making her ‘a mere nominee or agent for [the husband] to grant a tenancy to Mr Burton, and that what actually happened was that Mr Burton was granted such a tenancy’. In coming to that conclusion, he took into account the result of Street v Mountford [1985] AC 809, where Lord Templeman stated that on the true interpretation of the facts of that case the tenants obtained a tenancy and not a licence because what they received was exclusive occupation, notwithstanding that the document was called a licence. He also took into account the recent tax cases based on W T Ramsay Ltd v IRC [1982] AC 300, such as Furniss v Dawson [1984] AC 474, where it was stated that the fiscal consequences of a series of transactions should be examined. Dillon LJ said: It seems to me that a similar principle must be applicable wherever there is a pre-ordained series of transactions which is intended to avoid some mandatory statutory provision even if not of a fiscal nature. You must look at the effect of the scheme as a whole . . . It was in applying that test that Dillon LJ concluded that the landlord’s wife had been only the agent of the landlord. Russell LJ also concluded that the inclusion of the landlord’s wife in the series of transactions was only in order to prevent Mr Burton from having the right to serve a counternotice. He concluded that since there was never any intention that the landlord’s wife should farm the land, her inclusion in the transactions was tantamount to an agreement on the part of Mr Burton to a promise not to serve a counternotice, and so was contrary to Johnson v Moreton. Counsel for Mr Hilton submits that this appeal is concluded by the judge’s findings of fact and that there was no ‘sham’ within the Snook test. He submits that the real ratio of Street v Mountford was that the finding in the agreement that the occupation was to be exclusive was crucial: after that the agreement could only be construed so as to mean that the occupation was under a tenancy. Here, looking at the substance and not only at the form, the letting was one to Plustitle, as both parties always intended that it should be. He distinguishes Gisborne v Burton on the very ground on which the Court of Appeal decided it, that the documents were never intended to be acted on. The device of including the landlord’s wife meant that she was in effect acting as her husband’s agent. In this case, the company was not Mr Hilton’s agent. It was the only tenant to whom he was prepared to let, and the covenants in the lease were perfectly capable of being complied with by the company through its nominee (Miss Rose) and enforced against the company by Mr Hilton. Unlike Street v Mountford the transaction did represent the true position. The company obtained a protected tenancy with the benefits attached to that, but neither it nor Miss Rose obtained a statutory tenancy when the protected tenancy came to an end. We conclude that if the facts are consistent with the purported transaction, we see no reason why, by analogy with Gisborne’s case, public policy should override the transaction which was deliberately intended to avoid, but not evade, the Rent Acts. Otherwise, public policy would be contradicting the Rent Act 1977, section 2, and all the decisions which have been founded on it. We would dismiss the appeal. The appeal was dismissed with costs, save that costs incurred by the second defendant during the period when legally aided were not to be enforced without the leave of the court. Leave to appeal to the House of Lords was refused. A petition by the second defendant, Miss Rose, for leave to appeal to the House of Lords was dismissed by the Appeal Committee on February 23.