Kaye v Massbetter Ltd and another

Landlord and tenant — Letting to limited company tenant with a view to exclude the application of the Rent Act — Question as to the real identity of tenant — Allegation that the letting to the company was a sham and that in reality the appellant was the tenant — Judge’s decision that the letting was a genuine letting to the company upheld on appeal The parties to the tenancy agreement in this case were shown as the landlord, the tenant (a limited company) and a Mr Kanter, who was described as ‘the guarantor’ and who was also to be the ‘permitted occupier’ — Mr Kanter, who was said to be a trained accountant, was also an undischarged bankrupt — Mr Kanter had answered the landlord’s advertisement of a flat to let but was told by the landlord that the flat could be let only to a limited company — Mr Kanter, however, apparently at the landlord’s suggestion, managed to produce such a company, purchased on his behalf by two friends — The tenancy was granted to the company for one year, but at the end of a year it was extended on a monthly basis and lasted for a few months longer, when the landlord gave notice to quit and a possession action followed — Mr Kanter had been the ‘permitted occupier’ while the tenancy lasted Mr Kanter was the second defendant in the action and the appellant in the Court of Appeal — His submission was that the letting to the company was a sham, the reality being a letting to himself or, if it was originally a letting to the company, it had become a letting to him after the end of the year — The county court judge, however, decided that the letting had been a genuine letting to the company; this had been terminated and the landlord was entitled to possession In the Court of Appeal the appellant attacked the genuineness of the tenancy agreement on several grounds — It was argued that if the purpose of the letting to the company was to avoid the application of the Rent Act the letting was not genuine; it was not permissible to contract out of the Rent Act — The answer to this was that there was no need to contract out; the Rent Act did not apply as to possession anyway — It was also argued that the agreement was a sham because it incorporated a provision by which neither party intended to be bound and which was a smoke-screen for their real intentions — The court pointed out that here all the terms were intended to bind the parties; the question was: who were the parties? — Finally, it was said that facts spoke louder than words and the facts must prevail over the language; a passage in the speech of Lord Templeman in A G Securities v Vaughan was cited in support of this proposition — The answer to this was that Lord Templeman did not mean that there was a special rule that facts prevailed over language; he was dealing with the question whether a particular term was genuine — Lord Donaldson said, in the context of this argument about company lettings, that it was important not to confuse the objective of the parties with the route which they say, or one of them says, was adopted to achieve this objective — Lord Donaldson referred by analogy to transactions earlier this century to avoid the Money-lenders Acts — In the present case the judge, in a careful judgment, had weighed up all the factors — His conclusion that this was a genuine letting to a company could not be disturbed — Appeal dismissed The following cases are referred to in this report. A G Securities v Vaughan; Antoniades v Villiers [1990] 1 AC 417; [1988] 3 WLR 1205; [1988] 3 All ER 1058; (1989) 57 P&CR 17; [1988] 2 EGLR 78; [1988] 47 EG 193, HL 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 Harold Kanter from a decision of Judge Hayman, at Shoreditch County Court, ordering in favour of the landlord, Leon Joseph Kaye, possession of flat 59, Free Trade Wharf, in the Docklands area of London, and declaring that the tenant of the flat had been the first defendant, Massbetter Ltd. The judge had also declared that an application by Mr Kanter, the second defendant, to the rent officer to fix the fair rent of the flat was a nullity because Mr Kanter was not the tenant. Martin Seaward (instructed by McCormacks) appeared on behalf of the appellant; Paul de la Piquerie (instructed by Leon Kaye & Collin) represented the respondent, Leon Joseph Kaye. Giving judgment, LORD DONALDSON OF LYMINGTON MR said: This is an appeal from a decision of His Honour Judge Hayman in the Shoreditch County Court on May 4 1990. The judge then made two orders. The first was for possession of flat 59, Free Trade Wharf, in the Docklands area of London. The second involved a declaration that the tenant of the flat had been the first defendant, Massbetter Ltd, and that an application by Mr Kanter, the second defendant, to the rent officer to fix the fair rent of the flat was ineffective and a nullity because, in making that application, Mr Kanter was doing so as a tenant and he was not the tenant. The facts were these. As I have already said, the flat was in the Docklands area. The parties to the action were Mr Kaye, the landlord, who is a solicitor, the company and Mr Kanter, who is an accountant by training. On April 18 1988 Mr Kaye advertised the flat in the Evening Standard. It appears that he had bought it, or a98 leasehold interest in it, but was not in a position to use it at that time. On the other hand, he thought that at some time in the future he might use it for himself or for his children. On the evening of that day or the following day Mr Kanter, in reply to the advertisement, met Mr Kaye at the flat and viewed the flat, and there were the usual discussions as to rent and the like. It appears that the rent which was being asked was £650 a month together with a returnable deposit of a like sum. Towards the end of these discussions Mr Kaye told Mr Kanter that he would be prepared only to let the flat to a company. Mr Kanter said he had not got a company, to which Mr Kaye pointed out — this must have been obvious to Mr Kanter anyway in the light of the fact that he was a trained accountant — that he could very easily go and buy one, which is in fact what happened, with the qualification that Mr Kanter was not in a position to buy a company because he was an undischarged bankrupt. Two friends of his, accordingly, bought Massbetter Ltd for his benefit, and in a sense on his account. The tenancy agreement itself was entered into on April 21 and on its face it constitutes Mr Kaye the landlord, Massbetter Ltd the tenant, and Mr Kanter the guarantor. It reads as follows: Tenancy Agreement 21st April 1988 1  The Landlord Leon Joseph Kaye (and his address) 2  The Tenant Massbetter Limited (and its address) 3  The Guarantor Harold Kanter (giving as his address the address of the flat), property (and then repeating the address of the flat) Together with the Fixtures Furniture and Effects therein and more particularly specified in the Inventory thereof signed by the parties Term One year from 1st May 1988 Rent £150 per week . . . payable in advance in equal monthly instalments on the 1st day of each month in the sum of £650. First payment to be made on 1st May 1988 A  The landlord lets and the Tenant takes the Property for the Term at the Rent payable as above B  The Agreement incorporates the Letting Provisions printed overleaf with the following variations or additions: Then there are additions and variations relating to the deposit and the following clause: D  The provisions hereof are personally guaranteed by the Guarantor and in the event that the Tenant shall be in breach of any of its obligations then the Landlord shall have the right to look to the Guarantor for a full indemnity in respect thereof. E  The permitted occupier is the Guarantor or his guest. That was signed by Mr Kaye and by Mr Kanter, but the capacity in which Mr Kanter signed is not specified, save that the words ‘signed on behalf of the tenant in the presence of Ivan Cohen’ appear and there is only one signature. One might perhaps have expected that there would have been two signatures or some indication that Mr Kanter was signing in two different capacities, but at any rate the fact is that there is a single signature. On April 25 1989, that is to say a year later, Mr Kaye and Mr Kanter met and discussed whether there would be an extension, and it was agreed that there would be an extension on a monthly basis. In September of that year notice to quit was served on the company, and in November the possession action was begun. Both here and below there were two major submissions made on behalf of Mr Kanter. The first was that the letting to the company was a sham and that the reality was a letting to Mr Kanter. The second was that, even if originally there was a letting to the company, the extension involved a change and thereupon it became a letting to Mr Kanter. The judge dealt with these matters on p 39 of his judgment. It was a very long and detailed judgment in which he reviewed all the evidence, but his conclusions can be taken from a relatively short passage on pp 39 and 40. He said: Mr de la Piquerie (counsel for the landlord) submitted that there was, in effect, a short answer to this case. He said, and Mr Thom (counsel for Mr Kanter) agreed, that in no instance has a company let in fact been defeated. The reason, said Mr de la Piquerie, lay in the definition of sham. This is defined in a way which seems to me to be destructive of Mr Kanter’s case. It is a sham, in the words of Bingham LJ, ‘where the parties say one thing intending another’. Well, the parties here said in the contract that the company was to be the tenant — Mr Kanter was to be guarantor, but that is another point — and Mr de la Piquerie submitted that was in fact the common intention at the time. It is not the case that Mr Kanter was positively bursting with the desire to have a company let, but desire and intention are separate matters. He was presented with the position whereby the prospective landlord said ‘I want’, ‘I require’, or ‘I prefer’ (it does not really matter which) a company let. If Mr Kanter had demurred he would not have got the flat. The flat was offered on the basis that a company was to be the tenant and a company was purchased for that purpose. That was the common intention: however much of a ‘shot-gun’ tenancy (to coin an expression to describe what might have been Mr Kanter’s attitude), it was the common intention that the tenancy should be in the name of the company. Mr de la Piquerie submitted: ‘If that is so, then the subsequent conduct of the parties cannot alter that position.’  Of course, a contract can be varied by subsequent conduct, but that is not what was suggested here; what was suggested was that you can look at the subsequent conduct to find out what the parties had in mind at the time of the agreement. It is perfectly true that the subsequent conduct, until the notice to quit, on the face of it indicated that the relationship of landlord and tenant was as between Mr Kaye and Mr Kanter and not Mr Kaye and the company. However, apart from the fact that Mr Kaye was not very astute in his own affairs, this conduct can also be explained on the basis that the two men were fairly friendly and the matter was not spelt out in a particularly legalistic form. But, as Mr de la Piquerie put it, if the agreement was not a sham on day 1 it did not become a sham thereafter, and on day 1, in my judgment, it was the common intention of these parties that the agreement, as set out in the document, should be of a tenancy to the company. That being so, having regard to the definition referred to, which definition binds me, it seems to me that I cannot possibly find that the agreement was a sham. I therefore find that the tenancy in the name of the company was a genuine letting to the company and on that basis the claim for possession must succeed. Mr Seaward in this court has made a number of submissions and I hope I do him no injustice if I summarise them under four heads. First, the parties to an agreement cannot contract out of the Rent Acts. That is a proposition which I accept unreservedly, but I observe that, if the tenant under a tenancy agreement is a company, it does not need to. The Rent Acts do not apply to it anyway. Second, he said originally there was nothing to stop the parties agreeing a company let provided it was a genuine one. He said they were entitled so to arrange their affairs as not to come within the Rent Acts. Subsequently, he asked leave — and, of course, there was no objection — to withdraw that submission and rephrase it in a form that a company let can be effective only if the purpose is other than to avoid the application of the Rent Acts. If that is the purpose, the letting is not a genuine one. In my judgment, he was quite right the first time round. The test is: was the letting genuine?  If you look at the facts and find that there are indicia that the company was never intended to be the tenant, then you may conclude that it was not genuine. But the issue is simply one of genuineness. His third submission is that an agreement is a sham or a pretence if it incorporates a provision by which neither party intends to be bound and which is a smokescreen for their real intentions. Again, I accept that unreservedly, but it really is applicable, certainly as so phrased, only if there is no issue as to who the parties are. If there is no issue as to who the parties are, you look at the agreement term by term, or in combination, in order to see whether the terms are genuine terms intended to reflect the rights and obligations of the parties. That, of course, is not the problem with which we are faced. There is no doubt that all the terms are intended to bind the parties. The only question is: who were the parties?  I say ‘all the terms are intended to bind the parties’. If, of course, Mr Kanter was in fact the tenant and not the company, then the guarantor provision would have to be removed but, subject to that, essentially the issue is not what the tenancy agreement said — no doubt it gave exclusive possession and so on — the issue is: who was the tenant? Finally, he says that facts speak louder than words and the facts must prevail over the language, for which he cites A G Securities v Vaughan [1990] 1 AC 417 at p 463* from the speech of Lord Templeman, where he said: First, parties to an agreement cannot contract out of the Rent Acts. Secondly, in the absence of special circumstances, not here relevant, the enjoyment of exclusive occupation for a term in consideration of periodic payments creates a tenancy. Thirdly, where the language of licence contradicts the reality of lease, the facts must prevail. The facts must prevail over the language in order that the parties may not contract out of the Rent Acts. In the present case clause 16 was a pretence. *Editor’s note: Also reported at [1988] 2 EGLR 78 at p 82k. I do not understand Lord Templeman to be saying that there is a special rule that facts prevail over language. He is merely taking a particular scenario and applying his mind to the question whether a particular term was genuine or not and, as he said elsewhere either in99  this case or in the earlier case of Street v Mountford [1985] AC 809*, where there are very strong social pressures on a tenant to agree bogus terms and important potential benefits tending to lead landlords to insist upon bogus terms being agreed to, of course the courts will scrutinise the matter with greater care unless it is quite obvious that everything points to the agreement being genuine. *Editor’s note: Also reported at [1985] 1 EGLR 128. In the context of this argument about company lettings, it is, I think, important not to confuse the objective of the parties with the route which they say, or one of them says, was adopted to achieve this objective. Earlier in this century the Money-lenders Acts were perceived to be a major obstacle to retail trade. It was no doubt possible to produce agreements which were in reality money-lending agreements but did not look like it, and I do not doubt that the courts in those days would have been as astute in that context to detect a sham as they are today in the context of the Rent Acts. But thought was also given to whether it would not be possible to raise money by a route which did not involve money lending, and that of course is the birth of the modern hire purchase agreements with which everybody is so familiar. The position was that the seller of the goods was not prepared to give credit and the buyers had not got the money to pay cash. They had to raise the money. They could do it either by borrowing, which would run them, or rather their lenders, into difficulties under the Money-lenders Acts, or they could get the seller to sell to a finance company which would lease to the ‘buyer’ on terms of periodical payments, with a final payment for the option to purchase. All that is familiar. But, in the cases of those days, or in many of them, exactly the same argument was put up, namely that the court must look at the purpose of the transaction and that was money raising. So it was, but, provided you followed that route and provided you genuinely were hire purchasing, the agreement was perfectly effective. The same thing occurs in a rather more sophisticated form with the factoring of invoices, which again is merely an alternative method of raising money, and perhaps in an even more sophisticated form, with the execution of promissory notes and bills of exchange and discounting them on the market. These transactions are all perfectly lawful. The only purpose of adopting those routes is to avoid the Money-lenders Acts, and they are completely effective for that purpose. So, for my part, I cannot see why it should not be possible to adopt the company route, provided always that you really do adopt it and you do not merely go through the motions of adopting it, not intending to do so at all. In this case, undoubtedly, Mr Kaye wanted to achieve a letting of the flat to provide him with income at a time when he was not using it. Mr Kanter undoubtedly wanted to obtain the right to occupy the flat. That right he could obtain either directly by a tenancy or indirectly by achieving a tenancy for his creature in the shape of a company which he controlled. Mr Kaye, for his part, was not interested in letting to Mr Kanter or to any other individual. He was prepared only to let to somebody to whom or to which the benefits of the Rents Acts are not available, that is to say, to a company. It does not seem to me, again, that the achievement of those objectives by using a company is necessarily a sham. It is merely adopting one route rather than another. It is in the end entirely a question of fact. The learned judge took full account of the fact that Mr Kaye dealt at all times with Mr Kanter and did not write any letters to Massbetter, or to Mr Kanter as an agent for Massbetter. He took full account of the fact that Mr Kaye was not apparently interested in the financial stability of the company, although I am bound to say I do not see why he should have been in view of the fact that it was guaranteed by Mr Kanter. On the other hand, it is perfectly true that he took no interest in the financial stability of Mr Kanter, which was just plain stupid, particularly when it is realised that Mr Kanter was in fact an undischarged bankrupt. But, in any event, so far as that is concerned, he should equally well have taken an interest in Mr Kanter’s financial stability if Mr Kanter was the tenant. That and many other factors are weighed up in an extremely long and careful judgment by the county court judge, who reached the conclusion that this was a genuine letting. He saw Mr Kanter and he saw Mr Kaye. He was in a far better position to assess the reality than we are and, for my part, I cannot see any grounds whatever to disturb his decision. I would therefore dismiss this appeal. Agreeing, NICHOLLS LJ said: Mr Seaward submitted that, if the only purpose for which a company was introduced on to the scene and into a residential letting arrangement such as that involved here was to avoid the Rent Acts, the resultant tenancy agreement is not a genuine letting to the company. I cannot accept that proposition as an accurate statement of the law. The issue in every case involves seeing what, in law, was the agreement between the parties. This involves identifying who in law were the parties to the agreement. In this regard the terms of a document signed by the parties or the form of words used by them in an oral agreement are, of course, not conclusive. Parties cannot contract out of the Rent Acts and the court will be astute in detecting and frustrating shams or pretences, namely, agreements expressed in a form which do not truly reflect the parties’ intention. Thus, the purpose for which and the circumstances in which the company is introduced on to the scene are very important background facts. But it by no means follows that, a company having been introduced, the parties did not intend that in law the company should be the tenant and liable as such to the landlord. In the present case the agreement dated April 21 1988 described the first defendant as the tenant, and the letting was expressed to be in favour of the first defendant with the second defendant as the guarantor and permitted occupant. Thus, to succeed on this appeal Mr Kanter has to establish that, contrary to the terms of the document, the common intention of himself and Mr Kaye was that the company, ie the first defendant, was not to be subject to an obligation in law to pay rent or to perform the obligations imposed by the agreement on the tenant: in other words, that they intended that the legal relationship of the parties should be other than as stated in this written agreement. The parties’ intention is, of course, a question of fact. That is a question which the judge decided against the defendants. Mr Seaward submitted that, when deciding this question of fact, the judge failed to give proper weight to events which took place after the agreement was made. Actions, he said, speak louder than words. The rent was paid by Mr Kanter. Correspondence regarding the rent and other matters such as water damage was addressed by Mr Kaye to Mr Kanter alone, and the correspondence made no reference to the company. On April 12 1989 Mr Kaye wrote to Mr Kanter regarding the renewal of ‘your existing tenancy’. It was not until after Mr Kanter had consulted the rent officer that Mr Kaye addressed his communications, in particular a notice to quit, to the first defendant. I cannot accept this submission. The judge had the parties’ subsequent conduct well in mind, as shown by his reference to it in his judgment. I, too, see no ground for disturbing his conclusion on this question of fact. He had before him evidence regarding the circumstances surrounding the making of the agreement which entitled him to reach the conclusion he did. I, too, would dismiss this appeal. Also agreeing, MANN LJ said: The only perceptible transaction is the tenancy agreement of April 21 1988. That, on its face, is an agreement between Mr Kaye as landlord and Massbetter Ltd as tenant. The purposes for the achievement of that relationship are not material. What would have to be established here is that the agreement was not the operative agreement between the parties, but there was another relationship intended between Mr Kaye and Mr Kanter. That is a matter of fact which was examined by the learned judge and I do not fault his conclusion. The appeal was dismissed with costs to be paid out of the Legal Aid Fund. Leave to appeal to the House of Lords was refused.