Mansukhani v Sharkey

Rent Act 1977 — Whether transfer of reversionary interest to regulated tenancy by parents to son, subject to son’s discharging a registered charge, is an acquisition by purchase falling outside Case 9 of Part I of Schedule 15 to the 1977 Act The plaintiff’s parents acquired Flat 3, 41-49 Broadwick Street, London W1, in 1984 and charged the flat to the Bolton Building Society on September 21 1984 as security for a loan — By a transfer dated July 3 1989, the parents transferred the flat to the plaintiff absolutely but subject to the charge, which had, prior to the transfer, become vested in the Cheltenham & Gloucester Building Society — The transfer was expressed to be ‘in consideration of mutual love and affection and of the covenants hereinafter contained’ — The transfer contained covenants by the plaintiff with the building society, who were a party to the transfer, to duly and punctually pay all moneys due under the registered charge and, with his parents, to pay all the principal and other moneys with interest due under the charge — The parents remained liable to the building society on their personal covenants — The amount of the loan outstanding at the date of the transfer was about £14,000 — In December 1985 the plaintiff’s parents had let the flat to the defendant for a term expiring on October 1 1986, the defendant thereafter becoming a statutory tenant — The plaintiff’s claim for possession of the flat under Case 9 of Part I of Schedule 15 to the Rent Act 1977 was dismissed by Judge Harris QC in Westminster County Court on the ground that by reason of the terms of the transfer, and the covenant to pay off the loan, the plaintiff had become landlord of the flat by purchase Held: The appeal was allowed — The plaintiff did not purchase the flat, the transfer simply reciting that the disposition was in consideration of mutual love and affection, being a familiar recital in deeds of gift — The covenants entered into by the plaintiff were perfectly consistent with a gift of mortgaged property, the crucial matter being the nature of the property disposed of which, because it was mortgaged, some arrangement had to be come to as to who was to bear the burden of the obligation under the mortgage — The fact that the donee of land enters into some indemnity covenant with the donor in the deed of gift does not by itself indicate a sale The following cases are referred to in this report. Lawrence (Frederick) Ltd v Freeman, Hardy & Willis Ltd [1959] Ch 731; [1959] 3 WLR 275; [1959] 3 All ER 77, CA Thomas v Fryer [1970] 1 WLR 845; [1970] 2 All ER 1; (1969) 21 P&CR 398; 214 EG 131, CA This was an appeal by the plaintiff, Mahesh Narain Mansukhani, from a decision of Judge Harris QC in Westminster County Court whereby he had dismissed the plaintiff’s application for possession of Flat 3, 41-49 Broadwick Street, London W1, against the defendant, Mr Sharkey. Jonathan Gaunt QC and Harry Trusted (instructed by Brian Hillman Trivedi & Co) appeared for the appellant; Kim Lewison QC and Martin Westgate (instructed by the Central London Law Centre) represented the respondent. Giving judgment, FOX LJ said: This is an appeal by the plaintiff from a decision of Judge Harris QC at Westminster County Court. It is concerned with the construction of the Rent Act 1977. The plaintiff seeks possession of Flat 3, 41-49 Broadwick Street, London W1. The flat was acquired by the plaintiff’s parents (‘the parents’) in 1984. In December 1985 the parents let the flat to the defendant (and others) for a term expiring on October 1 1986. On that date the defendant became a statutory tenant of the flat. By a transfer of July 3 1989 (‘the transfer’), the parents transferred the flat to the plaintiff absolutely but subject to a charge of September 21 1984 to the Bolton Building Society. That charge had, prior to the transfer, become vested in the Cheltenham & Gloucester Building Society. The transfer was expressed to be ‘in consideration of mutual love and affection and of the covenants hereinafter contained’. The covenants were as follows: THE said MAHESH NARAIN MANSUKHANI hereby covenants with the CHELTENHAM AND GLOUCESTER BUILDING SOCIETY that he will at all times hereafter duly and punctually pay all moneys which under the registered charge or the rules of the Society for the time being shall become payable at the time and in the manner appointed and will in all other respects henceforth observe and perform all covenants therein contained on the part of the borrower. And the powers of sale and other powers and provisions contained or implied in the registered charge and all remedies for recovering payment of the moneys thereby secured or any part thereof or otherwise save as herein expressly released shall remain valid and shall be exercised in the same manner and to the same extent as such powers provisions and remedies would have been exercised as if the CHELTENHAM AND GLOUCESTER BUILDING SOCIETY had not been party to this deed. And I the said MAHESH NARAIN MANSUKHANI hereby covenant with the said NARAIN GOLPDAS MANSUKHANI and GITA NARAIN MANSUKHANI (the parents) that I the said MAHESH NARAIN MANSUKHANI (the plaintiff) will pay all the principal and other moneys with the interest due thereon which are secured by and henceforth will become payable under the registered charge at the times and in the manner provided by such charge and will duly observe and perform all and singular the other covenants and provisions contained or implied therein and will at all times hereafter indemnify and keep indemnified the said NARAIN GOLPDAS MANSUKHANI and GITA NARAIN MANSUKHANI and their estate from all claims and demands in respect thereof except claims and demands in respect of any breach of covenant other than the covenant for payment of the principal moneys and interest which have occurred prior to the date hereof. The parents remained liable to the building society on their personal covenants. Without that the society would, no doubt, have declined to concur in the transfer. The charge, I should add, was to secure a loan made by the society to the parents to assist in the purchase of the flat in 1984. The original loan was £15,000. The amount outstanding at the date of the transfer to the plaintiff was about £14,000. I turn to the statutory provisions in the Rent Act 1977. Section 1 renders the tenancy of any dwelling-house (subject to certain exceptions) a protected tenancy. Section 2 provides that when a protected tenancy comes to an end, the tenant shall become a statutory tenant so long as he occupies the dwelling-house as his residence. 106 Section 98 provides that no order for possession shall be made against a statutory tenant unless one of the grounds set out in Schedule 15 is applicable or unless suitable alternative accommodation is provided and, in any event, that it is reasonable to make an order for possession. Case 9 of Part I of Schedule 15 is one of the cases for granting possession, namely: Where the dwelling-house is reasonably required by the landlord or occupation as a residence by: (a) himself . . . — and I can omit (b) and (c) — and the landlord did not become landlord by purchasing the dwelling-house or any interest therein . . . The question in the present case is: did the plaintiff become the landlord by purchasing the flat?  The judge held that he did. The plaintiff appeals from that decision. In Thomas v Fryer [1970] 1 WLR 845 (which was concerned with the Rent Act 1968, section 10 and Schedule 3, Part I, Case 8, which, for present purposes, corresponds to the provisions of the 1977 Act to which I have referred) a testatrix who died in 1961 by her will bequeathed to her two sons and two daughters (of which the plaintiff, Miss Thomas, was one) a house and certain investments in equal shares. It was agreed between the children that Miss Thomas should take the house absolutely and should pay her brothers and sister three-quarters of the probate value of the investments. In October 1961 the elder brother, who proved the will, executed an assent vesting the house in Miss Thomas. In 1969 Miss Thomas started proceedings for possession of the house (which was subject to the Rent Acts). Miss Thomas relied on Case 8, which is the same as Case 9 of the present Act. Judge Moylan, in the county court, held that the transaction was not a purchase by Miss Thomas but a family arrangement. The Court of Appeal upheld that. Lord Donovan, at p 852 of the report, said: One returns, I think, to what the county court judge said was the root question: ‘Would the ordinary and reasonable person call this transaction a purchase and sale of the house?’  I think he would not. He would call it a domestic arrangement between members of a family for the division of their mother’s estate in a manner which did justice to all of them. Miss Thomas, if asked how she got the house, would I think, instinctively reply: ‘I got it as my share under my mother’s will, although I had to get my brothers and sister to agree, and I made adjusting payments so as to achieve fairness.’ I think that is the true view, and that the county court judge was therefore entitled to rule as he did on the preliminary point. Russell LJ, at p 853, said that the phrase ‘became the landlord by purchasing the house’ was to be interpreted in an ordinary sense and not in a technical fashion. Megaw LJ, at p 854, said: The question which the county court judge put to himself was: ‘Is this transaction properly described in ordinary non-technical words as buying or purchasing of this house by the plaintiff?’  I think that was the right question. Now Mr Oliver’s (counsel for the defendant in the Thomas case) argument on behalf of the tenant was stated by Lord Donovan thus at p 851: Here is the house. Miss Thomas was left by will an undivided fourth share in it. She wanted, however, the whole. Her fellow residuary legatees let her have it. She agreed to pay compensatory payments to them and indeed paid them £750. That was equivalent to the three-quarters’ interest which they had in it. What is that — he asked — except the purchase of an interest in the dwelling-house? The Court of Appeal rejected that and held that, in ordinary language, the transaction could not be called a purchase and that Miss Thomas acquired the house by a domestic arrangement by which it was appropriated to her with the consent of the other beneficiaries under the will, in satisfaction of her interest in the estate. In the present case Judge Harris held that the plaintiff did acquire the flat by purchase, because it was transferred to him in consideration of his discharging the sum of £14,000 secured by the charge. I do not feel able to accept that. We are concerned with the meaning of ‘purchasing’ as an ordinary English word and in its ordinary meaning. If, after the transfer of the flat to him, the plaintiff was asked: ‘When did you purchase the property?’, I think he would have replied: ‘I did not purchase it; it was a gift from my parents’. In approaching the matter it is, I think, necessary to bear in mind two matters. First, this was a transaction between parents and their son (who was a student); it was a family matter. Second, the subject-matter of the disposition was mortgaged property. The transfer is not expressed to be a transfer on sale. No reference is made to any sale or purchase. The transfer simply recited that the disposition is in consideration of mutual love and affection and the covenants thereinafter contained. Consideration by way of love and affection is a familiar recital in deeds of gift and voluntary settlements. It is difficult to imagine it normally having any place in a sale document. There are, however, the covenants. The plaintiff covenants with his parents to discharge the liabilities under the charge. He also agreed with the building society direct to make the payments — from time to time due to the society under the charge. He therefore undertook to repay the loan by the specified instalments. The amount owing under the mortgage was about £14,000. The judge treated the plaintiff’s liability to discharge that sum as the consideration for the transfer and held that the plaintiff acquired the flat by purchase accordingly. I do not agree with that analysis. There is no evidence to suggest that the parties negotiated the transfer as a sale in consideration of the covenant. There is no reference to a sale in the instrument itself; nor is there anything which suggests that the transaction was dressed up in some way to hide its true nature. The reference to love and affection strongly suggests a gift. The only possible indication the other way is the reference to the covenants. But I cannot regard them as having that significance. The covenants are perfectly consistent with a gift of mortgaged property. The crucial matter is the nature of the property disposed of. Because it was mortgaged, some arrangement had to be come to as to who was to bear the burden of the obligation under the mortgage. The arrangement was that the plaintiff should. But that only means that the parents said, in effect: ‘We will give you the flat but you must take the burdens as well as the benefit’. That, in my view, is in no way inconsistent with a gift of mortgaged property. It merely follows from the nature of the property given. I should add that the fact that the donee of land enters into some indemnity covenant with the donor in the deed of gift does not by itself indicate a sale. For example, if the property is subject to restrictive covenants, the donee would commonly give a covenant of indemnity against breaches. That again merely results from the nature of the property given. There is no evidence that the parents were striking a commercial bargain or doing anything but conferring a benefit on their son. The mortgage payments were £193 per month and the registered rent about £238 per month. We do not know the value of the flat, but it is in the W1 district of London and, in the absence of any evidence to the contrary, it seems unlikely that it is not worth more than the capital due under the mortgage. I conclude that the transaction was a gift and not a purchase and that, accordingly, the plaintiff did not become the landlord by purchasing the flat. I should add that it is submitted on behalf of the plaintiff that a transfer in consideration of a covenant would not be a sale and reliance is placed upon Frederick Lawrence Ltd v Freeman, Hardy & Willis Ltd [1959] Ch 731 (per Romer LJ at p 745). Having regard to the conclusion which I have reached, I do not need to consider that. I would allow the appeal. HOLLINGS J agreed and did not add anything. Appeal allowed with costs of preliminary issue in the Court of Appeal and below, not to be enforced without further order. Leave to appeal to the House of Lords refused. Legal aid taxation of parties’ costs.