Rhodes Trust v Khan

Principles applicable to exercise of judge’s discretion to set aside order for possession against tenant protected under Rent Act–Prolonged absence abroad of protected tenant who made no arrangements to get in touch with landlords or pay rent–County court judge made orders for possession and payment of rent arrears while tenant still abroad–Tenant’s flat subsequently included in long lease of landlords’ property to third parties with vacant possession–Tenant on return from abroad, finding himself dispossessed, sought to set aside judgment on ground that he was unaware of proceedings–Judge in exercise of discretion under Order 37 of County Court Rules set orders aside–Held by Court of Appeal that discretion had been exercised on wrong principle–Judge failed to take into account the prejudice to the third parties, who in good faith had acquired the landlords’ property with vacant possession of the flat–Appeal allowed This was an appeal from the Rhodes Trust from a decision of Judge McNair at the Bloomsbury and Marylebone County Court setting aside orders which he had previously made in their favour for possession and arrears of rent in an action brought by them as landlords against Allah Bax Khan as tenant of a flat at 111 Inverness Terrace, London. It appears from the judgment of Shaw LJ that Mr Khan had originally been a subtenant of the flat, but had subsequently become the tenant of the appellants on the termination of the intermediate tenancy. D A Wood QC and R J Furber (instructed by Coward Chance) appeared on behalf of the appellants; S Goldblatt QC and Richard Llewellyn Davies (instructed by G Lebor & Co) represented the respondent; T R F Jennings (instructed by Cowan, Lipson, Rumney) held a watching brief on behalf of Mobax Securities Ltd (not parties to the proceedings). Giving the first judgment at the invitation of Megaw LJ, SHAW LJ said: This is an appeal by the plaintiff in the action from an order of His Honour Judge McNair made at the Bloomsbury and Marylebone County Court on August 8 of this year whereby he set aside two judgments which had been obtained by the plaintiffs on May 22 and July 3 of this year respectively. The first of those judgments took the form of an order in favour of the plaintiffs for possession of a flat known as 111 Inverness Terrace in the west of London, which the defendant had occupied as a subtenant since July 1973, and where his status was that of a protected tenant. The second of those judgments was a written claim in respect of arrears of rent amounting to some £637. On August 17 the learned judge gave leave to appeal against his order and so the matter came before this court, it having been expedited in the interests of all now concerned in this matter. The history, so far as it is material to this appeal, is that the plaintiffs acquired the freehold of property which included 111 Inverness Terrace in 1969 and thereafter, by lawful subletting, the defendant became a tenant of 111. The contractual term out of which his subletting was derived would have ended in March 1978 and, before that date had arrived, the defendant, who is the respondent in this appeal, had sought to negotiate an extension of his tenancy with the plaintiffs, but these negotiations had not produced any result. In the month of February 1978 the defendant, who was a man of business, went to Nigeria in connection with that business. He had announced that he expected to be away for two months, but it might be, he thought, as short as two weeks; and he made no arrangements, whatever the length of his absence might be, to see that the rent due in respect of his tenancy was paid to the plaintiffs or to his intermediate landlord, whose name was Rahim. In the event, the defendant remained absent from this country until July of this year and, in the meantime, so far as the history of the matter has revealed, he made no attempt whatever to get in touch with the plaintiffs as his landlords, or to take any steps to see that the rent was paid as it fell due. What he says he did was to put a notice on the door of his flat, giving the address of persons who might be referred to in case of need. So far as the evidence goes–and it includes the evidence of somebody who acted at material times as a caretaker of the premises, and another gentleman who acted as a manager of those premises–in the course of their not infrequent visits to the premises they saw no such notice on the door. That is the most the defendant may have done to see that the relationship of landlord and tenant between the plaintiffs and himself was preserved in the normal way with the rent being paid at the intervals at which it fell due. The plaintiff appellants appear to have been very forbearing indeed, for they took no steps for over a year. In the end and, no doubt, because there was in prospect a sale in its entirety of the property of which 111 Inverness Terrace formed part, they took steps in the spring of 1979 to obtain an order for possession. Such an order was procured from the court on May 22 of this year and it was an order for possession forthwith. The money claim was not pursued at that time because, no doubt, the plaintiffs thought it would have been an empty judgment. Later, however, when they came to execute their order for possession–which they did some time in June 1979–it was found that there was a good deal of furniture inside the premises. Thus, there was something upon which execution might be levied, and so the judgment for the rent was also sought and was obtained. Then, on June 26 1979–and the date is a critical one–the plaintiffs granted a long lease of the whole of the residential part of the property in which 111 Inverness Terrace was situated to a company called Mobax Securities Ltd. The purchase consideration was £127,000. The term granted was a 75-year lease and, in a schedule which formed part of that lease, there were set out the properties comprised in it, namely, residential flats with an indication against each of them as to which were being sold with vacant possession and which were already occupied. Against no 111 was the indication that vacant possession was available. That formed part, therefore, of the bargain between the parties. On July 8 of this year Mr Kahn, the defendant, came back to England and, when he went back to what had been his abode and sought to enter it, he found that his furniture had been removed and that the locks had been changed so that he was unable to enter the premises. He says in his affidavit that he was able, by looking through the letterbox, to see that certain changes had been effected during his absence. He made an application to the court under Order 37 of the County Court Rules that the judgment for possession should be set aside, and he complained that he had been unaware of the proceedings against him. Through his counsel it was submitted to this court that no effort had been made by the landlords to make contact with him so as to apprise him of the fact that they were seeking an order for possession. The learned judge, in the exercise of what is undoubtedly a discretion which he had, took the view that, in all the circumstances which were disclosed before him, it would be right to set the judgment aside on the general principle that it is wrong to maintain a judgment against somebody who has had no knowledge of the proceedings, so that he was not present when the matter was before the court, and who knew nothing of the judgment at the time when it was given against him. That, as a general principle, is absolutely right. The interests of justice require that somebody against whom proceedings are being pursued should be accorded the opportunity of resisting them, for he may have some reason for which he can effectively resist them or, at least, ensure that, if the judgment goes against him, it will not be in the full terms sought by the plaintiff but with such modifications as justice may require. The learned judge, dealing with the matter, said this: It is a difficult case. After the plaintiffs obtained the order for possession they executed a new lease of the flat on the basis of vacant possession. They sold the flat on a long lease to Mobax Securities who paid a capital sum for this and other properties. Obviously the plaintiffs received a capital sum which was substantially more, because of the vacant possession, than they would have received if Mr Khan was the statutory tenant. It is submitted on these facts by the plaintiffs that I ought not to exercise my discretion to set aside the order which would be the normal step to take when a defendant is out of the country at the time of service, especially in a non-payment of rent case where there is no history of bad delay in payment. The normal procedure in a non-payment of rent case is that if the defendant pays money into court no order for immediate possession is made. As a matter of history the proceedings were started by way of substituted service, the necessary order having been obtained from the court. The learned judge went on to say that the plaintiffs claimed that they had been prejudiced. He referred in the course of his judgment to the decision of the Court of Appeal in Grimshaw v Dunbar [1953] 1 QB 408 and, in particular, to a passage in the judgment of Jenkins LJ specifying the matters which, in general, ought to be taken into account where a court is called upon to exercise its discretion whether to make an order setting aside a judgment. Jenkins LJ at p 415 dealing with a delay said: . . . I venture to think that delay in itself would not be important, but delay prejudicing the other party, or delay enabling rights of third parties to intervene, would be most material. How does the matter stand here as regards delay . . . Therefore, in this case I should not say that there had not been any undue delay. Mr Goldblatt on behalf of the respondent has urged that the delay there referred to is the delay which arises as between the date when the judgment has been given and the time when an application is made to set it aside. It appears to me that delay overall is a factor which ought to be taken into account in deciding whether or not the discretion to set aside a judgment ought to be exercised in favour of a defendant. Here, the major and effective delay resulted from the fact that the defendant absented himself for a long period; and that during the whole of that period, knowing that rent was accruing and falling due, knowing that he had instructed nobody to make contact with the landlords either to tender the rent to them or else to explain his absence and give them some assurance that he proposed to return and take up his tenancy and provide for the payment of any rent in arrears, he had created a situation in which any reasonable landlord would have supposed that, for one reason or another, the premises had been abandoned by the tenant and that he did not propose to come back at all. So, in those circumstances, they could take steps to obtain an order for possession and to re-enter and deal with the premises in whatever way they desired. It seems to me that, when the learned judge came to deal with this matter, he took the view that, if the plaintiffs got the arrears of rent and if they were to adjust the situation between themselves and Mobax (who had bought the long lease), they really would not be under any serious prejudice at all. What the learned judge appears not to have kept in the forefront of his mind–as I think he should have done–is the position of Mobax, who had in good faith purchased the whole property with vacant possession of flat 111. They had in consequence removed the contents of that flat and then had gone on to effect improvements with a view to disposing of the flat on a long lease. The learned judge makes no reference to their position and does not appear to have taken it into account. Mr Goldblatt conceded that their position is a relevant and material consideration. In a case where the rights of third parties have intervened and are threatened with prejudice, it is something which the court, when asked to exercise discretion, should weigh very heavily in deciding as to how to exercise that discretion. Mr Goldblatt says it is premature to consider the effect on the third party. That is a matter which can still be effectively dealt with. If this appeal is dismissed and there is a new trial, then at that trial the third parties can come in and it will then be appropriate for their situation to be canvassed and methods of redressing any possible loss to them can be gone into. With all respect to Mr Goldblatt’s argument–which he put as persuasively as it could be put–that very much begs the question of what is the immediate situation confronting the judge when asked to exercise his discretion under Order 37. He can of course–not that I for one moment suggest that it was so in65 this case–shelve the responsibility and say: ‘Well, this is to be left to be dealt with at the trial. Nobody will be hurt if that happens.’  On the other hand, for so long as a new trial is pending, the third party’s interests are precarious. They cannot be sure what will happen when the trial takes place. In my view it is right at the earliest available opportunity–which is when the learned judge is being asked to set aside the judgment–for him to weigh the interests of the third parties and to see whether there is a real threat to them or whether that threat can be dismissed as illusory and insubstantial. In the present case, it is quite obvious that the threat is a substantial and a real one. Where such a situation exists, the interests of the third party ought not to be exposed to such a degree of risk in a matter for which they have no responsibility whatever, and with regard to which they have acted at all times in good faith. To find that the situation so far as they are concerned is turned upside down because, as in the present case, the defendant has brought this situation about by his own dilatoriness and by his own neglect to take any step to look after his own interests, would be, it seems to me, utterly to ignore the impact upon innocent third parties. While this is a matter in which this court would not usually interfere with the exercise of the discretion of the judge in the court below, it does seem to me that the learned judge had not applied his mind sufficiently to the effect upon the position of a third party. In the result, he made an order which could not reasonably be made if reasonable consideration had been given to all the relevant factors. For those reasons, notwithstanding the elaborate and careful argument of Mr Goldblatt, I would allow the appeal. I would also add that, at a very late stage, Mr Goldblatt suggested that the appellants had themselves acted with inclement haste, having got an order for possession forthwith. They did not seek to execute that order through the court, which might have involved more time, and they also sought an order forthwith instead of the usual order, which would allow 28 days so that there might be an application for a stay of execution. As a result they prevented Mr Khan by only a few days from approaching the court earlier or from appearing at the court. They it was who made it necessary for him to go back and put himself in mercy and ask for the judgments against him to be set aside. I find those arguments unimpressive in the light of the defendant’s own conduct. I consider that the learned judge erred in principle in the exercise of his discretion and I would allow this appeal. Agreeing, MEGAW LJ said: This is a matter that was for the discretion of the learned judge and, for myself, I would not begin to think it right to intervene merely because of any view which I might take that I would have been disposed to exercise the discretion in a different way. But it seems to me in this case that the learned judge, as appears from the careful note of reasons for judgment approved by him which has been placed before us, has indeed acted upon a wrong principle in arriving at his conclusion. That being so, it is the right and the duty of this court to give effect to its own discretion based upon the material before the county court judge, but upon what we conceive to be the correct principle. There are various unsatisfactory matters about this case. Our attention was called, for example, to discrepancies between, on the one hand, some of the contents of the affidavit put in on behalf of the defendant on the day before the hearing of the county court application resulting in the order to set aside the previous order, and, on the other hand, notes, apparently accepted by the parties and approved by the learned judge, of oral evidence given by the defendant at the hearing of the application. But, however much they might be matters of which one would wish explanation, they would not, in my view, in themselves begin to justify this court in thinking of setting aside the learned judge’s order. The principle on which the learned judge, with great respect to him, erred is that, as I read his notes of judgment, he did not take into account–or certainly did not take into account as being a material factor–the fact that rights of third parties had been affected during the period between the making by the learned judge of his order for possession in favour of the plaintiff on May 22 1979–that was an order which was perfectly validly and lawfully obtained and was a valid order of the court–and the date when the application came before the court to set aside that order. Between those dates third parties had obtained rights perfectly properly. No criticism can be made either of the third parties or of the plaintiffs in respect thereof. Those rights would, at any rate in some degree, be put in peril if the judgment lawfully obtained and lawfully executed were to be set aside as the learned judge decided should be done. The principle is that which is set out in a sentence in a judgment of Jenkins LJ in Grimshaw v Dunbar [1953] 1 QB 408 at p 415. Each case, of course, must be decided on its own facts, as was clearly recognised and stated by Jenkins LJ in that judgment. He set out certain guiding principles to be followed. The two sentences which I wish to quote are these: Secondly, has there been any undue delay by the absent party in launching his proceedings for a new trial?  In answering that question I venture to think that delay in itself would not be important, but delay prejudicing the other party, or delay enabling rights of third parties to intervene, would be most material. Now, it is perfectly true that the principle as there laid down is not literally applicable to the question which we have to consider. Jenkins LJ was there considering a case where it was suggested on behalf of the plaintiff, who had obtained an order and that order had been set aside at the instance of the defendant, that the defendant had shown undue delay in his application to set aside the original order. That question does not arise in this case because it cannot be suggested, and has not been suggested, that, after the defendant, Mr Khan, returned to this country on July 8 1979, there was anything other than proper expedition in the steps which he took to seek to have the order, of which he then learned for the first time, set aside. But the analogy with the passage which I have read appears to me to be this. By analogy with the delay which Jenkins LJ was there considering, you have in this case the conduct of the defendant in failing throughout all this time to pay rent, or to take any steps to have the rent paid or to take any steps to ascertain what was happening about the rent, which he must have realised was falling due in respect of these premises, of which he remained, so far as Rent Act law is concerned, in occupation, and for which he was liable for rent. That is one of the factors. The other is that he absented himself from this country for a period which, however short he originally may have thought it was going to be, extended to a period of some 18 months and, neither initially nor at a later stage when he realised, if it was a matter of realisation, that his stay was going to be much more prolonged, did he take any steps which could conceivably be regarded as reasonable steps–and, after all, he is a man of business–to ensure or to make it probable that matters of importance relating, for example, to any legal proceedings that might arise in connection with his rent or non-payment of rent or his right to remain in occupation of the flat should be brought to his notice. He simply did nothing that could really be described as reasonably meeting the sensible requirements in such circumstances. In these circumstances, it seems to me that, while these circumstances in themselves would not be sufficient to justify the refusal of the setting aside of the judgment and of the order for possession, nevertheless when, in relation to these circumstances and arising out of them, rights have accrued to third parties on the basis of an order lawfully made by the court and lawfully executed, that is a most material factor. The learned judge failed to take into account its materiality. It may be that it would turn out that the third parties would have a right of indemnity, which might require legal proceedings to enforce, and which might or might not be successfully resisted, in respect of the loss which they would have suffered by reason of the contract which was made by them on the assumption, based upon a lawful order of the court, that Mr Khan was no longer interested in the property. But it does not seem to me to be material whether that loss or potential loss which the third parties would suffer, their legal rights being undoubtedly affected, is potentially large or potentially small. It is sufficient that there is here a real interference with the right of third parties and, in the absence of some strong factor to the contrary, it seems to me that justice requires that the order which had been lawfully made and executed should not be set aside. I agree that the appeal should be allowed. The appeal was allowed with costs. An application by the respondent for leave to appeal to the House of Lords was refused.