Banning v Wright
| Jurisdiction | England & Wales |
| Judge | Lord Chancellor,Lord Reid,Lord Morris of Borth-y-Gest,Lord Simon of Glaisdale,Lord Salmon |
| Judgment Date | 14 June 1972 |
| Judgment citation (vLex) | [1972] UKHL J0614-1 |
| Date | 14 June 1972 |
| Court | House of Lords |
[1972] UKHL J0614-1
Lord Chancellor
Lord Reid
Lord Morris of Borth-y-Gest
Lord Simon of Glaisdale
Lord Salmon
House of Lords
Upon Report from the Appellate Committee, to whom was referred the Cause Banning against Wright (Inspector of Taxes), that the Committee had heard Counsel, as well on Monday the 24th, as on Tuesday the 25th, days of April last, upon the Petition and Appeal of Bernard John Banning, of B. J. Banning Limited, 513-516 Lichfield Road, Birmingham 6, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 19th of November 1970, so far as regards the words "Affirms the said Order dated 12th December 1969 and the said determination of the Commissioners for the Special Purposes of the Income Tax Acts in so far as they relate to the assessments to Income Tax for the following years: ( a) 1963/64, Further assessment (Excess rents), £1,162, ( b) 1964/65, Income from property, £1,557, ( c) 1965/66, Income from property, £792", might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order, so far as aforesaid, might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Case of Arthur James Wright (Her Majesty's Inspector of Taxes), lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen Assembled, That the said Order of Her Majesty's Court of Appeal, of the 19th day of November 1970, in part complained of in the said Appeal, be, and the same is hereby, Varied, and that the Cause be, and the same is hereby, remitted back to the Chancery Division of the High Court of Justice with a Direction to proceed in accordance with the majority Opinions expressed in this House: And it is further Ordered, That the Respondent do pay, or cause to be paid, to the said Appellant the Costs incurred by him in the Courts below, and also the Costs incurred by him in respect of the said Appeal to this House, the amount of such last-mentioned Costs to be certified by the Clerk of the Parliaments.
These proceedings originate in a case stated by the Special Commissioners dated 21st July, 1969, arising out of an appeal against 4 assessments to income tax. At that stage the case raised two questions, namely:—
( a) whether and to what extent a sum of £3,000 paid by the Appellant in circumstances thereinafter mentioned was deductible from rents received by the Appellant pursuant to section 175 of the Income Tax Act, 1952, and/or paras. 8 and 9 of Sch. 4 to the Finance Act, 1963.
( b) whether a further assessment for the year 1962-63 in the amount of £1,250 (which in fact related to part of the £3,000) was a valid assessment on the grounds that there was evidence of a discovery on the part of the Respondent Inspector of Taxes.
The Special Commissioners decided both questions in a sense adverse to the Appellant, and were upheld by Foster J. on 12th December, 1969.
On 19th November, 1970, the Court of Appeal (Russell, Sachs and Buckley LJJ) dismissed the Appellant's appeal on the first of the two points, but declared in the Appellant's favour on the second. The effect of this decision, which has been accepted by the Respondent, is that, of the £3,000 referred to in the first question, £1,250 has been treated as deductible by the Appellant in calculating his liability to income tax on excess rents for the year 1962–63, and the appeal, therefore, substantially affects only the balance of £1,750 remaining out of the £3,000 to which the first question relates.
At the material times the Appellant was the tenant of premises known as 388 and 390, Lichfield Road, Aston. The lease (dated 16th September, 1959), was for 7 years from 17th March, 1958, but was renewable for a further period of 7 years at the option of the tenant on giving 3 months' notice. This option, however, could only be exercised if up to the time of the giving of the notice the tenant had paid the rent and performed and observed the covenants of the lease.
The relevant term of the lease containing the option to renew was numbered 2(12) and was in the following terms:—
"(12) If the Lessee shall desire to renew the present demise at the expiration of the last year of the said term and shall give to the Lessors three months' notice in writing of such his desire and if the Lessee shall up to the time of the giving of notice have paid the rent and performed and observed the covenants on his part hereinbefore contained then the Lessors will grant to the Lessee a new Lease of the said premises for a further term of seven years to commence from the date of the determination of this demise and shall contain similar covenants and conditions to those herein contained except this covenant for renewal".
In addition to the option to renew, the lease contained covenants to paint and repair (clauses 2( 3) and 2(4)) and also covenants against assigning or under-letting without the consent of the landlords (clause 2(8)) and against permitting (without the consent of the Landlords) the demised premises to be used for any trade or business except that of "a garage proprietor tyre repairer and distributor, motor sales dealer and the like" (clause 2(5)). There were the usual provisions for forfeiture and re-entry for breach of covenant (clause 4(i)). The exact terms of these covenants are not material.
In the events which happened, the Appellant committed breaches of the two covenants restricting user and against sub-letting by sub-letting the two premises respectively for use as a betting shop and a store and offices, in each case without obtaining the necessary consent. The names of the unauthorised sub-tenants were respectively Donnelly, and Dowley and Darby (Soft Ices) Ltd.
In the result, the landlords complained, served a notice under s. 146 of the Law of Property Act, 1925, and instituted proceedings for forfeiture and re-entry.
The payments which fall to be discussed in the present proceedings arise out of a compromise of the dispute thus arising between the Appellant and his landlords. The nature of this compromise appears fairly completely from correspondence passing between the two parties and incorporated in the case. I refer to these letters in detail at a later stage in this opinion.
The negotiations for the compromise, so far as is relevant, were in three stages. In the first stage, by letter dated 16th September, 1963, the landlords proposed a payment of £1,250 as consideration for the abandonment of his right of re-entry and possibly any right of damages for breach of covenant, but on condition that the lease terminated without option to renew at the expiry of the original term of 7 years. In the second stage, by letter dated 17th October, 1963, as a result of representations on behalf of the tenant, the landlords modified their original proposals by increasing the proposed payment to £3,000, but dropped the claim to terminate the lease at the end of the original term of 7 years without the option of renewal. In the third stage, the Appellant proposed and the landlords accepted that the £3,000 should be split into the original sum of £1,250 for the continuance of the unauthorised tenancies, and the balance of £1,750 for the retention of the option to renew, but the landlord in accepting this apportionment made it plain that the £1,750 was not to be returnable even (as we were informed in fact occurred) if the option were not exercised. This appears from a letter of the landlords of 9th December, 1963. This apportionment of the £3,000 was thus not merely colourable; it corresponded exactly to the first two stages of the negotiation, and payment was in fact effected on 17th February, 1964, by two separate cheques for £1,250 and £1,750.
The result of the appeal depends on the answer to the question whether the £3,000 (or the balance of £1,750) was the consideration for the variation or waiver of any of the terms of the lease. If it were, the effect of s.22(4) of the Finance Act, 1963, is that the payment would be treated as a premium for the purposes in s.22(4) and that the Appellant must succeed. If not, the appeal must be dismissed.
The effect of s.22(1) of the Finance Act, 1963, is that, where payment of a premium is required under a lease of premises let for not more than fifty years, the landlord is made liable to pay income tax on the year in which the premium is received. The amount payable is based on a notional income calculated according to a formula, dependng, amongst other things, on the length of the term and the amount of the premium. This is provided by s.22(1) of the Act. Subsections (2), ( 3) and (4) of section 22 deal successively with possible methods of avoiding the charge imposed on the landlord by subsection (1). Thus subsection (2) provides a method of preventing a mode of avoidance which might take the form of imposing on the tenant an obligation to effect structural alterations in lieu of a premium. Subsection (3) is designed to forestall any device which, in lieu of a premium, provided for the capitalisation of part of the rent, or the imposition of a capital fee for surrender of the lease. It is in the context of these provisions against avoidance that s.22(4) must be considered. The subsection aims at treating as premiums payments made as consideration for the variation or waiver of any of the terms of the lease. S.22(4) is in the following terms: —
"Where, as consideration for the variation or waiver of any of the terms of a lease, a sum...
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