London Diocesan Fund and another v Phithwa and Others (Avonridge Property Company Ltd, Part 20 defendant)
| Jurisdiction | England & Wales |
| Judge | LORD WALKER OF GESTINGTHORPE,LORD HOFFMANN,BARONESS HALE OF RICHMOND,LORD NICHOLLS OF BIRKENHEAD,LORD SCOTT OF FOSCOTE |
| Judgment Date | 01 December 2005 |
| Neutral Citation | [2005] UKHL 70 |
| Date | 01 December 2005 |
| Court | House of Lords |
[2005] UKHL 70
HOUSE OF LORDS
Appellate Committee
Lord Nicholls of Birkenhead
Lord Hoffmann
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Baroness Hale of Richmond
and others and others
Appellants:
Mark Warwick
(Instructed by Philippsohn Crawfords Berwald)
Respondents:
Nathan Wells
(Instructed by Gattas Denfield)
This appeal raises a question on the effect of the Landlord and Tenant (Covenants) Act 1995. A sublease invariably contains a covenant by the lessor to pay the rent due under the head lease. Before the enactment of the 1995 Act a lessor could, by the use of appropriate wording, limit his liability under such a covenant in whatever way he and the subtenant might agree. In particular, the lessor's liability could be restricted to the period while the reversion to the sublease remained vested in him. This was legally possible, if seldom met in practice. When the lessor's liability was confined in this way, and the lessor assigned the reversion, his successor would be liable under this covenant by virtue of privity of estate but the lessor's own liability by virtue of privity of contract would be at an end. The issue on this appeal is whether the 1995 Act precludes a lessor from now limiting his liability in this way. The Court of Appeal held it does: [2005] 1 WLR 236.
The context is as follows. In February 2002 Avonridge Property Co Ltd acquired by assignment a lease of seven small shop units at Wealdstone, Middlesex. The lease was for a term of 99 years expiring in 2067, at an annual rent of £16,700 subject to review. Avonridge granted subleases of six of these shops for substantially the same term as its own lease, or head lease as the lease then became. The rent payable under each sublease was a peppercorn. The sublessees paid Avonridge substantial premiums for their subleases, of the order of £75,000 for each sublease.
Each sublease contained, in clause 6, a landlord's covenant for quiet enjoyment and for payment of the rent reserved by the head lease. The words of covenant read as follows (commas have been added to assist reading):
'The Landlord covenants with the Tenant as follows (but not, in the case of Avonridge Property Company Limited only, so as to be liable after the Landlord has disposed of its interest in the Property) ….'
On 2 April 2002 Avonridge assigned the head lease to a Mr Dhirajlal Phithwa. Mr Phithwa was, to use the old legal phrase, a man of straw. He disappeared, leaving unpaid the rent due under the head lease. The head lessor, the London Diocesan Fund and the Parochial Church Council of Holy Trinity, Wealdstone, commenced forfeiture proceedings. The subtenants were granted relief, on unexceptional terms: they had to pay the rent arrears under the head lease with interest and costs, and take new leases of their individual units. The new leases were for the same term as their former subleases and at a rent equal to an apportioned part of the rental payable under the forfeited head lease. This meant that for the future, under the new leases, the former subtenants had to pay an annual rent of £2,376 or, in one instance, £2,441. This is to be contrasted with the nominal rent payable under the subleases they had bought from Avonridge.
The subtenants brought proceedings against Avonridge, claiming damages for breach of the landlord's covenant in clause 6 of their leases. Judge Copley sitting in Willesden County Court gave judgment for the subtenants, for damages to be assessed. He held that the 1995 Act rendered void the words in clause 6 limiting Avonridge's liability to the time it was the landlord. The Court of Appeal, comprising Pill, Jonathan Parker and Hooper LJJ, dismissed Avonridge's appeal. Avonridge has now appealed to your Lordships' House.
A trap for the unwary?
It must be said at once that Avonridge's case is not overburdened with merit. Indeed, on their face the transactions have the appearance of a scam. The sublessees' security, and the value of their subleases, depended on the strength of the sublessor's covenant to pay the head lease rental. But Avonridge could end its liability to pay this rent at any time. There was, it seems, no restriction on assignment of the head lease. If Avonridge assigned the head lease its liability as tenant of that lease would end automatically, by virtue of section 5 of the 1995 Act. Its liability as landlord under the subleases would also end automatically, by virtue of the limited terms of the landlord's covenant in clause 6 of the subleases.
An assignee of the head lease from Avonridge would of course become liable to the head lessor in respect of the tenant's covenants in the head lease. An assignee would also become liable to the sublessees in respect of the landlord's covenant in clause 6 of the subleases. In each instance this liability would arise by virtue of privity of estate. But no one of financial substance would take an assignment of the head lease and thereby incur liability to pay rent of £16,700 per annum to the head lessor, save on payment of a substantial 'reverse' premium. No one would do so, because the property for which this rent was payable was let on correspondingly long subleases yielding no rental income.
Thus the overall position was that Avonridge received premiums from the subtenants totalling altogether £458,500 in exchange for subleases which from their inception were essentially valueless. They were valueless because by its own act of assignment to a worthless assignee Avonridge could at any time put the subleases in jeopardy of forfeiture. Avonridge could do this without incurring any liability either to the head lessor or to the subtenants. From the outset it was in Avonridge's financial interest to take this course as soon as possible. Avonridge lost no time in doing so.
How these unfortunate sublessees came to acquire and pay for these subleases is not a matter before your Lordships. Nor is the question whether any of the circumstances surrounding these transactions may afford the sublessees redress, whether against Avonridge or others. Your Lordships' House is concerned only with the rights and obligations of the parties under the terms of the subleases they entered into. But the potential use of the provisions of the 1995 Act in the manner illustrated by the facts of this case is a matter to be taken into account when interpreting the statutory provisions.
The 1995 Act gave effect, with amendments, to the recommendations of the Law Commission in its report 'Landlord and Tenant Law - Privity of Contract and Estate': Law Com No 174 (1988). One of the principal mischiefs the Act was intended to remedy was that, as the law stood, the original tenant of a lease remained liable for performance of the tenant's covenants throughout the entire duration of the lease. A tenant might part with his lease and many years later find himself liable for substantial amounts of unpaid rent, perhaps much increased under rent review provisions, and for the cost of making good extensive dilapidations.
This was considered unfair. This potential liability was not widely understood by tenants, and it could lead to hardship. Section 5 of the Act remedied this defect in the law. Section 5 provides that where a tenant assigns the whole of the premises demised to him under a tenancy, he is released from the tenant covenants of the tenancy. A tenant covenant is a covenant falling to be complied with by the tenant of premises demised by the tenancy. Tenancy includes a sub-tenancy: section 28(1).
Section 6 contains a corresponding provision for the benefit of landlords in respect of landlord covenants, but this provision is not so far-reaching in its effect. Unlike the automatic release of tenant covenants brought about by assignment of the whole of the demised premises, assignment of the reversion in the whole of the demised premises does not automatically relieve the landlord from his liability under the landlord covenants. The Law Commission considered the new provision regarding landlord covenants could not mirror precisely the position regarding tenant covenants. Tenants rarely, if ever, have a right to give or withhold consent to dispositions by their landlord. Moreover, there was less need for radical change with landlord covenants because landlords undertake far fewer obligations than tenants, and landlords may not be troubled by the prospect of continuing responsibility: see para 4.16 of its report.
So sections 6 to 8 of the Act provide a landlord with a means which may result in his being released from the landlord covenants but will not necessarily do so. If the landlord assigns the whole of the premises of which he is landlord he may apply to be released from the landlord covenants of the tenancy. A landlord covenant is a covenant falling to be complied with by the landlord of the premises demised by a tenancy. An application for release is made by the landlord serving an appropriate notice on the tenant requesting a release of the landlord covenant wholly or in part. Where the landlord makes such an application the covenant is released to the requested extent if the tenant consents, or if he fails to object, or if he does object but the court decides it is reasonable for the covenant to be released: section 8.
These statutory provisions might readily be stultified if the parties to a lease could exclude their operation. In particular, the provision for automatic release of tenant covenants on assignment of a lease would be a weak instrument if it were open to a landlord to provide that the original tenant's contractual liability should continue for the whole term...
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