Pennell v Payne
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE SIMON BROWN,LORD JUSTICE LEGGATT |
| Judgment Date | 25 November 1994 |
| Judgment citation (vLex) | [1994] EWCA Civ J1125-4 |
| Docket Number | FC3/94/7963/F |
| Court | Court of Appeal (Civil Division) |
| Date | 25 November 1994 |
[1994] EWCA Civ J1125-4
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM GRIMSBY COUNTY COURT
(Mr. Recorder Heath)
Before: Lord Justice Leggatt Lord Justice Simon Brown
FC3/94/7963/F
CCRT1 94/0115/F
MR. P MORGAN QC & MR. M ROGER (Instructed by Bride McFarland, Lincolnshire; London Agents Steggles Palmer WC1R 4BV) appeared on behalf of the Appellant
MR. A GORE (Instructed by Wilkin Chapman, Lincolnshire) appeared on behalf of the First Respondent
Friday 25 November 1994
This is an agricultural tenant's appeal with the leave of this Court against the Order of the Grimsby County Court on 27th August 1993, dismissing his application to set aside an arbitrator's award made on 30th July 1992 in favour of the Respondent landlord.
The appeal raises a pure question of law which can be stated thus: where a head tenant serves an upwards notice to quit, ie a notice upon his landlord, is the landlord thereupon entitled to possession against a sub-tenant irrespective of whether that sub-tenancy was granted within the terms of the headlease?
Although the point is one of general principle and application in the law of landlord and tenant, it is nevertheless right to indicate the factual context in which it arises upon the present appeal.
The first Respondent is the landlord and the Appellant the tenant of a farm known as Bridge Inn Farm, Grainthorpe, Louth, Lincolnshire. The farm comprises 128 acres and includes a dwelling house. The tenant holds the farm under a tenancy agreement granted on 22nd April 1971 on terms prohibiting him from sub-letting the farm without the landlord's consent. The tenancy is of an agricultural holding within the Agricultural Holdings Act, 1986. The Act provides security of tenure for tenants by restricting the circumstances in which an effective notice to quit can be given during the tenant's lifetime.
In 1991, the Appellant tenant entered into a transaction with R. Caudwell (Produce) Limited for the working of the land. This transaction was subsequently held by the arbitrator to amount to a sub-letting of the farm.
On 5th February 1992 the first Respondent landlord served on the Appellant a notice to quit expiring on 6th April 1993, relying on section 26 (2) and Case E in Schedule 3 to the 1986 Act. Case E is one of those cases where the consent of the Tribunal to the operation of the notice to quit is not required under sections 26(1) and 27 of the Act. It reads:
"CASE E
At the date of the giving of the notice to quit the interest of the landlord in the agricultural holding had been materially prejudiced by the commission by the tenant of a breach, which was not capable of being remedied, of any term or condition of the tenancy that was not inconsistent with the tenant's responsibilities to farm in accordance with the rules of good husbandry, and it is stated in the notice that it is given by reason of the said matter."
On 20th February 1992 the Appellant required arbitration on the efficacy of the notice to quit pursuant to Article 9 of the Agricultural Holdings (Arbitration on Notice) Order, 1987. On 22nd April 1992 the second Respondent was appointed arbitrator.
Before the arbitrator, two issues arose: first, did the tenant's agreement with the company in 1991 amount to a sub-letting? (If so, it was accepted that it constituted an irremediable breach of covenant). As stated, the arbitrator found it did and that finding has not since been challenged. Second, if so, had the landlord suffered material prejudice as a result? The arbitrator found that he had, on the basis that he might, upon certain contingencies, be forced into a direct relationship with the sub-tenant, a company, which, unlike an individual, will never die. The landlord would accordingly lose the opportunity of possession on the death of the tenant and his reversion would thereby be postponed indefinitely.
The tenant applied to the County Court pursuant to paragraph 27 of Schedule 11 to the 1986 Act, seeking to set aside the arbitrator's award. First, he alleged misconduct on the part of the arbitrator. That allegation failed, is not now pursued and need not be mentioned again. The other issue raised before the County Court was whether the arbitrator was right in deciding that the landlord had suffered material prejudice as a result of the sub-letting of the farm. The Recorder agreed with the arbitrator. Before both, let it be made plain at this stage, it was accepted on behalf of the tenant that if he served an upwards notice to quit, thereby determining the head tenancy, the sub-tenancy, albeit unlawful, would as a matter of law become binding on the landlord. That, I repeat, is the sole point now at issue in this appeal. Paradoxically, it is the landlord who argues that he would be bound by the sub-tenant, the tenant who asserts the contrary.
Just before turning to this point, I should dispose of what really amounts to a preliminary submission by the landlord. It is that, irrespective of the position arising following the service of an upwards notice to quit, in the present case he has suffered material prejudice through being unable to accept a surrender of the headlease, it being common ground that a surrender does indeed have the effect of promoting the sub-tenant to become the landlord's own tenant. Mr Gore argues that even if the Appellant is correct on the new point he now raises, nevertheless the question of surrender remains. The landlord, he suggests, may be faced with a stark choice between continuing with an unsatisfactory tenant he does not want or accepting a surrender on such terms as the tenant will offer him.
Contrary to Mr Gore's contention, I cannot accept that the question of surrender formed an independent ground of the arbitrator's decision. Nor certainly was it the basis of judgment in the County Court. Rather the Recorder found that:
"The material prejudice occurred as soon as the landlord found himself in a position as a result of the tenant's breach of covenant that the tenant could by serving a notice to quit foist upon the landlord a tenant who was not an individual, but a company."
More important, however, the argument is in any event unsustainable: the landlord can always refuse the offer of surrender and, if the Appellant is right upon this appeal, can invite instead the service of an upwards notice to quit. The mere inability to accept a surrender cannot in my judgment constitute the material prejudice necessary to make good a claim for possession under Case E.
I turn to the point at issue. Let me first put it in its general context in landlord and tenant law. At common law, the general rule is that when the head tenancy comes to an end, any sub-tenancy derived out of it also automatically and simultaneously comes to an end. This general rule applies without question when the head tenancy comes to an end by effluxion of time, by a landlord's notice to quit, or by forfeiture. It is equally beyond question that the general rule does not apply in cases of surrender and merger.
As to whether an upwards notice to quit falls within the general rule or the exceptions to it, Counsels' arguments have ranged far and wide. They have discussed the juridical basis for the exceptions, the effect of the authorities, the views of legal commentators, and a variety of competing policy considerations for deciding the point one way or the other.
Let me start with the juridical basis for the exceptions to the rule. The common law exception relating to surrender is stated in Coke upon Littleton, Volume II, 338B in these terms:
"Having regard to the parties to the surrender, the estate is absolutely drowned … but having regard to strangers, who were not parties or privies thereunto lest by a voluntary surrender they may receive prejudice touching any right or interest they had before the surrender, the estate surrendered hath in consideration of law a continuance."
The present position is summarised in Lord Denning's speech in Fairweather -v- St Marylebone Property Co Limited [1963] AC 510 at page 546:
"At common law, if a leaseholder made an underlease and afterwards surrendered his term to the freeholder, then the freeholder could not evict the underlessee during the term of the underlease: see Pleasant (lessee of Hayton) -v- Benson. But this was not because there was any assignment from surrenderer to surrenderee. It is clear that, upon the surrender, the head term was determined altogether. It was extinguished completely, so much so that the freeholder could not sue the underlessee on the covenants or enforce the proviso for re-entry: see Webb -v- RussellUNK [1789] 3 Term Rep. 393. The underlessee could enjoy the property without payment of rent and without performance of the covenants and conditions until the end of the term of the underlease: see Ecclesiastical Commissioners for England -v- TreemerELR [1893] 1 Ch 166. This was remedied by the Statutes of 1740 [this is a mistake for 1730] and 1845, which have been re-enacted in sections 139 and 150 of the Law of Property Act, 1925. Under those Statutes, on a surrender of the headlease, an underlessee becomes a direct tenant of the freeholder on the terms of his underlease. So that the surrender does operate as if it were an assignment of the surrenderer's interest."
The case of Webb -v- Russell there referred to was in fact one of merger. That, of course, is essentially the converse of surrender: the tenant acquires the freehold reversion so that the headlease becomes "drowned" in the superior interest, the...
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