Property litigation weekly update – 5 November 2021
In this week's bulletin the team discuss three cases which consider a breach of covenant in a shared ownership lease, 'keep-open' clauses in commercial leases and opposing a lease renewal on the basis of ground (g) of Section 30(1), Landlord and Tenant Act 1954.
Bedford v Paragon Asra Housing Ltd (2021) UKUT 266 - Landlord and tenant breach of covenant in a shared ownership lease
This case will be of interest to landlords with shared ownership long leases who are considering forfeiture as a potential remedy to serious tenant breaches.
The case concerned a residential social housing tenant under a long shared ownership lease (a lease of more than 21 years). Mr Bedford was allegedly in breach of a covenant prohibiting subletting and Paragon sought to forfeit the lease on the basis of that breach.
Before a landlord of a long residential lease can seek possession based on forfeiture, it must first seek a determination that the alleged breach has occurred (unless the tenant admits the breach). Such a determination is sought under Section 168(1) of the Commonhold and Leasehold Reform Act 2002. Once the determination is obtained, the landlord may then serve a notice to forfeit under Section 146 of the Law Property Act 1925 before issuing forfeiture proceedings in the County Court.
Determinations are usually obtained from the First-Tier Tribunal (Property Chamber) (FTT) and Paragon sought and obtained such a determination. However, Mr Bedford was subsequently given permission to appeal the FTT's decision to reject his application for strike out which he had made during the proceedings. Mr Bedford appealed to the Upper Tribunal, Lands Chamber (UT) alleging that the Judge at the FTT was wrong to reject his application to strike out. He claimed that Paragon had waived its right to forfeit the lease and, because the application under Section 168 was a precursor to an action for forfeiture, the application was an abuse of process. Paragon had allegedly accepted rent after discovering the subletting and a period of time had allegedly elapsed between the unapproved subletting being discovered and Paragon expressing an intention to forfeit. Such action might be capable of supporting a waiver defence.
Upper Tribunal's Decision
The UT was asked to consider: (1) whether the FTT had been wrong in considering alternative remedies to forfeiture which might be available to Paragon, when considering Mr Bedford's application for strike out; and (2) whether the FTT should have determined if Paragon had waived its right to forfeit in considering Mr Bedford's strike out application.
The UT dismissed the appeal, granting Paragon the right to serve a Section 146 notice and to commence forfeiture proceedings, should it choose to.
The UT determined that the FTT had taken the correct approach in considering Paragon's alternative remedies to forfeiture. These might have included an application for injunctive relief to prevent Mr Bedford from subletting and/or damages. The UT also said that, in principle, the FTT could have determined whether the right to forfeit had been waived as part of its consideration of the strike out application. However, as its decision not to strike out was obviously correct, the issue of jurisdiction did not need to be fully explored. In any event, the FTT did not have the evidence before it to determine if there had been a waiver of the right to forfeit. There was a lack of detail as to when Paragon had discovered the unapproved subletting and a lack of clarity in Mr Bedford's pleadings on the subject of waiver. The UT pointed out that Mr Bedford would have the opportunity to submit his waiver defence in any future County Court proceedings.
Landlords should be alive to the fact that forfeiture proceedings differ from the Housing Act 1988 possession proceedings such that the simple act of accepting rent following a breach or permitting a delay between discovering a breach and acting on it can be fatal to a successful forfeiture claim.
It is not clear in this case why the forfeiture route was pursued rather than a possession action based on Ground 12 (Schedule 2, Housing Act 1988). However, this is likely to be because the shared owner had sub-let and did not occupy as his only or principal home. Under those circumstances a shared ownership lease would not fulfil the requirements of the Housing Act 1988 and would not be an assured tenancy for the purpose of a possession action.
Half-hearted trading will not satisfy a 'keep open' clause in a lease - M&S avoids contempt of court
Case: Sapphire 16 S.a.r.l -v- Marks and Spencer Plc (2021)
In a Scottish claim, M&S were found to be in breach of an interim order requiring them to re-open and remain trading. The interim order was based on a 'keep open' clause which can often be found in commercial leases, usually those surrounding the retail sector. In Scotland, a landlord can obtain a court order to force the tenant to remain open and trading. This is exactly what happened here, but M&S failed to do so and were found to be in breach of the court order. However, as there was a degree of uncertainty in the order, they were given the benefit of the doubt and were not found to be in contempt of court.
During the first lockdown, M&S closed part of its operations (in line with government guidance) and only kept open part of the store selling essential foodstuff. Most of its retail space was closed. The entrance on the street remained open, but the doors leading from the shopping centre (that the landlord (Sapphire) also owned) were locked and the window displays blacked out.
When the restrictions were lifted, M&S continued to only offer limited foodstuff; food stocks were depleted and there was no stock in other parts of the store, even though the lease contained a 'keep open' clause.
Sapphire therefore sought and obtained an interim injunction in July 2020 requiring M&S to comply with the lease terms. The order provided that M&S were obliged to:
- Re-open the whole of the store;
- Keep it open for business during normal business hours; and
- Keep it sufficiently staffed, stocked, furnished and otherwise equipped for that purpose.
M&S went onto convert the shop to an outlet store, reducing the number of staff and only selling limited stock at reduced prices. The entrance from the shopping centre remained closed and the windows remained blacked-out.
While Lord Braid found that the interim order had some ambiguity in how much staff or stock was 'sufficient' it was clear that M&S had been ordered to open the whole of the retail space and to trade in good faith and not carry-on business "half- heartedly".
The Judge commented that he was "led to the inexorable conclusion that the defender is not interested in attracting business to its store, and that it is doing the bare minimum which it considers it need do in order to comply with its obligations"
Keep open clauses
A keep open clause requires the tenant to actively trade for the duration of its lease but it has long been established that enforcement of keep open clauses in English courts can be difficult. A specific enforcement remedy is often rejected by the courts, especially when it would force a tenant into financial difficulty to keep its doors open. Equally, in claims for damages it can be difficult to evidence loss.
This is a timely reminder for tenants that leases should be carefully checked for any keep open clauses that might restrict or prohibit operational decisions.
Our team regularly advise on the preparation and execution of leases, deeds of variation and side letters and advice is best sought on such matters to ensure that both parties understand their obligations or so variations can be made to onerous clauses.
A ground (g) takeaway – Macey v Pizza Express (Restaurants) Ltd  EWHC 2847 (Ch)
Pizza Express recently won opposed 1954 Act proceedings against one of its landlords in a case which reiterates the importance for landlords to make sure they have sufficient evidence in place to demonstrate a firm and settled intention in order to succeed on ground (g) of Section 30(1) of the Landlord and Tenant Act 1954.
Pizza Express' landlord opposed renewal on the basis that he intended to occupy the property for the purposes of running his own business – a wine bar. The issue for the court, therefore, was whether the landlord held the requisite intention to satisfy s30(1)(g). The judge at first instance found against the landlord and the landlord then lost again on appeal.
The judgments underline that "intention" must involve "a decision by the landlord to bring about a certain state of affairs". The court must be satisfied that such a decision is "firm and settled". The court was not satisfied as to the landlord's subjective intention. The court was also unconvinced on the objective element – i.e. whether the landlord could show he would be able to run a wine bar from the property. The judge recognised that the landlord had attempted to establish such intention by way of his family undertaking training and acquiring personal licences. The court was unconvinced, however, and particularly noted that the landlord had not incurred "significant costs that demonstrate a commitment to move beyond the valley of decision". The landlord's belated disclosure of documents, namely an incomplete business plan and undated balance sheet, did little to help demonstrate that he possessed the requisite intention. The landlord also failed to substantiate his claim under cross-examination. The court found the landlord had not “demonstrated a real prospect of overcoming or surmounting the obstacles facing the hospitality industry in the centre of the city of Exeter at the height of the Covid-19 health emergency”.
This case is a reminder for any landlords seeking to rely on s30(1)(g) that they must put sufficient evidence together to convince the court that they possess the subjective intention to run a business at their property, and that they are, in fact, able to do so.
Insights from across the firm
- HR Law – November 2021
- Podcast: How has the Building Safety Bill impacted valuation and funding in the real estate sector?
- Thinking Real Estate – Issue 13
Positive news stories
- A study has managed to reverse the symptoms of Alzheimer’s disease in mice by administering drugs currently used to treat hypertension and inflammation in humans. In this study, scientists at IRB Barcelona led by Dr.Aloy have characterized three stages of Alzheimer’s disease, namely initial, intermediate, and advanced. For each of these stages, they have analysed the behaviour of the animals, studied the effects on the brain (specifically the hippocampus at the tissue level), and performed a molecular analysis to measure gene expression and protein levels.
- A “long-held dream” of science was realized when a team of researchers from Spain and Utah coordinated to restore basic vision to a blind women by connecting a camera to an array of microchips to her brain.
- During spooky season in Italy, you’ll often hear people say, “Dolcetta or Scherzetta,” meaning “a little sweet or a little joke.” Well, a great-grandmother in the UK recently had three little sweeties arrive at her door, and they gave her the best Halloween of her life.