England and Wales Court of Appeal (Civil Division) Decisions

Court of Appeal

		15 November 1978

1. Giving judgment, LORD DENNING MR said: If the judgment of the judge below is right, it will open a gap in the protection which is offered to tenants by the Rent Act. I will first give the facts.
2. Mr Quennell is a gentleman who lives in Cheyne Row in London. But he is the owner of a large house in Lewes. It is 6 Wallands Crescent, Lewes, with about nine bedrooms. He has an agent in Lewes who looks after it for him. The house is very suitable for students. In 1973 the agent let it to some students of the University of Sussex. Two of them became the tenants. They were Mr Maltby and Mr Jack. They were let into possession for a term of one year at a rent of £ 90 a month, expiring on December 31 1974. They had other students there with them, about nine students in the house. While Mr Maltby and Mr Jack were tenants Mr Quennell borrowed money from Barclays Bank and mortgaged this house to secure the loan. It was only for the sum of £ 2,500. He executed a legal charge on August 13 1974 in favour of Barclays Bank to cover any moneys which might from time to time be owing to the bank. In that legal charge there was this clause 4, which is in common form:

During the continuance of this security no statutory or other power of granting or agreeing to grant or of accepting or agreeing to accept surrenders of leases or tenancies of the Mortgaged Property or any part thereof shall be capable of being exercised by the Mortgagor without the previous consent in writing of the Bank.

3. That meant thereafter from August 13 1974 so long as this legal charge subsisted to the bank, Mr Quennell could not let the premises or accept surrenders without the consent in writing of the bank.
4. The tenancy of Mr Maltby and Mr Jack came to an end at the end of December 1974. The house was then relet to two other students, a Mr Quilter and a Mr Lyeth, again for a year. It was not relet to Mr Maltby because it was thought that he was going to the United States. As it happened Mr Maltby did not go to the United States. In fact he stayed on living in the house. So did several other students. At all events, the important thing to note is that the bank did not give its consent to this letting to Mr Quilter and Mr Lyeth. No one asked the bank for its consent. No one realised it was necessary. No one interfered and nothing happened. The year 1975 passed. Then at the end of that year there was a fresh letting. This was between Mr Quennell as landlord and Mr Maltby and a Mr Lupton as tenants. That tenancy lasted until December 1976. Again no one asked the bank for consent. No one realised it was necessary. And from January 1977 onwards the tenants remained as statutory tenants, paying the rent to the agents.
5. The position then arose that Mr Quennell wanted to get possession of the house. If he could get vacant possession, he could sell it at a high price. It might be worth £ 30,000 to £ 40,000 with vacant possession. Mr Quennell started proceedings for nuisance and annoyance, but he dropped them. Then he went to lawyers for advice. After consulting them, in October 1977 Mr Quennell went to the bank and told them about the tenants in the house. The bank had not heard before about the various changes in the tenancies. Even when they were told the bank made it clear that they had no intention of taking any proceedings to enter the property or to turn the tenants out or anything of that kind. The bank were not concerned to get possession.
6. Then Mr Quennell's lawyers in London advised him that there was a good way in which possession could be achieved. This is what it was: Mr Quennell's wife, Mrs Quennell, paid off the bank. She paid the £ 2,500 which was owing to the bank and took a transfer of the charge. The bank transferred it to her by a transfer dated January 17 1978. Then Mrs Quennell brought proceedings against the tenants, Mr Maltby and Mr Lupton, seeking possession. She said that she stood in the shoes of the bank, and, seeing that the tenancy was granted without the consent of the bank, it was void. So she could recover possession.
7. The judge accepted this submission. He held that the wife, Mrs Quennell, was entitled to possession of the premises and could turn Mr Maltby and all the other students out of the house. Now it has been held that, when the bank holds a charge and there is a clause in it whereby there are to be no tenancies granted or surrendered except with the consent of the bank in writing, then in those circumstances, if the mortgagor does thereafter grant tenancies without the consent of the bank, those tenancies are not binding on the bank, and the tenants are not entitled to the protection of the Rent Acts. That was decided in Dudley & District Benefit Building Society v Emerson [1949] Ch 707. Mrs Quennell relies on that case. She says that, as transferee of the legal charge, she stands in the shoes of the bank and can obtain possession.
8. The judge accepted that submission. His decision, if right, opens the way to widespread evasion of the Rent Acts. If the owner of a house wishes to obtain vacant possession, all he has to do is charge it to the bank for a small sum. Then grant a new tenancy without telling the bank. Then get his wife to pay off the bank and take a transfer. Then get the wife to sue for possession.
9. That indeed was what happened here. In October 1977, when Mr Quennell went to the bank, he told them about the tenancies. They said that they did not intend to take proceedings. So he got Mrs Quennell to do it. In evidence, she said: 'I paid £ 2,500. This was for my husband. I took the charge to make the debt to his bank less onerous. I was aware he wanted to obtain possession of the house to sell it. I merely paid off the charge. These proceedings have been brought to get possession to sell.' So the objective is plain. It was not to enforce the security or to obtain repayment or anything of that kind. It was in order to get possession of the house and to overcome the protection of the Rent Acts.
10. Is that permissible? It seems to me that this is one of those cases where equity steps in to mitigate the rigour of the law. Long years ago it did the same when it invented the equity of redemption. As is said in Snell's Equity, 27th ed (1973) on p 376:

The Courts left the legal effect of the transaction unaltered, but declared it to be unreasonable and against conscience that the mortgagee should retain as owner for his own benefit what was intended as a mere security.

11. So here in modern times equity can step in so as to prevent a mortgagee, or a transferee from him, from getting possession of a house contrary to the justice of the case. A mortgagee will be restrained from getting possession except when it is sought bona fide and reasonably for the purpose of enforcing the security and then only subject to such conditions as the court thinks fit to impose. When the bank itself or a building society lends the money, then it may well be right to allow the mortgagee to obtain possession when the borrower is in default. But so long as the interest is paid and there is nothing outstanding, equity has ample power to restrain any unjust use of the right to possession.
12. It is plain that in this transaction Mr and Mrs Quennell had an ulterior motive. It was not done to enforce the security or due payment of the principal or interest. It was done for the purpose of getting possession of the house in order to resell it at a profit. It was done so as to avoid the protection which the Rent Acts afford to tenants in their occupation. If Mr Quennell himself had sought to evict the tenants, he would not be allowed to do so. He could not say the tenancies were void. He would be estopped from saying so. They certainly would be protected against him. Are they protected against his wife now that she is the transferee of the charge? In my opinion they are protected. For this simple reason, she is not seeking possession for the purpose of enforcing the loan or the interest or anything of that kind. She is doing it simply for an ulterior purpose of getting possession of the house, contrary to the intention of Parliament as expressed in the Rent Acts.
13. On that simple ground it seems to me that this action fails and it should be dismissed. The legal right to possession is not to be enforced when it is sought for an ulterior motive. I would on this account allow the appeal and dismiss the action for possession.
14. Agreeing BRIDGE LJ said: The situation arising in this case is one, it seems to me, in which the court is not only entitled but bound to look behind the formal legal relationship between the parties to see what is the true substance of the matter. Once one does that, on the facts of this case it is as plain as a pikestaff that the purpose of the bringing of these proceedings via Mrs Quennell is not for her own benefit to protect or enforce the security which she holds as the transferee of the legal charge but for the benefit of her husband as mortgagor to enable him to sell the property with the benefit of vacant possession. In substance she is suing as his agent. That being so, it seems to me inevitably to follow that she can be in no better position in these proceedings than her husband would be if they had been brought in his name. If they had been brought in his name, it is clear that the defendants would have had an unanswerable defence under the Rent Acts.
15. I agree that the appeal should be allowed.
16. Also agreeing, TEMPLEMAN LJ said: I agree that the appeal should be allowed. The landlord Mr Quennell, finding that he was encumbered by a statutory tenant and not able to reap the benefit of a sale with vacant possession, devised under advice a scheme whereby he might obtain vacant possession. It so happened that the landlord had mortgaged the property to his bank to secure his overdraft and other borrowings, and the mortgage contained a common form prohibition on any lettings without the consent of the mortgagee bank.
17. The lease to the statutory tenant was made by the landlord after the date of the mortgage without the consent of the bank and was therefore in breach of the landlord's covenant contained in the mortgage. That lease was binding on the land-
    lord but void against the bank. On expiry of the lease the tenant became a statutory tenant as against the landlord but not as against the bank.
18. The landlord being unable to get possession from his own statutory tenant approached the bank and asked the bank to bring an action against the tenant for possession. This would then enable the landlord to sell the property with vacant possession. The bank very properly declined to take any such action which was not required to protect their position as mortgagee. The amount of the debt owed by the landlord to the bank was £ 2,500, the rent payable by the tenants exceeded £ 1,000 a year, and the property was worth in the region of £ 30,000 to £ 40,000. The bank in these circumstances rightly refused to do for the landlord that which the landlord could not do for himself.
19. The landlord, again under advice and undaunted, conceived an alternative method of obtaining vacant possession. His wife paid off the debt of £ 2,500 owed to the bank by her husband-landlord; and the bank, as it was bound to do accepted that payment and transferred the mortgage to the wife. The landlord's wife (then the mortgagee) was owed £ 2,500 by her husband; and she, at the request of her husband, brings an action against the tenant for possession claiming that the lease made by her husband is not binding on her as mortgagee and that she can therefore obtain possession and then sell to the benefit of herself and her husband.
20. As I say, the authorities establish that as a matter of law a lease made in breach of covenant by a mortgagor is void against the mortgagee and, I assume for present purposes, against the transferee unless the lease is adopted by the mortgagee. Neither the bank nor the wife adopted the tenancy. The estate, rights and powers of a mortgagee, however, are only vested in a mortgagee to protect his position as a mortgagee and to enable him to obtain repayment. Subject to this, the property belongs in equity to the mortgagor. In the present case it is clear from the facts and the evidence that the mortgagee Mrs Quennell is not bona fide exercising her rights and powers for her own purposes as mortgagee but for the purpose of enabling the landlord mortgagor (her own husband) to repudiate his contractual obligations and defeat the statutory tenancy of the tenant which is binding on the landlord. Mrs Quennell does not even pretend to be acting in her own interests as mortgagee. She brings this action to oblige her husband. In my judgment the court must therefore treat this action, although in form brought by a mortgagee, as an action brought for and on behalf of the landlord mortgagor. The court should deal with it as though the mortgagor landlord were the plaintiff, and on that basis possession will not be ordered.

The appeal was allowed with costs in the Court of Appeal and below. Legal aid taxation ordered for the successful appellants (defendants below).

The electronic text of this judgment was provided by Estates Gazette, whose assistance is gratefully acknowledged.