England and Wales Court of Appeal (Civil Division) Decisions

Case No: B2/2000/2066

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM CENTRAL LONDON COUNTY COURT

HHJ COLIN SMITH QC

Royal Courts of Justice

Strand, London, WC2A 2LL

Thursday 21st December 2000

(Claimants/Respondents)

(Defendant/Appellant)

David Holland (instructed by Speechly Bircham for the Appellants)

David Lonsdale (instructed by Regan & Co for the Respondents)

MR JUSTICE CHARLES:

Introduction

8. It was in my judgment correctly common ground that the approach and principle to be applied, and which was applied by the Judge, is set out in the judgment of Nicholls LJ (as he then was) in Javed v Mohammed Aqil [1991] 1 WLR 1007. This was the judgment of the court. The issue on the appeal in that case is identified at page 1011 D/F of that judgment where Nicholls LJ says:

The issue on this appeal

As already foreshadowed, the sole issue on this appeal is whether the tenant went into occupation as a tenant at will or as a quarterly tenant. This is the sole issue, because the parties have pleaded and presented their cases in this way. Thus, as to the landlord, his particulars of claim assert that at the tenant's request the landlord allowed the tenant into possession of the property as a tenant at will pending the outcome of the negotiations. ---------

As to the tenant, his case, as pleaded and presented at the trial, was that he held a periodic tenancy.

Nicholls LJ then identifies the arguments and what (at pages 1015H and 1018E) he refers to as the underlying principle to be applied in the following terms (at 1011H to 1013D):

Possession plus payment of rent

Much of the argument before us was directed at the legal consequence which follows from proof of possession and payment of rent by reference to a quarterly period. For the tenant it was submitted that proof of those facts raises a presumption in favour of a periodic tenancy which can only be rebutted, and the occupant be held to be a tenant at will, by an express agreement to that effect. Alternatively, this presumption is not rebutted by the fact that the grant of a lease is under discussion, in a case where a substantial sum has been paid over as rent in advance. Mr. Harvey relied on a brief passage in the judgment of Buckley J. in D'Silva v. Lister House Development Ltd. [1971] Ch. 17, 31. For the landlord it was submitted that today there is no presumption in favour of an intention to create a periodic tenancy arising from possession with consent plus periodic payments of rent. At a later stage Mr. Challenger modified this submission so as to make it applicable only in cases where negotiations for the sale or lease of property were taking place. He prayed in aid observations by Ormrod L.J. in Longrigg, Burrough Trounson v. Smith (1979) 251 E.G. 847.

I cannot accept the tenant's submissions. They are contrary both to principle and to authority. I shall consider first the position in principle. A tenancy, or lease, is an interest in land. With exceptions immaterial for present purposes, a tenancy springs from a consensual arrangement between two parties: one person grants to another the right to possession of land for a lesser term than he, the grantor, has in the land. The extent of the right thus granted and accepted depends primarily upon the intention of the parties.

As with other consensually-based arrangements, parties frequently proceed with an arrangement whereby one person takes possession of another's land for payment without having agreed or directed their minds to one or more fundamental aspects of their transaction. In such cases the law, where appropriate, has to step in and fill the gaps in a way which is sensible and reasonable. The law will imply, from what was agreed and all the surrounding circumstances, the terms the parties are to be taken to have intended to apply. Thus if one party permits another to go into possession of his land on payment of a rent of so much per week or month, failing more the inference sensibly and reasonably to be drawn is that the parties intended that there should be a weekly or monthly tenancy. Likewise, if one party permits another to remain in possession after the expiration of his tenancy. But I emphasise the qualification "failing more." Frequently there will be more. Indeed, nowadays there normally will be other material surrounding circumstances. The simple situation is unlikely to arise often, not least because of the extent to which statute has intervened in landlord-tenant relationships. Where there is more than the simple situation, the inference sensibly and reasonably to be drawn will depend upon a fair consideration of all the circumstances, of which the payment of rent on a periodical basis is only one, albeit a very important one. This is so, however large or small may be the amount of the payment.

To this I add one observation, having in mind the facts of the present case. Where parties are negotiating the terms of a proposed lease, and the prospective tenant is let into possession or permitted to remain in possession in advance of, and in anticipation of, terms being agreed, the fact that the parties have not yet agreed terms will be a factor to be taken into account in ascertaining their intention. It will often be a weighty factor. Frequently in such cases a sum called "rent" is paid at once in accordance with the terms of the proposed lease: for example, quarterly in advance. But, depending on all the circumstances, parties are not to be supposed thereby to have agreed that the prospective tenant shall be a quarterly tenant. They cannot sensibly be taken to have agreed that he shall have a periodic tenancy, with all the consequences flowing from that, at a time when they are still not agreed about the terms on which the prospective tenant shall have possession under the proposed lease, and when he has been permitted to go into possession or remain in possession merely as an interim measure in the expectation that all will be regulated and regularised in due course when terms are agreed and a formal lease granted.

Of course, when one party permits another to enter or remain upon his land on payment of a sum of money, and that other has no statutory entitlement to be there, almost inevitably there will be some consensual relationship between them. It may be no more than a licence determinable at any time, or a tenancy at will. But when and so long as such parties are in the throes of negotiating larger terms, caution must be exercised before inferring or imputing to the parties an intention to give to the occupant more than a very limited interest, be it licence or tenancy. Otherwise the court would be in danger of inferring or imputing from conduct, such as payment of rent and the carrying out of repairs, whose explanation lies in the parties' expectation that they will be able to reach agreement on the larger terms, an intention to grant a lesser interest, such as a periodic tenancy, which the parties never had in contemplation at all.

I turn to the authorities -----------------

9. The discussion and analysis of the authorities by Nicholls LJ is to support the underlying principle he identifies and thus that, for example, regard must be had to the particular circumstances of each case and the widespread intervention of statute in the landlord-tenant area that now exists (see 1014G) and caution must be exercised when the parties are in the throes of negotiation (see 1018A).

10. As Nicholls LJ makes clear the principle which he sets out falls to be applied where the parties have not "agreed or directed their minds to one or more fundamental aspects of their transaction" and that in such a situation the law, "where appropriate has to step in and fill the gaps in a way which is sensible and reasonable". The law does this by implying "from what was agreed and all the surrounding circumstances, the terms the parties are taken to have intended to apply".

The Appellant's case

11. Both before us and before the Judge the heart of the Appellant's case was that, as the parties were negotiating subject to contract or lease a new underlease to the Walji brothers, the possession of the Shop Premises and the payment of rent by the Walji partnership were based on, or referable to, those negotiations and this had the consequence that the law should not imply the creation of a periodic tenancy. It was argued that the differences between the circumstances in this case to those that existed in Javad v Mohammed Aqil did not found a different result to the conclusion in the Javad case that no periodic tenant was created.

12. Unsurprisingly counsel for the Appellant referred us in particular to the need for caution when parties are in negotiation before inferring or imputing to the parties an intention to give the occupant more than a limited interest or one that gives him statutory protection. I bear that need for caution well in mind.

13. Counsel for the Appellant also referred us to a short passage from the judgment of Ralph Gibson LJ in JT Development v Quinn & Another [1991] 2 EGLR 257 at 260M where he says that:

It is not open to the court to impose an agreement because it would have been reasonable for the parties to agree or because, if the importance of an immediate agreement had been more clearly understood at the time, the parties might well or probably have so agreed.

In my judgment that passage is not of assistance here because it is directed to the issue in that case whether the parties had orally entered into an immediately binding agreement for a lease (which it was said was enforceable by reason of acts of part performance) and there is no such allegation in this case. In other words that comment is not directed to the issue that exists here and thus to what the law should imply or impute applying the approach and principle enunciated by Nicholls LJ in Javad v Mohammed Aqil. In such a situation the law has to fill gaps in what was agreed in a way that is sensible and reasonable having regard to what was actually agreed and all the surrounding circumstances.

14. Additionally, whilst not disputing the findings of fact made by the Judge, counsel for the Appellant referred us to passages from the transcript of evidence and some of the documents to put the findings in their context and to support his submission that, on a proper analysis and application of the findings made by the Judge in the context of the undisputed background (including the documents), the Judge was wrong to conclude that a periodic tenancy had been created. In my judgment this exercise which, as counsel accepted, inevitably involved the isolation of particular passages which should be read in context did not advance, or detract from, the Appellant's case.

The conclusion of the Judge that the Claimants have a periodic tenancy

15. In my judgment the conclusion reached by the Judge was correct. Thus in my judgment the inference sensibly and reasonably to be drawn from (a) what was expressly agreed, and (b) all the surrounding circumstances was that the Claimants have a quarterly periodic tenancy of the Shop Premises.

16. What was expressly agreed was that a new underlease for a seven year term at a rent of £26,000 increasing to £28,000 if and when air conditioning was installed at the premises and otherwise on the same terms as the Underlease would be granted to the Walji brothers. This was not an immediately binding agreement and was subject to contract or lease. It was an agreement in principle or a "gentleman's agreement". However after it the parties did not continue to negotiate and were not in the throes of negotiation. Indeed it was not until May 1997 that solicitors for Romula Ltd wrote about the grant of the new underlease. In the meantime the Walji partnership had been paying the rent (at the rate of £26,000 per annum which was the rate being paid immediately prior to May 1995) and had been in occupation.

17. At the time that agreement in principle was reached Romula Ltd were informed that Fads Limited (the company to whom the Underlease had been granted) no longer existed. It was therefore known to Romula Ltd that the Walji brothers were in, and were going to remain in, occupation and the agreement in principle was that the new underlease would be granted to them.

18. Additionally at and about the time that agreement in principle was reached it is apparent that neither of the parties to it gave thought to, or took advice on, the question what effect, if any, the fact that Fads Limited no longer existed had in law. As I have said before the Judge it was common ground that the Underlease had vested in the Crown bona vacantia. Neither this, nor the possibility that Fads Limited held the Underlease as a trustee with the consequence that a new trustee could be appointed and a counter notice for a new tenancy could be served under the 1954 Act (see sections 26 and 41 thereof) were considered.

19. The subjective positions of the parties to the agreement in principle were that Mr Walji thought that he and his brothers were the tenants and Mr Sclare did not turn his mind to the question whether the Walji brothers became the tenants as a result of the meeting in May 1995 but when asked about it later he was not clear whether they were legally the tenants of Romula Ltd or not. In evidence Mr Sclare added that he was clear that in a moral sense they were the tenants.

20. However in May 1995 both Mr Walji and Mr Sclare were clear that Fads Limited no longer existed and that the Walji brothers were in occupation of the Shop Premises. In my judgment it was inherent in their agreement in principle and flows from the circumstances in which it was reached that Romula Limited agreed, or accepted, that the Walji brothers would remain in occupation of the Shop Premises and would pay the agreed rent as the Judge puts it as "a non limited entity". It was accepted and found that the rent demands continued to be sent out in the name of the company as a matter or routine.

21. The crucial gap in the agreement reached was therefore as to the legal nature of the occupation by the Walji brothers of the Shop Premises pending the grant of the new underlease.

22. Other circumstances were that:

(a) the Walji partnership had been in occupation of the Shop Premises trading as Fads Boutique throughout the term of the Underlease and it seems for a short period before it was granted,

(b) the Walji partnership were therefore not let into possession in contemplation of, or as a result of, the agreement in principle reached in May 1995 or negotiations based thereon, they simply remained in occupation, and

(c) the Walji partnership could easily have found alternative premises in the "tenants' market" that existed in May 1995.

23. Although Mr Sclare and Mr Walji were aware that the Underlease still had a year to run, the acceptance by Mr Sclare of the points (i) that Fads Limited no longer existed, and (ii) that the Walji brothers were in occupation, together with the lack of thought concerning the effect of Fads Limited ceasing to exist, have the consequences that as a result of, or immediately following, the agreement reached in principle in May 1995 Romula Limited did not think (and it was not asserted that they thought) either:

(a) that the company (Fads Limited) occupied the Shop Premises or that the Walji brothers occupied them through or by virtue of the Underlease to Fads Limited, or

(b) that the occupation of the Walji brothers was, or at the expiration of the term of Underlease would be, by virtue of protection given by the 1954 Act in relation to Underlease.

The finding of the Judge that Mr Sclare did not turn his mind to the question whether the Walji brothers were tenants and the lack of any action from either side when the term of the Underlease expired in March 1996 also support this view.

24. In my judgment correctly it was not argued before us, as it had been before the Judge, that the point that the term of the Underlease did not expire until March 1996 was significant. In my judgment the reason why it is not significant is that the parties did not turn their minds to the effect of Fads Limited ceasing to exist and proceeded in the knowledge and on the basis that the Walji brothers were in occupation of the Shop Premises. Also neither side took any action on the expiry of the Underlease. In my judgment it follows that arguments that in law a periodic tenancy to the Walji brothers would be a concurrent tenancy until March 1996 do not found a conclusion that it would not be sensible and reasonable for the law to fill the gap in the agreement reached between the parties by implying a periodic tenancy from what they did agree and all the surrounding circumstances.

25. The fact that, in May 1997 (about two years after the agreement in principle was reached) in the correspondence and documents referred to by the Judge and in paragraphs (15) to (18) of the Background set out above (where parts of them are set out), reference is made to the Underlease as the basis for the occupation of the Shop Premises, to holding over and to the tenants does not in my judgment affect the points made in paragraphs 23 and 24 above.

26. In my judgment the comments made by the Judge in the passage I have quoted from his judgment on the effect of this correspondence and pre contract enquiries are correct. Further in my judgment this documentation demonstrates that, as was pointed out by the Judge, Mr Sclare (and therefore Romula Limited) were uncertain as to the legal position relating to the occupation by the Walji brothers of the Shop Premises. However as the Judge also points out that documentation confirms that they knew that it was the Walji brothers and not the company (Fads Limited) that were in occupation and paying the rent. Further in my judgment the references in such documents to the Underlease as the basis for the occupation of the Shop Premises, to "holding over" and to the "tenants" indicate that Romula Limited were not, and had not been, concerned to take steps to ensure that the Walji brothers did not obtain any statutory protection.

27. Like the Judge in my judgment the totality of the agreement reached between Mr Walji and Romula Limited and the above circumstances have the consequence that this is not a case like Javad Mohammed v Aqil where a person was let into occupation in anticipation of terms being agreed. In my judgment the position is closer, although not wholly analogous, to a tenant without statutory protection holding over at the end of a lease and paying rent on a quarterly basis.

28. In short in my judgment the points that (i) the Walji brothers had been in occupation and had been paying the rent for some time, (ii) in May 1995 Romula Limited were told that Fads limited (the tenant under the Underlease) no longer existed, (iii) with that knowledge and on that basis Romula Limited permitted the Walji brothers to remain in occupation and accepted rent from them, (iv) the terms of the proposed new underlease to the Walji brothers were agreed subject to contract or lease, (v) there were no continuing negotiations and neither side pressed for the grant of the lease and (vi) there is no indication that Romula Limited were concerned (as would often be the case where a landlord lets someone into possession during negotiations for a lease) that the Walji brothers should not be tenants with statutory protection, lead to and support the conclusion reached by the Judge that, applying the underlying principle confirmed and identified in Javad v Mohammed Aqil, the Claimants have a periodic tenancy of the Shop Premises.

The Respondents' Notice

29. The Respondents argued before the Judge that if their primary contention that they had a periodic tenancy was found to be wrong the Appellant was nonetheless estopped from asserting that they were not tenants. The Judge rejected this alternative argument and by their notice the Respondents assert that he was wrong to do so. In view of our conclusion on the appeal this point was not argued and I express no view on it.

Conclusion

30. In my judgment this appeal should be dismissed.

LORD JUSTICE MANCE:

31. I agree

LORD JUSTICE ALDOUS:

32. I also agree.