England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE BRIGHTON COUNTY COURT
HIS HONOUR JUDGE KENNEDY QC

		Royal Courts of Justice Strand, London, WC2A 2LL Tuesday 10th April 2001

Lady Justice Arden:

Introduction

1. This is an appeal from the order dated 18 August 2000 of His Honour Judge Kennedy QC sitting in the Brighton County Court. By this order the Judge granted possession to the claimant Bankway Properties Limited ("Bankway") of Flat 1, 54/55 Marine Parade, Brighton ("the property") and gave judgment for outstanding arrears of rent in the sum of £12,261.25. The Judge also gave the defendants permission to appeal and certified the case as one suitable to be transferred to the Court of Appeal under CPR 52.14(a).

2. The facts as found by the Judge are as follows. By an agreement in writing dated 15 February 1994 ("the agreement") and expressed to be an assured tenancy agreement made pursuant to the Housing Act 1988 ("the Act of 1988"), Artesian Competitor plc ("Artesian") granted to Mr David Penfold-Dunsford and Mr Bryan Charles Leech (the appellants) a tenancy of the property from 15 February 1994 to 16 February 1995 at an initial rent of £4,680.00 per annum payable by equal monthly instalments of £390 per month. The rent payable under the agreement was subject to increase in accordance with clause 8(b) on "the review dates" defined as 16 February 1995 and every 12 months thereafter. Clause 8(b) provided as follows:-

   ". . . (b) The rent which shall be payable under this Agreement shall be:-

   (i) Until the first review date the initial rent

   (ii) During each successive review period until (and inclusive of) the day prior to the last review date a rent (the new rent) equal to the greater of:-

   i. The rent payable immediately prior to the relevant review date plus 10% thereof or

   ii The rent payable immediately prior to the relevant review date plus the percentage increase in the Retail Price Index

   a. In the case of the first review date between the Base Figure and the figure for the month preceding the first review date and

   b. In the case of the second and subsequent reviews between the figure for the month preceding the previous review date and the figure for the month preceding the relevant review date

   iii The then current open market rent for the Property to be agreed between the parties hereto or in the absence of agreement to be assessed by an independent surveyor appointed by the Landlord such surveyor acting as an expert and not as an arbitrator and whose decision as to the amount of the current open market rent for the property shall be final

   (iii) From the last Review Date the sum of twenty five thousand pounds per annum"

   The last review date was defined as 11 February 1996.

3. The Judge found that at the time of the grant of the tenancy the appellants were in receipt of housing benefit to the knowledge of the landlord who knew and intended that the rent would be paid by way of housing benefit. In addition he found in effect that the annual rent of £25,000 substantially exceeded what any tenant for this property could hope to pay.

4. The Judge made the following findings as to the circumstances in which the appellants signed the agreement. They moved into the property on 15 February 1994. They received a letter of that date from the landlord in (so far as material) the following terms:

   "Re: 54/55 Marine Parade, Brighton - Flat 1

   The enclosed Tenancy Agreement sets out the terms upon which Artesian Competitor plc is prepared to let the above property to you. It is an important document which imposes upon both parties certain contractual and legally enforceable obligations. It is therefore most important that you fully appreciate the terms of the Tenancy Agreement and, if you have any doubts, that you take legal advice BEFORE signing the Agreement.

   In particular, we wish to draw your attention to clause 8 of the Agreement pursuant to which the rent will be increased and pursuant to which you may terminate the Tenancy by not less than one month's written notice, such notice not to expire earlier than [15/8/1994].

   Finally, we would ask you to note that it is a term of the Tenancy Agreement, and a condition of the Housing Act 1988, that a tenant occupying a dwelling house under an assured tenancy, occupies the property as his/her only or principal home, and that the property is not used for business purposes. . . ."

   The letter did not, however, enclose the agreement. What happened was that the agent brought the agreement to the appellants at the property and invited them to read it. The Judge accepted that Mr Penfold-Dunsford did not read the lease properly. Nobody on behalf of the landlord or managing agents ever explained the rent provisions in the agreement. By implication the Judge also accepted that Mr Leech did not read the agreement before he signed it. (He also explains in his witness statement that he has a reading impairment).

5. By letter dated 14 January 1997 addressed to the appellants, an associated company on behalf of the landlord offered to vary the agreement. The terms which it offered were that

   (1) the review date should be deferred indefinitely;

   (2) the landlord should be entitled to specify a new review date but had to give at least five weeks' written notice ("a review notice");

   (3) on the new review date the rent was to increase to £25,000 per annum;

   (4) when the landlord gave a review notice specifying the new review date, the appellants were to be able to give 14 days' written notice terminating the agreement;

   (5) the landlord was to be entitled to a serve a review notice at any time it thought fit.

   These terms were accepted by the appellants who signed a copy of the letter on 17 January 1997.

6. Mr Penford-Dunsford read the letter dated 14 January 1997, but did not note that rent was to increase to £25,000 per year. (He explains in his witness statement that he had a serious heart attack in 1992 and would have found it very onerous to have read the agreement and the letter of 14 January 1997). By implication the Judge also accepted that Mr Leech did not notice the proposal that rent should be increased to £25,000 per annum.

7. In June 1988 the landlord changed to Bankway.

   The Judgment of HHJ Kennedy QC

8. The Judge referred to A G Securities v Vaughan [1990] AC 417, (to which I refer below under the name of Antoniades v Villiers, the conjoined appeal, in which the tenants were successful) but distinguished that authority on the grounds that in that case the landlord was purporting to do two different and inconsistent things. The Judge also rejected a submission based on Interphoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433. In that case there was an onerous and unusual condition which had not been drawn to the other party's attention and therefore did not become part of the contract. The Judge held that that case did not assist because the appellants were given the contract to read, were asked to sign and did sign it. The Judge also distinguished White v Michael Callan & Partners, Times Law Reports, November 15 1993, page 572 as that was a case where it was alleged that the defendants intended to deceive and so to defraud the plaintiffs. (That case has not been cited on this appeal).

9. The Judge held that the Unfair Terms in Consumer Contracts Regulations 1994 were inapplicable because the agreement was entered into before 1 July 1995, the commencement date for the Regulations. He did not think that the 1997 letter was a contract but at most a waiver, and accordingly that letter was outside the Regulations.

10. The Judge expressed the view that if it had been pointed out to the appellants that they had two clear years under the original rent or a modest increase of it, he expected that they might have been prepared to say that they would take the two years and their chances thereafter. But this was surmise, not a finding. The Judge accepted that the appellants would have been desperate to obtain accommodation.

11. The Judge also rejected the submission by counsel (Mr Knafler) that clause 8(b)(iii) was an attempt to contract out of the Act of 1988, and therefore invalid. The Judge held that the landlords were perfectly entitled to offer a contract which may have had the effect of ousting the provisions of the Act of 1988. The contract would not be enforceable if there was a misrepresentation or if the landlord made it so complicated that nobody could understand what the contract provided, or if the landlord indicated that clause 8(b)(iii) would not be enforced. However the Judge held that none of those possibilities applied in this case. "It was a perfectly clear agreement deliberately designed to have the potential for allowing the landlord to acquire possession under the Housing Act". The Judge added in the final paragraph of his judgment:

    "The only problem is that it is by a device, that is by arrears of rent which nobody ever expected to pay. That is the problem. It is a device. I do not for a moment say that there was anything devious or dishonest or concealed about it. It is a device. The real problem that I have is that if I find that these tenants recognised that there was a device and went along with it, then they would have a difficult job to persuade this court to help them. I do not see why they should be in any better position because they chose not to read it properly. I think that is a permissible device. That is the word I am going to use."

    The statutory framework

12. The assured tenancy regime is found at Chapters I and II of the Act of 1988. At the relevant time there were two types of assured tenancies: assured shorthold tenancies (in Chapter II), which did not have security of tenure, and assured tenancies (in Chapter I) which did have security of tenure.

13. To qualify as an assured tenancy, a letting must be of a dwelling let as a separate dwelling and must satisfy section 1 of the Act of 1988, and not be excluded by Schedule 1. Schedule 1, paragraph 2(1) excludes tenancies granted after the 1 April 1990 at an annual rent exceeding £25,000.

14. The landlord cannot obtain possession save by obtaining an order of the Court, which will only be made if the landlord proves the existence of certain prescribed grounds, found in Schedule 2 (divided into mandatory and discretionary grounds) (section 5 and 7 of the Act of 1988). Rent arrears exceeding two months constitute a mandatory ground (Ground 8) and the Court has no discretion in such a case.

15. Section 6 provides that when a fixed term assured tenancy ends, a statutory assured periodic tenancy arises, on terms analogous to those of the former fixed term tenancy and with the same security of tenure as any other periodic tenancy.

16. There is statutory machinery enabling landlords to increase the rent payable, subject to review by the rent assessment committee (sections 13 and 14). However this machinery has no application to contractual rent or rent review clauses. In other words, if the landlord and the tenant have agreed on the rent or increased rent payable on review, or a procedure for review of the rent, the tenant cannot object to the rent or refer it to the rent assessment committee.

    By contrast, assured shorthold tenancies have no security of tenure. Although the landlord must comply with statutory machinery and obtain a possession order (see sections 19A to21) and there is a form of rent control (see section 22), the landlord can recover possession by giving notice without having to prove that (for instance) there are arrears of rent (section 21).

    Application to file new evidence

17. On the face of it, it may see odd that Artesian should have wanted to grant an assured tenancy as opposed to an assured shorthold tenancy, which does not confer security of tenure. Mr Knafler wishes to submit that in this case Artesian had a commercial motive to do so because it was a business expansion scheme company which would obtain benefits if it entered into assured tenancies: see section 50 of the Finance Act 1988. At trial, Mr Knafler sought to probe this matter in his cross-examination of the only witness called by Bankway, Miss Gold. She gave evidence to the effect that she did not know what the position was and the respondent's representatives were unable to clarify the position before the trial started.

18. On this appeal, Mr Knafler applies for an order admitting in evidence the published audited accounts for Artesian for the year ended 31 March 1995. The directors' report annexed to those accounts states that Artesian's "principal activity" from 1991 was "the renting of residential property under the Assured Tenancy provisions of the Housing Act 1988 and under the Business Expansion Scheme."

19. In the result, for my part I do not consider that this information assists greatly in the disposition of this appeal. All the accounts show is that Artesian may have entered into the agreement as an assured tenancy to gain benefits as a business expansion scheme company. It is already clear from the agreement and the letter dated 15 February 1994 that Artesian intended to grant an assured tenancy. Its motive for doing so is not, as I see it, relevant. Moreover I am concerned that costs should not be incurred by attempts to produce new evidence on appeal. On the other hand, in this particular case Artesian (having disposed of the property to Bankway) is not a party to the proceedings. Had it remained the landlord, the information would have been available at the trial. In addition Miss Padley very fairly concedes that it is possible that Artesian may have been acting in pursuance of a business expansion scheme and did not seek to adduce contrary evidence on behalf of Bankway. We are only concerned with one document and in the judgment of Pill LJ greater significance attaches to it than is necessary for my analysis. In the circumstances, I am satisfied that it would be in accordance with the overriding objective to admit these accounts in evidence on this appeal.

    Submissions

    Appellants' submissions

20. The principal submission of Mr Knafler for the appellants is based on Antoniades v Villiers [1990] 1 AC 417. In that case, a landlord purported to give a licence to each of two parties who wished to share a flat in a house. By clause 16 of the agreements between the parties, the landlord reserved the right to cause third parties to occupy the premises as well. The landlord contended that, since exclusive possession of the premises was not given to either of the parties, there was no tenancy and the protection of the Rent Acts did not apply. The House of Lords held that the two agreements had to be read together. The House of Lords held further that parties could not contract out of the Rent Acts, that clause 16 did not reflect the true position and that accordingly clause 16 should be struck out.

21. Mr Knafler particularly relies on the following passage from the speech of Lord Templeman:-

    "Where a landlord creates a tenancy of a flat and reserves the right to go into exclusive occupation at any time of the whole or part of the flat with or without notice, that reservation is inconsistent with the provisions of the Rent Acts and cannot be enforced without an order of the court under section 98. Where a landlord creates a tenancy of a flat and reserves the right to go into occupation of the whole or part of the flat with or without notice, jointly with the existing tenants, that reservation also is inconsistent with the provisions of the Acts. Were it otherwise every tenancy agreement would be labelled a licence and would contract out of the Rent Acts by reserving power to the landlord to share possession with the tenant at any time after the commencement of the term.

    Clause 16 is a reservation to Mr Antoniades of the right to go into occupation or to nominate others to enjoy occupation of the whole of the flat jointly with Mr Villiers and Miss Bridger. Until that power is exercised Mr Villiers and Miss Bridger are jointly in exclusive occupation of the whole flat making periodical payments and they are therefore tenants. The Rent Acts prevents the exercise of a power which would destroy the tenancy of Mr Villiers and Miss Bridger and would deprive them of the exclusive occupation of the flat which they are now enjoying. Clause 16 is inconsistent with the provisions of the Rent Acts.

    There is separate and alternative reason why clause 16 must be ignored. Clause 16 was not a genuine reservation to Mr Antoniades of the power to share the flat and a power to authorise other persons to share the flat. Mr Antoniades did not genuinely intend to exercise the powers save possibly to bring pressure to bear to obtain possession. Clause 16 was only intended to deprive Mr Villiers and Miss Bridger of the protection of the Rent Acts. Mr Villiers and Miss Bridger had no choice in the matter." (page 462).

22. Mr Knafler emphasises the sentence that "Mr Antoniades did not genuinely intend to exercise the powers save possibly to bring pressure to bear to obtain possession". He submits this applies to any term which it is impossible for the tenant to perform.

23. In Antoniades v Villiers, Lord Templeman refers to a transaction whose only object is to disguise the grant of a tenancy and to evade the Rent Acts as a "pretence" rather than a sham. Mr Knafler submits that a pretence is a variant of the type of sham considered in Snook v West Riding Investments Ltd [1967] 2 QB 786, where Diplock LJ held that both parties must have a common intention that the sham document is not to create the rights and obligations which it appears to create.

24. Mr Knafler relies also on the following passage from the speech of Lord Bridge:-

    "Here the artificiality was in the pretence that two contemporaneous and identical agreements entered into by a man and a woman who were going to live together in a one-bedroom flat and share a double bed created rights and obligations which were several rather than joint. As to the nature of those rights and obligations, the provisions of the joint agreement purporting to retain the right in the respondent to share the occupation of the flat with the young couple himself or to introduce an indefinite number of third parties to do so could be seen, in the relevant circumstances, to be repugnant to the true purpose of the agreement. No one could have supposed that those provisions were ever intended to be acted on. They were introduced into the agreement for no other purpose than as an attempt to disguise the true character of the agreement which it was hoped would deceive the court and prevent the appellants enjoying the protection of the Rent Acts. As your Lordships all agree, the attempt fails." (page 454).

25. The other members of the House, Lord Ackner (at 466), Lord Oliver (at 469 to 470) and Lord Jauncey (at 476 to 477) came to the same conclusion as Lord Templeman and Lord Bridge.

26. Mr Knafler submits that the concepts of 'pretence' and inconsistency are closely connected. In this case, there was no literal contracting out of the Act of 1988 but in effect the landlord wished to recover possession without being hindered by the Act of 1988. Clause 8(b)(iii) was thus also inconsistent with the overall purpose of the agreement which was to confer an assured tenancy. The Act of 1988 does not provide that an assured tenancy may be entered into for a fixed period: it provides for indefinite security of tenure.

27. Mr Knafler submits that clause 8(b)(iii) is a pretence if it was not intended to create a real legal liability which was to be performed in the real world. Accordingly, for clause 8(b)(iii) to be enforceable, the landlord must know that the tenants could pay. Where there is no genuine belief that the term would be performed in the real world, it is just a device without commercial purpose. Mr Knafler submits that if the provision for the increase of rent to £25,000 per annum is lawful, there are few limits to what can be imposed by contract. There could be a term that the tenant decorates the premises with gold leaf or builds a swimming pool in the basement. Mr Knafler submits that if clause 8(b)(iii) is not enforceable, the landlord cannot increase the rent except in accordance with section 13 of the Act of 1988. In this case the rent arrears flow entirely from the increase in rent.

28. Mr Knafler's alternative submission was that Artesian's letter dated 15 February 1994 was misleading because it did not say that the rent was to go up to £25,000. By the time the appellants saw the agreement they had already moved into the premises. The Judge found that the term was unreasonable. Mr Knafler submits that in those circumstances the term should have been brought to the appellants' attention fairly and reasonably and that the landlord did not do so.

29. In support of this submission, Mr Knafler relies on Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, above. In this case, the plaintiffs sought to recover a daily fee chargeable under their standard conditions for transparencies delivered to a customer on sale or return. The defendants knew that there were conditions on the delivery note but did not read them. The Court of Appeal held the condition in question was particularly onerous and unusual and it was not enforceable unless it had been fairly and reasonably brought to the attention of the other party. Mr Knafler submits that this principle was applied to contracts which a party had actually signed in Jaques v Lloyd D George [1968] 1 WLR 625 at 630 per Denning LJ, Laceys Footwear (Wholesale) Ltd v Bowler International Freight Ltd [1977] 2 Lloyd's Law Rep 369 and in Ocean Chemical Transport Inc v Exnor Craggs Ltd, 15 December 1999, Court of Appeal, unreported, per Evans LJ (obiter), with whom Henry and Waller LJJ agreed. Mr Knafler submitted that it was essential to modern life that no trader should not go beyond what it is reasonable for him to insert in standard agreements or conditions.

30. Mr Knafler submits that the right approach to an onerous condition is to ask whether the party seeking to enforce it has discharged the burden of showing that he brought the onerous term to the attention of the other party.

31. Mr Knafler did not pursue arguments based on the Unfair Terms in Consumer Contracts Regulations, and the European Convention on Human Rights.

    Respondent's submissions

32. Miss Padley for the respondent submits that this was not a case of contracting out of the Act of 1988. The appellants here have the protection of an assured tenancy. She distinguishes Street v Mountford [1985] 1 AC 809. In that case an agreement which was described as a licence was held to be a tenancy. However it is clear that parties can in an appropriate case enter into a licence properly so called (see Street v Mountford, above, at 819). Miss Padley submits that the parties are not limited in their freedom to agree rents. Section 13 of the Act of 1988 is excluded where parties have contracted for a particular rent. Because clause 8(b)(iii) limited the rent to £25,000, the relevant provisions of the Act of 1988 applied. Assured tenancies could cease to be such if the rent went above £25,000, or if for some other reason they cease to qualify under the Act of 1988.

33. Miss Padley submits that clause 8(b)(iii) was not a pretence. This was not a lease pretending to be licence. It was not the intention of both parties to enter into a transaction to mislead a third party, as required by the test of 'sham' to be found in Snook. An example of a lease which was a sham on this basis and of no effect was the lease in Bhopal v Walia (1999) L&TR 460, where the landlord and tenant (acting at the landlord's request) entered into a written tenancy agreement which had been backdated and falsely showed the rent to be more than it in fact was. The reason why the agreement was executed was to enable the landlord to show it to his bank. By contrast the agreement in this case was a genuine agreement.

34. Miss Padley also relies on Hilton v Plustitle Ltd [1989] 1 WLR 149, in which the landlord and 'tenant' specifically agreed that the tenancy should be granted to a limited company formed by the tenant, which it was legitimate for them to do so as to avoid the Rent Acts. The landlord and tenant had agreed that the tenancy should be granted to a limited company and the tenant had taken legal advice. The Court of Appeal held that in these circumstances the individual who had formed the company could not be a statutory tenant. It was not a sham in the Snook sense or an unlawful contracting out of the Rent Acts. On Miss Padley's submission, in order for the appellants to succeed in this case, it has to be shown to be a sham in the Snook sense. It is not possible for the appellants to do this on the findings made by the Judge.

35. As respects Antoniades v Villiers, Miss Padley relied on a holding by Lord Templeman that clause 16 if genuine was a reservation by the landlord of a power at some time during the currency of the tenancy to share occupation with a tenant (page 461). So here the landlord intended clause 8(b)(iii) to be legally binding and accordingly the concept of pretence had no application. The landlord intended to rely on clause 8(b)(iii) to recover possession of the premises or to induce the tenant to leave.

36. Miss Padley also relied on Belvedere Court Ltd v Frogmore Ltd [1997] QB 858, where the Court of Appeal upheld the trial judge's finding that leases entered into by landlords with an associated company were not a sham even though they were artificial devices designed to circumvent the effect of the Landlord and Tenant Act 1987, which gave tenants the right to acquire the reversion.

37. There is nothing in the Act of 1988 to restrict the rent which the parties could agree. Moreover, the tenants were free to enter into the lease and were free (on giving 14 days' notice) to leave the premises.

38. Miss Padley accepts that clause 8(b)(iii) was curiously worded. It referred to "successive" anniversaries of the rent review date when only one was anticipated.

39. Miss Padley submits that the landlord had found a way through the Act of 1988. It was a matter for Parliament to alter the law if it wished to prevent what landlords do: see Jones v Wrotham Park Estates [1980] AC 76. The "device" adopted by the landlord was therefore permissible.

40. As regards the second issue, Miss Padley submits that a person who signed a contract was bound whether he had read it or not: see L'Estrange v Graucob [1934] KB 394. The correct starting point is that a signed contract is binding. The only qualifications were where the Unfair Terms in Consumer Contracts Regulations applied (which they did not in instance case) or in ticket cases. In Jaques v Lloyd D George, there was a clear misrepresentation which was not present in this case. The decision in Lacey's Footwear was arrived at by the majority from a different perspective. In this case the tenant had been invited to read the rent review clause. The decision in Ocean did not support the argument that clauses in a tenancy agreement could be held unenforceable. In this instance the case could not be brought within the decision in Interfoto.

    Conclusions

    Was clause 8(b)(iii) effectively incorporated in the agreement?

41. I take first Mr Knafler's alternative submission and the question whether the appellants are bound by clause 8(b)(iii). The Interfoto case shows that a condition may not be enforceable or validly incorporated into a contract where the condition is onerous. However the starting point here must be that, since the appellants signed the agreement containing clause 8(b)(iii), they are bound by it. It is not in my judgment clear that the Interfoto doctrine applies to a contract which a party signs, but I need not express a view on that point because, in my judgment, while clause 8(b)(iii) was an onerous and unusual clause, Miss Padley is right in her submission that the landlord did all that it needed to do when it drew the appellants' attention to the rent review clause in the letter dated 15 February 1994. If they did not like the clause when they subsequently saw it, it was open to them to refuse to sign the agreement.

    Is clause 8(b)(iii) of the agreement enforceable?

42. I now turn to Mr Knafler's main submission. A special feature of this case is that the appellants did not specifically agree clause 8(b)(iii). This means that there was no common intention on the part of the appellants and Artesian to create some other obligation for the purpose of misleading third parties, who might include the court. Accordingly clause 8(b)(iii) cannot be a sham as that expression is normally understood (see Snook v London and West Riding Investments Ltd, above). In that context, a test of common subjective intention applies. In addition, the fact that clause 8(b)(iii) was not negotiated means that the appellants cannot say that they were misled when they signed the tenancy agreement. Nor do they say that they entered into the agreement under some mistake.

43. However, as Mr Knafler submits, there is a variant on the usual definition of sham where a question arises whether an agreement is not intended to have the effect stated but is intended to evade the operation of a statute out of which the parties cannot contract. This doctrine has been developed and applied by the courts not only in the context of the Rent Acts (see Antoniades v Villiers, above) but also in the context of agricultural tenancies (Johnson v Moreton [1980] AC 37 and Gisburne v Burton [1989] 1 QB 391), the question whether a hire purchase agreement is in fact an unregistered bill of sale (see for example Re Watson (1890) 25 QB 27), the question whether a sale and repurchase agreement is an unregistered company charge (see for example Re George Inglefield Ltd [1933] Ch.1), the question whether an absolute conveyance is in fact a mortgage (see for example Re Duke of Marlborough [1894] 2Ch 133), the question whether a transaction is in substance an unauthorised reduction of share capital contrary to the Companies Acts (see for example Aveling Barford Ltd v Perion Ltd [1989] BCLC 626) and the question whether a sum payable under a contract is a penalty (see for example Bridge v Campbell Discount [1962] AC 600). In these types of situations, as Lord Ackner put it in Antoniades v Villiers, above at 466, the question is: what was the substance and reality of the transaction entered into by the parties? The Court is not bound by the language which the parties have used. It may for instance conclude, when it examines the substance of the transaction, that what the parties have in their agreement called a sale and repurchase of book debts is in truth a registerable charge over them.

44. For this purpose, the court can look at all the relevant circumstances, including the subsequent conduct of the parties (see per Lord Jauncey in Antoniades v Villiers, above, at 475). There does not have to be a common intention to enter into other obligations or to deceive a third party: in Antoniades v Villiers for instance, the "licensees" acknowledged in writing that their agreements with the landlord did not have the protection of the Rent Acts (see Antoniades v Villiers, above, at 457-8). Lord Templeman points out in Antoniades v Villiers that the earlier case of Street v Mountford, above, had established that "where the language of licence contradicts the reality of the lease, the facts must prevail. The facts must prevail over language in order that parties may not contract out of the Rent Acts" (at 463). Or, as Lord Esher MR put it in Re Watson, above, "the Court ought never to let a sham document, drawn up for the purpose of evading an Act of Parliament prevent it from getting at the real truth of the matter".

45. Miss Padley invokes the doctrine of freedom of contract. But it is well-established that legislation has interfered with that doctrine in the field of landlord and tenant. In Johnson v Moreton, above, Lord Simon of Glaisdale said:

    "There was one economic and social relationship where it was claimed that there were palpably lacking the prerequisites for the beneficent operation of laisser-faire - that of landlord and tenant. The market was limited and sluggish: the supply of land could not expand immediately and flexibly in response to demand, and even humble dwellings took more time to erect that those in want of them could spare. Generally, a man became a tenant rather than an owner-occupier because his circumstances compelled him to live hand-to-mouth; the landlord's purse was generally longer and his command of knowledge and counsel far greater than the tenant's. In short, it was held, the constriction of the market and the inequality of bargaining power enabled the landlord to dictate contractual terms which did not necessarily operate to the general benefit of society. It was to counteract this descried constriction of the market and to redress this descried inequality of bargaining power that the law - specifically, in the shape of legislation - came to intervene repeatedly to modify freedom of contract between landlord and tenant. Since Maine the movement of many "progressive" societies has been reversed. The holding of a statutory or a protected tenancy is rather a status than a pure creature of contract." (page 66-67).

46. That brings me to the question whether clause 8(b)(iii) is permitted by the Act of 1988. To answer this question, it is necessary to examine the Act of 1988 and, if it is found to impose a mandatory and comprehensive scheme, to consider whether clause 8(b)(iii) is an attempt in substance to evade this scheme.

47. The material provisions of the Act are summarised above. The material provisions of sections 5 to 7 in the fasciculus of sections headed "Security of Tenure" are expressed in mandatory terms. Section 5(1) contains a prohibition on termination by the landlord by notice:

    "5. (1) An assured tenancy cannot be brought to an end by the landlord except by obtaining an order of the court in accordance with the following provisions of this Chapter or Chapter II below or, in the case of a fixed term tenancy which contains power for the landlord to determine the tenancy in certain circumstances, by the exercise of that power and, accordingly, the service by the landlord of a notice to quit shall be of no effect in relation to a periodic assured tenancy."

    Section 7 then confers added protection on the tenant by stipulating the circumstances in which the court can make an order for possession:

    "7(1) The court shall not make an order for possession of a dwelling-house let on an assured tenancy except on one or more of the grounds set out in Schedule 2 to this Act; but nothing in this Part of this Act relates to proceedings for possession of such a dwelling-house which are brought by a mortgagee, within the meaning of the Law of Property Act 1925, who has lent money on the security of the assured tenancy.

    (2) The following provisions of this section have effect, subject to section 8 below, in relation to proceedings for the recovery of possession of a dwelling-house let on an assured tenancy.

    (3) If the court is satisfied that any of the grounds in part 1 of Schedule 2 to this Act is established then, subject to [subsection (5A) and (6)] below, the court shall make an order for possession.

    (4) If the court is satisfied that any of the grounds in Part II of Schedule 2 to this Act is established, then subject to subsection (5A) and (6) below, the court may make an order for possession if it considers it reasonable to do so.

    (5) Part III of Schedule 2 to this Act shall have effect for supplementing Ground 9 in that Schedule and Part IV of that Schedule shall have effect in relation to notices giving as mentioned in Grounds 1 to 5 of that Schedule. . . "

48. Section 8 provides further protection to the tenant by stipulating the form of the notice of proceedings for possession, and section 9 gives the court power to adjourn proceedings for possession of a dwelling-house let on an assured tenancy, save where mandatory grounds for possession exist. Where an Act of Parliament , like the Act of 1988, confers protection on a person whose bargaining position may be disadvantaged when compared with that of the counterparty, it may be the duty of the Court in certain circumstances to scrutinise critically a transaction which is onerous, like the one in this case, to see if it constitutes a sham. But this point has not been argued, and accordingly I express no view on it.

49. I note that the Judge was anxious to emphasise that the judicial role is not one of "social engineering, nannyism or anything of that sort". But it is of course the role of the Court to interpret Acts of Parliament and to give effect to the intention of Parliament as expressed in the words that it has used. Hence my approach is to examine the material provisions of the Act of 1988 with a view to determining their true construction. In my judgment it is clear from sections 5 and 7 on their true construction that parties to an assured tenancy may not agree to vary the statutory scheme for security of tenure so as to reduce the level of protection available to the tenant. Moreover, section 7 provides the only ways in which an assured tenancy may be terminated. Thus, to provide additional ways of bringing the agreement to an end would be an improper attempt to evade the provisions of section 7.

50. Accordingly, if clause 8(b)(iii) is properly to be regarded as a clause for the payment of rent, I would accept Miss Padley's submission that it is binding on the appellants and does not amount to any evasion, or contracting out, of the provisions of the Act of 1988. That Act does not provide any mechanism for reviewing rent which the parties have agreed.

51. If, however, clause 8(b)(iii) is not in substance or reality a provision for the fixing of rent, but a provision to enable the landlord to recover possession otherwise than in accordance with the mandatory scheme, either because the tenant voluntarily surrenders possession when asked to pay a sum purporting to be but not in fact rent or because it facilitates the landlord relying on a mandatory ground for possession when in truth he is not entitled to do so, then, in my judgment, the provision amounts to a contracting out of the statutory scheme for assured tenancies and is not enforceable. The statutory scheme does not provide a mandatory ground for a possession order for non-payment of rent unless the rent is properly due as such.

52. The question whether a document is a sham or a pretence or in substance an unlawful contracting out or evasion of an Act of Parliament is a pure question of fact. As regards the evidence, the Judge in effect confined himself to the agreement and did not consider the surrounding circumstances, including subsequent conduct. In this regard in my judgment he fell into error for, as I have explained, all such evidence is relevant to the question of sham, pretence or whether in substance there was an unlawful contracting out of the Act of 1988. I must therefore consider whether, in the light of the evidence as to the surrounding circumstances, the appropriate conclusion which the Judge should have reached was that the agreement was in substance an unlawful contracting out of the Act of 1988.

53. I turn to the evidence as to the circumstances surrounding the fixing of the rent of £25,000 per annum. My starting point is that there is no evidence that clause 8(b)(iii) was ever negotiated between the parties. That distinguishes this case from cases like Hilton v Plustitle. In addition cause 8(b) is curiously drafted: it may be a small point but it is clearly not drafted in a way that makes it clear that the security of tenure was for less than two years. Moreover, the landlord has never attempted in these proceedings to justify the rent fixed by clause 8(b)(iii) as being a market rent. That in itself is some indication that the landlord never expected that rent to be paid. Miss Padley properly accepts that the rent of £25,000 was above market rent. It was, of course, well above market rent and not in my judgment a sum that it could genuinely have been expected to be the market rent as at 11 February 1996 (the last review date).

54. If clause 8(b)(iii) was intended to have full effect, one would expect to find that as from 11 February 1996 rent of £25,000 per annum was demanded. There was no evidence of any such demand. When the date for enforcing clause 8(b)(iii) arrived, the landlord had either forgotten about clause 8(b)(iii) or taken the view that it would continue to accept the original rent. If the former was the case, one would expect the landlord to demand the rent of £25,000 per annum as soon as it realised its mistake. It did not do that. Instead it bound itself to defer the right to the increased rent by the letter of 14 January 1997 on the basis there set out. Its inactivity from 11 February 1996 to 14 January 1997, and its reasons for writing its letter of 14 January 1997 are unexplained. Nor has the landlord put forward any reason for changing its mind and requiring the rent of £25,000 per annum in March 2000. The appellants had paid to date the reduced rent then due from them as a result of an order compromising earlier proceedings for possession and breach of the landlord's repairing obligations (the landlord issued the present proceedings on 8 May 2000). The proper inference from all the circumstances in my judgment is that the landlord never expected to receive rent of £25,000 per annum and intended that it should only invoke clause 8(b)(iii) as a means of recovering possession.

55. In my judgment, when the facts of this case are examined as a whole, it is clear, that, as the Judge found, clause 8(b)(iii) was merely a device. It was in reality a provision which would enable the landlord to obtain possession of the premises. As such, clause 8(b)(iii) masqueraded as a provision for an increase of rent: it was not in substance a provision for the payment of rent. It was introduced to enable the landlord to bring the assured tenancy to an end when it chose. In some cases the tenant might be expected to leave voluntarily. In other cases such as this, the landlord would have to make an application to the court but (subject to the outcome of this appeal) that would only be a formality since the rent was much higher than a tenant could be expected to pay. The landlord, therefore, did not have to give the tenants the last opportunity which they obtain in the usual way to pay the rent arrears at the door of the court to avoid an order for possession. The landlord may, as Miss Padley submits, have intended to demand rent but it had no genuine expectation that it would ever receive any rent under clause 8(b)(iii).

56. As I see it, the effect of the Act of 1988 is that where a tenant is in a position to pay the sum genuinely reserved as rent at the time provided in the tenancy agreement or at such later date as Parliament allows, he should be free to do so and not lose possession. In my judgment the effect of this agreement is that the tenant is prevented from paying the genuine rent by a provision for payment of a sum which was never expected to be paid and which is not on its true analysis rent at all. That provision in my judgment offends against the mandatory scheme of the Act of 1988 and is unenforceable. I differ from the Judge in that in my judgment this device (as he fairly called it) is not permissible.

57. I do not accept the Judge's distinction of Antoniades v Villiers from this case. The landlord here was doing two inconsistent things: letting the property on an assured tenancy and trying to reserve to itself a right to obtain possession effectively on notice. Nor do I accept Miss Padley's proposition that there was no contracting out of the Act of 1988 because even with a rent of £25,000 the agreement remained an assured tenancy. For the purposes of the doctrine against unlawful contracting out, or evasion of a mandatory provision of an Act of Parliament, it is not necessary to show that the whole of a statutory scheme is evaded. It is sufficient if part is evaded, here the security of tenure provisions of the Act of 1988.

58. Since writing the first draft of this judgment I have had the advantage of reading the judgment of Pill LJ. The approach of Pill LJ is different from my own. He expresses difficulty with the concept of an unlawful contracting out of the Act of 1988 since the parties were free to create some other form of tenancy. However Pill LJ reaches the same conclusion as myself on the basis of the inconsistency between clause 8(b)(iii) and the intention of the parties to grant an assured tenancy as a matter of the true construction of the agreement (see Glynn v Margetson & Co [1893] AC 351). The citations from the speeches of Lord Bridge and Lord Templeman set out above show that inconsistency (or repugnancy) and pretence are alternative bases for their decision in Antoniades v Villiers, and I accept that inconsistency is relevant and applicable in this case too. I further accept Mr Knafler's submission that the two concepts are closely connected. In this case, however, where the sum reserved by clause 8(b)(iii) was not, as I see it, in substance as opposed to form, a true reservation of rent, I prefer to place primary reliance on the basis that here is an improper attempt to evade the mandatory scheme for security of tenure in the Act of 1988. This conclusion does not depend solely upon the construction of the agreement or the intentions, subjective or objective, or the parties: indeed the purported effect of clause 8(b)(iii) is not a result which on my anaylsis the parties had freedom of contract to achieve. My approach is directed to qualifying and invalidating the effect of their agreement through recourse to the Act of 1988. I am content to say that there was inconsistency here, though that inconsistency is not, as I see it, mere internal inconsistency within the agreement, but inconsistency between clause 8(b)(iii), in the context of the agreement and taken with all the surrounding circumstances, and the mandatory provisions of the Act of Parliament. The Act of 1988 prescribed the relevant provisions of a tenancy which is to be an assured tenancy, and it is clear that an assured tenancy was the form of tenancy which the parties intended to create.

59. In the circumstances, the order for possession must in my judgment be set aside. It does not escape notice that this device has resulted in a substantial personal judgment against each of the appellants, which is a very serious matter for them. It could for instance lead to their bankruptcy. It follows that in my judgment this judgment, which represents arrears of rent over and above the rent reserved by clause 8(b)(ii), must also be set aside.

    PILL LJ:

60. I agree. I gratefully adopt Arden LJ's statement of the facts. The lease had a heading in capital letters: "Assured Tenancy Agreement made pursuant to the Housing Act 1988". The lease is dated 15 February 1994 and the initial annual rent was £4,680.00. The effect of Clause 8(b)(iii) of the lease, read with Clause 1(h), which stipulated the "last review date", was however that as from 11 February 1996, that is within two years of the agreement, the annual rent was to be £25,000. That level of rent permitted the tenancy to remain an assured tenancy within the Act (Schedule 1, paragraph 2(1)) but was never expected to be paid. It was a figure well beyond the means of the appellants or anyone likely to rent this flat in this location. No tenant would sensibly fail to exercise his right to terminate the lease rather than pay that sum. If he could afford to pay that sum, he could obtain greatly superior accommodation for it. I agree with Arden LJ's analysis of the circumstances. I also agree with her that Clause 8(b)(iii) cannot be avoided by application of the Interfoto principle ([1989] QB 433).

61. The provision for rent of £25,000 was plainly included in the lease as a device. What the landlord hoped to do was to create a tenancy which would be treated in law as an assured tenancy but at the same time permit him to obtain possession within two years. The respondents' predecessors, who granted the lease, were commercial landlords. Their "principal activity", as appears from the directors' report annexed to their accounts, was "the renting of residential property under the Assured Tenancy provisions of the Housing Act 1988 and under the Business Expansion Scheme". It is not disputed that under the Business Expansion Scheme there was a financial advantage to a landlord who created an assured tenancy rather than an assured shorthold tenancy. They hoped to obtain that financial advantage while at the same time to ensure that they could terminate a lease within two years, thus depriving the tenant of the long term security which is the essence of an assured tenancy.

62. While it was, as the judge found, a device, it was not a subterfuge. The increase in rent to £25,000 a year was clearly and plainly stated in the lease and was a sum permitted, in the case of an assured tenancy, by statute. The distinctive feature of the present lease was that the landlords sought both a tenancy which would qualify as an assured tenancy and also a tenancy which they had an effective means of terminating after just under two years. The situation is somewhat different from that in Antoniades v Villiers [1990] 1 AC 417 where Lord Bridge stated, at p 454, that clauses had been introduced "as an attempt to disguise the true character of the agreement which it was hoped would deceive the court and prevent the appellants enjoying the protection of the Rent Acts". The language involved a pretence that only a licence was created in a context where it was not permissible to contract out of the Rent Acts.

63. For the respondents, Miss Padley submits that the device in the present case is permitted by the 1988 Act which leaves the parties free to agree a rent up to a figure of £25,000 a year. Nothing in the Act prevents the parties agreeing that a greatly increased rent should be payable upon a review. The tenancy was an assured tenancy within the meaning of the Act notwithstanding that in practice the tenant had no long term protection. The Act did not require that all tenancies be assured and left parties free to create a tenancy which was not an assured tenancy. That being so, they were entitled, it is submitted, to make the agreement set out in this lease.

64. Miss Padley relies on the decision of this Court in Belvedere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858 where it was held that, although the leases in that case were an artificial device designed to circumvent the effect of the Landlord and Tenant Act 1987, that finding did not entitle the Court to ignore or override apparently effective transactions which on their face conferred an interest in land in the transferee. The arrangements made in granting the leases involved no pretence and did not constitute a sham. Accordingly the Court could not disregard the leases or strike them down. Sir Thomas Bingham MR stated at p 876F:

    "Many transactions between group companies may be artificial. That does not entitle the court in ordinary circumstance to treat such transactions as null."

65. I do have difficulty with the concept, which has featured in the proceedings, that there was an unlawful contracting out of the 1988 Act when the parties were free to contract out of it. They could have entered into a shorthold assured tenancy, which did not confer security of tenure, without contravening the Act. They were free to agree the level of rent. The scheme of the Act, as I understand it, was not a mandatory scheme for tenancies such as gave rise to the concept of unlawful contracting out in its usual form.

66. Since the parties were free to contract out of the Act, the answer depends on an analysis of the terms of the contract. The lease contains the plainest indication that an assured tenancy agreement pursuant to the 1988 Act was intended. That is stated in capital letters in the heading to the lease. The statutory purpose of the assured tenancy is to give long term security to the tenant, as explained by Arden LJ. There are other indications in the lease of an intention to achieve that purpose:

    1. The landlord's letter of 14 February 1994 underlined that the tenancy was to be within the statutory scheme:

    "Finally, we would ask you to note that it is a term of the tenancy agreement, and a condition of the Housing Act 1988, that a tenant occupying a dwelling house under an assured tenancy occupies the property as his/her only or principal home and that the property is not used for any business purposes".

    2. In Clause 9 of the lease, the tenant declares that the property is to be his only or principal home.

    3. Detailed drafting points in the same direction. Clause 1(g) provides for a review date, under a procedure consistent with long term protection, on February 16 1995 "and every twelve months thereafter" and Clause 8(b)(iii) provides for the fixing of rent after the first review date "during each successive review period". The wording contemplates a lengthy lease and one which is inconsistent with the "last review date" (bringing into effect the rent of £25,000) on 11 February 1996, that is less than two years from the date of the lease.

67. The tenancy is to be construed as one intended to give effect to the statutory purpose of long term protection for the tenant. That is "the main purpose of the contract" (Glynn v Margetson & Co [1893] AC 351 per Lord Halsbury at p 357) or the "main intent and object" (per Lord Herschell at p 355) or "the main object of the contract" (Suisse Atlantique Societe d'Armement Maritime v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 per Lord Reid at p 389G).

68. The intention of Clause 8(b)(iii) is in my judgment inconsistent with the statutory purpose which it was the main object of the agreement to achieve. In Glynn at p 357 Lord Hailsbury stated:

    "Looking at the whole of the instrument, and seeing what one must regard, … as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract."

69. In Antoniades Lord Bridge, at p 454, also acknowledged the concept of a clause in a lease being rejected as "repugnant to the true purpose of the agreement", though he did so in the context of what he regarded as an attempt to deceive by making a lease appear to be a licence.

70. A clause purporting to allow for an increase of rent to £25,000 is inconsistent with and repugnant to the statutory purpose which, in the circumstances, in incorporated into the agreement. To permit the enforcement of Clause 8(b)(iii) would be to defeat the main purpose of the agreement. The landlords cannot defeat that purpose by reliance on Clause 8(b)(iii). The clause is inconsistent with the main object and intent of the agreement and must be ignored.

71. I agree that the appeal should be allowed.
    Order: Appeal allowed. Order as minuted by Council. Leave to appeal to the House of Lords refused. (Order does not form part of approved Judgment)