England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THEALDERSHOT & FARNHAM COUNTY COURT
Deputy District Judge Haig-Haddow
Claims No: 6AF00761 and 6AF0253

		Royal Courts of Justice Strand, London, WC2A 2LL
		03/07/2007

Lord Justice Thomas :

1. The dispute in this case began as a result of the termination of a tenancy granted by Mr Graves to his former wife, Mrs Graves, of a house in Fleet, Hampshire. For reasons I shall explain, Mr Graves began proceedings in the Aldershot and Farnham County Court for possession of the house. The proceedings came before Deputy District Judge Haig-Haddow for a multi-track trial for possession. The judge found that the tenancy agreement was void for mistake or alternatively was frustrated. He ordered payment to Mrs Graves of two thirds of the deposit paid and applied the balance as occupation rent for part of the time she had remained in possession. The judge also varied a maintenance order in respect of one of the children of the marriage which had been made in 1998.
2. Mr Graves appeals to this court by permission of Neuberger LJ on the issues of frustration and mistake, the order for payment and on the question of whether, in the circumstances, the judge should have varied the original maintenance order.
3. The background to the marriage and the financial settlement on its dissolution and the facts and evidence relating to the tenancy can be briefly summarised.

The background

4. Mr and Mrs Graves were married on 14 February 1992. On the marriage Mr Graves treated Mrs Graves's son Anthony as a child of the family and in December 1992 a child of the marriage, Bethany, was born.
5. In July 1997 a decree nisi was pronounced. There were proceedings in relation to maintenance. On 5 January 1998 an order was made by consent by District Judge Cooper which provided for a clean break; Mrs Graves received a significant amount of capital and Mr Graves was ordered to pay £300 per month for Bethany and Anthony by way of maintenance. That sum was index -linked.
6. Subsequently Mr Graves agreed that Mrs Graves and the children could return to the former matrimonial home. Thereafter she lived with her children (and another child born of a subsequent relationship) in a series of houses owned either by Mr Graves alone or by Mr and Mrs Graves jointly. In April 2002 Mr Graves became redundant and fell behind with the payment of child maintenance. In circumstances, which it is not for present purposes necessary to go into, Mr Graves in June 2003 transferred his half share in a house at Fleet, which they jointly owned, to Mrs Graves for £8,500. Under the agreement Mrs Graves waived the claim for the children's future maintenance which was assessed as having a value of £50,000. The agreement was not referred to the court and the order of 5 January 1998 was not varied.
7. As Mrs Graves was unable to maintain mortgage payments on that house she sold it at the end of 2004 and, after repaying the mortgage and her debts, she was left with approximately £17,000. She was qualifying to be a radiographer and had little by way of income.

The arrangement made in respect of 37 Longmead

8. Mr Graves had moved to Germany to live with his partner and 2 children of that relationship. He still retains property in this jurisdiction. One of those properties, 37 Longmead, Fleet, became vacant in November 2004 because the tenant was leaving. Mrs Graves needed somewhere to live. She asked Mr Graves whether she and the children could live there. It is clear that Mr Graves wanted to be sure that he would receive his rent. He was worried that, in view of the fact he was not paying child maintenance, Mrs Graves might not pay the rent as an indirect way of obtaining maintenance from him.
9. As he knew that Mrs Graves did not have the income to pay the rent, he wanted to be sure that the bulk of the rent would be paid through the payment of housing benefit to Mrs Graves. The judge made the following finding about the arrangements made:

"I accept Mr Graves' evidence when he said "I believed majority of rent was to be paid by Housing Benefit ..... she said [she had] not sufficient money to pay. The tenancy was on condition of her getting the Housing Benefit. I would never have granted the tenancy, if Housing Benefit were not to pay. We operated on the mistaken basis that Housing Benefit would be paid". Mr Graves had wisely enquired of Housing Benefit of Hart District Council whether as they had previously been married and had children the benefit would be paid. They said it would. I also accept Mrs Graves evidence to the same effect. She said "I would not have taken the property on unless Hart said Housing Benefit would pay. I would not have lost my £12,000 or spent money doing up the house which was the last money I had". She had also enquired of Hart District Council whether the fact that they had been married and had children affected her entitlement to Housing Benefit and was told that it did not."

The finding that Mr Graves had enquired of the Housing Benefit Office of Hart District Council was challenged. We have considered Mr Graves' witness statement and the transcript of his evidence. It is clear that the Judge misunderstood his evidence; although Mrs Graves said that Mr Graves had spoken to the Council, Mr Graves never gave evidence that he had enquired directly himself of the Housing Benefit Office of the District Council; his evidence was that he had been told of this by Mrs Graves. It was submitted on behalf of Mrs Graves that the judge was entitled to make the finding he did on the basis of Mrs Graves' evidence; that was not the way the judge expressed himself and I consider that the finding he made was made on a misunderstanding of the evidence of Mr Graves.

10. Mrs Graves was also told that housing benefit would not be payable unless she was in occupation. Accordingly a tenancy agreement was executed and dated 4 December 2004 granting an assured shorthold tenancy of 37 Longmead to Mrs Graves and her children for 12 months from 1 February 2005 at a rent of £1,150 a month payable in advance on the first day of each month. On 1 February 2005 she went into occupation and paid Mr Graves £12,000 by way of deposit and £1,150 as the first month's rent.
11. Hart District Council had given Mrs Graves wrong advice; she was not entitled to housing benefit. The Council refused to pay housing benefit on the ground that Mr Graves was Bethany's father. Mrs Graves subsequently received compensation of £1,000 from the Council's ombudsman for the incorrect advice she had been given. However, Mrs Graves had paid over nearly all her capital to Mr Graves in the form of a deposit and had spent £2,000 on making the house more comfortable. She did not have the funds to pay the rent due for March 2005.
12. The position in which Mrs Graves found herself was a very difficult one. The judge found that she had no funds to pay what would be required if she was to move to another house - a 3 month deposit, the first month's rent and the moving expenses. If she left 37 Longmead voluntarily, the local authority would not re-house her save in bed and breakfast or hostel accommodation; the judge accepted her evidence that this would be wholly unsuitable for the children.
13. The judge heard oral evidence on how Mr and Mrs Graves tried to resolve the position and considered the written exchanges between them, including exchanges by text. Initially Mrs Graves had told Mr Graves that she was prepared to leave if he paid her back in full. The judge went on to find that she changed her position:

"Mrs Graves was prepared to leave provided .., as her final proposal, £6,250 of her deposit was paid back and in those circumstances, she would be out by 31 July 2005."

14. Mr Graves did not accept the offer. He said he would keep the £12,000 for the rent for the following months and, when the money ran out, he would start eviction proceedings against her and the children.
15. Mr Graves did as he said he would. During the remaining months of 2005, he did not serve notice or any take any other step to require Mrs Graves and the children to leave; he demanded no rent or other sum.

The commencement and course of the proceedings

16. On 10 January 2006, he served notice under s. 8 of the Housing Act 1988 and on 13 January 2006 he served notice pursuant to s. 21 of the same Act. On 23 February 2006 possession proceedings relying on the s. 8 notice were issued. On 2 August 2006 further proceedings relying on the s. 21 notice were served.
17. Mrs Graves served a defence on 20 April 2006; in it she included a claim that Mr Graves had failed to pay maintenance and had not done so for a considerable time. On 6 July 2006 there was a hearing for directions before District Judge Manuel. Directions were made which were appropriate to a possession action and not to proceedings in relation to a variation of an earlier maintenance order in the light of the financial settlement that had been subsequently made.
18. On 21 September 2006 the trial of the possession action came on before the Judge at Aldershot County Court. Mr Graves was represented by counsel and Mrs Graves appeared in person. Mr Graves and counsel who appeared for him both believed that the trial was to be a trial of the possession claim only. The judge heard evidence from Mr Graves, Mrs Graves and Mr Graves' solicitor.
19. On 3 October the Deputy District Judge handed down judgment. In summary he decided:

(1) The tenancy agreement was void for mistake; alternatively it had been frustrated.

(2) Mr Graves was entitled to possession of 37 Longmead.

(3) Mr Graves should pay Mrs Graves £8,050.

(4) The order of 5 January 1998 was set aside and £216.66 per month should be paid for the maintenance of Bethany.

(5) There be no order as to costs.

20. On 18 October 2006, Mrs Graves issued an application under the Children Act 1989 for a lump sum order or the transfer of 37 Longmead and, if necessary, confirmation of the order made on 3 October 2006 by the Judge for maintenance.
21. On 15 February 2007, Mrs Graves vacated possession of 37 Longmead; her son remained in occupation until 9 March 2007. No responsibility can attach to Mrs Graves for the continued occupation after 15 February 2007.
22. The appeal that arises gives rise to issues that can be grouped under three headings:

(1) The status of the agreement after the Council had made clear that housing benefit was not payable

(2) The claim for occupation rent, damages or mesne profits

(3) The decision on maintenance

(1) The status of the agreement after the Council had made it clear that housing benefit was not payable

(a) The decision of the judge

23. The reasons that the judge gave for finding that the agreement was void for mistake or alternatively frustrated were short.

(1) The judge first referred to the judgment of Lord Phillips MR in Great Peace Shipping Co v Tsavliris [2002] EWCA Civ 1407 ([2003] QB 679) where at paragraph 76, he pointed to five elements which must be present if a contract was to be avoided through common mistake:

"(i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible."

(2) The judge went on to hold that:

"There was a common assumption that Housing Benefit would pay the majority of the rent and I accept Mrs Graves evidence that majority probably meant 90%. Neither party gave a warranty that the contract would be made on that basis and neither were at fault in believing that Housing Benefit would be paid because as previously stressed, they both made their independent enquiries before Mrs Graves went into occupation. In judging whether the non receipt of the housing benefit made the contract impossible in performance I look at all the surrounding circumstances as is suggested in paragraphs 74 and 82 of Great Peace Shipping. The heart of this contract was to provide a home for the children which could be afforded certainly for a year and probably until Mrs Graves qualify as a radiographer bearing in mind that her capital and income were extremely limited.

I do not accept Miss Cox's implicit submission that because the mistake may have been a mistake of law the contract survives. Brenman v Bolt Burdon [2004] EWCA CA 1017 applying Kleinwort Benson v Lincoln City Council [1998] 4 All ER 513 is against her on this point. Also I do not accept her submission that if the assured shorthold goes Mrs Graves still has liability under a valid monthly periodic tenancy by virtue of her paying one month's rent on the 1^st February. That periodic tenancy is also in my view vitiated by mistake."

(3) The judge then went on to find that the contract was frustrated:

"I also find that the contract has been frustrated. As Lord Radcliffe said in Davis Contractors Fareham UDC [1956] AC 696 "frustration occurs when, without the fault of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it radically different from what was undertaken by the contract.""

(4) He concluded:

"Whether by mistake or frustration the tenancy agreement is void. As in my view there are no expenses which I would be prepared in my discretion under the proviso of section 1 (2) of the Law Reform (Frustrated Contracts) Act 1943 to reimburse Mr Graves for the period prior to the contract being frustrated and no valuable benefit before discharge which I would order Mrs Graves to pay for under section 1(3) of that Act - I deal with what she should pay for use and occupation below - under section 1 (3) of that Act it follows that she is entitled to the return of her £13,150 - subject of course to the payment of use and occupation.

As the agreements under which she occupies 37 Longmead are void it follows that as she is in Landlord and Tenant law a trespasser Mr Graves is entitled to a possession order."

(b) The contentions of the parties

24. It was contended by counsel for Mr Graves that the judge was wrong.

(1) The tenancy was not void for mistake:

a) The judge had been wrong to conclude that Mr Graves had spoken to the District Council; for the reasons set out at paragraph 9 above, I accept this submission.

b) What had in fact happened was that Mrs Graves had represented the position to Mr Graves by stating that housing benefit would be payable. That representation amounted to a collateral warranty that she would receive housing benefit and be able to pay the rent. The second element set out in Great Peace was not met.

c) Nor was the fourth element present; the performance of the contract was not impossible; it was simply more onerous.

(2) The contract had not been frustrated:

a) Mrs Graves' obligation to perform the tenancy agreement was an obligation to pay money. It could still be performed. The nature of the outstanding rights and obligations had not changed from what the parties could reasonably have contemplated.

b) There was no supervening event.

c) A lease could rarely be frustrated and that would require something such as a vast convulsion of nature, as Viscount Simon had stated in Cricklewood Property and Investment Trust v Leightons Investment Trust [1945] AC 221.

25. Mrs Graves was represented before us; her counsel contended that:

(1) The judge was right to find that there had been a common mistake; even if Mr Graves had not spoken to the Council, this was not a case where the common assumption had been created by Mrs Graves without any reasonable grounds.

(2) If the contract was not void for mistake, then there was a supervening event - the decision of the Council that Mrs Graves was not entitled to housing benefit. That event had frustrated the contract.

(3) The reality was that the underlying common assumption was that the rent was going to come from housing benefit. When that source was found to be unavailable, the contract was in truth impossible of performance or an agreement of a kind different to that into which both had entered.

(c) The nature of the agreement made by the parties

26. In approaching the arguments addressed to us, we have considered the analysis of the law set out in Bell v Leaver Brothers [1932] AC 161, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 and Great Peace.
27. It is clear from these decisions that the first task of a court is to examine the nature of the agreement made by the parties and in particular the allocation of risk. The judgment of Steyn J in Associated Japanese Bank (International) Ltd v Crédit du Nord [1989] 1 WLR 255 and of Hoffman LJ in William Sindall plc v Cambridgeshire County Council [1994] 1 WLR 1016 ...referred to at paragraphs 80 and 81 of Great Peace) are illustrations of this approach which is also set out in Chitty on Contracts (29^th edition) at paragraphs 5-015 and 5-041. As Steyn J said in Associated Japanese Bank:

"Logically, before one can turn to the rules as to mistake, whether at common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent on the point, is there scope for invoking mistake."

28. It is clear from the facts I have set out, from the evidence of Mr Graves and Mrs Graves and the findings of the judge that the agreement made by the parties was that they would execute the tenancy agreement on the basis that 90% of the rent would be paid by Hart District Council through housing benefit. Unless the rent was to be paid in that way Mr Graves would not have entered into the agreement or executed the tenancy agreement which was to operate as the means by which the benefit was to be claimed. He knew Mrs Graves could not pay the rent and he did not want to expose himself to the risk that Mrs Graves would use the occupation of the house as an indirect means of obtaining maintenance from him. Mrs Graves knew she did not have the means of paying the rent and would not have committed herself to the agreement or entered into the tenancy agreement or used her remaining capital unless 90% of the rent was to be paid through housing benefit. This was not an agreement where the housing benefit was to be merely the source of finance; it was the means by which Mr Graves was to avoid the risk of Mrs Graves using her possession of the house as an indirect means of obtaining maintenance.
29. This was not a case where either party was assuming any risk as regards the payment of the housing benefit. Mr Graves knew Mrs Graves could not pay the rent under the tenancy agreement unless housing benefit was payable; that was her position. Mrs Graves knew that Mr Graves would never have allowed her to occupy the house on any other basis; that was Mr Graves' position. Neither party was therefore assuming any risk in this respect. In other words the essence of the agreement which they reached was that Mr Graves would provide a house in which Mrs Graves would live on the basis that 90% of the rent would be paid by the local authority; the agreement was then expressed as a shorthold tenancy agreement at a rent which both believed the local authority would then fund as to 90%.
30. Nor was this a case where there was any warranty. In providing to Mr Graves the information which she had obtained from the Council that housing benefit would be payable, Mrs Graves was not providing any warranty as to the correctness of the position. She was simply making a prudent enquiry on behalf of both. There was plainly no collateral warranty; there had simply been a reasonable enquiry that Mrs Graves had undertaken on behalf of both: cf the judgments of Dixon and Fullagar JJ in McRae v Commonwealth Disposals Commission referred to at paragraphs 78 and 79 of Great Peace.
31. I therefore conclude that Mr and Mrs Graves, after reasonable enquiry, entered into an agreement under which accommodation would be provided to Mrs Graves at 37 Longmead by entering into a shorthold tenancy agreement on the basis that 90% of the rent would be paid for by the local authority through housing benefit. It was fundamental to both that this was the position for the reasons I have given. I will consider at paragraphs 38 to 41 below whether a term can be implied as to what was to happen if housing benefit was not payable.

(c)The mistake of the council as to housing benefit

32. It was common ground that the Council had been mistaken in the advice given to Mrs Graves; housing benefit was not in fact payable as a matter of law. In the light of the decision in Kleinwort Benson v Lincoln City Council [1999] 2 AC 349 and Brennan v Bolt Burdon [2004] EWCA Civ 1017 ([2005] QB 303), it was, rightly, not contended that it mattered that the mistake made by the Council and on which the parties acted was a mistake of law. There is no longer any reason to distinguish between a mistake of law and a mistake of fact.

(d) The consequences

33. Before turning to examine whether the agreement made between the parties encompassed by necessary implication a term to cover this eventuality, it is necessary to refer to the generally accepted view that neither the doctrine of frustration or mistake can realistically or satisfactorily be explained on the basis of an implied term: see paragraphs 73 and 82 of Great Peace. As the Master of the Rolls said in Great Peace at paragraph 73:

"Where a fundamental assumption upon which an agreement is made proves to be mistaken, it is not realistic to ask whether the parties impliedly agreed that in those circumstances the contract would not be binding. The avoidance of a contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform, no obligation arises out of that agreement."

In Panalpina, Lord Simon of Glaisdale expressed the principle:

"Frustration of a contract takes place when there supervenes an event (without the default of either party and for which the contract makes no provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance."

34. However, although it is clear that both mistake and frustration now rely upon broader principles of law, the judgments in the cases make it clear, as I have set out, that it is necessary to examine the agreement the parties have made in determining whether the assumption on which the contract has been made no longer exists or whether there is a supervening event that has so significantly changed those obligations that it would be unjust to hold them to their agreement. As was said at paragraphs 74 and 82 of Great Peace:

"74. In considering whether performance of the contract is impossible, it is necessary to identify what it is that the parties agreed would be performed. This involves looking not only at the express terms, but at any implications that may arise out of the surrounding circumstances. In some cases it will be possible to identify details of the "contractual adventure" which go beyond the terms that are expressly spelt out, in others it will not.

…

82. Where it is possible to perform the letter of the contract, but it is alleged that there was a common mistake in relation to a fundamental assumption which renders performance of the essence of the obligation impossible, it will be necessary, by construing the contract in the light of all the material circumstances to decide whether this is indeed the case. In performing this exercise, the test advanced by Diplock LJ, applicable alike to both frustration and fundamental breach, in Hong Kong Fir Shipping Ltd Co v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 65-66 can be of assistance."

35. In Bell v Lever Brothers [1932] AC 161 Lord Atkin in his celebrated speech referred at pp 225-6 to the following proposition formulated by Sir John Simon, counsel for the respondent company:

"Whenever it is to be inferred from the terms of a contract or its surrounding circumstances, that the consensus has been reached on the basis of a particular contractual assumption, and that assumption is not true, the contract is avoided: i.e. it is void ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future fact"

36. Lord Atkin continued:

"I think few would demur to this statement, but its value depends upon the meaning of "a contractual assumption" and also upon the true meaning to be attached to "basis", a metaphor which may mislead…. Various words are to be found to define the state of things which made a condition. "In the contemplation of both parties fundamental to the continued validity of the contract" "a foundation essential to its existence", "a fundamental reason for making it", are phrases to be found in the important judgment of Scrutton LJ in the present case. The first two phrases appear to me to be unexceptionable. They cover the case of a contract to serve in a particular place, the existence of which is fundamental to the service, or to procure the services of a professional vocalist whose continued health is essential to performance. But "a fundamental reason for making the contract" may, with respect be misleading. The reason of one party only is presumably not intended, but in the cases I have suggested above, the sale of a horse or of a picture, it might be said that the fundamental reason for making the contract was the belief of both parties that the horse was sound or the picture was an old master, yet in neither case would the condition, as I think, exist. Nothing is more dangerous than to allow oneself the liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more business like or more just. The implications to be made are to be no more than are necessary for giving business efficacy to the transaction, and it appears to me that, both as to existing facts and future facts, a condition would not be implied unless the new state of facts makes the contract something different in kind from the contract in the original state of facts. Thus in Krell v Henry [1903] 2 KB 740, Vaughan Williams LJ finds that the subject of the contract was 'rooms to view the procession': the postponement, therefore, made the rooms not rooms to view the procession. This also is the test finally chosen by Lord Sumner in Bank Line Ltd v Authur Capel & Co [1919] AC 345, agreeing with Lord Dunedin in Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC 119 at 128, where, dealing with the criterion for determining the effect of interruption in "frustrating" a contract, he says: "An interruption may be so long as to destroy the identity of the work or service, when resumed, with the work or service when interrupted." We therefore get a common standard for mutual mistake and implied conditions whether as to new or existing facts. Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts?"

37. It is helpful to refer in a little more detail to the judgment of Vaughan Williams LJ in Krell v Henry, the case arising out of the postponement of the coronation of King Edward VII, at p 749 where he said of the principle of frustration:

"I do not think that the principle of the civil law as introduced into the English law is limited to cases in which the event causing the impossibility of performance is the destruction or non-existence of some thing which is the subject matter of the contract or of some condition or state of things expressly specified as a condition of it. I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things. If it does, this will limit the operation of the general words, and in such a case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited."

38. Thus, although therefore the principles of both frustration and mistake rest on wider principles of law, it is, I think, necessary in the circumstances of this case, to consider first, following the approach in Associated Japanese Bank, whether the agreement made included an implied condition that the contract was to end if housing benefit was not payable. In the circumstances of this case this is not an unrealistic or artificial exercise. Mr Graves had made it clear in his evidence (as set out at paragraph 9) that the receipt of housing benefit was in his view a condition of the agreement; although Mrs Graves did not expressly state it, that was also the effect of her evidence. As I have set out at paragraph 31, the agreement between them was on the basis that 90% of the rent would be paid for by the local authority through housing benefit
39. But can a condition to that effect only be implied if the effect of the new state of facts was such that performance of the agreement was impossible or the agreement something different in kind from the agreement in the original state of facts? Lord Atkin made it clear in Bell v Lever Brothers that, as terms to this effect were to be implied only if they were necessary, to imply a term in circumstances less clear cut than he suggested would be to undermine contractual certainty and in effect permit the courts to write a contract that the court thought more business like or just. I will assume that a condition that brings the contract to an end can therefore only be implied in the circumstances specified by Lord Atkin.
40. In the present case, the agreement was to provide accommodation to Mrs Graves through a shorthold tenancy under which 90% of the rent would be paid for by the local authority. It was plainly not impossible for Mrs Graves to perform the shorthold tenancy agreement by paying rent. Inability to perform a contract because of impecuniosity does not make performance impossible. However, in the particular circumstances of this case, the agreement made was one made on the basis that 90% of the rent was to be paid through housing benefit; when it was clear that that basis for the agreement was one that did not in fact exist, the agreement was, in my view, different in kind to that originally contemplated. The source of financing the payment of the rent was not in fact available. Without that source of finance, this was not a case where Mrs Graves simply could not pay, but Mr Graves was subject to the risk that Mrs Graves would use her possession of the house as an indirect means of obtaining maintenance from him.
41. In my view therefore a condition should be implied into the agreement on the basis of the strict approach to the implication of terms; the term was an implied condition that if housing benefit was not payable, the tenancy would come to an end. Such a condition was, on the evidence, obviously a term of the agreement which Mr and Mrs Graves both plainly intended to form part of their contract
42. When therefore the Council stated that housing benefit would not be paid in March 2005, the tenancy determined. This was an issue which it appears from the transcript of the hearing was canvassed before the judge. Although the judge did not decide it on this basis, he could and should have done so
43. It is therefore not necessary to consider whether the contract was frustrated or void for mistake.

(2) The claim for occupation rent or mesne profits

(a) The decision by the judge

44. As I have set out, Mrs Graves remained at 37 Longmead until February 2007. A claim was made by Mr Graves for mesne profits or occupation rent or damages to cover the period from January 2006. The judge's decision on the claim was expressed by him:

"As Mrs Graves and the children were technically trespassers Mr Graves is entitled at first sight to be paid an occupation rent by Mrs Graves for her enjoyment of the property but he is not entitled to be paid an occupation rent if his actions have been the cause of her remaining at the property."

The judge then referred to the offer made by Mrs Graves set out at paragraph 13 above:

"However much the tone of some of Mrs Graves texts are to be regretted the point is that she was prepared to cut cackle and make an offer which was less than her claim was worth. Mrs Graves in those texts was offering to leave by the end of July 2005 if he repaid her £6,250. She had paid £1,150 for the first month's rent and the £12,000 deposit. However as analysed above as the contract was void Mrs Graves was entitled to her entire £13,150 back less (on the basis she left by the 31^st July 2005) £5,100 being 6 months occupation rent at £850 per month. She was therefore entitled to the return of £8,050. She was prepared to get out for £6,250. The reason why Mr Graves has lost further 15 months rent or so since the 31^st July is because he did not accept an offer from Mrs Graves in figures that he ought to have accepted. I also do not consider an occupation rent right when the notices were not served until January 2006. I decline therefore to order occupation rent after the 31^st July 2005. Mrs Graves is entitled to the return of £13,150 less £5,100 occupation rent up to the 31^st July 2005 and is thus entitled to the payment of £8,050."

45. The figure of £850 per month was based on an earlier finding of the judge.

"I accept Mrs Graves' evidence that the rent that Mr Graves had been receiving from the previous tenant of 37 Longmead was approximately £850 per month after estate agents commission. [An e-mail from] the former letting agent sets out that the rent from the tenant in the three years to January 2005 was £995 per month but was then increased from 13/11/04 to £1,045 per month. I infer from the fact that the tenant left that he was not prepared to pay £1,045 per month and after allowing for the fact that Mr Graves did not have to pay agents charges by letting direct to Mrs Graves I find the net rental income at £850 per month was the market rent at the time of the tenancy agreement. I also accept that the property was in poor condition when Mrs Graves took it on - see the final page of her letter of 22^nd May 2005 -and that there was little furniture in it."

46. It was contended by Counsel for Mr Graves that the judge was wrong both as to his finding that Mr Graves was not entitled to be paid for the use and occupation after 31 July 2005 and as to the monthly amount:

(1) When the tenancy had come to an end, she was in occupation with the permission of Mr Graves and not a trespasser liable to pay either damages for occupation or mesne profits.

(2) Whether the sum was claimed as damages or mesne profits or on a restitutionary basis, the judge had been wrong to hold that the appropriate amount was to be assessed at £850 per month

(b) The monthly amount payable

47. It is first necessary to consider the judge's finding set out at paragraph 45 that the sum of £850 per month was a fair monthly sum for the occupation of the premises; it was common ground before us that the sum payable should be calculated by reference to the market rental value and would be the same whether payable as compensation for use and occupation based on an implied promise or some other restitutionary basis or by way of mesne profits or damages.
48. The judge set out the rent the previous tenants had paid and inferred that the last tenant had left because the rent was too high. There was no evidence to support that inference. However, Mr Graves had stated in the Reply served on his behalf that the rent charged to the tenant immediately prior to Mrs Graves was £850 per calendar month rising to £950 per calendar month; in his evidence he said that the statement in the e-mail from the former letting agents was more accurate. Mrs Graves explained this in her evidence by saying that the sum received from the tenants was £850-870 after the deduction of the agents' fees. There is no evidence that the figure used in the tenancy agreement reflected a fair market rent; the better guide to a gross rent before agents' fees was the rent the last tenant was paying in November 2004 - £1,045. Making an allowance for agents' fees but adding back an amount for the gradual increase in rent over the period, I consider that the sum of £1,045 per month paid by the last tenant would be a fair figure for the market rent.

(c) The period for which Mrs Graves is liable

49. I then turn to consider the issue as to the period for which Mrs Graves is liable to pay. On the oral evidence and the documents, the judge was entitled to make the finding set out at paragraph 13 that Mrs Graves offered to leave at the end of July 2005, if Mr Graves would repay £6,250. By the end of July 2005, Mrs Graves would have been in occupation for 6 months. She had paid the rent under the tenancy agreement for the first month in advance. Taking the sum of £1,045 per month as the sum that would be due for occupation of the premises, the further five months would amount to a total of £5,225. If that sum was deducted from £12,000 paid by way of deposit, then there would be due to her the sum of £6,775. There was no evidence that any sum was due by way of dilapidations; on the contrary the judge had found, as is set out in the quotation from his judgment set out at paragraph 45, that the house was in poor condition on occupation. Thus she was offering to leave if she was repaid what was due to her. Mr Graves declined that offer. He did not serve notice to quit, but decided to hold on account of rent that would become due the balance of the sum in fact paid as a deposit against dilapidations and to allow her to continue in occupation.
50. In ordinary circumstances where a person occupies a house or land with permission but without there being in place terms as to the rent, there is usually an implied promise to pay a reasonable sum for the use and occupation of the land; see the cases cited in Woodfall at paragraph 10.01. Mrs Graves continued in occupation until notice to quit was served with the permission of Mr Graves, but can it be said that there was an implied promise to pay in the very unusual circumstances that had arisen in this case?
51. Mrs Graves wanted to leave, but, given her circumstances and the policy of the council on re-housing, she needed it to be made clear that she was leaving under compulsion, rather than voluntarily abandoning a tenancy. Mr Graves knew that. He did not serve notice to quit which he could and should have done and which would have made it clear that she was being compelled to leave. As the shorthold tenancy had been entered into on the basis that the rent would be funded as to 90% through housing benefit and the deposit had been taken against dilapidations, it is difficult to see that there was any basis for implying in the unusual circumstances of this case an implied promise to pay either a reasonable rent or on terms that she was holding over on the terms of the original lease. She was not there as a trespasser, as Mr Graves had consented to her being there. Nor in my view can it be said, in the unusual circumstances of this case, that there is any other restitutionary basis on which Mr Graves could be said to be entitled to be paid for the period until notice to quit was served. Nor was Mrs Graves unjustly enriched by being left in possession as a result of the position that Mr Graves had taken.
52. However notice was given in January 2006 as set out at paragraph 15. As from 1 February 2006, Mrs Graves no longer continued to occupy 37 Longmead with the permission of Mr Graves. Counsel for Mrs Graves rightly accepted that Mrs Graves was liable to pay mesne profits from that time until she quit the premises on 15 February 2007 – a period of 12½ months.
53. I have set out at paragraph 48 that the sum due per month for the occupation of the premises was £1,045. There is therefore due to Mr Graves the sum of £13,163.50 for that period, less the balance of £6,775 from the deposit, namely £6,388.50.

(3) The judge's decision on maintenance

54. As set out at paragraph 18, Mr Graves and counsel representing him prepared for and attended the hearing rightly thinking that it was a hearing of the action for the possession of 37 Longmead. Shortly after the hearing had commenced, the judge raised the question of maintenance on the basis of a letter he had received from Mrs Graves' previous solicitors stating that Mrs Graves had told them that the maintenance issue would be considered.
55. Counsel for Mr Graves rightly pointed out that this was not the case (though there was nothing to show this on the court file) and made the point that neither party had filed any evidence. The judge, no doubt, because of the size of the sums in issue relative to the costs, thought that it would be right to deal with the issue on maintenance and asked the parties to complete a form showing their income and expenditure.
56. Although we can understand the wish of the judge to try and deal with everything at one hearing, it was neither right nor fair to do so. It is clear now that nothing in the pre-trial proceedings had occurred which could in fact have led either party to contemplate maintenance would be dealt with at the hearing for the possession of 37 Longmead. It was wrong of the judge therefore to have embarked on other issues at that hearing; neither party had prepared for this and the issues in relation to maintenance were not straightforward given the property transfers that had taken place, the agreement made to which I have referred in paragraph 6 and the other dealings. Proper evidence was needed as to what had happened in the dealings. The financial position needed to be based on the documents that the parties did not bring to the hearing. Mr Graves was plainly placed at a considerable disadvantage. It was clearly unjust to Mr Graves for the issue of maintenance to have been dealt with in this informal manner.
57. In the circumstances, I consider that the judge's order varying the order of 5 January 1998 and the order that Mr Graves pay maintenance of £216 per month for Bethany should be set aside. Proceedings for a variation of the order have since been issued by Mrs Graves as set out at paragraph 20 and it is in those proceedings that the issue of maintenance should have been determined.
58. At the hearing of this appeal, we enquired if the parties could reach agreement upon the maintenance. For understandable reasons they could not do so in the time available. In the light of the open offer made by Mr Graves in the course of the hearing, it is very much hoped that agreement can be reached. If it is not, then a further hearing on the issue must take place in the proceedings issued by Mrs Graves. The Order made by the District Judge on 3 October 2006 must be set aside.

Conclusion

59. I consider therefore that the Orders made by the judge should be set aside and judgment entered for Mr Graves for £6,388.50.

Lord Justice Hughes:

60. I agree.

Mr Justice Coleridge:

61. I also agree.