England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
John Jarvis QC
HC12D04636

		Royal Courts of Justice Strand, London, WC2A 2LL
		18 March 2014

Lord Justice Patten :

1. On 9 November 2004 the appellant, Erimus Housing Limited ("EHL"), was granted a lease of premises on the 4^th and 7^th floors, Centre North East, Albert Road, Middlesbrough ("the Premises") for a term of five years expiring on 31 October 2009. The rent was £170,209 per annum together with a service and insurance charge which were also reserved as rent. Under clause 3.1.1 of the lease EHL covenanted to pay the rents quarterly in advance on the usual quarter days throughout the term.
2. The lease was contracted out of the provisions of the Landlord and Tenant Act 1954 so that the contractual term came to an end on 31 October 2009. The respondent landlords ("BWT") had acquired the freehold reversion in 2005 and on 20 May 2009 Mr Andrew Arkle, EHL's land and property manager, wrote to the landlord's agent (Mr Gilroy of Storeys SSP) suggesting that discussions should begin about the terms on which BWT would be seeking to renew the lease. Mr Arkle said that although EHL would wish to take a lease of the existing accommodation, it wished to maintain flexibility by having a break clause as was included in the existing lease. He suggested a new three year term with annual breaks.
3. On 6 October 2009 after a meeting with Mr Arkle, Storeys wrote setting out BWT's proposals for a new lease. They suggested a six year term with breaks every two years. The initial rent was to be £173,764 per annum (a modest increase on the previous rent) which would be subject to an upwards only rent review at the end of the third year.
4. The next communication between the parties seems to have been on 15 January 2010 by which time the 2004 lease had expired and EHL had continued to occupy the Premises and to pay the rents reserved under that lease. In an e-mail of 15 January Mr Arkle made some counter-proposals about the terms of a new lease and the new rent and service charge. He proposed a six year term with breaks after two, three, four and five years; a rent of £165,000 reviewable after three years; and a service charge of £72,388. The new lease, like the old, was to be contracted out of the 1954 Act.
5. It looks from the evidence as if there was no immediate response to this from BWT which is very probably explicable by the level of rent which they continued to receive from EHL. The landlord's proposals of 6 October 2009 confirm that there had been no appreciable increase in rental values for the Premises and EHL was now proposing a lower starting rent under any new lease. Some delay may also be attributable to a change in BWT's managing agents. In August 2010 Storeys were replaced by Commercial Estates Group Limited ("CEG"). In any event on 16 November 2010 Mr Arkle sent an e-mail to Mr Richardson of CEG in which he said this:

"On the matter of our occupation, we are holding over under the terms of the original lease and continue to make rent, service charge and insurance payments on the due dates. When we met at John Irwin's offices some time ago we discussed the background to our occupation but that was just before legal completion of the building sale. We haven't received any specific proposals from you in terms of lease documentation and I was therefore wondering whether this is something that you will be progressing in the near future? In the meantime we assume that both sides are content for matters to continue as they currently exist."

6. Some further negotiations did take place, although they appear to have proceeded at a relatively leisurely pace. There are no further e-mails or letters (at least in evidence) until 15 June 2011 when Mr Arkle and Mr Richardson confirmed in an exchange of e-mails that the parties had agreed terms for the renewal of the lease. There was to be a three year term of the existing accommodation at a rent of £133,665 per annum with an option to break on 30 June 2013 on six months' notice. The target date for the execution of the new lease was 1 July 2011.
7. The lease was not executed on that date. Instead, on 26 August 2011, Mr Arkle confirmed to Mr Richardson what had already been communicated to BWT which was that EHL now wished to vacate the Premises having been given the opportunity to purchase another more suitable building. In his e-mail Mr Arkle said:

"Unfortunately this means we are unable to progress with the two year minimum commitment as originally expected in good faith. We are anticipating vacating Centre North East around March of 2012 and are therefore suggesting that we continue to hold over paying as we have to date, such payments being comparable with what was intended in terms of the sums involved."

8. Mr Richardson says in his witness statement that he had heard nothing further from Mr Arkle and so on 3 February 2012 he sent him an e-mail to find out if (and, if so, when) they anticipated vacating the Premises. Mr Richardson says that he was looking to be given a period of notice by EHL in order to arrange for a schedule of dilapidations and to organise the future marketing of the Premises. On 24 May 2012 Mr Arkle suggested 31 August 2012 as a suitable date and asked whether BWT wished to receive formal notice. On 30 May Mr Arkle sent a letter to CEG asking them to accept it as EHL's intention to vacate the Premises "and end our tenancy on 31 August 2012".
9. The dispute between the parties is whether that notice or the notice served by EHL's solicitor on 21 June 2012 was effective to bring to an end the tenancy of the Premises which continued after EHL held over at the end of the 2004 lease. If the legal effect of those arrangements was to create a tenancy at will on the same terms as to rent as the expired lease then it is common ground that the notice given on 21 June 2012 which expired on 28 September 2012 when EHL vacated the Premises was effective to terminate the tenancy. But BWT contend that EHL held over under a periodic yearly tenancy which could not be terminated except by at least six months' notice served to expire on 31 October 2013. By May 2012 it was too late for them to serve an effective contractual notice for 31 October 2012 or to comply with the 1954 Act which would, of course, have applied to a new periodic tenancy as opposed to a tenancy at will: see Wheeler v Mercer [1957] AC 416. Section 24(2) would have required EHL to have given the contractual period of notice.
10. To resolve the issue between the parties as to the requisite period of notice, BWT issued a Part 8 claim in the Chancery Division seeking a declaration that EHL had continued to occupy the Premises after 31 October 2009 under an annual tenancy. As with all Part 8 claims, the underlying facts were not in dispute and there was no cross-examination of any witnesses. Both sides' solicitors put in witness statements setting out the history and exhibiting the documents I have referred to. Mr Richardson dealt only with the sequence of events following Mr Arkle's e-mail of 26 August 2011. There was also a useful agreed chronology. The judge had therefore to decide whether, on the facts I have outlined, the parties agreed to create a yearly tenancy of the Premises to which the 1954 Act applied or only a tenancy at will. It is common ground that if a new periodic tenancy came into existence it was a yearly and not a quarterly tenancy because it was a tenancy at a yearly rent: see Richardson v Langridge (1811) 4 Taunt 128,131.
11. Mr John Jarvis QC (sitting as a deputy judge of the Chancery Division) decided that the parties had created a new yearly tenancy of the Premises which could not therefore be terminated before 31 October 2013. The parties have subsequently agreed that any such tenancy came to an end on that date. EHL now appeals with the leave of Vos LJ. In granting leave he observed that it might be thought surprising that parties who were engaged even in desultory or stalled negotiations, as the judge seems to have treated them, should have intended to create a protected annual tenancy. EHL's case is that the judge's finding was both inconsistent with any reasonable objective view of the circumstances relevant to the period of holding over and with the authorities which govern the court's approach to what is a question of law.
12. I have to say at the outset, with respect to the judge, that it is far from clear as to when in his view the yearly tenancy came into existence. He accepted that prior to the end of the original term negotiations did begin about the renewal of the lease and BWT proposed terms. Further discussions were anticipated. The lease expired on 31 October 2009 by which time Mr Arkle had not responded in detail to Storey's letter of 6 October. But this was remedied by his e-mail of 15 January 2010 and BWT has not contended that any periodic tenancy came into existence during this period.
13. The judge described the negotiations as desultory and lacking any impetus:

"26. I have set out in some detail at the outset of this judgment the chronology of the negotiations. I said during the course of argument that I considered the negotiation to be at the very least desultory. Bearing in mind that the lease expired on 31 October 2009, the period up to August 2011 was getting close to two years alone. There was certainly no great impetus in the negotiations. It seems to me that any fair reading of these discussions must lead to the conclusion that the parties were not in the throes of a negotiation. It was a very half-hearted exercise that seems to have gone on.

…

29. So, at that date in August 2010, it was absolutely plain that a different arrangement would have to be made from that which had been originally discussed, because the tenant was going to move into new offices and that it would want to leave the present premises at some point. Things then appeared to have moved very little forward by 16 November 2010, because that is when Mr Arkle wrote again to Mr Richardson, and the main concern was about parking. There were no proposals for any new terms of a lease and the suggestion was: "Both sides are content for matters to continue as they currently exist."

30. So, far from there being active negotiations, the position, it seems to me, was quite the reverse. There were no negotiations and there was no push on either side for there to be negotiations. They were happy for the tenant to remain in occupation. It was not then until 15 June 2011 that new heads of terms were agreed, as I have set out earlier in this judgment, for a three year lease, with break terms which would have enabled the tenant to vacate on three months notice. As it turned out, that never came into being. In due course, notice was given to vacate."

14. Although the judge was clearly right to regard the progress of negotiations as slow and lacking any urgency, there was no evidence before him that the negotiations had ceased or been abandoned by the parties because of an inability to agree terms. In fact, as the judge records, agreement was eventually reached on 15 June 2011 for a new contracted-out lease.
15. The judge attached some importance to what he said was an understanding between the parties that EHL would not be evicted without a suitable period of notice. He says in [31] of the judgment:

"It seems to me that this was a relationship which developed in which it was accepted on both sides that the landlord would not, at its whim, simply take proceedings to evict the tenant without notice. There was plainly, it seems to me, an acceptance on both sides that notice was going to be relevant and the occupation was on that basis."

16. Again, it is not clear from the judgment what this acceptance on both sides was based on or when it came into existence. On one reading of [31] the judge seems to be referring to the period leading up to the agreement on terms on 15 June 2011. But if that is what he meant, it is not clear to me what facts he was relying on or when the acceptance or agreement occurred. On the face of it, the parties continued to negotiate until 15 June 2011 when they came to terms. The negotiations were certainly not active and continuous but it is not possible to say on the evidence that there was ever a time when they ceased to contemplate entering into a new contracted-out lease. The interim arrangement suited both parties because it gave EHL continued possession of the Premises and BWT a rent which was probably equal to or in excess of the market rent. But, in these circumstances, there is nothing to suggest that either party intended to grant a new lease except upon the terms which were ultimately to be agreed and it is not clear to me whether the judge has decided anything different.
17. The judge's point about security of tenure seems to have been given more weight by him in relation to the period after 26 August 2011 when EHL had confirmed its intention to vacate. One might have thought that the creation of a new protected annual tenancy not by then terminable until at least 31 October 2012 was inconsistent with EGL's expressed intention to vacate the Premises in March 2012. But the judge treated the expression of its wish to remain in occupation until then as evidence from which he could infer an agreement for a periodic tenancy which was the only form of legal arrangement which would guarantee security of tenure for at least that period of time. He said:

"35. It seems to me, therefore, that there was a very clear indication in the 26 August 2011 email that the tenant wanted to have the right to stay in the premises until March 2012. It could not be achieved at law by a tenancy on that basis other than a periodic tenancy. Against that, Mr Rosenthal submits that the landlord simply could have at any stage told the tenant that it had to vacate, without notice. He submits that was a risk that the tenant took.

36. I do not consider that to be a realistic reading of what was happening between these parties over this very substantial period of time. It seems to me that the tenant expected to have some protection. In other words, that it would not be turned out on its ear. These premises were its principal offices, with substantial equipment and were essential for the way in which its business was operated. It could not have taken the risk that it could have been evicted at a moment's notice.

37. I do, on the other hand, have to ask the question, would the landlord in these circumstances have committed itself to a position where it would have given a protective tenancy under the Landlord and Tenant Act, because the procedure for contracting out had not been carried out? It seems to me, this case falls very much into the same vein as the Walji case. It seems to me that this is a case where the landlord was simply not concerned with that issue. It allowed the situation to develop as it did. It may not itself have taken sufficient notice of that, but that is irrelevant. It seems to me, whether it did or not, the fact of this relationship developing in the way it had, was such that it did in fact create protection."

18. The judge's conclusion that EHL was in possession of the Premises under a yearly periodic tenancy seems therefore to be based on two key elements: what he described as the half-hearted progress of the negotiations up to 15 June 2011 and the importance to EHL of having security of tenure up to at least March 2012. Although, as I have tried to explain, the judgement is not clear as to when the yearly tenancy came into existence, it is, I think, tolerably clear from what the judge says that there was not any significant overlap between the two factors I have described. The negotiations did not extend beyond 15 June 2011 and the desire (if it existed) for security of tenure up to March 2012 did not become a factor until after 26 August 2011. There is nothing before then from which one can derive any agreement or understanding about EHL having security of tenure for a specific period of time. The parties were simply negotiating for a new lease and EHL remained in possession in anticipation of that event. In commercial terms, the rent was acceptable to both parties and BWT had no reason to seek possession of the Premises. Continued possession was a given so long as the negotiations for a new lease were in progress.
19. I can therefore begin by considering the period up to 15 June 2011. The judge, as I have said, does not suggest that any periodic tenancy would have come into existence before 15 January 2010 when Mr Arkle set out EHL's proposals for a new lease. On 16 November Mr Arkle sent the e-mail I have quoted from at [5] above asking about progress on the new lease. Again, it is difficult to see why anything should have changed in the parties' contractual relationship between these dates. Mr Arkle referred in his e-mail to both sides being content in the meantime for matters to continue as they currently exist. On that basis, nothing had changed.
20. The judge in the passages from [26-30] of his judgment quoted earlier seems to have attached significance to what he regarded as the stalling of the negotiations between August 2010 and June 2011. During this period the parties were, he reasoned, no longer in what Nicholls LJ in Javad v Aqil [1991] 1 WLR 1007 described as the throes of negotiation and there was, according to the judge, a shift of focus caused by the tenant's insistence that any new lease should have a break clause to allow EHL to vacate, if it wished, in two or three years' time in order to move into a new building. But the correspondence and e-mails between the parties, most particularly on 15 June 2011, seem to me to confirm that any break was to be achieved through the medium of a break clause in the new lease rather than any new intermediate arrangement.
21. Javad v Aqil is a decision of this court which provides a convenient and authoritative summary of the law as to when, in circumstances like the present, the court should infer the creation of a periodic tenancy as opposed to a tenancy at will. The case itself concerned the occupation of premises and the payment of "rent" pending agreement on the terms of a proposed lease for 10 years. When the negotiations broke down and the landlord sought possession on the basis of there being a tenancy at will, the defendants alleged that a protected periodic tenancy had been created by the taking of possession and the acceptance of rent. The defendants failed both before the judge and on appeal.
22. The judgment of Nicholls LJ contains a comprehensive review of the relevant authorities but, for the purposes of this appeal, the following passages seem to be those most relevant:

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

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

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

23. When a party holds over after the end of the term of a lease he does so, without more, as a tenant on sufferance until his possession is consented to by the landlord. With such consent he becomes at the very least a tenant at will and his continued payment of the rent is not inconsistent with his remaining a tenant at will even though the rent reserved by the former lease was an annual rent. The payment of rent gives rise to no presumption of a periodic tenancy. Rather, the parties' contractual intentions fall to be determined by looking objectively at all relevant circumstances. The most obvious and most significant circumstance in the present case, as in Javad v Aqil, was the fact that the parties were in negotiation for the grant of a new formal lease. In these circumstances, as in any other subject to contract negotiations, the obvious and almost overwhelming inference will be that the parties did not intend to enter into any intermediate contractual arrangement inconsistent with remaining parties to ongoing negotiations. In the landlord and tenant context that will in most cases lead to the conclusion that the occupier remained a tenant at will pending the execution of the new lease. The inference is likely to be even stronger when any periodic tenancy would carry with it statutory protection under the 1954 Act which could be terminated by the tenant agreeing to surrender or terminating the tenancy by notice to quit: see Cardiothoracic Institute v Shrewdcrest Ltd [1986] 1 WLR 368. This point is given additional force in the present case by the fact that the intended new lease, like the old lease, was to be contracted out.
24. The judge interpreted the reference by Nicholls LJ to the throes of negotiation as importing some requirement for a particular intensity of negotiations. But, in my view, it means no more than that the negotiations should be continuing in the sense that both parties remain of the intention that there should be a new lease on terms to be agreed. Mr Rosenthal for EHL accepted that one could have a case in which the negotiations either broke down or came to an end but the tenant was allowed to remain in occupation paying the rent and other outgoings. In time the correct inference in such a case might be that the parties had chosen to regulate their legal relationship by something other than the grant of a new long lease and a periodic tenancy might then be implied. An example of this sort of case is Walji v Mount Cook Land Limited [2002] 1 P&CR 13 where the parties reached agreement on the terms of a new lease but then did nothing further for years in terms of executing such a lease. The judge inferred that a periodic tenancy had come into existence and his decision was affirmed on appeal.
25. The present case seems to me to be very different. Ms Betts for BWT submitted that a periodic tenancy should be deemed to have come into existence between January 2010 and June 2011 when the negotiations had stalled. But the e-mail of 16 November 2010 confirms that both parties continued to work on the assumption that a new lease would be granted: the negotiations, although painfully slow, were never abandoned; and in June 2011 they reached fruition in agreement on the terms. None of this is consistent with the creation of a yearly tenancy in advance of the grant of a new lease or, in particular, with one which would be protected under the 1954 Act.
26. The judge's view that a yearly tenancy would have arisen after 26 August 2011 is equally unsupportable. Not only is it inconsistent with EHL's expressed intention to vacate. It also, I think, places far too much emphasis on the contents of Mr Arkle's e-mail. His suggestion was that EHL should continue to hold over "paying as we have to date" until vacating in 2012. This contemplates no change in EHL's status in the interim which was, for the reasons I have explained, that of a tenant at will. I do not therefore understand how BWT's acceptance of this proposal can carry with it the implication of a protected yearly tenancy.
27. I would therefore allow the appeal and make the declaration sought by EHL.

Lord Justice Christopher Clarke :

28. I agree.

Lord Justice Longmore :

29. I agree also.