England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		12th March 2007

MR JUSTICE MANN:

1. This is an application for summary judgment on a claim for specific performance of two agreements for leases. The agreements are made between the claimant, Cameron, as landlord and the defendant, Rolls-Royce, as tenant.
2. The facts can be shortly stated. Rolls-Royce was between 1999 and 2002 the tenant of two sets of premises, office premises and industrial premises, at the Atlantic Industrial Complex, Bootle. It held sub-tenancies for a term of three years from 30^th September 1999 to 29^th September 2002. Both of those subleases were contracted out of the security of tenure provisions of Part II of the Landlord and Tenant Act 1954. When the underleases expired, Rolls-Royce remained in occupation while negotiations were carried on for the renewal of the leases. During that period no moneys were paid in respect of the occupation. The negotiations were concluded on 29^th May 2003 when two agreements for lease were entered into, one in respect of each of the office and industrial premises respectively.
3. The terms of those agreements were substantially identical. They provided in each case for Rolls-Royce to take a lease of the relevant premises for a period from 1^st October 2002 to 27^th March 2007, both leases to be contracted out of the 1954 Act. Pending the grant of those leases, Rolls-Royce was given what was described as a licence of each premises in substance on the same terms as the leases. On the entering into of the agreement a back fee was paid to Cameron at the lease rental rate for the period between the expiry of the old leases and the date of the agreement.
4. Each agreement was said to be conditional in two respects. The first condition was the obtaining of an order of the court sanctioning the contracting out of the intended lease from the security of tenure provisions of the 1954 Act. The second condition was obtaining the consent of the superior landlord. The first condition was fulfilled when orders to that effect were granted on 27^th May 2004. The second condition proved a little more problematical but, at the latest, it was fulfilled on 19^th January 2007. There is some argument as to whether it might have been fulfilled before then. The conditions having been fulfilled, Cameron called on Rolls-Royce to enter into the leases in question. Rolls-Royce did not and does not wish to do so. That is not because it wishes not to occupy the premises, but because it wishes to occupy the premises beyond March 2007.
5. Historically speaking, various points were taken but the dispute between the parties has now been distilled to a relatively narrow one. Rolls-Royce maintains that the rights of occupation given under the agreements in respect of both premises, pending grant of the leases, was pursuant to a lease and not a licence. It maintains that that lease has the benefit of the protection afforded by Part II of the 1954 Act and that it is not obliged to take the contracted out leases because the obligation to do so, if fulfilled, would give rise to a surrender by operation of law of its present leases and an agreement to surrender its present 1954 Act protected leases would be void under section 38 of the 1954 Act.
6. This matter has come before me pursuant to an order for expedition. I was told that Cameron has served a break notice under its own tenancy and the status of Rolls-Royce as a 1954 Act protected tenant or otherwise might be relevant to the validity of that notice. What Rolls-Royce is now saying is that despite the fact that the original three-year term was contracted out, and despite the fact that it freely entered into an agreement to enter into a further contracted out agreement, and despite the fact that it jointly applied with Cameron to the court in order to have that agreement sanctioned in the normal way under the then applicable legislation, it is nevertheless now entitled to insist on what it says are its rights to a tenancy under the current agreement which give it, according to Rolls-Royce, security under that Act which would entitle it to remain in the premises beyond 27^th March 2007.
7. I need hardly say how unattractive that position is and I confess to some surprise that Rolls-Royce should take the point. Mr. Jonathan Small QC, who appeared for Rolls-Royce, acknowledged that the point was not an attractive one and was unable to advance any reason why it might not be appropriate to describe Rolls-Royce's conduct as "dishonourable": see Lord Denning in Joseph v. Joseph [1967] 1 Ch 78 at page 91C. However, what is obviously important is not the adjective to apply to this conduct but whether it is legally justified and whether the stance of Rolls-Royce is legally correct.
8. The documents under which Rolls-Royce takes its right or interest are the two agreements of 29^th May 2003. Since they are, for practical purposes, in the same terms I can take the detail of one of them, the one relating to the industrial premises. Recital 1 of the agreement sets out various definitions which I do not need to deal with. Recital 2 records that:

"The Landlord has agreed to let the Demised Premises to the Tenant upon the following terms of this Agreement."

9. Clause 1 of the body of the Agreement then contains "The Conditions". It reads:

"1. The Conditions

1.1 This Agreement is conditional upon the full discharge of the Conditions.

1.2 The Conditions are that:

1.2.1 The Court Order is obtained.

1.2.2 The consent of the Superior Landlord is obtained to the grant of the Underlease and the Office's Underlease."

10. The court order is obviously the order excluding the security of tenure provisions of the 1954 Act. Clauses 1.3 and 1.4 impose obligations to join in applications to the court and the landlord. I do not need to read them. Clause 1.5 reads:

"1.5 Upon the discharge of the last of the Conditions, this Agreement shall become unconditional."

11. Clause 2 is the important provision dealing with rights of occupation. It provides:

"Occupation

Upon the date hereof vacant possession of the Demised Premises shall be given to the Tenant immediately and the Tenant may occupy the Demised Premises as a licensee upon the following terms:

2.1 The Tenant shall use the Demised Premises for the purposes authorised by the Lease

2.2 The Tenant shall subject to the proviso hereafter contained (whether or not it shall occupy the Demised Premises pursuant to clause 2.1 hereof) pay to the Landlord from 1^st October 2002 until the grant of the Lease or until this Agreement shall be rescinded a licence fee at the same yearly rate and payable at the same times and in the same manner as the commencing yearly rent (if any) and other payments other than rent to be reserved by the Lease together with any other monies in respect of the Demised Premises which would have been payable by the Tenant if the Lease had then been granted. Provided that the Tenant shall not be liable to pay the licence fee service charge or other outgoings if the Tenant is required to vacate the Demised Premises by the Landlord or any Superior Landlord.

2.3 Any monies paid as aforesaid shall upon completion of the Lease be treated (pro tanto) as the payment of such monies that would otherwise be due under the Lease in respect of the same period.

2.4 The Tenant shall be deemed to occupy the Demised Premises subject to the same exceptions reservations covenants and condition and to the other provisions contained in the Lease so far as they are not inconsistent with the said licence and this Agreement and so that the Landlord shall have and be entitled to all remedies by distress action or otherwise for recovering the licence fee in arrear and for any breach of any of the agreements on the part of the Tenant as if the Lease had been actually granted but nothing in this sub clause shall vary or affect the application of the next succeeding clause and the Landlord shall comply with the obligations on its part contained in the Lease so far as they are not inconsistent with this Agreement.

2.5 Until the grant of the Lease this Agreement shall not operate or be deemed to operate as a demise of the Demised Premises nor shall the Tenant have or be entitled to any estate right title or interest in the Demised Premises (other than the said licence).

2.6 The Licence hereby granted shall terminate on the 27^th March 2007 or earlier upon termination of this agreement pursuant to clause 5.1 or upon the grant of the Lease."

12. Clause 3.1 provides that:

"The Landlord shall grant the Lease and the Tenant shall accept and execute a counterpart of the Lease within 14 working days after the date this Agreement shall have become unconditional ×."

13. Clause 5 entitled "General Provisions" provides:

"5.1 The Landlord may determine the licence to occupy and this Agreement:

5.1.1 forthwith by giving notice to that effect in the event that the Tenant shall have failed to pay any instalment of the licence fee or other monies due hereunder within twenty-eight days after notice has been served on the Tenant stating that it shall have become due under the provisions of this Agreement; or

5.1.2 on 14 days written notice to the Tenant if the Tenant shall have committed any material breach of its obligations under this Agreement which the Tenant has failed to rectify within 14 days of service on the Tenant of a notice of such breach."

There appears to be no express provision dealing in terms with what is to happen if the landlord's consent could not be obtained.

14. It is the contention of Rolls-Royce that what purports to be the grant of a licence in clause 2 is in fact the grant of a tenancy. Mr. Small says that Rolls-Royce had exclusive possession of the premises at a term and for a rent. Those three crucial indicia mean that there was a tenancy of both sets of premises from the date that the agreement was signed. There was no contracting out from the effects of Part II of the 1954 Act in respect of that tenancy so it was a tenancy thus protected. Were the contracted out tenancy to be granted, that would give rise to a surrender by operation of law of the present tenancy arising under the agreement itself. That would offend against section 38. Under section 38 of the 1954 Act the following is provided:

"(1) Any agreement relating to a tenancy to which this Part of this Act applies (whether contained in the instrument creating the tenancy or not) shall be void (except as provided by subsection (4) of this section) insofar as it purports to preclude the tenant from making an application or request under this Part of this Act or provides for the termination or the surrender of the tenancy in the event of his making any such application or request or for the imposition of any penalty or disability on the tenant in that event."

Since a surrender would be inevitable the provision requiring the grant of the new tenancy would be one which precluded the tenant from making an application or request for a new tenancy under the Act and the obligation is, therefore, according to Mr. Small, void.

15. Mr. Gaunt QC, for Cameron, said that the relationship under the ostensible licence was indeed that of a licensor/licensee, so there was no question of the application of section 38. He had other points, and other points arose during the hearing but, logically, the first question that I should address is whether or not Mr. Small is right in saying that the rights of Rolls-Royce were and are those of a tenant and not those of a licensee.
16. Looked at against the background of the matter and against what the parties were apparently trying to achieve when they entered into the agreements, it seems fairly clear that they cannot have intended the grant of a tenancy and particularly one to which the 1954 Act applied. The original three-year term was contracted out and, during the period between then and the execution of the agreements it can hardly be contended that there was a tenancy at all unless it was a tenancy at will, much less one to which the Act applied. The ostensible purpose of the two agreements was to bring about a situation in which Rolls-Royce were in the premises with the benefit of a tenancy but without the benefit of the protection of the Act. It might be thought to be a remarkable suggestion or conclusion that they would acquire such an interest and such protection under the agreement itself. It would apparently have defeated the whole object of the exercise. The terms of the agreement itself seem to make this clear. The interest of Rolls-Royce under the agreement is said to be a licence and there is an attempt to achieve express agreement but no legal estate is to be acquired: see clause 2.5.
17. However, the authorities make it plain that such expressions, labels and apparent intentions are not determinative of the question of what interest is created. What matters is what interest the parties have actually managed to create rather than the interest that they thought they had created: see Street v. Mountford [1985] 1AC 809. I can take such matters into account but I am not to be governed by them: see

Queen on the Application of National Car Parks Limited v Trinity Development Company (Banbury) Ltd. CA unreported, 18^th October 2001,[2001] EWCA Civ 1686.

18. Mr. Small's starting point was Street v. Mountford and the exclusive possession/term/rent trinity. He said all those elements were present in the instant case. I am prepared to approach this matter on the footing that he is right about that. Nothing much turns on the questions of term and rent and Mr. Gaunt did not really feel himself able to argue that there was no exclusive possession in these circumstances. However, as is made plain in Street v. Mountford that is not an answer to the question in all cases. There are circumstances in which those factors are consistent with a licence and only a licence. One of those situations is where a person is in occupation of land pending a sale of the land. As Lord Templeman said in Street v. Mountford, at page 826H to 827B:

"Sometimes it may appear from the surrounding circumstances that the right to exclusive possession is referable to a legal relationship other than a tenancy. Legal relationships to which the grant of exclusive possession might be referable and which would or might negative the grant of an estate or interest in the land include occupancy under a contact for the sale of the land, occupancy pursuant to a contract of employment or occupancy referable to the holding of an office. But where as in the present case the only circumstances are that residential accommodation is offered and accepted with exclusive possession for a term at a rent, the result is a tenancy."

19. Of particular significance is the reference to "occupancy under a contract for the sale of the land". It is not unknown for an intending purchaser to be permitted to occupy the land prior to completion under what is expressed to be a licence and that is, doubtless, what Lord Templeman had in mind. That is presumably the thinking behind his earlier passage at page 821B:

"In Errington v. Errington and Woods [1952] 1KB 290 and in the cases cited by Denning LJ at page 297 there were exceptional circumstances which negatived the prima facie intention to create a tenancy, notwithstanding that the occupier enjoyed exclusive occupation. The intention to create a tenancy was negatived if the parties did not intend to enter into legal relationships at all, or where the relationship between the parties was that of vendor and purchaser, master and service occupier, or where the owner, a requisitioning authority, had no power to grant a tenancy. These exceptional circumstances are not to be found in the present case where there has been the lawful, independent and voluntary grant of exclusive possession for a term at a rent."

Again, note the reference to "vendor and purchaser" and note in particular the reference to "independence" in the last sentence of that citation.

20. It seems to me that the case of the vendor and purchaser is clearly the position in the case before me. There is no significant distinction for these purposes between a contract for the sale of a freehold and a contract for the grant of a lease. In this case the occupation of Rolls-Royce was permitted pending the grant of a lease. That there is no material distinction between those two instances is apparent from Essex Plan Ltd. v. Broadminster (1988) 56 P&CR 353. That was a decision of Hoffmann J (as he then was). In that case a person with the benefit of an option to take a lease was allowed into the premises pursuant to what was described as, and purported to be, a licence. Hoffmann J held that it was indeed a licence. At page 355 of the report he cites the passage from page 826 and 827 of Street v. Mountford that I have cited and observes:

"Earlier in his speech Lord Templeman had contrasted the case in which the relationship between the parties was that of vendor and purchaser with an independent grant of exclusive possession for a term at a rent."

21. Hoffmann J there emphasised, as I have done, the reference to "independence" at page 821. He goes on to say this at the foot of page 355:

"Mr. Pearce drew attention to the fact that contracts for the sale of land commonly provide for the purchaser to be allowed into occupation as a licensee pending completion on terms that he is to pay all outgoings together with interest on the purchase money and is to keep the premises in good repair. The purchaser's possession is ancillary and referable to his interest in the land created by his contractual right to a conveyance and Lord Templeman acknowledges that such a relationship, although exhibiting the ordinary badges of a tenancy, does not create one.

The fact that the contract in this case provided for Essex Plan to acquire a long lease rather than the freehold is not material. The difference between this case and the ordinary sale under the National Conditions is that Essex Plan had an option to take the lease but was not obliged to do so. In my judgment this also does not affect the application of the principle. The option gave Essex Plan the right to call for the grant of the lease and therefore gave it in equity an immediate interest in the land. Its entry into occupation pending the exercise or expiry of the option was ancillary and referable to that interest. There is therefore no need to infer the creation of a tenancy which would give Essex Plan a different interest in the same land."

22. The relevant distinction for these purposes is therefore between cases where the licence or purported licence and some other transaction are entirely independent, so that the licence is a stand-alone transaction, and cases where the occupation under the licence and the licence itself is ancillary to a relationship which is part of a bigger picture. If the latter is true, as it may be in the case of a contract to acquire an interest in land, then the exception to Lord Templeman's prima facie rule can be invoked.
23. By the end of his argument, Mr. Small did not seem to dispute this. He sought to say that this exception to the Street v. Mountford basic position did not apply because our case was not a case of the occupation arrangement being merely ancillary to something else. He said that the licence provisions and the lease-granting provisions of the agreement were severable, making the licence itself a stand-alone licence. This severability took the case outside the Street v. Mountford exception; otherwise he accepted the case would have been within it.
24. This alleged severability involves a finding that the parties intended two distinct severable and ultimately independent things. In no particular order, Mr. Small suggested that the parties intended, first, that there should be a contracted out lease ending on 27^th March 2007. They also intended, second, that there should, in any event and, irrespective of the grant of the tenancy, be a licence terminating on the same date and effectively on the same terms. That meant that the licence was, in effect, a completely separate and stand-alone transaction.
25. One only has to express the matter in the way in which I have expressed it for it to be apparent how absurd the notion is. If the parties intended a licence in any event, why would they intend a lease as well? What would be the point of the lease? Mr. Small sought to justify this on the basis of some commerciality or other but I am afraid that despite his best endeavours I completely fail to see what that commerciality was. If one is looking to commerciality, then that seems to me to compel non-severability. The lease was plainly what was ultimately intended and the licence was intended to govern the position in the meanwhile. It is true that the agreement is not particularly satisfactorily drafted in specifying what was to happen if the lease became impossible (for example if the landlord's consent were not obtained), but whatever the answer to that is, the overall integration of lease and licence is clear: they are simply not severable.
26. That then is an answer to the case. As I have said, Mr. Small accepted that if the licence did not fall to be treated as a stand-alone document, then the vendor/purchaser exception to the prima facie Street v. Mountford position would obtain. He is right to accept that. I have come to the conclusion that this is plainly a case of a licence being granted in the context of the acquisition of the larger interest and, as such, the nature of the interest granted by Cameron and obtained by Rolls-Royce under the agreement itself and pending the grant of the lease is that of a licence only.
27. That makes it unnecessary for me to rule on other submissions made by Mr. Gaunt as to why section 38 would not apply. Among them were submissions made on section 28 of the 1954 Act. The possible application of this section was raised by me at the outset of the hearing. It reads:

"Where the Landlord and Tenant agree for the grant to the Tenant of a future tenancy of the holding, or of the holding with other land, on terms and from a date specified in the Agreement, the current tenancy shall continue until that date but no longer, and shall not be a tenancy to which this Part of this Act applies."

28. It seemed to me that the provisions of that section could very arguably operate in Cameron's favour with the effect that even if the agreements granted leases, they did not have the protection of the Act because of the words of that section. Mr. Gaunt adopted the point. However, since the point was not apparently in play before the beginning of the hearing, I am not satisfied that it has had the airing and consideration that it would deserve were I to base any part of my decision on it, so I will say no more about it than that.
29. There being no other defence to specific performance, I shall therefore give judgment for the claimant and order it.

(For proceedings after judgment and further rulings on costs and permission to appeal see separate transcript)