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United Kingdom Supreme Court
You are here: BAILII >> Databases >> United Kingdom Supreme Court >> S Franses Limited v The Cavendish Hotel (London) Ltd [2018] UKSC 62 (5 December 2018)
URL: http://www.bailii.org/uk/cases/UKSC/2018/62.html
Cite as: [2018] Bus LR 2504, [2018] WLR(D) 778, [2019] 2 All ER 463, [2019] L & TR 8, [2018] 3 WLR 1952, [2019] 1 P & CR DG14, [2018] UKSC 62, [2019] AC 249
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Summary
[2018] UKSC 62
On appeal from: [2017] EWHC 1670 (QB)
JUDGMENT
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S Franses Ltd (Appellant) v The Cavendish Hotel (London) Ltd (Respondent)
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before
Lady Hale, President Lord Sumption Lady Black Lord Briggs Lord Kitchin
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JUDGMENT GIVEN ON |
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5 December 2018 |
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Heard on 17 October 2018 |
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Appellant |
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Respondent |
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Joanne Wicks QC |
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Guy Fetherstonhaugh QC |
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Benjamin Faulkner |
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Nicholas Taggart |
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(Instructed by David Cooper & Co) |
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(Instructed by Maples Teesdale LLP) |
LORD SUMPTION: ( with whom Lady Hale, Lady Black and Lord Kitchin agree)
“that on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding ...”
Section 31A (which was inserted by the Law of Property Act 1969, section 7(1)), provides:
“(1) Where the landlord opposes an application under section 24(1) of this Act on the ground specified in paragraph (f) of section 30(1) of this Act … the court shall not hold that the landlord could not reasonably carry out the demolition, reconstruction or work of construction intended without obtaining possession of the holding if -
(a) the tenant agrees to the inclusion in the terms of the new tenancy of terms giving the landlord access and other facilities for carrying out the work intended and, given that access and those facilities, the landlord could reasonably carry out the work without obtaining possession of the holding and without interfering to a substantial extent or for a substantial time with the use of the holding for the purposes of the business carried on by the tenant; or
(b) the tenant is willing to accept a tenancy of an economically separable part of the holding and either paragraph (a) of this section is satisfied with respect to that part or possession of the remainder of the holding would be reasonably sufficient to enable the landlord to carry out the intended work.”
Section 37 provides that where a court is precluded from ordering the grant of a new tenancy on certain grounds, including this one, the tenant is entitled to compensation.
3. The premises in issue on this appeal comprise the ground floor and basement of 80, Jermyn Street in the St James’s area of London. The freeholders of the building are the South London and Maudsley NHS Foundation Trust and the landlord is the head lessee. The tenant is a textile dealership and consultancy, specialising in antique tapestries and textiles. It occupies the ground floor and basement under an underlease for a term of 25 years from 2 January 1989, and uses them as a retail art gallery, showroom and archive. The rest of the building is occupied and managed by the landlord as a hotel. The local planning authority, Westminster City Council, has designated the St James’s area as a “special policy area”, in which it seeks to protect and promote certain uses, namely private members clubs, art galleries and niche retail outlets. Pursuant to that policy, the premises occupied by the tenant are recognised as having a specific, sui generis, use for planning purposes, namely “mixed use, comprising retail, depository, research centre, archive library, publishing and conservation for historic tapestries, textile art and carpets.” Any material change of use would require planning consent.
4. On 16 March 2015, the tenant served statutory notices requesting the grant of a new tenancy. On 15 May 2015, the landlord served a statutory counter-notice opposing the grant of a new tenancy under section 30(1)(f) of the Act. On 8 June 2015, the tenant applied in the Central London County Court for an order. A preliminary issue was directed whether that ground of opposition was made out.
5. The facts are unusually stark. In its defence, the landlord put forward several successive schemes said to represent the works which it intended to carry out. These works were designed (i) to be sufficiently “substantial” to qualify under ground (f); (ii) to be too substantial and disruptive to be carried out by exercising a right of entry while the tenant remained in possession; and (iii) to avoid the need for planning permission, which would have enabled the tenant to argue that its likely refusal would make the project ineffective. In the words of the judge (HHJ Saggerson), the proposed scheme of works was “designed with the material intention of undertaking works that would lead to the eviction of the tenant regardless of the works’ commercial or practical utility and irrespective of the expense.” The scheme went through three iterations. The first scheme involved incorporating the former bar of the hotel into the ground floor of the premises. This scheme was shortly abandoned and replaced by a new scheme which involved creating two new retail units incorporating the premises occupied by the tenant and part of the hotel, and carrying out certain associated external works including the installation of a new street door to allow access to one of the units. The planning officers of the local authority recommended this scheme for refusal, whereupon it was withdrawn and replaced by a third scheme, which was the one eventually relied upon at the trial of the preliminary issue. The third scheme was based on the second, with two significant differences. First, it omitted the external works, which would have required planning permission. For this reason, the internal wall dividing the two proposed retail units stopped two metres short of the shopfront at ground floor level; and there was no external door to one of the units, so that it could be accessed only through the other. Secondly, the new scheme added more extensive internal works, many of which were objectively useless. They included the artificial lowering of part of the basement floor slab, in a way which would achieve nothing other than the creation of an impractical stepped floor in one of the units; the repositioning of smoke vents for no reason; and the demolition of an internal wall at ground floor level followed by its immediate replacement with a similar wall in the same place. The cost of the scheme was estimated by the landlord at £776,707 excluding VAT, in addition to statutory compensation of £324,000 payable to the tenant.
6. It is common ground that the proposed works had no practical utility. This was because, although the works themselves required no planning permission, it would be impossible to make any use of them at all without planning permission for change of use, which the landlord did not intend to seek. Planning permission would have been required because the scheme involved combining premises permitted for hotel use with premises permitted for sui generis use. In addition, one of the retail units was unusable without an entrance from the street. In accordance with a common practice in this field, the landlord supported its evidence of intention with a written undertaking to the court to carry out the works if a new tenancy was refused. The sole purpose of the works was to obtain vacant possession. The landlord’s evidence was that it was prepared to run the risk that the premises occupied by the tenant would be rendered unusable “in order to secure its objective of undertaking [the third scheme] and thereby remove the claimant from the premises.” The landlord submitted that “the works are thoroughly intended because they are a way of obtaining possession. That is all there is to it.” As the landlord’s principal witness put it, the third scheme was “designed purely for the purpose of satisfying ground (f).” The judge found that the landlord genuinely intended to carry out the works if they were necessary in order to get rid of the tenant, but that it did not intend to carry out the works if it were not necessary to do so for that purpose. It would not, for example, have been necessary to carry out the works if the tenant agreed to go voluntarily, or it were to be found possible to carry them out by exercising a right of entry without obtaining vacant possession. The landlord gave evidence that in the longer term, it was hoped that the departure of the tenant would facilitate a more ambitious plan of works to add 28 bedrooms to the hotel. It was proposed to review the desirability of proceeding with this plan in 2018. These further works were not, however, the works relied upon by the landlord for the purpose of satisfying ground (f).
7. Schemes like this will not always be economically feasible. They depend on the value of vacant possession exceeding the cost of the useless works. But in locations such as the west end of London, where property values are high and/or rentals depressed by planning restrictions, they may make economic sense as a means of obtaining vacant possession. On that footing, Judge Saggerson found that the landlord genuinely intended to carry out the works and that ground (f) was made out. He therefore declined to order a new tenancy. On appeal to the High Court, Jay J agreed, but gave permission for a leap-frog appeal to this court.
8. The justification for the leap-frog appeal was that the decision of the courts below was based on a line of authority in the Court of Appeal and the House of Lords to the effect that the operation of the section depended on a two-part test. The landlord had to prove (i) that it had a genuine intention to carry out qualifying works; and (ii) that it would practically be able to do so. It was submitted on behalf of the landlord that the effect of these decisions was that nothing else mattered. In particular, the landlord’s motives, the reasonableness of its intentions, or the objective utility of the works, whether for its own purposes or in the public interest, were all alike irrelevant, except (as the landlord accepted) as material from which the court might infer that the intention to carry them out was not genuine.
9. The origin of the two-part test proposed by the landlord is the decision of the Court of Appeal in Cunliffe v Goodman [1950] 2 KB 237.This was an appeal in an action for damages for breach of a repairing covenant on the expiry of a lease. By section 18(1) of the Landlord and Tenant Act 1927, no such damages were recoverable “if it is shown that the premises … would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant”. The language, purpose and context of the statutory provision under consideration were therefore quite different from those of Part II of the Act of 1954. But it had been held in Marquess of Salisbury v Gilmore [1942] 2 KB 38 that the test for the application of section 18(1) depended on the intention of the landlord at the time when the tenancy came to an end, and the judgment of Asquith LJ in Cunliffe has been treated as a general definition of intention. He held, at p 253, that it connoted a “state of affairs which … he decides, so far as in him lies, to bring about, and which, in point of possibility, he has a reasonable prospect of being able to bring about, by his own act of volition.” On the facts of that case, the landlord failed because it was found that he had no settled intention to carry out the works but was reserving his final decision until further information should become available.
10. After the passage of the 1954 Act, a trio of cases addressed the question of intention in the context of ground (f). The background to all three cases was similar. The landlord wished to occupy the premises himself, but ground (g), which authorised the refusal of a new tenancy in that case, was available only if he had held his interest in the premises for at least five years before the end of the tenant’s term. Landlords who had acquired their interest within the five-year period therefore proposed works to redevelop the premises before moving into occupation, in order to bring themselves within ground (f) instead. The argument was that the existence of ground (g) implied that ground (f) should not be available to a landlord who intended to occupy the premises himself but failed to satisfy the conditions on which ground (g) was available.
11. In Atkinson v Bettison [1955] 1 WLR 1127, the Court of Appeal held that this kind of problem fell to be resolved by determining which was the primary reason for the landlord’s desire to obtain vacant possession. The judge had refused to order a new tenancy because he found that the landlord’s real purpose was to occupy the premises and that the proposed redevelopment was no more than an ancillary purpose directed to that end. The Court of Appeal affirmed his decision. Denning LJ (with whom Hodson and Morris LJJ agreed) held that, where there were two purposes, only the primary purpose was relevant.
12. In Fisher v Taylors Furnishing Stores Ltd [1956] 2 QB 78 it was held that the landlord’s intention to demolish and reconstruct satisfied ground (f), notwithstanding that his purpose was to occupy the premises himself without being able to satisfy ground (g). Denning LJ, delivering the leading judgment in the Court of Appeal, reinterpreted his earlier judgment in Atkinson v Bettison and resiled from his statement that only the primary purpose was relevant. A landlord might have two purposes but, provided that the purpose of demolishing or reconstructing the premises was genuine, it would satisfy ground (f). Grounds (f) and (g) were distinct and each of them had to be considered on their own terms separately. The true view of the earlier decision, he said (p 84), was that the courts should ensure that landlords whose real purpose was to occupy the premises themselves but failed to satisfy ground (g), did not devise spurious schemes of works in order to obtain possession on ground (f):
“For this purpose the court must be satisfied that the intention to reconstruct is genuine and not colourable; that it is a firm and settled intention, not likely to be changed; that the reconstruction is of a substantial part of the premises, indeed so substantial that it cannot be thought to be a device to get possession; that the work is so extensive that it is necessary to get possession of the holding in order to do it; and that it is intended to do the work at once and not after a time. Unless the court were to insist strictly on these requirements, tenants might be deprived of the protection which Parliament intended them to have. It must be remembered that if the landlord, having got possession, honestly changes his mind and does not do any work of reconstruction, the tenant has no remedy. Hence the necessity for a firm and settled intention.”
Morris LJ, who had also sat in Atkinson v Bettison , said (p 89):
“ Where, as in section 30(1)(f), proof of an intention is to be supplied, and of an intention related to a particular time, then the genuineness of a declared intention may have to be decided. Considerations as to what may be a landlord’s ‘primary purpose’, or his ‘real intention’, or his ‘main purpose’, or his ‘secondary purpose’, or his ‘real reason’ (to quote phrases which have been used), are only of relevance and assistance in the course of deciding whether the landlord has proved that he genuinely has an intention of doing one of the things specified in section 30(1)(f), and of doing it on the termination of the current tenancy.”
13. The third case was the decision of the House of Lords in Betty’s Cafés Ltd v Phillips Furnishing Stores Ltd [1959] AC 20. The decision is authority for two propositions: (i) that the relevant intention of the landlord was his intention at the date of the hearing; and (ii) that grounds (f) and (g) were distinct grounds of opposition, and that accordingly ground (f) should not be read as implicitly excluding cases where the landlord wished to occupy the premises himself. However, the tenant also sought to resurrect the argument rejected in Fisher v Taylors Furnishing Stores Ltd that redevelopment must be the landlord’s primary purpose, and two members of the Appellate Committee, Lord Denning and Lord Morton, commented on that attempt, obiter. Lord Denning (p 52) reaffirmed the view which he had expressed in Fisher . Lord Morton (pp 44-45) also rejected the tenant’s argument, but on the more limited ground that it wrongly assumed that grounds (f) and (g) were mutually exclusive categories. The speeches throw little light on the broader relevance (if any) of the landlord’s motives in seeking to redevelop the premises. But the House may fairly be said to have implicitly endorsed the approach taken in Fisher rather than that in Atkinson .
14. The decision of the Court of Appeal in Housleys Ltd v Bloomer-Holt Ltd [1966] 1 WLR 1244 turned on the identity of the relevant premises for the purposes of ground (f). Diplock LJ, however, took the opportunity to point out that Betty’s Cafés must be regarded as having definitively laid to rest the concept of the primary purpose floated in Atkinson v Bettison . He observed (p 1251) that the fallacy in that case lay in the proposition that “one had got to look and see what the primary intention or purpose or motive of the landlord was.” The same point was subsequently made by the Court of Appeal in Turner v Wandsworth Borough Council [1994] 69 P & CR 433, where it was decisive. The facts of that case were that the landlord proposed to demolish the premises with a view to leasing them for a short period as a car park and selling them thereafter if market conditions were favourable. The judge found that the intention to demolish was genuine but that it was colourable because it was simply a device to be able to sell. The Court of Appeal allowed the appeal. Staughton LJ, delivering the only reasoned judgment, treated the above cases as authority for the proposition that “in general, motive is irrelevant, provided there is a genuine intention to demolish or reconstruct” (p 436).
15. As Baroness Hale pointed out in Majorstake Ltd v Curtis [2008] AC 787, paras 34-35, it is clear that for the purposes of section 30(1)(f) of the Act of 1954 it is for the landlord to decide what works he wishes to carry out and where. It follows that if his intention is genuine, it cannot matter whether it is reasonable, or whether reasonable changes to the scheme would make it consistent with the tenant’s continued possession of the demised premises: see Decca Navigator Co Ltd v Greater London Council [1974] 1 WLR 748; Blackburn v Hussain [1988] 1 EGLR 77, 79 (Taylor LJ).
16. Although the point must be regarded as res integra in this court, I accept the submission of Mr Fetherstonhaugh QC (who appeared for the landlord) that the touchstone of ground (f) is a firm and settled intention to carry out the works. The landlord’s purpose or motive are irrelevant save as material for testing whether such a firm and settled intention exists. This is implicit in the abundant case law generated by the Act since Atkinson v Bettison and it is the plain meaning of “intention” in both ground (f) and ground (g). Mr Fetherstonhaugh is also surely right in saying that as a statutory interference with the landlord’s proprietary rights, the protection conferred by the Act should be carried no further than the statutory language and purpose require. It confers no more than a qualified security on the tenant. Certain interests of the landlord override whatever security it was intended to confer on the tenant, and one of them is the right to demolish or reconstruct his property in whatever way he chooses at the expiry of the term. Nonetheless, I do not think that these considerations avail the landlord on the facts of the present case.
17. This appeal does not, as it seems to me, turn on the landlord’s motive or purpose, nor on the objective reasonableness of its proposals. It turns on the nature or quality of the intention that ground (f) requires. The entire value of the works proposed by this landlord consists in getting rid of the tenant and not in any benefit to be derived from the reconstruction itself. The commercial reality is that the landlord is proposing to spend a sum of money to obtain vacant possession. Indeed, in many cases, apart from the statutory compensation, landlords with proposals like these will not even have to spend the money. They need only supply the tenant with a schedule of works substantial and disruptive enough to be inconsistent with his continued occupation. If the landlord’s argument is correct, the tenant will have no incentive to go to court just to get an undertaking to carry out the works, from which he could derive no possible benefit. He will recognise defeat and leave voluntarily. The landlord will then have no need to give an undertaking to the court and no reason to carry out the works. The result is that no overriding interest of the landlord will be served which section 30 can be thought to protect. The right to obtain vacant possession on the expiry of the existing term, which is all that the landlord is getting for his money, is not in itself an interest protected by section 30. On the contrary, in a case where the parties have not agreed to contract out of statutory protection, it is the very interest that Part II of the Act is designed to restrict.
18. These considerations are relevant not so much in themselves as because in such a case one would usually infer what in this case the landlord has been honest enough to admit, ie that the landlord’s intention to carry out the works was conditional. It intended to carry them out only conditionally on their being necessary to get the tenant out, and not, for example, if he left voluntarily or if the judge was persuaded that the works could be done by exercising a right of entry. Does an intention of this kind engage ground (f)? The courts below thought that it was a sufficient answer to this question that the condition was satisfied at the time of the trial, because it was by then clear that the tenant would not in fact leave voluntarily and that the works could not be done by way of a right of entry while he remained in possession. A dictum of Neuberger J in Al-Malik Carpets (Private) Ltd v London Buildings (Highgate) Ltd [1999] All ER (D) 971, Transcript p 11, suggests that he too would have regarded it as sufficient, although the point was not directly in issue in that case.
19. I respectfully disagree. The problem is not the mere conditionality of the landlord’s intention, but the nature of the condition. Section 30(1)(f) of the Act assumes that the landlord’s intention to demolish or reconstruct the premises is being obstructed by the tenant’s occupation. Hence the requirement that the landlord “could not reasonably do so without obtaining possession of the holding”. Hence also the provision of section 31A that the court shall not hold this requirement to have been satisfied if the works can reasonably be carried out by exercising a right of entry and the tenant is willing to include a right of entry for that purpose in the terms of the new tenancy. These provisions show that the landlord’s intention to demolish or reconstruct the premises must exist independently of the tenant’s statutory claim to a new tenancy, so that the tenant’s right of occupation under a new lease would serve to obstruct it. The landlord’s intention to carry out the works cannot therefore be conditional on whether the tenant chooses to assert his claim to a new tenancy and to persist in that claim. The acid test is whether the landlord would intend to do the same works if the tenant left voluntarily. On the facts found by Judge Saggerson, the tenant’s possession of the premises did not obstruct the landlord’s intended works, for if the tenant gave up possession the landlord had no intention of carrying them out. Likewise, the landlord did not intend to carry them out if the tenant persuaded the court that the works could reasonably be carried out while it remained in possession. In my judgment, a conditional intention of this kind is not the fixed and settled intention that ground (f) requires. The answer would be the same if what the landlord proposed was a demolition, conditionally on its being necessary to obtain possession from the court.
20. More complex issues would arise if the landlord intended to carry out some substantial part of the proposed works whether or not it was necessary to do so in order to obtain vacant possession from the court, and part of them only if it was necessary in order to gain possession. This might arise if, for example, the unconditional part of the landlord’s plan was insufficiently substantial or disruptive to warrant the refusal of a new tenancy, so that spurious additional works had to be added for the sole purpose of obtaining possession. In a situation like that, the answer is likely to depend on the precise facts. If, however, it is established that, at the time of the trial, were the tenant hypothetically to leave voluntarily, the landlord would not carry out the spurious additional works, then the tenant’s claim to a new tenancy would normally fall to be resolved by reference only to the works which the landlord unconditionally intended.
21. Just as the landlord’s motive or purpose, although irrelevant in themselves, may be investigated at trial as evidence for the genuineness of his professed intention to carry out the works, so also they may be relevant as evidence of the conditional character of that intention. In both cases, the landlord’s motive and purpose are being examined only because inferences may be drawn from them about his real intentions. Likewise, although the statutory test does not depend on the objective utility of the works, a lack of utility may be evidence from which the conditional character of the landlord’s intention may be inferred. I am not persuaded by Mr Fetherstonhaugh’s submission that if the law is as I believe it to be, landlords will disguise their intentions more effectively than his clients did. It would be unworldly for this court to ignore that possibility. But we cannot decide an issue of statutory construction on the assumption that landlords will withhold the truth from the court on an application for a new tenancy. We have to proceed on the footing litigants are honest or, if they are not, that they will be found out by the experienced judges who hear these cases.
22. This makes it unnecessary for me to deal with the tenant’s alternative submission that the landlord’s apparent intention should be disregarded for want of any commercial purpose, by analogy with the approach taken in W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300 to tax avoidance schemes. That submission is not only more radical in its implications but more difficult to reconcile with established authority on the Act of 1954.
23. I would allow the appeal and declare that on the facts found the landlord does not intend, within the meaning of section 30(1)(f), to carry out the works specified in the scheme of works relied upon in opposition to the tenant’s application for a new tenancy.
LORD BRIGGS: (with whom Lady Black and Lord Kitchin agree)