Landlord and tenant — Leasehold Property (Repairs) Act 1938 — Tenant in breach of repairing covenant — Lease covenant entitles landlord to remedy breach and recover cost of repairs — Whether covenant enforceable without leave under 1938 Act — Whether reimbursement moneys irrecoverable as penalty
By an
underlease dated July 11 1947 the defendant tenant held premises for a term of
999 years from December 24 1899 from the plaintiff landlord. By clause 2(10) of
the underlease the landlord is authorised to enter the premises to view the
state of repair and to give notice of any wants of repair. In default of the
tenant remedying the same within three months, the landlord may do the work and
recover the costs from the tenant. The tenant failed to comply with a notice
served by the landlord requiring repairs to be carried out. The landlord
intended to do the repairs and recover the costs from the tenant. The tenant
refused to allow the landlord to enter and contended that the landlord first
required leave under section 1 of the Leasehold Property (Repairs) Act 1938 to
enforce clause 2(10); further, that the clause is a penalty.
was not required. The tenant’s liability to reimburse the landlord for its
expenditure on repairs is not a liability in damages for breach of the
repairing covenant. It is not a claim to compensation for breach of the
tenant’s covenant to repair. The landlord’s claim sounds in debt not damages. Swallow
Securities Ltd v Brand [1981] 2 EGLR 48 overruled. Clause 2(10) is
not a penalty clause because it provides for the payment of a sum of money on
the happening of a specified event other than a breach of a contractual duty
owed by the party liable to make the payment to the party entitled to receive it.
The following
cases are referred to in this report.
Alder v Moore [1961] 2 QB 57; [1961] 2 WLR 426; [1961] 1 All ER 1
Apex
Supply Co Ltd, Re [1942] Ch 108
Associated
British Ports v Bailey [1990] 2 AC 703;
[1990] 2 WLR 812; [1990] 1 All ER 929; (1990) 60 P&CR 211; [1989] 1 EGLR
69; 2 EGLR 83 (HL); [1990] 1 EGLR 77
Colchester
Estates (Cardiff) v Carlton Industries plc
[1986] Ch 80; [1984] 3 WLR 693; [1984] 2 All ER 601; [1984] 2 EGLR 64; [1984]
EGD 461; (1984) 271 EG 778
DunlopPneumaticTyre
Co Ltd v New Garage and Motor Co Ltd [1915]
AC 79
Elite
Investments Ltd v TI Bainbridge Silencers Ltd
[1986] 2 EGLR 43; (1986) 280 EG 1001–1012
Export
Credits Guarantee Department v Universal Oil
Products Co [1983] 1 WLR 399; [1983] 2 All ER 205; [1983] 2 Lloyd’s Rep 152,
HL
Hamilton v Martell Securities Ltd [1984] Ch 266; [1984] 2 WLR 699;
[1984] 1 All ER 665; (1984) 48 P&CR 69
National
Real Estate & Finance Co Ltd v Hassan
[1939] 2 KB 61
Philip
Bernstein (Successors) Ltd v Lydiate Textiles
Ltd unreported June 26 1982, CA
Proudfoot
v Hart (1890) 25 QBD 42
Sidnell v Wilson [1966] 2 QB 67; [1966] 2 WLR 560; [1966] 1 All ER
681; [1966] EGD 48; (1966) 197 EG 363
Swallow
Securities Ltd v Brand (1981) 45 P&CR
328; [1981] 2 EGLR 48; 260 EG 61
This was an
appeal by the tenant, Shammai Harris, from a decision of Morritt J who, on May
10 1994, decided certain preliminary issues in an action by the landlord, John
Jervis, to enforce the covenants of an underlease.
Kim Lewison QC
and David Berkley (instructed by Liefman Rose & Co, of Manchester) appeared
for the tenant; Anthony Elleray QC and Ian Foster (instructed by James A
Singleton & Co, of Manchester) represented the landlord.
Giving
judgment at the invitation of Sir Stephen Brown P, Millett LJ said: This is an appeal by the defendant from
declarations made by Morritt J, as he then was, sitting as Vice-Chancellor of
the County Palatine of Lancaster on May 10 1994 at the trial of three issues
ordered to be tried as preliminary issues in the action. The second and third
issues are of general importance in the law of landlord and tenant and the
judge granted leave to appeal. The first issue raises a question of
construction specific to the particular lease which is the subject-matter of
the action and the judge refused leave. We thought it right to grant leave, not
least because the lease in question has still more than 900 years to run, and
the question is likely to recur from time to time during that period.
In the action
the plaintiff landlord seeks to enforce certain covenants contained in an
underlease dated July 11 1947 for a term of 999 years, less 10 days, from
December 24 1899. The underlease was granted at a premium of £26,000 and a rent
of £1,000 pa. It was originally granted in respect of the entire works at a
site at Adelphi Street, Salford. The defendant has become the tenant of part of
the site known as the West Works at an apportioned rent of £80 pa. The benefit
of the term in respect of the remainder of the site together with the leasehold
reversion to the whole are now vested in the plaintiff. The headlease was
granted on August 20 1929 for a term of 999 years from December 24 1899. The
covenants in the underlease which give rise to the preliminary issues reflect
similar covenants in the headlease. It is a reasonable inference that the 1929
headlease was granted on the surrender of an earlier lease on similar terms
granted in 1899, and that the covenants which now fall to be considered had
their origin in the 1899 lease.
The first of
the preliminary issues (‘the construction issue’) concerns the true
construction of the tenant’s repairing covenant contained in clause 2(7) of the
underlease. The second and third preliminary issues are concerned with clause
2(10) of the underlease, which gives the landlord the right from time to time
during the term to enter on the demised premises to view the state of repair
and to remedy any want of repair at the tenant’s expense. The second
preliminary issue (‘the 1938 Act issue’) is whether the clause is enforceable
by the landlord without the leave of the court first obtained under section 1
of the Leasehold Property (Repairs) Act 1938. The third preliminary issue (‘the
penalty issue’) is whether the moneys due by way of reimbursement to the
landlord pursuant to the clause are irrecoverable as a penalty.
Construction
issue
Clause 2(7) of
the underlease is in the following terms:
… the lessees
will at all times during the said term maintain, repair, and keep in good
tenantable repair and condition in all respects whatsoever the buildings which
now are, or shall hereafter be, erected or standing upon the said premises and
their respective appurtenances and will, when necessary, rebuild the said
buildings, or any of them, so that they may be at all times during the said
term of the clear letting value of £1,000 per annum.
The issue is
framed as follows:
Whether or
not on the true and proper construction of clause 2(7) of the lease the
repairing liability thereunder of the defendant only obliges the defendant to
carry out such works of repair, if any, as may be necessary to ensure that the
clear letting value of the demise premises and the buildings thereon at all
times during the term of 999 years less the last 10 days thereof granted by the
lease is £80 per annum or is alternatively £1,000 per annum.
The judge
answered the question in the negative.
The clause
imposes two distinct obligations upon the tenant, one to repair and one to
rebuild, and follows the second with qualifying words. Grammatically, therefore,
the clause is capable of two possible interpretations. The question is whether
the concluding words qualify both obligations or only the second of them.
The judge held
that they qualify the second obligation only. He reached his conclusion for two
reasons. First, the standard to which the obligation to repair is to be
performed is expressed in the clause as ‘in good tenantable repair and
condition’. That standard is not by any means necessarily the same as
sufficient to secure a letting value of £1,000 pa. Neither could sensibly stand
as a proviso to the other. Second, it was necessary to specify the event on the
occasion of which the obligation to rebuild should arise, and this was achieved
by the concluding words of the clause. Accordingly, the judge read these words
as indicating both when the obligation to rebuild arose and also the standard
to which, or the nature of the new building which, it was the obligation of the
tenant to carry out. Accordingly, the judge declared that the concluding words
of the clause qualified the second or rebuilding obligation, but not the first
or repairing obligation.
I agree with
the judge and find it unnecessary to add more than a few words of my own. If
the concluding words of the clause are taken to apply to the obligation to
repair, then the tenant is required to keep the premises in two different and
inconsistent standards of repair. This gives rise to a further question of
construction. Is the tenant required to comply with both repairing obligations
or with one only, and if with one only, with which? Even if the concluding
words do govern the obligation to repair, I do not understand on what basis it
could be argued that it is sufficient for the tenant to leave the premises in a
state of serious disrepair provided only that they are still capable of
commanding a rent of £1,000 pa. He would not thereby be performing his
obligation to keep the premises in good and tenantable repair. It is no answer
to say, as counsel for the defendant submits, that the standard of what constitutes
good and tenantable repair is judged by reference to the class of tenant likely
to take the property, and that the parties have limited that class to those
persons willing to pay no more than £1,000 pa. The expression ‘good tenantable
repair’ means such repair as, having regard to the age, character, and
locality of the property, would make it reasonably fit for the occupation
of a tenant of the class who would be likely to take it: Proudfoot v Hart
(1890) 25 QBD 42. The standard of repair required does not vary with the
lettable value of the property (which in turn will to some extent at least
depend on the standard of repair required), save in so far as this reflects its
age, character and locality.
If, therefore,
I were persuaded that the concluding words of the clause governed the
obligation to repair as well as the obligation to rebuild, I would have held
that they were words of obligation and not of limitation; that is to say, that
they imposed an additional requirement upon the tenant and did not limit or
qualify his obligation to keep the premises in good and tenantable repair.
Another way of putting it would be to say that, just as they required the
tenant to rebuild so as to achieve a minimum letting value, so they required
him to achieve at least a minimum standard of repair without relieving him of
the obligation to keep the premises in good and tenantable repair. But I prefer
to adopt the judge’s construction and hold that they do not apply to the
repairing obligation at all.
1938 Act issue
Clause 2(10)
of the underlease authorises the landlord or the superior landlords to enter
upon the demised premises from time to time during the term granted to view the
state of repair and to give notice in writing to the tenant of any defects or
want of repair. The tenant is required within three months to make good all
such defects or want of repair of which he has been given notice and in default
the landlord or the superior landlords may do the work themselves and recover
the costs and expenses of the work from the tenant on demand.
The plaintiff
has caused the premises to be inspected and has served a notice specifying the
wants of repair which he alleges exist on the property. The defendant has
failed to carry out any of the work needed to remedy such wants of repair and
it is the landlord’s intention to exercise his rights under clause 2(10) of the
underlease to enter and do the work himself and recover the cost from the
defendant. The defendant has refused to allow the plaintiff or his workmen to
enter upon the premises, and the plaintiff has accordingly brought the
present proceedings seeking, inter alia, an injunction to restrain the
defendant from preventing him from entering the premises and carrying out works
of repair thereon.
The question
is whether the plaintiff is entitled to enforce any of the provisions of clause
2(10) without first obtaining the leave of the court under section 1 of the
1938 Act. That section contains what are described as ‘restrictions on the
enforcement of repairing covenants in long leases of small houses’. The section
has since been extended to apply to long leases generally whether of
residential or commercial property. Section 1(1) restricts the landlord’s right
to forfeit the lease for want of repair. Subsections (2) and (3) of section 1
have the effect that a right to damages for breach of a tenant’s repairing
covenant is not enforceable by action commenced at a time when three or more
years of the term are unexpired without the leave of the court. The question,
therefore, is whether the landlord’s right to enter the property, effect the
repairs himself and then claim to recover the cost of doing so from the tenant,
is a claim for damages for breach of a covenant by the tenant ‘to keep or put
in repair during the currency of the lease all or any of the property comprised
in the lease’.
This question
has been considered at first instance on a number of occasions. It was first
considered by McNeill J in Swallow Securities Ltd v Brand (1981)
45 P&CR 328*. He answered the question in the affirmative. In a
comprehensive and convincing judgment in Hamilton v Martell
Securities [1984] Ch 266, Vinelott J declined to follow McNeill J and
reached a different conclusion. Since then the question has come before Nourse
J, as he then was, in Colchester Estates (Cardiff) v Carlton
Industries plc [1986] Ch 80† and Judge Paul Baker QC in Elite
Investments Ltd v TI Bainbridge Silencers Ltd [1986] 2 EGLR 43‡. On
each occasion the judge followed the decision of Vinelott J on the ground that,
where the later of two conflicting decisions has been reached after a full
consideration of the earlier it should normally be followed without further
inquiry. Morritt J took the same course in the present case. This is,
therefore, the first occasion on which the question has been raised before this
court, and we must re-examine the position for ourselves.
*Editor’s
note: Also reported at [1981] 2 EGLR 48.
†Editor’s
note: Also reported at [1984] 2 EGLR 64.
‡Editor’s
note: Also reported at (1986) 280 EG 1001.
The short
answer to the question is that the tenant’s liability to reimburse the landlord
for his expenditure on repairs is not a liability in damages for breach of his
repairing covenant. The landlord’s claim sounds in debt not damages; and it is
not a claim to compensation for breach of the tenant’s covenant to repair, but
for reimbursement of sums actually spent by the landlord in carrying out
repairs himself. I shall expand on each of these distinctions in turn.
The law of
contract draws a clear distinction between a claim for payment of a debt and a
claim for damages for breach of contract. The distinction and its consequences
are set out in Chitty on Contracts (27th ed) paras 21–31. As there
stated, a debt is a definite sum of money fixed by the agreement of the parties
as payable by one party to the other in return for the performance of a
specified obligation by the other party or on the occurrence of some specified
event or condition; whereas damages may be claimed from a party who has broken
his primary contractual obligation in some way other than by failure to pay
such a debt.
The plaintiff
who claims payment of a debt need not prove anything beyond the occurrence of
the event or condition on the occurrence of which the debt became due. He need
prove no loss; the rules as to remoteness of damage and mitigation of loss are
irrelevant; and unless the event on which the payment is due is a breach of
some other contractual obligation owed by the one party to the other, the law
on penalties does not apply to the agreed sum. It is not necessary that the
amount of the debt should be ascertained at the date of the contract; it is
sufficient if it is ascertainable when payment is due. The landlord’s monetary
claim under clause 2(10) does not arise unless and until he has carried out the
repairs; when it does arise, his claim is for an account and payment, not for
damages.
Moreover, the
landlord’s monetary claim under such a clause is not a claim for compensation
for loss suffered by him, by reason of the tenant’s failure to repair, but for
reimbursement of expenditure which he incurred in order to avoid such loss. The
difference is one of substance. The loss which the landlord suffers by reason
of the tenant’s failure to repair is the diminution of the value of his
interest in the property. Even before the Landlord and Tenant Act 1927 the
landlord could not recover more than the diminution in the value of the
reversion unless he coupled his claim with a claim for forfeiture of the lease.
Even if the landlord left the lease on foot then, having recovered damages for
breach of the tenant’s repairing covenant, he was not bound to apply them in
carrying out repairs. He could choose to leave the property unrepaired; he had
been fully compensated for the diminution in the value of his interest, and the
tenant would have to live with the diminution in the value of his.
But a clause
such as clause 2(10) works very differently. It enables the landlord to take
remedial action himself to avoid any loss consequent on the tenant’s failure to
repair. Once the landlord has carried out the repairs himself, the value of his
interest in the property is restored. The work of repair enures to the benefit
of the tenant as well as the landlord. The landlord is out of pocket, but that
is because he has carried out repairs, not because the property is in
disrepair.
Counsel for
the defendant emphasises that the landlord’s right, under clause 2(10) to enter
the property and effect the necessary repairs at the tenant’s expense, cannot
arise unless there has first been a breach by the tenant of his repairing
obligations, not only under clause 2(7) to keep the property in repair, but
also under clause 2(10) itself to effect repairs on notice. He accepts that
section 1 of the 1938 Act can have no application in the absence of any
repairing covenant on the part of the tenant: but where the landlord’s right to
reimbursement depends on an anterior breach of his repairing obligations by the
tenant, he submits, the section applies.
I do not
accept this. Leaving aside for the moment the landlord’s claim to
reimbursement, his contractual right to enter the property and effect the
repairs himself, if the tenant does not do so, is plainly outside the section.
Nothing in the section requires him to obtain the leave of the court either
before entry or before service of notice of disrepair. Should he then decide to
bring proceedings for forfeiture or damages for breach of covenant, whether to
repair or to repair on notice, he must first obtain the leave of the court
under the section. But if he chooses instead to effect the repairs himself,
there is nothing in the section which requires him to obtain the leave of the
court before doing so. So the question is: does the section require him to
obtain the leave of the court after having carried out the repairs and before
demanding reimbursement? But this claim cannot sensibly be described as a claim
to damages for breach of the tenant’s repairing covenant. That breach has been
remedied. The landlord sues in respect of an altogether different breach which
occurs when the tenant fails to repay the landlord on demand the amount which
he promised to pay.
The landlord’s
claim to reimbursement is not triggered by the tenant’s breach of covenant but
by his own expenditure on carrying out repairs. The fact that the property is
in disrepair is not enough. The landlord must have carried out work to remedy
the want of repair; and his right to do so does not depend upon the existence
of any covenant on the part of the tenant, but simply upon there being a want
of repair which the tenant has failed to remedy within the stated period after
notice. The fact that the tenant is thereby in breach of covenant is neither
here nor there. It merely means that the landlord has an alternative remedy of
claiming damages for breach of covenant. But the presence of an alternative remedy
which the landlord does not choose to enforce cannot affect the proper
characterisation of the remedy which he does.
In reaching
his conclusion, that the remedy which a clause like clause 2(10) gives to the
landlord is within section 1 of the 1938 Act, MacNeill J was influenced by his
belief that the intended purpose and effect of such a clause is to circumvent
the provisions of the section. His belief that it was a device to circumvent
the section is, with
drawn leases since long before 1938: in the present case, the clause appears in
a lease granted in 1929, and almost certainly owes its origin to a similar
clause in a lease granted in 1899. Nor is it obvious that such a clause is
within the mischief which the section was enacted to remedy. This was described
at the time by Goddard LJ in National Real Estate & Finance Co Ltd v
Hassan [1939] 2 KB 61 at p78 as follows:
The mischief
it was designed to remedy was speculators buying up small property in an
indifferent state of repair, and then serving a schedule of dilapidations upon
the tenants, which the tenants cannot comply with. I am not saying that was
this case, but this is the general mischief, that the speculator buys at a low
price, turns out the tenants, and gets the reversion which he has never paid
for, which is a great hardship to the tenants.
Lord Denning
MR described the mischief in similar terms in Sidnell v Wilson
[1966] 2 QB 67 at p76. After citing this passage in Hamilton v Martell
Securities Ltd [1984] Ch 266, Vinelott J said at p278:
As I
understand it, the particular mischief at which, in the opinion of Lord Denning
the Act of 1938 was directed was that an unscrupulous landlord would buy the
reversion of a lease which had little value as a reversion and harass the
tenant with schedules of dilapidations not with a view to ensuring that the
property was kept in proper repair for the protection of the reversion, but to
put pressure on the tenant, who might be a person of limited means, and who
might not be in a position to obtain or accustomed to obtain proper advice as
to his liabilities, to the point at which he would accept an offer for the
surrender of his lease.
An
unscrupulous landlord who takes that course does not need to put his hand in
his pocket to carry out the repairs which he seeks to compel the tenant to
carry out, and indeed in the case of a long lease, he might have no real
interest in ensuring that those repairs are carried out. It is not to my mind
obvious that the presumed legislative purpose of countering that mischief
should be extended so as to fetter a lessor’s right to recover moneys which he
has actually spent.
The judge then
referred to counsel’s submission that an unscrupulous lessor might similarly
carry out repairs pursuant to the relevant clause, not because he genuinely
wanted the repairs carried out, but in order to put financial pressure on the
lessee, and commented at p279:
It seems to
me that the fact that the lessor must initially meet the cost of carrying out
the repairs is a considerable disincentive. Whether that is so or not, I am not
persuaded that this possible abuse justifies the court in treating an action to
recover costs actually incurred by a lessor on repairs as if it were an action
for damages for breach of a covenant to repair solely on the ground that the
provision enabling a lessor to carry out repairs in the event of a default by
the lessee and to recover the cost, is a device to circumvent the provisions of
the Acts of 1927 and 1938.
I respectfully
agree, and add only that if parliament had intended to deal with the suggested
abuse to which counsel had referred in that case, it is remarkable that it did
not deal explicitly and directly with what had for generations been a standard
form of covenant in a long lease.
Counsel for
the defendant in the present case submits that Vinelott J expressed the
legislative purpose too narrowly. The section, he asserts, was also designed to
prevent tenants being put to expenditure which would be useless to them and of
minimal value to the landlord; to prevent pressure being put upon them by the
service of exaggerated schedules of dilapidations; and to prevent them being
put to considerable expense as a condition of relief from forfeiture. All these
mischiefs, he alleges, would follow if the landlord were allowed to pursue his
remedy under a clause like clause 2(10) without the leave of the court.
I would, for
my part, be willing to accept that these may have been part of the mischief
which parliament sought to remedy by enacting section 1 of the 1938 Act,
subject only to this important qualification, that the expenditure in question
which is said to be useless to the tenant and of minimal value to the landlord
is expenditure which the landlord does not intend should be incurred. In Associated
British Ports v Bailey [1990] 2 AC 703 Lord Templeman said at p714:
Section 1 of
the 1938 Act is there to protect a tenant from a landlord whose only object is
to turn out the tenant [many] years in advance
(Emphasis
supplied)
In my view,
every consideration points in the same direction, that it was not the intention
of parliament to put obstacles in the way of a landlord whose object is to
secure that necessary repairs are carried out, preferably at the expense of the
tenant, but if necessary at his own. If that had been the intention of
parliament, then the 1938 Act would have been expressed very differently.
Penalty
issue
The answer to
the 1938 Act issue also disposes of the penalty issue. Clause 2(10) is not a
penalty clause because it provides for the payment of a sum of money upon the
happening of a specified event other than a breach of a contractual duty owed
by the party liable to make the payment to the party entitled to receive it:
see Re Apex Supply Co [1942] Ch 108; Alder v Moore [1961]
2 QB 57; Export Credits Guarantee Department v Universal Oil Products
Co [1983] 1 WLR 399.
The law on
penalties was extensively reviewed by Lord Dunedin in Dunlop Pneumatic Tyre
Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at p86. He
explained that the essence of a penalty is a payment of money stipulated as in
terrorem of the offending party, and that it will be held to be a penalty
if the sum stipulated is extravagant and unconscionable in amount in comparison
with the greatest loss that could conceivably be proved to have followed from
the breach. He added that it will also be held to be a penalty if the breach
consists only in not paying a sum of money and the sum stipulated is a sum
greater than the sum which ought to have been paid. This makes it clear that
the doctrine does apply where the obligor’s primary liability sounds in debt
and not in damages; indeed this is one of the most ancient instances. Portia
knew perfectly well that Shylock’s pound of flesh was irrecoverable as a
penalty; she did not advance this defence because she was after bigger game.
But it is well
settled that the event on which the sum alleged to be a penalty becomes payable
must be a breach of some other contractual obligation owed by the obligor to
the obligee. That is not the case here. There is only one relevant obligation
on the part of the tenant, and that is to repay the landlord his costs of
carrying out repairs himself. Counsel for the defendant advanced an interesting
argument based on the law relating to bonds. As at present advised, I think
that a bond in a sum certain conditioned on the tenant’s keeping the premises
in repair, or carrying out specific works of repair required by the landlord,
would constitute a penalty even in the absence of an express covenant by the
tenant to do so. The condition of the bond supplies the necessary obligation.
But the event which triggers the tenant’s liability under a clause such as
clause 2(10) is the expenditure by the landlord of money in effecting repairs,
not the anterior failure of the tenant to repair. If the payment were secured
by a bond, it would be a simple or single bond, not a double or conditional
one. The doctrine of penalties, which operates by striking down the penalty and
enforcing the condition, does not apply to the former.
In Export
Credits Guarantee Department v Universal Oil Products Co Lord
Roskill expressly approved of the warning given by Diplock LJ in Philip
Bernstein (Successors) Ltd v Lydiate Textiles Ltd CA unreported June
26 1982 against extending the law by relieving against an obligation in a
contract entered into between two parties which does not fall within the well
defined limits in which the court has in the past shown itself willing to
interfere. These words have all the more force in a case such as the present,
where the court is asked for the first time to strike down a standard clause
which has been familiar to property lawyers for generations, which has been
enforced on countless occasions; and which if the challenge is well founded was
vulnerable as well before 1938 as after it.
Conclusion
I would
overrule Swallow Securities Ltd v Brand and dismiss the appeal.
Sir Stephen
Brown P and Otton J
agreed and did not add anything.
