Ipsofactoj.com: International Cases [2000] Part 6 Case 11 [HL]


HOUSE OF LORDS

Coram

Cadogan Estates Ltd

- vs -

McMahon

LORD BINGHAM OF CORNHILL

LORD STEYN 

LORD HOFFMANN 

LORD HUTTON 

LORD MILLET

26 OCTOBER 2000


Judgment

Lord Bingham of Cornhill

My Lords,

  1. I have had the advantage of reading in draft the opinions prepared by my noble and learned friends Lord Hoffmann and Lord Millett. As their differing analyses and conclusions show, the issue raised in this appeal, though short, is by no means simple to resolve.

  2. There is great logical force in the reasoning of my noble and learned friend Lord Millett, and had this question come before the House many years ago in the absence of any authority or understanding I should have been inclined to accept it. If one contracting party grants the other a right to act in a certain way if a given event shall occur, he is not ordinarily understood to promise (i.e. to assume an obligation) that such event will not occur.

  3. There is, however, nothing to suggest that Parliament intended to make any change of substance when the reference to "conditions of the tenancy" in section 1(1) of the Increase of Rent (Amendment) Act 1919 was replaced by a reference to "obligation of the tenancy" in section 5(1) of the Increase of Rent and Mortgage Interest (Restrictions) Act 1920. It was shortly thereafter held in In re Drew (A Bankrupt) [1929] I.R. 504 that a tenant subject to a re-entry clause similar to the present who had gone bankrupt had broken an obligation of his tenancy. This decision was cited by Sir Robert Megarry in his work on The Rent Acts for many years without any expression of dissent. In R.M.R. Housing Society Ltd v Combs [1951] 1 K.B. 486 at 493 Evershed M.R. thought it unnecessary to distinguish between obligations and terms and conditions of a tenancy. In Paterson v Aggio [1987] 2 EGLR 127 the Court of Appeal held that bankruptcy of a tenant who had granted his landlord a right of re-entry on bankruptcy had broken an obligation of his tenancy: while this ruling was given in construing section 52 of the Housing Act 1980 and the correct construction of Case 1 of Schedule 15 to the Rent Act 1977 need not be the same, it is not desirable that the same expression should be held to have different meanings in two statutes governing the relationship of landlord and tenant. If the Rent Acts had been drafted with the precision ordinarily to be found in Acts of Parliament it might be right to give "obligation" its most natural meaning, but judges have for many years noted the lack of such precision. It is not in my view a big step to hold that bankruptcy, which may undoubtedly be a breach of a condition in a lease, is a breach of an obligation. So to hold does not expose the tenant to a risk of undue hardship, since no order for possession will be made unless it is reasonable to make it. I can see no reason why Parliament should have wished to free a statutory tenant of a risk to which he had been subject under the tenancy agreement into which he had voluntarily entered.

  4. Compelling though I find the analysis of my noble and learned friend Lord Millett I am on balance persuaded that the judge and the Court of Appeal reached the right decision for the reasons given by Lord Hoffmann. I would therefore dismiss the appeal.   

    Lord Steyn

    My Lords,

  5. The issue is whether the court is entitled to make an order for possession under Case 1 of Schedule 15 to the Rent Act 1977. On the present facts such jurisdiction only exists if the appellant has broken or not performed an "obligation" of the previous protected tenancy which is applicable to the statutory tenancy. The question is whether the proviso imposes an obligation on the tenant not to become bankrupt. The proviso is to the effect that in the event of the bankruptcy of the tenant "it shall be lawful for the lessor .... to re-enter and thereupon this demise shall absolutely determine." On the plain meaning of the proviso there is no obligation created: the proviso simply creates a conditional right in favour of the lessor.

  6. It is, of course, sometimes possible to depart from the plain meaning of the words in an instrument. A theoretical possibility is to imply words into the lease. My understanding is that nobody in the majority supports this idea. I am also persuaded by the judgment of Lord Millett that resort to the legislative history, and the fragile strands in the case law, does not justify the bold step of saying that under the lease bankruptcy is a breach of an obligation. Consequentialist arguments are often valuable. But in the present case a decision giving effect to the plain meaning will produce no absurd or undesirable consequences. On the contrary, the success of Cadogan Estates in a case where the tenant's daughter was continuing to pay the rent is hardly a just solution. This tends to suggest that policy considerations militate against the view of the majority rather than in favour of it.

  7. My Lords, I regard the judgment of Lord Millett as entirely convincing. But it is not every disagreement with a majority view which must be pressed to dissent. Reluctantly, I assent to the order proposed by Lord Hoffmann.

    Lord Hoffmann

    My Lords,

  8. The appellant Mr. McMahon occupies a flat near Sloane Square. He took an assignment of the short residue of a lease granted by the Cadogan Estate for 14 years from 25 March 1979. The lease created a "protected tenancy" for the purposes of the Rent Act 1977. When it expired in 1993 Mr. McMahon became a statutory tenant. The lease contained a covenant to pay the rent quarterly in advance. But Mr. McMahon was constantly in arrear. On several occasions the landlords had to take him to court. Three orders for possession were made but suspended. On two such occasions, a warrant for possession was actually issued but withdrawn when the rent was eventually paid.

  9. In 1997 Mr. McMahon took an expensive holiday but failed to pay the travel agent's bill. When he also failed to satisfy a judgment for the debt, he was made bankrupt on 17 March 1998. The result was that his assets vested in his trustee in bankruptcy. But the statutory tenancy, which is not an asset but merely a personal status of irremovability, was unaffected. His daughter, who lives with him in the flat, continued to pay the rent. There were no arrears when, on 30 April 1998, the landlords commenced fresh proceedings for possession. They claimed an order solely on the ground that Mr. McMahon had been made bankrupt.

  10. Section 98(1) of the Rent Act 1977 provides:

    Subject to this Part of this Act, a court shall not make an order for possession of a dwelling house which is for the time being .... subject to a statutory tenancy unless the court considers it reasonable to make such an order and .... (b) the circumstances are as specified in any of the Cases in Part I of Schedule 15 to this Act.

    The landlords rely on the following provisions in Case 1 of the Schedule:

    Where any rent lawfully due from the tenant has not been paid, or any obligation of the .... statutory tenancy which arises under this Act, or .... any other obligation of the previous protected tenancy which is applicable to the statutory tenancy, has been broken or not performed.

    The landlords' case is that it was a condition of the 1979 lease that the tenant should not become bankrupt. Section 3(1) of the Act provides:

    So long as he retains possession, a statutory tenant shall observe and be entitled to the benefit of all the terms and conditions of the original contract of tenancy, so far as they are consistent with the provisions of this Act.

  11. The landlords say that there was nothing inconsistent with the Act in applying the same condition to the statutory tenancy. It was therefore an obligation of the protected tenancy, applicable to the statutory tenancy, which had been broken or not performed.

  12. His Honour Judge Cotran accepted this submission and also decided that in view of Mr. McMahon's record as a tenant, it was reasonable to make an order for possession. There has been no challenge to the latter finding but Mr. McMahon appealed on the ground that the bankruptcy did not fall within Case 1. The Court of Appeal (Stuart-Smith and Laws L.JJ. and Jonathan Parker J.) dismissed the appeal. He now appeals to your Lordships' House.

  13. The lease is in the traditional form. After the demise and reddendum, there are 25 paragraphs of covenants by the tenant. He covenants to pay the rent, repair, lay carpets, not to put flower pots outside the windows or allow his children to loiter in the lifts and many other things. But they contain no reference to bankruptcy. There follow the covenants by the landlords. Then comes the re-entry clause:

    If and whenever the said rent hereinbefore reserved or any part thereof shall be in arrear for the space of twenty-one days next after any of the said days whereon the same ought to have been paid as aforesaid (whether the same shall have been formally demanded or not) or if and whenever the Lessee shall fail or neglect to perform or observe any of the covenants agreements and stipulations herein contained and on the part of the Lessee to be performed and observed or shall become bankrupt or make any composition or arrangement with creditors then and in any of the said cases it shall be lawful for the Lessor at any time thereafter into and upon the said premises or any part thereof in the name of the whole to re-enter and thereupon this demise shall absolutely determine but without prejudice to the right of action of the Lessor in respect of any breach of the Lessee's covenants herein contained.

  14. Mr. Griffiths, who appeared for Mr. McMahon, submitted that the lease did not create any obligation not to become bankrupt. The covenants imposed obligations to do many things but said nothing about becoming bankrupt. The re-entry clause does not impose any obligations. It merely specifies the events which will entitle the landlord to re-enter and determine the tenancy. One of them is bankruptcy, but that is not at all the same thing as an obligation not to become bankrupt.

  15. My Lords, if the Act was an ordinary conveyancing statute, I would see much force in this argument. The re-entry clause is expressed as a series of conditions, rather than obligations. Furthermore, the sole purpose of the conditions is to specify the events in which the landlords will be entitled to re-enter and resume possession. But such a right would not be consistent with a statutory tenancy, under which the right to possession is restricted by section 98. If the right of re-entry cannot be applicable to the statutory tenancy, how can the disembodied conditions be applicable? They would be the grin without the cat.

  16. But this is not an ordinary statute. It is the Rent Act, a consolidation of a remarkable sequence of enactments which go back to the First World War. The provisions with which we are concerned come, with minor verbal changes, from the Increase of Rent and Mortgage Interest (Restrictions) Act 1920. Section 15(1) of that Act provided, like section 3(1) of the Act of 1977, that:

    A tenant .... shall, so long as he retains possession, observe and be entitled to the benefit of all the terms and conditions of the original contract of tenancy, so far as the same are consistent with the provisions of this Act ....

    And section 98(1) of the Act of 1977 and Case 1 of the Schedule are derived from section 5(1) of the Act of 1920:

    No order or judgment for the recovery of possession of any dwelling-house to which this Act applies .... shall be made or given unless .... any rent lawfully due from the tenant has not been paid, or any other obligation of the tenancy (whether under the contract of tenancy or under this Act) so far as the same is consistent with the provisions of this Act has been broken or not performed.

  17. The judiciary soon found that they could not interpret the Rent Acts in the same way as ordinary legislation. Sir Robert Megarry's great work on the Acts, first published in 1939, contains in its most recent (1988) edition, at pp. 14 to 18, an anthology of judicial comments on the peculiar difficulties of construction to which they have given rise. They include the observations that the Acts had "not been framed with any scientific accuracy of language" (Sargant L.J. in Roe v Russell [1928] 2 K.B. 117, 138) and that it was essential "that, wherever possible, [they] should be construed in a broad, practical, common-sense manner so as to effect the intention of the Legislature" (McCardie J. in Read v Goater [1921] 1 K.B. 611, 615.)

  18. It therefore seems to me necessary to consider what could have been the broad policy of the legislature in providing that the statutory tenant should be required to "observe .... all the terms and conditions" of the original contract of tenancy and that a breach or non-performance of an obligation of the tenancy should remove the restriction on the landlord's right to recover possession. In one of the earliest cases on the Acts, Remon v City of London Real Property Company Ltd [1921] 1 K.B. 49, Scrutton L.J. said (at p. 57):

    The object of the various Rent Restrictions Acts is clear. It was intended to prevent the tenant from having his rent raised against him, or from being turned out, though his tenancy by agreement had expired, so long as he was willing to pay the rent authorised by statute.

  19. The tenant was to be entitled to retain possession though his tenancy had expired, whether by the effluxion of a fixed term or a period of notice. But the Acts were not initially intended to enable a tenant to retain possession against a landlord who was entitled to forfeit the tenancy for breach of a covenant or condition of the lease. Later, in the Rent and Mortgage Interest Restrictions (Amendment) Act 1933, it was provided that even in such cases, the judge must consider it reasonable to make the order. But we are presently concerned with the construction of the threshold requirement in the Act of 1920.

  20. This policy must be viewed against the distinction made in the law of landlord and tenant between two ways in which the landlord could put an end to the tenancy before it would otherwise have expired. One was by the exercise of an option to terminate contained in the lease. It would usually be exercisable by notice to the tenant, sometimes upon a specific date during the tenancy or upon the happening of some event, such as the landlord obtaining planning permission to demolish and reconstruct the premises. Such an option was called a break clause. The other way was by forfeiture pursuant to a right of re-entry contained in the lease, such as the re-entry clause in this case. Forfeiture would usually be for non-payment of rent or breach of covenant, but, as in this case, the right of re-entry might also be expressed to arise in other events, such as bankruptcy or an arrangement or composition with creditors. The two methods of termination were treated differently in various respects: for example, exercise of the right of re-entry or forfeiture "under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease" required the prior service of a notice under section 146 of the Law of Property Act 1925, which was first enacted as section 14(1) of the Conveyancing Act 1881. The exercise of a break clause did not require any such prior notice. The court had certain powers, both at common law and under statute, to grant relief against forfeiture but not to restrain the exercise of a break clause.

  21. In some cases it may be difficult to say whether a provision in a lease is only an option to terminate conditional upon the happening of some event or whether it is truly a re-entry under a forfeiture. This borderline country was discussed by Goulding J. in Halliard Property Co. Ltd v Jack Segal Ltd [1978] 1 W.L.R. 377, where the lease contained a proviso for re-entry if the tenant or either of his sureties should commit an act of bankruptcy. On the bankruptcy of one of the sureties, the landlord brought an action for possession without having served a notice under section 146 of the Act of 1925. He argued that the bankruptcy of the surety, being an event entirely outside the control of the tenant, was not a ground for forfeiture but simply an event entitling the landlord to terminate the lease in the same way as under a break clause. Goulding J. decided that it fell on the forfeiture side of the line. The bankruptcy of the tenant himself had always been regarded as a "breach of a condition in the lease" within the meaning of section 146. Subsections (9) and (10) made specific provisions qualifying the application of the section to forfeitures for bankruptcy. The judge held that re-entry on the bankruptcy of a surety was also a forfeiture within the meaning of section 146.

  22. The position therefore was that when the Rent Acts were first enacted, forfeiture for bankruptcy of the tenant was treated (subject to the qualifications in section 146, which are not for present purposes relevant) in the same way as forfeiture for breach of covenant. If, therefore, the policy of the Acts was to allow the tenant to retain possession despite the expiry of his lease but to preserve the landlord's right to recover possession by forfeiture, there would be no reason to distinguish between forfeiture for bankruptcy and forfeiture for breach of covenant.

  23. My Lords, I entirely accept that to speak of a breach or non-performance of an "obligation of the tenancy" is not an accurate way of describing what happens when a tenant becomes bankrupt. But then, neither is the expression "breach of a condition in the lease" in section 146 of the Act of 1925 and, as I have said, those words have always been construed to include forfeiture for bankruptcy. In R.M.R. Housing Society Ld. v Combs [1951] 1 K.B. 486, 493, Sir Raymond Evershed M.R. said that he could see "no valid or useful distinction" between the phrase "obligation of the tenancy" and the phrase "terms and conditions of the original contract of tenancy" in section 15 of the Act of 1920. Mr. Griffiths drew your Lordships' attention to the fact that in section 1(1) of the Increase of Rent (Amendment) Act 1919, a temporary Act which preceded the Act of 1920, Parliament had provided that no order for possession could be made "so long as the tenant continues to pay rent at the agreed rate .... and performs the other conditions of the tenancy." He said that the different language used in the Act of 1920 shows that a different and narrower meaning was intended. I find this very improbable. Why should Parliament have decided in this obscure way to exclude bankruptcy forfeitures as a ground for a possession order? It seems to me rather to confirm Sir Raymond Evershed's view that the various phrases were regarded as equivalent to each other.

  24. There is very little authority on the point. In the Irish case of In re Drew [1929] I.R. 504, 508 Johnston J. said that a tenant who had gone bankrupt was not protected from an order for possession by the Irish equivalent of section 5 of the Act of 1920 because he had "broken one of the conditions of his tenancy." On the other hand, there is no authority the other way and in successive editions of Sir Robert Megarry's book In re Drew was cited for the proposition that a statutory tenant is "subject to the burden of a condition of forfeiture on bankruptcy". This in itself is weighty evidence of contemporary opinion at a time when the Rent Acts were daily before the courts.

  25. In Paterson v Aggio [1987] 2 EGLR 127 the Court of Appeal had to consider whether a tenancy was a "protected shorthold tenancy" within the meaning of section 52 of the Housing Act 1980 and therefore excluded from the protection of the Rent Act 1977. The section provided that such a tenancy was to be for "a term certain of not less than one year nor more than five years" and satisfy various conditions, including

    (a)

    it cannot be brought to an end by the landlord before the expiry of the term, except in pursuance of a provision for re-entry or forfeiture for non-payment of rent or breach of any other obligation of the tenancy.

  26. The intention of Parliament was to require that the tenant under a protected shorthold tenancy should have security of tenure for at least a year and to prevent this requirement from being evaded by the grant of a tenancy for a longer period but subject to a break clause which enabled the landlord to terminate the tenancy earlier. On the other hand, it was not intended that a tenancy should be excluded from the definition by the presence of a normal forfeiture clause. The tenant argued that the tenancy failed to comply with condition (a) because it could be forfeited for bankruptcy and that this was not a breach of an "obligation of the tenancy". The Court of Appeal rejected the argument. May L.J. said that "although on a strict construction" it could be said that "the requirement not to become a bankrupt was not an 'obligation' on the tenant", this would defeat the plain intention of the legislature.

  27. My Lords, I accept that the legislation of 1920 should not be construed according to what Parliament appears in 1980 to have thought was meant by the term "obligation of the tenancy". But May L.J. based his judgment partly on an analogy with the meaning of the same phrase in the Rent Acts. He referred to In re Drew [1929] I.R. 504 and the passage from the judgment of Sir Raymond Evershed M.R. in R.M.R. Housing Society Ld. v Combs [1951] 1 K.B. 486, 493. He said that he agreed with the submission of counsel for the landlord, which included the observation that:

    if a tenant under the terms of the tenancy agreement with which we are concerned went bankrupt, this must amount to a breach by him of an obligation or a term or condition of the tenancy and, in the context of the Rent Acts, would entitle the landlord to possession under Case 1 of Schedule 15 to the 1977 Act.

  28. Mr. Griffiths submitted that May L.J. was not necessarily agreeing with every step in counsel's argument, but he seems to me to have recited it all with approval. I would therefore find it very difficult to accept the "strict construction" of Case 1 without saying that Paterson v Aggio [1987] 2 EGLR 127 was wrongly decided. For my part, I think that it was plainly right.

  29. In my opinion Judge Cotran and Laws L.J. reached the right conclusion for the right reasons. I would dismiss the appeal.

    Lord Hutton

    My Lords,

  30. The proviso for re-entry in the lease of 15 August 1979 provided:

    PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED as follows:

    (I)

    IF and whenever the said rent hereinbefore reserved or any part thereof shall be in arrear for the space of twenty one days next after any of the said days whereon the same ought to have been paid as aforesaid (whether the same shall have been formally demanded or not) or if and whenever the Lessee shall fail or neglect to perform or observe any of the covenants agreements and stipulations herein contained and on the part of the Lessee to be performed and observed or shall become bankrupt or make any composition or arrangement with creditors then and in any of the said cases it shall be lawful for the Lessor at any time thereafter into and upon the premises or any part thereof in the name of the whole to re-enter and thereupon this demise shall absolutely determine but without prejudice to the right of action of the Lessor in respect of any breach of the Lessee's covenants herein contained.

  31. Section 3(1) of the Rent Act 1977 provides:

    So long as he retains possession, a statutory tenant shall observe and be entitled to the benefit of all the terms and conditions of the original contract of tenancy, so far as they are consistent with the provisions of this Act.

    Section 98(1) of the 1977 Act provides:

    Subject to this Part of this Act, a court shall not make an order for possession of a dwelling-house which is for the time being let on a protected tenancy or subject to a statutory tenancy unless the court considers it reasonable to make such an order and either-

    (a) 

    the court is satisfied that suitable alternative accommodation is available for the tenant or will be available for him when the order in question takes effect, or

    (b)

    the circumstances are as specified in any of the Cases in Part I of Schedule 15 to this Act.

    Case 1 in Part I of Schedule 15 to the 1977 Act provides:

    Where any rent lawfully due from the tenant has not been paid, or any obligation of the protected or statutory tenancy which arises under this Act, or

    (b)  

    in the case of a statutory tenancy, any other obligation of the previous protected tenancy which is applicable to the statutory tenancy, has been broken or not performed.

  32. The first question which arises on this appeal is whether the proviso for re-entry contained an obligation on the part of the tenant. On a literal construction of the proviso the appellant can advance an argument of considerable force that the proviso contained no such obligation. He can point to the wording of the proviso and to the distinction which it draws between the failure or neglect of the tenant to perform or observe any of the covenants agreements and stipulations in the lease and the tenant becoming a bankrupt. He can also point to the absence of words which expressly impose an obligation on the tenant not to become a bankrupt and can contend that the tenant becoming a bankrupt is merely an eventuality which permits the landlord to exercise his power to re-enter. However it was clearly a condition of the original protected tenancy that the tenant should not become a bankrupt and this condition has been broken by the appellant, Goulding J. stating in Halliard Property Co. Ltd. v Jack Segal Ltd. [1978] 1 W.L.R. 377, 381H with reference to the provisions of a proviso for re-entry that: "forfeiture on the bankruptcy of the lessee is considered as a case of breach of condition."

  33. The authorities make it clear that the Rent Acts are to be construed in a broad and commonsense way, and Megarry on the Rent Acts, 11th ed. (1988), at p. 14 cites a number of judicial comments to this effect on the language of the Acts:

    In this "extraordinary and unique legislation," "the [earlier] Acts were passed in a hurry, the language used was often extremely vague," and the draftsman, who seems deliberately to have avoided technology, has used language which "resembles that of popular journalism rather than the terms of the art of conveyancing." "It is patchwork legislation, has not been framed with any scientific accuracy of language, and presents great difficulties of interpretation to the courts that have to give practical effect to it.

  34. Section 1(1) of the Increase of Rent etc. (Amendment) Act 1919 provided that, save in certain specified circumstances, no order to recover possession should be made against a tenant so long as he continued to pay the agreed rent and performed "the other conditions of the tenancy". Section 5(1) of the Increase of Rent and Mortgage Interest (Restrictions) Act 1920, which replaced the 1919 Act, provided that no order to recover possession should be made against a tenant unless any rent lawfully due had not been paid "or any other obligation of the tenancy" had been broken or not performed. In my opinion it is more probable that the draftsman of the 1919 and 1920 Acts used the terms "the conditions of the tenancy" and "the obligations of the tenancy" interchangeably, rather than with the intention of drawing some distinction between them. In R.M.R. Housing Society Ltd. v Combs [1951] 1 K.B. 486, 493 where Sir Raymond Evershed M.R. was considering the term "any other obligation of the tenancy" in paragraph (a) of Schedule 1 to the Rent and Mortgage Interest Restrictions (Amendment) Act 1933 he said:

    I think no valid or useful distinction can be made between that phrase in para. (a) and the phrase "terms and conditions of the original contract of tenancy" in s. 15 of the Act of 1920 ....

  35. I further think that, using language in a non-technical way, there would be nothing unnatural in saying that the tenant under the lease was "obliged" not to become a bankrupt if he wished to remain in possession of the house let to him. Therefore I consider that if, whilst the lease was subsisting, the tenant became a bankrupt, he broke an "obligation of the previous protected tenancy", within the meaning of paragraph (b) of Case 1.

    This view accords with the decision of the Court of Appeal in Paterson v Aggio [1987] 2 E.G.L.R. 127 where it held that a proviso for re-entry similar to the proviso in this case contained "an obligation" on the tenant not to become a bankrupt. The decision related to the provisions of section 52(1)(a) of the Housing Act 1980 and not to the provisions of the Rent Act 1977, but I agree with the opinion of Laws L.J. in the Court of Appeal in this case [1999] 1 W.L.R. 1689, 1693E that it would be anomalous to hold that a proviso for re-entry in the event of bankruptcy, contained in a tenancy which has become a Rent Act 1977 statutory tenancy, creates no obligation when there is a decision by the Court of Appeal that a proviso in similar words in a tenancy which is a shorthold tenancy creates an obligation. There is further support for the view that such a proviso creates an obligation in the dictum of Johnston J. in In re Drew [1929] I.R. 504, 508:

    The tenant here has broken one of the conditions of his tenancy by allowing himself to be adjudicated a bankrupt, and therefore he is no longer entitled to possession, even as a statutory tenant.

  36. The second question which then arises is whether the obligation not to become a bankrupt was applicable to the statutory tenancy so that the appellant was in breach of it, or whether by virtue of section 3 of the 1977 Act the appellant was not required to observe that obligation because it was inconsistent with the provisions of that Act.

  37. On behalf of the appellant Mr. Griffiths advanced two arguments in support of his submission that, assuming that the proviso for re-entry contained an obligation, the obligation was not applicable to the statutory tenancy. One argument was that the obligation not to become a bankrupt was linked to the demise created by the 1979 lease, the demise terminated with the end of the contractual tenancy and the statutory tenancy merely had a personal right to remain in possession of the dwelling house. Accordingly as the demise had terminated so also had the obligation which was linked to it. I am unable to accept that submission because section 3 of the 1977 Act and paragraph (b) of Case 1 clearly contemplate that obligations contained in the original lease will continue to apply to the statutory tenancy provided that they are not inconsistent with the provisions of the 1977 Act.

  38. Mr. Griffiths' second argument was that the proviso for re-entry containing the obligation was inconsistent with the provisions of the 1977 Act because under the proviso the landlord had power to re-enter, whereas under section 98(1) of the Act the landlord can only regain possession if the Court considers it reasonable that he should do so. I am also unable to accept that argument. The proviso consists of two elements, the obligation not to become a bankrupt and the power of the landlord to re-enter if the obligation is broken. The power to re-enter is inconsistent with the provisions of the Act, but the obligation contained in the original lease will continue to bind the statutory tenant provided that it is not inconsistent with the provisions of the 1977 Act, and a breach of it is a ground for an order for possession under paragraph (b) of Case 1. Having regard to the safeguard provided by section 98(1) that an order for possession will not be made unless the court considers it reasonable to do so I consider that there is nothing inconsistent with the provisions of the Act in continuing as an obligation of the statutory tenancy the obligation contained in the lease not to become a bankrupt.

  39. Accordingly I would dismiss this appeal.

    Lord Millett

    My Lords,

  40. Where a proviso for re-entry is contained in a lease, it is clearly a term or condition of the tenancy. But it does not survive the determination of the term granted by the lease so as to become a term or condition of a statutory tenancy. There are two reasons for this. In the first place, it is inconsistent with the concept of a statutory tenancy. The proviso for re-entry gives the landlord a right to resume possession of the property comprised in the tenancy; the Rent Acts give the tenant a statutory right to remain in possession.

  41. In the second place, a proviso for re-entry is inapplicable to a statutory tenancy. It is concerned with the forfeiture of an existing term and can have no application after the contractual term has expired: see Brewer v Jacobs [1923] 1 K.B. 528. It is a true proviso; that is to say, it operates as a qualification of or in derogation from what has gone before. A proviso for re-entry in a lease is a derogation from the term previously granted. It provides that in certain events (which usually include but need not be confined to breach of the tenant's obligations) then, notwithstanding and in derogation of the term previously granted, the landlord may enter into possession of the property and determine the term. There is no room (and no need) for such a provision once the contractual term has expired. Its purpose is to remove the only self-imposed obstacle to the landlord's right to possession if the tenant turns out to be unsatisfactory. Without it, the landlord would be saddled with an unsatisfactory tenant for the remainder of the term however long. Once the contractual term has expired, no such obstacle remains. This is why the proviso is not found in a weekly or other periodic tenancy which is determinable by reasonably short notice.

  42. A proviso for re-entry in the normal form does not impose any obligation, express or implied, on the part of the tenant not to cause or suffer anything which would entitle the landlord to exercise his right of re-entry. It may well import an implied obligation on the part of the tenant to give up possession if the landlord chooses to exercise his right; but as the term is brought to an end by the landlord's re-entry this only replicates the tenant's express covenant to yield up the demised premises at the end of the term, and both are inconsistent with his statutory right to remain in possession.

  43. The proviso in the present case contains no express obligation on the part of the tenant not to become bankrupt. It merely confers on the landlord a right to retake possession if he does. No such obligation is implicit in the existence of the landlord's right. A correlative obligation is usually implicit in the conferment of a right, but the only obligation which is correlative to the landlord's right of re-entry is the obligation to give up possession if he exercises it. An obligation not to cause or suffer anything which would allow the landlord to exercise his right is not implicit in the conferment of the right but needs to be separately expressed. It is not necessary to imply such an obligation in order to give business efficacy to the contract. All the landlord needs is the right to bring the tenancy to an end, and this is given to him expressly. Even if an undertaking not to become bankrupt were compatible with public policy (which I doubt) it is impossible to see how such an undertaking could be enforced or what remedy (other than the determination of the term) could be granted in the event of breach.

  44. It follows that I do not agree with the reasoning of the Court of Appeal in Paterson v Aggio [1987] 2 E.G.L.R. 127. The question in that case was whether the tenancy in question was a protected shorthold tenancy and thus outside the Rent Acts. This depended on the definition of such a tenancy in section 52(1)(a) of the Housing Act 1980, which included the requirement that it should be incapable of being brought to an end by the landlord before the expiry of the term

    except in pursuance of a provision for re-entry or forfeiture for non-payment of rent or breach of any other obligation of the tenancy ....

  45. The Court of Appeal held that the inclusion of a provision for forfeiture in the event of the tenant's bankruptcy did not prevent the tenancy from being a protected shorthold tenancy because, while as a matter of strict construction

    the requirement not to become a bankrupt was not an "obligation" on the tenant, this would .... defeat the plain intent of the legislature.

  46. Although the point is probably merely a semantic one, the reference to the "requirement" on the part of the tenant not to go bankrupt would seem to beg the question. I do not accept that there is any such requirement. There is simply a provision that, if he does (which he is at liberty to do), the landlord may exercise the right to determine the tenancy.

  47. It does not, of course, follow that the case was wrongly decided. Indeed I think that it was plainly right. A protected shorthold tenancy must be granted for a term certain, and as such would normally contain a proviso for re-entry. If the inclusion of a proviso for re-entry in the standard form, that is to say one which included a right for the landlord to re-enter in the event of the tenant's bankruptcy, prevented the tenancy from being a shorthold tenancy, it would exclude the great majority of tenancies. This would obviously defeat the intention of Parliament. Moreover, there is no reason why Parliament should have sought to exclude such a provision from a protected shorthold tenancy. In my opinion, however, this did not compel the conclusion that the tenant's bankruptcy constituted a breach of an obligation of the tenancy.

  48. The case turned on the true extent of the exception, and this turned on whether the concluding words:

    for non-payment of rent or breach of any other obligation of the tenancy

    were words of limitation or merely descriptive. Had the exception contained some limiting words, or had it omitted the words "in pursuance of a provision", then its meaning would have been beyond doubt. But the concluding words are ambiguous. They can be read as merely descriptive of the usual proviso for re-entry (without necessarily being a full or complete description) rather than words of limitation, and I would myself read them in this way in order to give effect to the obvious intention of Parliament. Some support for this construction may be found in section 146(1) of the Law of Property Act, 1925 (replacing section 14(1) of the Conveyancing Act of 1881), which uses the words "breach of any covenant or condition" in reference to a proviso for re-entry, but extends to a condition for forfeiture on the bankruptcy of the lessee: see subsections (9) and (10). The word "breach" is not felicitous, but the reference to the proviso in subsection (1) can be read descriptively. It is unlikely that Edward Wolstenholme (who drafted the Conveyancing Act, 1881) or Sir Benjamin Cherry (who drafted the greater part of the Law of Property Act, 1925) would have been guilty of referring to a condition of forfeiture as a breach of obligation, and it is noticeable that the draftsman of subsections (9) and (10) took care not to do so.

  49. The question in the present case, however, turns on the meaning of the words "obligation of the previous protected tenancy .... has been broken or not performed" in Case 1 of Schedule 15 to the Rent Act 1977. The Respondents submit that the word "obligation" should be construed as extending to any term or condition of the tenancy even though it is not strictly speaking an obligation of the tenant. But the statutory language must be construed as a whole, and it requires there to be

    1. an obligation of the tenancy

    2. which is applicable to the statutory tenancy and

    3. which has been broken or not performed (sc. by the tenant).

    In my opinion none of these requirements is satisfied by the bankruptcy of the tenant, though in the past they must usually have been satisfied when the rent remained unpaid following the bankruptcy.

  50. In the first place, the Act uses the word "obligation" not condition", and their meaning is not the same. "Condition" is wider than and includes "obligation", so that an obligation is a condition, but a condition does not necessarily import an obligation. This is why Sir Raymond Evershed M.R. was able to say in R.M.R. Housing Society Ltd. v Combs [1951] 1 K.B. 486 at p. 493 that "for present purposes" (my emphasis) no useful or valid distinction could be made between "obligation of the tenancy" in Case 1 and "terms and conditions of the original contract of tenancy" in what is now section 3(1) of the Rent Act 1977. I should add that the actual decision appears to lend some support to the Appellant's argument. The tenant was in breach of an express obligation properly so-called (and therefore of a term or condition of the original tenancy agreement); but it was a personal obligation and not an obligation of the tenancy. The Master of the Rolls was not suggesting that there was no distinction between "terms and conditions" and "obligation", but rather that both expressions excluded personal obligations so that there was no difference which was relevant to the case before him.

  51. In the second place, as I have already explained, the proviso for re-entry is not applicable to a statutory tenancy. In the present case Laws LJ sought to meet this objection by distinguishing between the consequences of the breach (forfeiture of the term) and the obligation itself. This, of course, assumes what has to be demonstrated - the existence of a free-standing obligation. But the tenant's bankruptcy is not free-standing. It is attached to the landlord's right of re-entry as a condition precedent to its exercise, and is found only in a term or provision of the contractual tenancy which is not carried over into the statutory tenancy.

  52. In the third place, the expression "broken or not performed" is the classic way to refer to breaches of negative and positive obligations respectively. A condition cannot be broken; it can only be satisfied or performed. The Respondents rightly placed no reliance on the words "not performed", since while they are appropriate to describe an obligation on the part of the tenant which has not been performed they are singularly inapt to describe a condition precedent to the exercise of a right by the landlord which has been performed.

  53. The Rent Acts were enacted in haste and in places badly drafted, and have greatly perplexed judges of the greatest distinction over many decades. They contain many passages where it has been found necessary to do some violence to the statutory language in order to give effect to the policy of the legislation. But unless the words used are inconsistent with the policy of the Acts they must be given their natural meaning. Since the proviso for re-entry has no possible application to a statutory tenancy, there is no policy reason to distinguish between a statutory tenancy which follows the determination of a contractual tenancy which contains such a proviso and a statutory tenancy which follows the determination of one which does not.

  54. Moreover, the position of the parties to a statutory tenancy is not significantly different from the position of the parties to a contractual tenancy containing a proviso for re-entry where the landlord has exercised the right. In either case the tenant has no legal interest in the property and no contractual right to remain in possession. In one case the landlord has an immediate right to possession but cannot obtain an order for possession if the tenant applies for relief and the Court considers that it is reasonable that he should have it. In the other he cannot obtain possession unless there is a breach of an obligation on the part of the tenant and it is reasonable to make an order for possession. I do not accept that the breach of a trivial obligation, such as placing a flower pot on the window-sill in breach of a term of the contractual tenancy, would justify the Court in making an order for possession against a tenant who, for quite unconnected reasons, was unsatisfactory. A breach of some obligation is necessary to give the Court jurisdiction, and unconnected circumstances may tilt the balance against the tenant and make it reasonable to make an order of possession, but it is not reasonable to seize upon a trivial and remediable breach to evict a tenant from his home if he could not be evicted without it.

  55. In the case of a contractual tenancy, section 146(10) of the Law of Property Act 1925 enables the Court to give relief from forfeiture if the tenant's interest is sold within a year of the bankruptcy. The subsection is intended for the protection of the tenant's creditors rather than the tenant himself, but it indicates what Parliament considered to be a fair balance between the interests of the landlord on the one hand and the tenant or his creditors on the other. The landlord's interest lies in the continued payment of rent and performance of the tenant's obligations. So long as the tenant's trustee in bankruptcy maintains the payment of rent and continues to observe the other terms of the tenancy and disposes of the property within a year to a satisfactory tenant, the landlord cannot take advantage of the bankruptcy to obtain possession.

  56. It is not at all obvious what the fair balance should be where there is a statutory tenancy. The tenant has no interest in the property, so there is nothing to preserve for the benefit of his creditors. On the other hand, the Rent Acts are concerned with protecting tenants and their families from being evicted from their own homes. Plainly the landlord should be entitled to possession if following the bankruptcy the rent is unpaid or there is a breach of the tenant's obligations and it is reasonable to make the order. But what if the rent continues to be paid and the tenant continues to perform the obligations of the tenancy? Why should the tenant and his family lose their home on bankruptcy if this makes no significant difference to the position of the landlord? The landlord of controlled premises subject to a statutory tenancy has seldom had much security for the rent; his real security has always lain in his ability to obtain an order for possession if it is not paid. The provisions for the transmission of a statutory tenancy on the death of the tenant suggest that Parliament has given a higher priority to the family's security of tenure then to the landlord's security for rent. It cannot have been the policy of Parliament that the tenant's daughter in the present case should be evicted from her home because her father had become bankrupt but not if he had died instead. It is no answer to say that the tenant's protection lies in the requirement that it must be reasonable to make an order for possession. That is only one of the statutory requirements. There must also be a breach of an obligation of the tenancy.

  57. In the past, the question is unlikely to have arisen with any frequency, for bankruptcy would usually be followed by non-payment of rent. But today the bankrupt tenant will usually be able to obtain housing benefit payable direct to the landlord. Since the policy of the Rent Acts does not compel a particular answer (though I think that it suggests one), the safest as well as the proper course is to apply the statutory language according to its natural meaning.

  58. This is not a case in which there has been a long history of consistent (if erroneous) understanding of the legal position on which parties have ordered their affairs; nor is it a case in which the inability to create new statutory tenancies makes the point academic. The line of authorities relied upon by the Court of Appeal is in fact remarkably weak. They consist of an obiter dictum of Johnston J at first instance in the Irish case of In re Drew [1929] I.R. 504; a passing remark of Sir Raymond Evershed M.R. (correct on any view) in R.M.R. Housing Society Ltd. v Combs; and the decision of Goulding J. in Halliard Property Co. Ltd. v Jack Segal Ltd. [1978] 1 W.L.R. 377. In re Drew was referred to without adverse comment in successive editions of Megarry on the Rent Acts, though the latest edition adds the words "in Ireland", which may be the author's equivalent of sed quaere. More to the point, perhaps, it is referred to in a section dealing with the terms of the statutory tenancy; it is not mentioned in the relevant passages at pp. 398-400 which list the kinds of conduct which will ground an order for possession. It is noticeable that the bankruptcy of the tenant is not included. Halliard was a decision on section 146 of the Law of Property Act, 1925. I have no doubt that it was rightly decided, but so far as relevant at all it is a case on "breach" rather than "obligation". There is no evidence, and no reason to believe, that statutory tenants who became bankrupt but who continued to pay the rent and perform their obligations under the tenancy were regularly evicted from their homes, and it is noticeable that whenever the point has arisen for decision it has been in a completely different context.

  59. I do not, with respect, consider that any help can be derived from the language of the 1919 Act, which re-enacted a provision in similar terms in an Act of 1915. These were emergency war-time Acts which limited the rent and prevented eviction during the currency of the contractual tenancy. They did not give security of tenure once the contractual tenancy had determined. The concept of the statutory tenancy first saw the light of day in the 1920 Act, which is generally regarded as the first of "the Rent Acts". The fact that the 1920 Act sometimes adopted the language of the earlier legislation but used it in a very different context adds little to the argument.    

  60. Although no new statutory tenancies can be created, there are more than 100,000 still in existence, and the availability of housing benefit makes the present issue of much greater importance than was the case in the past. Moreover, a similar point may arise in other contexts, and it would be unfortunate if an erroneous decision of the House were available to be relied upon in other cases. The books are full of cases which are still relied upon today even though the context in which the litigation arose is long since obsolete. In a case where no useful purpose would be served by reversing the Court of Appeal, the proper course is to refuse leave to appeal. The reversal of the decision below can then be left to another day. But the case is before us, and I do not think we can escape our duty to do justice to the parties as well as to clarify the law for the future.


Cases

In re Drew (A Bankrupt) [1929] I.R. 504; R.M.R. Housing Society Ltd v Combs [1951] 1 K.B. 486; Paterson v Aggio [1987] 2 EGLR 127; Roe v Russell [1928] 2 K.B. 117; Read v Goater [1921] 1 K.B. 611; Remon v City of London Real Property Company Ltd [1921] 1 K.B. 49; Halliard Property Co. Ltd v Jack Segal Ltd [1978] 1 W.L.R. 377; Brewer v Jacobs [1923] 1 K.B. 528

Legislations

Increase of Rent  (Amendment) Act 1919: s.1(1)

Increase of Rent and Mortgage Interest (Restrictions) Act 1920: s.5(1)

Rent Act 1977

Housing Act 1980: s.52(1)(a)

Law of Property Act 1925: s.146

Authors and other references

Megarry on the Rent Acts, 11th ed. (1988)


all rights reserved