Landlord and tenant update

Citation

Dowden, M. and Nathanson, N. (1999), "Landlord and tenant update", Journal of Property Investment & Finance, Vol. 17 No. 4. https://doi.org/10.1108/jpif.1999.11217dab.001

Landlord and tenant update

Landlord and tenant update

Malcolm Dowden and Nabarro Nathanson

Keywords: Law, Local housing authorities, Debt collection, Service charges, Occupier's liability, Rent

1. Payments made under a mistake of law

1.1 The Kleinwort decision

In Kleinwort Benson Ltd v. Lincoln City Council [1998] 3 WLR 1095 (HL), the House of Lords abrogated the rule, dating back to the 1760s, that payments made under a mistake of law were irrecoverable. The rule has long been subject to criticism on the basis that it is difficult to draw a sensible distinction between payments made under a mistake of fact (which have been recoverable) and payments made under a mistake of law (which have not).

The case involved the recovery of sums arising from local authority interest-swap deals developed for use by a number of local authorities during the 1980s as a means of avoiding restrictions on capital expenditure. In 1992 the Court of Appeal held in Hazell v. London Borough of Hammersmith and Fulham [1990] 2 WLR 1038 (CA) that such deals were invalid, being ultra vires the local authorities.

Kleinwort Benson had a number of claims against local authorities with which it had entered into interest-swap deals. But, as some of the payments had been made more than six years earlier, it seemed that its claims were barred under the Limitation Act 1980. However, under s32(1)(c) of the Limitation Act 1980, the limitation period for claims where a mistake has occurred runs from the date the mistake is discovered, or could with reasonable diligence be discovered. Kleinwort Benson therefore argued that it was only with the 1992 decision in Hazell that they had "discovered" the mistake and it was, therefore, entitled to make a claim within six years of that decision.

The House of Lords therefore had two points to decide before Kleinworts could recover the money. Firstly, was the claim being made in time under section 32(1)(c)? Secondly, even if the claim were being made in time should the rule relating to payments made under a mistake of law be sustained as part of the laws of England and Wales?

Recovery was allowed, with the rule relating to mistake being overturned by a 3:2 majority. All five Law Lords recognised that the rule was no longer defensible, but two of their lordships believed that overruling this principle should be done only by the legislature, so that it would not operate retrospectively. The other three Law Lords were willing to hold that payments made under a mistake of law should be recoverable, recognising that because of the declaratory nature of judgments, their decision would have retrospective effect.

The result of this decision is that where any payment has been made in the past, a repayment can now be sought if the paying party subsequently discovers that there has been a mistake of law. This could occur several years after the payment has been made, possibly as a result of a Court of Appeal or House of Lords' decision overturning either earlier authority or a settled understanding of the law which proves to have been erroneous.

Property lawyers have identified a potential for claims in the following areas, although this is certainly not an exhaustive list:

1. 1.

   Tenant's notices under s27 of the Landlord and Tenant Act 1954. It used to be thought that, as a matter of law, a tenant was required to serve a notice under s27 of the Landlord and Tenant Act 1954 at the end of the contractual term of the lease to bring the lease to an end even when he was no longer in occupation of the premises. Many tenants failed to do so and their landlords claimed - and the tenants paid - rent for the period from the end of the contractual term until the tenants' s27 notices (when later served) expired. In Esselte AB and another v. Pearl Assurance plc [1997] 02 EG 124, the Court of Appeal held that, where the tenant was not in occupation, there was no need to serve a notice under s27 of the 1954 Act. Under Kleinwort it could be open to tenants who were not in occupation of their premises and who paid rent to their landlords after the expiry of the term of their leases to claim those sums back from the landlords.

2. 2.

   Before Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] 24 EG 122; [1997] 25 EG 138, a break notice had to expire on the exact date required by the lease. In Mannai, the House of Lords relaxed this rule. So long as a reasonable landlord would understand the purpose of the notice, the notice would be held to be valid even if the date specified were wrong in the notice itself. Would a tenant who served a break notice specifying the wrong date before the decision in Mannai, and who had therefore continued to pay rent in the mistaken belief that the break notice was invalid, now be able to claim that the lease had come to an end and that the rent should be repaid?

3. 3.

   Rent reviews. If a tenant agrees to a rent review on the mistaken view of the legal effect of a rent review clause, would that tenant now have a claim for repayment of part of any increase in the rent if particular wording in the rent review clause is later construed differently?

4. 4.

   Service charges. A landlord makes a service charge demand under a lease and includes sums for services for which the tenant is under no obligation to pay. If the tenant pays that service charge under the mistaken belief that it is under an obligation to do so, can the tenant now reopen that payment and claim a repayment from the landlord?

1.2 The question of limitation

Assuming that claims can be made, the most vexing question to arise is that of the applicable limitation period. When does the limitation period begin to run? Some commentators believe that in respect of all payments made under a mistake of law the period runs from the date of the House of Lords' decision in Kleinwort. Until then, the tenant would not have known that there was a right to claim for sums paid under a mistake of law (indeed, until then, there was no such right). Other commentators (myself included) disagreed, pointing out that in Kleinwort the ditching of the rule would have been of no benefit to Kleinworts unless the House of Lords also agreed with their argument on limitation (i.e. that the period began when the "mistake" which induced the payment was discovered by the Hazell decision in 1992 rather than the earlier dates when the payments were made).

Resolution of the limitation debate may be assisted by the reasoning Neuberger J in Nurdin & Peacock plc v. DB Ramsden & Co Ltd (No 2) [1998] 09 EG 175 - although in fact, the question of limitation did not arise in Nurdin since the payments in question were all made within the six years preceding the action. However, its relevance to the debate stems from the confirmation that recovery is not restricted to mistakes as to liability, but may also be available where the mistake relates to the law of restitution itself. The key point is that recovery depends upon there being a causal connection between the mistake and the making of the payment. It must follow that the limitation period runs from the point when the factor that induced payment is discovered, or could with reasonable diligence be discovered, to have been a mistake. So, the circumstances in which limitation runs from the decision in Kleinwort must be restricted to cases where the relevant mistake was one relating to the law of restitution itself. Where the relevant mistake is one which relates to liability, the limitation period must run from the point at which the belief that the payment was due proves to have been mistaken.

1.3 Nurdin - a special case

Nurdin itself concerned restitutionary claims relating to ten overpayments of rent under a commercial lease. In respect of the first five, Neuberger J held that they were paid under a mistake of fact and were accordingly recoverable under the law as stated before Kleinwort. He held that the last four overpayments were recoverable by the tenant on the basis of an implied agreement in an exchange of correspondence by solicitors that they would be repaid if the tenant succeeded at trial. In the alternative he held that following Kleinwort they would be recoverable as having been made under a mistake of law - specifically, reliance upon advice (wrong when given) that it would be recoverable if the court in due course decided that it was not payable to the landlord.

The most difficult part of the the judgment relates to the sixth overpayment made in May 1997. This payment predated the implied agreement for recovery of the last four payments. Moreover, it was made at a time when the tenant could not be said to have paid under a mistaken belief that it was liable to pay since it was by then disputing liability. This payment was held to be recoverable solely on the basis that it was made under a mistake of law. Neuberger J held that where the payer believes that a payment would be recoverable if the court holds that it was not due to the recipient, he makes the payment under a mistake of law - in this case, the law of restitution - just as much as a payer who pays in the mistaken belief that the payment is due.

Jonathan Brock QC (Estates Gazette, 6 March 1999) suggested that:

if this decision is right then periodical payments made under leases will be recoverable even where the payer has no fixed view as to whether the payment is lawfully due and irrespective of whether the payment is made under protest. It will be enough for the payer to claim reimbursement of any sums overpaid once it is established, by agreement or by a decision of the court or other tribunal, that the sums paid were not due to the recipient if the payer can prove that, when paying, it believed that it would be entitled to reimbursement in the event that the sums paid were subsequently held not to be due (emphasis added).

The critical point here, and the one that probably means that claims of the type arising over the May 1997 claim in Nurdin will be rare, is the onus on the payer to prove that, when paying, it believed that it would be entitled to reimbursement should the court find in its favour. Only in those circumstances would it be the case that the mistake which induced the payment was one relating to the now-abrogated rule. In other words, it requires a situation in which, before Kleinwort, erroneous advice was given that an overpayment would be recoverable on a successful outcome to litigation.

Moreover, Neuberger J took pains to point out that there is a difference between a payment which is made under a mistake and one which is made in doubt. The point was made by Lord Hope Of Craighead in Kleinwort (at p. 1147H):

Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side. A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong - and that is so whether the issue is one of fact or one of law.

Neuberger J emphasised that Kleinwort does not go so far as to enable a person who has made a payment that is not due to recover it, where he was aware that he might not be liable to pay. Consequently, in order for the May 1997 payment to be recoverable there had to be special factors. Those special factors were found in Nurdin's erroneous understanding of the law of restitution. Their firm view that the payments would be recoverable was a mistake of law. It induced them to make the payments. Consequently, after Kleinwort, payments made on the basis of that mistake were recoverable.

Argument in Nurdin was complicated by the effect of the Kleinwort decision on the mistake of law which induced payment. A logical paradox emerged. The advice to Nurdin was that the overpayments were recoverable; the advice was wrong; Nurdin followed that advice; therefore Nurdin paid under a mistake of law; therefore the advice was right; therefore there was no mistake. The landlord left the argument at that point. Neuberger J pressed it further, pointing out that that amounted to a classic vicious circle since the last step in the landlord's argument would make the payment irrecoverable, in which case the advice given to Nurdin was wrong - in which case the overpayment was made pursuant to a mistake. In Neuberger J's view, the right point at which to cut this vicious circle was at the point where one concludes that Nurdin made the May 1997 payment under a mistake of law.

The convolutions of this argument highlight the unfortunate feature of the Kleinwort decision - its retrospective effect. Had the mistake of law rule been overturned by legislation (as proposed by the Law Commission, and recommended by the minority in the House of Lords) then the question of retrospective effect could have been properly addressed. However, the declaratory nature of judgments means that the House of Lords has, in effect, discovered that the rule that payments made under a mistake of law could not be recovered was never part of the laws of England and Wales. This leads to the bizarre conclusion that erroneous advice, such as that given to Nurdin, has turned out to be correct, whilst "correct" advice given before Kleinwort now turns out to be wrong.

In practice, where "correct" advice was given before Kleinwort then it is unlikely that any payment would have been made. This is because the advice then considered correct would have been that any overpayment would not have been recoverable even if the court found in the payer's favour on the question of liability. Making a payment would have been tantamount to conceding liability, or to agreeing that the payment would be made even in the absence of liability. Given these unlikely circumstances, a flood of claims similar to Nurdin seems unlikely.

2. Overriding interests

The Court of Appeal decision in Ferrishurst v. Wallcite [1998] 05 EG 161 has confirmed:

1. 1.

   that occupation of part of the property affected by rights of the occupier is sufficient for the purposes of section 70(1)(g); and

2. 2.

   that the capacity in which the person occupies need not indicate the nature of the right claimed.

The issue was whether Ferrishurst's option to acquire a leasehold interest in a building comprising offices, a depot and a garage was exercisable as to the whole or only as to the offices that they occupied. The judge at first instance was bound by the Court of Appeal decision in Ashburn Anstalt v. Arnold (No 2) [1988] 1 EGLR 64 and found that the protection afforded by section 70(1)(g) applied only to those parts of the property occupied by Ferrishurst. The Court of Appeal, however, was able to take a different view, noting that Ashburn could not stand when considered against Williams & Glyn's Bank Ltd v. Boland [1981] AC 487, to which the Court of Appeal in Ashburn was not referred.

While Ferrishurst is not a surprising decision, it focuses attention on both the protection of proprietary rights as overriding interests under section 70(1)(g) and the enquiries that a purchaser ought to make.

Acknowledging that its decision could give rise to anomalies, the court gave the example of the purchase of a block of flats where the tenant of one flat had an option to buy the same block. Occupation of the flat would suffice to make the tenant's option an overriding interest in respect of the whole block. The court might equally have referred to the tenant of a unit in a shopping centre. Occupation of part of the centre would, according to Ferrishurst, suffice to protect any rights relating to the whole of that centre as overriding interests.

To be sure of acquiring property free from section 70(1)(g) overriding interests (or at least of discovering their existence) it is necessary to make enquiries of the occupiers when acquiring the landlord's interest in a multi-let building. Enquiries of the seller alone do not displace the risk, as the section protects overriding interests save where enquiry is made of the occupier and the rights are not disclosed.

What is actual occupation?

"Actual occupation" requires physical presence. A mere right to occupy will not suffice. A more difficult issue is whether the occupation must be apparent. The balance of authority suggests that occupation need not be apparent, but the point cannot be regarded as finally settled.

In practice, it is not always an easy task to ascertain who is in actual occupation. Take, for example, group sharing arrangements. A group company with rights might be in actual occupation without there being any indication (for example, from signage, trading names, etc.) that it is not the tenant who is in occupation.

One possible way of dealing with business tenancies would be to seek information about tenants and subtenants by requiring that, as part of the sale package, the seller provide replies to notices served under section 40 of the 1954 Act. However, this might be impracticable if the deal is on a tight timescale, since the tenant has one month to respond to a section 40 notice.

Moreover, this would not cover group companies sharing occupation nor occupation by way of licence. Those acquiring shopping centres, office buildings or other multi-let premises should be advised to make a full physical inspection as well as making enquiries of the seller. Buyers and their advisers might also seek out signs of anomalies in occupation (e.g. rents being paid by someone other than the tenant).

Clearly, making such enquiries in the context of a large commercial scheme will be costly and may be impractical. Having been advised of the risk and having gathered such information as is available, buyers may be able to take a view as to the remoteness of the risk that an occupational tenant could have undisclosed rights binding the whole scheme. However, the point cannot be ignored. The courts have acknowledged that section 70(1)(g) overriding interests place a heavy burden of inquiry on the buyer. As Lord Wilberforce said in Boland:

What is involved is a departure from an easy going practice of dispensing with enquiries as to occupation beyond that of vendor and accepting the risks of doing so. To substitute for this a practice of more careful inquiry as to the fact of occupation and if necessary, as to the rights occupiers, can not in my view of the matter, be considered unacceptable.

The consultative paper recently issued by the Land Registry and the Law Commission on Land Registration for the Twenty-First Century does not recommend the removal of protection under section 70(1)(g). However, it is suggested that "in the comparatively near future", registration will become an essential part of the process by which rights over registered land are expressly created. When that happens, the only rights capable of being protected by actual occupation will be those that can be created without the need for registration. That is likely to comprise rights that arise informally (for example, by estoppel or adverse possession), and interests under trusts. This, the paper says, "will significantly restrict the ambit of section 70(1)(g) for the future". In the meantime, it is very much a case of "buyer beware".

3. The meaning of "occupation"

A tenant need not be in physical occupation of the premises at the end of the tenancy in order to claim the protection of the Landlord and Tenant Act 1954. Where events occur which force the tenant to leave the premises - such as a fire - the tenant can still apply to the court for the renewal of the tenancy, provided that he continues to claim his right to occupy the premises during the period of his absence. It is a question of fact in each case whether the tenant can show an intention to resume occupation.

In Flairline Properties Ltd v. Hassan [1998] EGCS 169 (QBD), the tenant of a restaurant had to move out in April 1995 after a fire, and reopened in nearby premises in August 1996, taking a 25-year lease of them. However, the tenant retained the key to the restaurant, stored equipment there and claimed to have informed the landlord's agent of his desire to return to the restaurant once it had been reinstated to open a second restaurant. The tenancy expired in March 1997 and the landlord wished to redevelop the premises. He argued that the tenant was not in "occupation" for the purposes of the 1954 Act, so that he would not have to operate the 1954 Act procedure and pay the tenant the statutory compensation to which the tenant would have been entitled had the landlord succeeded in preventing the lease being renewed under ground (f).

The landlord's argument was that to establish an "intention" to return to the premises, the tenant would have to show a genuine, firm and settled intention to return to the premises which is not likely to be changed and which he has a reasonable prospect of bringing about. This is the standard of "intention" required in an action by a landlord under s30(1)(f) of the 1954 Act to regain possession of the premises for redevelopment. The Court rejected this argument and accepted that a lower standard of "intention" applied for the purposes of proving an intention to occupy.

After a detailed consideration of the evidence, the court held that the tenant had an intention to return to the premises, once they were reinstated, to open a second restaurant, to be run alongside the one in the nearby premises. Mr A. Hacking QC, sitting as a deputy judge, put it this way: "It is sufficient if [the tenant] establishes that, at all times since the event which caused him to absent himself, he has intended to return to reoccupy the premises once they have been reinstated. Although not strictly required, he should communicate this intention to exert and claim his right of occupancy to the landlord or the landlord's agent." It was not necessary for the tenant to show that there was a reasonable prospect of bringing this about.

4. Service charge: recovery of underpayment

The Court of Appeal, in Universities Superannuation Scheme Ltd v. Marks & Spencer Plc (1998) EGCS 168 has held that a landlord who incorrectly calculates a tenant's service charge proportion is entitled to recover the underpayment, even for past service charge years which have been balanced and closed.

Marks & Spencer was the tenant under a lease which provided for the payment of a service charge apportioned between tenants in a shopping centre by reference to the rateable value of their respective units. The tenant was to pay interim amounts of service charge, together with a balancing payment following receipt from the landlord of an account of the annual service charge. In error, the rateable value of Marks & Spencer's premises was included in the calculations as£348,600 instead of£848,600. The landlord sought to reopen two service charge years to recover the balance of the correct amount from the tenant.

The landlord was unsuccessful at first instance, but succeeded in this appeal. The Court of Appeal made it clear that what had to be done was to construe the tenant's obligations under the lease, and then ask whether those obligations had been complied with. It was irrelevant that Marks & Spencer had paid all the amounts of service charge which had been demanded. On a proper construction of the lease, the obligation was to pay not the sums demanded, but the proper proportion of the landlord's expenditure calculated in accordance with the lease. As a result, the landlord was entitled to recover the balance of the correct amount of the service charge.

5. Double rent

In Ballard (Kent) Ltd v. Oliver Ashworth (Holdings) Ltd, (The Times, 1 April 1999), the Court of Appeal upheld a tenant's appeal against a finding of liability for double rent under the Distress for Rent Act 1737.

The 20-year lease at the centre of the case contained a break clause entitling the tenant to determine after ten years six months by giving at least six months' previous notice in writing to the landlord. In March 1996 the tenant notified its landlord that it intended to operate the break clause as of 24 September 1996, but it did not vacate the premises until November 1997.

The landlord successfully sued for £23,000 rent for the period up to November 1997 and it also obtained a ruling that its acceptance of the equivalent of single rent did not mean that it had waived its right to claim double rent under section 18 of the 1737 Act.

Allowing the appeal against the second ruling, Laws LJ said the right to double rent under the 1737 Act arose only where the tenant became a trespasser and the landlords treated him as such. He said it was clear that the legislature was concerned only to compensate for the potential loss of rent arising when a tenant held over against the landlord's insistence that he should comply with his own notice to quit. It would be an unfair result if the tenant were liable to pay double rent under the 1737 Act as a trespasser in respect of a period when the landlord, by pursuing it for rent, was strongly contending that the tenant was not in fact a trespasser.