Magnic Limited v Ul-Hassan and another [2015] EWCA Civ 224

Magnic fails to cast a spell

Summary

The Court of Appeal has confirmed that relief from forfeiture will generally be available to tenants, provided that any conditions to relief are complied with and the landlord is not unfairly prejudiced.

In this case, the Defendant tenants had breached the conditions for relief that the Court had ordered on a prior occasion.

However, the Court found that the breach had resulted from a legal misunderstanding of the conditions that applied. Consequently the Court held that it was fair to allow relief from forfeiture, bearing in mind all of the relevant circumstances and the fact that the Defendants had subsequently met the conditions. It would be disproportionate and unjust to deprive them of their property as a consequence of a genuine error.

The case is useful in clarifying circumstances in which relief might be granted to tenants, even where there has been a clear breach.

The Facts

The Claimant is the landlord and the Defendants are the tenants of commercial premises on Heston Road, Heston ("the Premises"). The case is the culmination of a long-running landlord and tenant dispute over the Defendants' use of the Premises.

The Defendants had acquired the occupational sublease of the Premises in 2004, and then the long 125 year head lease in 2008. They were trading from the Premises as a takeaway pizza restaurant. Prior to the acquisition of the sublease by the Defendants, the previous owner had used the Premises as a bakery. Consequently, whilst the Premises contained some ducting, this was not sufficient to deal with the greater demands of a pizza restaurant. Similarly, the Defendants did not have planning permission to use the Premises for this purpose.

Both the sublease and the head lease contained an obligation on the Defendants to use the Premises in accordance with all planning permissions. The Defendants therefore attempted to regularise the position and applied for planning permission in 2006.

The Council duly granted permission in 2007, subject to various conditions, including the erection of an appropriate extractor duct on the exterior of the building to deal with odours created by the restaurant. However, only the interior of the ground floor of the Premises was let to the Defendants.

In January 2008, the Claimant acquired the freehold. The Defendants duly applied to the Claimant for permission to install the ducting on the exterior of the building, but the Claimant objected. It obtained a declaration from the Court that the Defendants had no right to erect the ducting. As a consequence, the Defendants' planning permission never became unconditional, and finally lapsed. Despite this, the Defendants continued to run their takeaway restaurant from the Premises.

In May 2009, the Claimant served a notice threatening to forfeit the head lease. This was followed by the service of possession proceedings, which forfeited the head lease and, as a direct consequence, the sublease. It should be remembered that, as a 125 year long lease, there was commercial value in the head lease in particular.

Initially the parties tried to compromise by way of a Consent Order. This granted the Defendants relief from forfeiture provided that they complied with the terms of the Order. The Defendants failed to comply and in 2011 the Claimant obtained a possession order with the proviso that, if the Defendants ceased business by February 11 2011, they would be granted relief.

That order was stayed on 8 February 2011 pending the outcome of an appeal by the Defendants. In the interim, the Defendants continued to trade, in the mistaken belief that their appeal granted them a stay of execution.

At first instance, the Court dismissed the Defendants' application and declared that the head lease had indeed been forfeited. The Court declined to grant the Defendants a retrospective extension of time to close down the takeaway business. The Defendants appealed again to the Court of Appeal.

The Appeal

The Defendants argued that there were three main errors in the initial decision:

  1. The Court had been incorrect to refer to their continuation of trade as being "a deliberate decision". In fact, it had simply arisen from a misunderstanding of the correct legal position;
  2. The Court had failed to take into account properly the fact that the Claimant would be obtaining a great windfall if forfeiture were granted whilst the Defendants would be suffering a great prejudice; and
  3. The Court had been incorrect to state that there had been no substantive change in the Defendants' position since the original 2011 decision.

The Decision

The Court of Appeal found in favour of the Defendants and allowed the appeal. On each point:

  1. Overall, the judges felt that the focus should be on the way in which the original  Court had refused to exercise its discretion in allowing an extension of the date by  which the Defendants were required to cease the takeaway business. Although the  Court had the power to exercise that discretion retrospectively, the original judge had  mischaracterised the situation by finding that the Defendants were in deliberate  breach.

This mischaracterisation had meant that the Court had not engaged properly with the circumstances surrounding the Defendants' continuation of the takeaway business  from February 11 to May 31 2011. By contrast, the Court of Appeal found that the fact  that the Defendants had ceased to trade following the dismissal of their appeal strongly  supported the view that they would have ceased on February 11 had the stay not been  obtained. This was not a deliberate and flagrant breach of the terms of the Order.

  1. At first instance, the Court had considered the windfall for the landlord, and found that  its impact was diminished by virtue of the fact that it was the Defendants' third  attempt to vary the terms of relief. It is correct in isolation to say that considerations that would usually be  persuasive in granting relief should have less weight attached to them where there  have been persistent failures to satisfy the conditions of the Court. But in this case the  judge had given them less weight because he had found that the Defendants were not acting deliberately. In fact the Defendants had believed they were permitted to trade pending the outcome of the appeal due to an inadequately drafted Consent Order, and the Court of Appeal found that this had to be taken into account.
  2. The original decision failed to take into account the circumstances in which the  Defendants had continued trading.

Although a tenant who continually fails to comply with conditions for relief will test the  patience of the Court as well as his landlord, the Court is nonetheless required to carry  out a balancing exercise taking the reasons for non-compliance into account. In this  case, the original Court had failed to do that, and had treated the Defendants'  continuing trade as a deliberate decision to ignore the consequences.

If the Defendants had been breaching the terms of the Order in such a blatant fashion,  then the Court would have been entitled to refuse the extension of time for compliance.  However, as the Defendants had genuinely misunderstood the Order, the decision had  to be set aside and reconsidered by the Court of Appeal.

Although the Claimant was not unreasonable to be concerned by the Defendants' conduct, there was no suggestion that the breaches could not be remedied. There was nothing to suggest that the additional months of trading until May 2011 had caused any additional loss to the Claimant or made the grant of relief on the condition that the trade ceased would be inadequate to protect the Claimant's freehold interest. Conversely, it would be extremely disproportionate and harsh to deprive the Defendants of their valuable interest in these circumstances.

The Court therefore found that it would be disproportionate to refuse relief, which was duly granted, subject to further conditions concerning payment of the landlord's costs.

Our advice to Landlords

This is a useful decision as it is a clear demonstration of the established principle that the Court will treat forfeiture as an ultimate sanction. It highlights that the Court will  grant relief if a tenant can show that it is capable of remedying the breaches without detriment to the landlord.  In this case, the breach had subsisted for many years, yet the Court still granted relief after the Defendants had remedied the position.

If you have a tenant who is breaching the terms of the lease, it will be important to seek early advice on the nature of the breach and the remedies available to both parties. Given the ease with which a right to forfeit can be waived, advice should be sought before any communication is made with the tenant, including the demand/acceptance of rent.

Our advice to Tenants

Even though the decision is positive for tenants, it is important to note that it is not free rein to commit breaches and then blithely apply for relief.  The Court of Appeal here placed much on the fact that the continuing nature of the breach was the result of a misunderstanding.

It should also be noted that the tenant was obliged to cease trading in order to preserve the lease, and that it was liable for the costs.

If you are accused of breaching the terms of your lease, or consider that you might be in breach whether knowingly or unknowingly, legal advice should be sought so that you can ensure your interest and business are not exposed.