You have to (c) it to believe it

Youssefi v Mussellwhite [2014] EWCA Civ 885

Summary

The Court of Appeal has provided some useful guidance on when a tenant ought not to be granted a new tenancy in lease renewal proceedings that are opposed by the landlord on one of the "tenant fault" grounds. Case law on these grounds is rare, and so the decision is welcome.

The landlord had sought to oppose on all three grounds (a), (b) and (c), being disrepair, persistent arrears and any other breach respectively. The Court of Appeal found that the breaches under (a) and (b) were not sufficiently substantial, but upheld the original decision to terminate the lease on ground (c) as a consequence of the tenant's behaviour during the term.

The law

Under the Landlord and Tenant Act 1954 ("the Act"), a business tenant will have an automatic right to renew the lease, unless the landlord can oppose this on one of seven statutory grounds under Section 30 of the Act. The first three of these seven grounds relate to situations where the tenant is in some kind of default, and are set out below:

 where under the current tenancy the tenant has any obligations as respects the repair and maintenance of the holding, that the tenant ought not to be granted a new tenancy in view of the state of repair of the holding, being a state resulting from the tenant’s failure to comply with the said obligations;

that the tenant ought not to be granted a new tenancy in view of his persistent delay in paying rent which has become due;

that the tenant ought not to be granted a new tenancy in view of other substantial breaches by him of his obligations under the current tenancy, or for any other reason connected with the tenant’s use or management of the holding;

It can be seen from the wording above that ground (c) is far wider in scope than the first two grounds, because it contains an alternative option in the second part of the Section.

The facts

The tenant had a lease of mixed use premises in the centre of Winchester. The property consisted of a shop, together with residential accommodation and a yard at the rear. When the lease expired, the tenant served notice seeking a new tenancy. However, the landlord did not wish to renew, because of the tenant's conduct during the term. She served a counter notice citing all three grounds of opposition, and sought an Order from the Court to terminate the lease without the grant of a new tenancy.

The Courts agreed with the landlord. It found on each ground as follows:

Ground (a) - Disrepair   The tenant had failed to control creepers that were growing in the yard. This breached an implied covenant to “use the premises in a tenant-like manner”, which was sufficiently serious for the landlord to succeed under ground (a).

Ground (b) - Arrears

Although the tenant had been in and out of arrears over the years of the tenancy, the Court did not agree that this was sufficiently serious to deny the grant of a new lease. The landlord failed on this ground.

Ground (c) – Other Substantial Breaches/Reasons

The tenant, described by the Court as "combative and obstructive", had refused to permit the landlord access to the property over the years. This had breached a covenant to allow access, and was sufficiently serious to refuse a new lease under ground (c).

Secondly, the lease contained a covenant that required the tenant to use the premises for a retail business. Although the landlord did not dispute that the tenant was using the property for a business, it was not trading as a shop. The Court found that this was a sufficiently serious breach of the user clause again to oppose renewal on ground (c).

The tenant appealed the decision.

The Court of Appeal’s decision

The Court of Appeal allowed the appeal in respect of ground (a), but upheld the original decision on ground (c). Consequently the tenant was denied a new lease. The Court of Appeal answered some key questions, particularly in respect of relying on grounds (a), (b) and (c).

First, the Court considered the tests that must be applied for these grounds. So for ground (a), the Court had to consider whether "in view of the state of repair of the holding", such state brought about by the tenant's failure to repair and maintain the property, the tenant "ought not to be granted" a new lease. This meant the Court focusing exclusively on the condition and asking itself whether "the proper interests of the landlord would be prejudiced" by compelling it to continue in the landlord/tenant relationship. In other words, would it be fair to the landlord to "foist" the tenant upon it for another term, in light of the tenant's past performance. The sole consideration is on the state of repair.

A similar approach applies for ground (b). Here, the only focus is on the persistent delay in paying rent, and nothing else. 

However, there is a much broader approach under ground (c). In these cases, the Court must focus not only upon "other" substantial breaches, which could encompass any covenant, but also or alternatively on "any other reason connected with the tenant's use or management" of the property. This gives the landlord a very broad brush with which to paint a picture of the tenant's breaches.

The Court found that it is not necessary for the landlord to prove a loss in rental income or the value of his own interest; he simply has to prove that his interests are prejudiced by the tenant's breaches. Whilst this gives a very wide scope, the tenant is protected because the exercise is at the discretion of the Court.

Secondly, the Court considered whether the tenant had sufficiently breached the repair and maintenance covenants in this case. Focusing on the state of repair, the Court decided that removal of the creeper fell outside the tenant’s repairing responsibilities. Under the lease, internal repairs were the responsibility of the tenant and external repairs were the responsibility of the landlord.

However, even if the creeper had been the tenant’s responsibility, the Court’s view was that it was still insufficient to warrant a refusal to grant a new tenancy, because the cost of removing the creeper would only have been in the region of £350.

On the other hand, the Court upheld the decisions on ground (c). The judge had been entitled to find that the breaches of the access covenant alone were enough for a new tenancy to be denied. There was a long history of intransigence on the tenant’s behalf and it would be unfair for the landlord to be stuck in a relationship with a tenant who clearly would not respect the landlord’s legitimate rights to inspect.

The Court also upheld the second decision under ground (c) that the tenant’s obvious refusal to comply with the user covenant in the lease was so substantial that no further tenancy should be granted on that basis. The tenant's failure to operate a legitimate business from the property was sufficiently prejudicial to the landlord without her having to quantify the losses.

Our advice for landlords

This is the second case on ground (c) in recent months. It is useful clarification of the breadth of ground (c), and in particular the alternative to establishing an actual breach.

A landlord that succeeds on one of the "tenant fault" grounds does not have to pay statutory compensation. This makes grounds (a), (b) and (c) more inherently attractive to landlords than options such as redevelopment or owner-occupation under grounds (f) and (g).

It is still likely that the Court will be reluctant to oppose renewal on grounds (a) and (b), because of the alternatives available to landlords, such as forfeiture or self-help notices for repairs. It is more likely to insert conditions into the new lease. However, the doors may have opened a little wider for ground (c) in light of these decisions.

If a lease is nearing expiry, and the tenant has not behaved well, it would be sensible to keep very clear records of the breaches and to seek early advice on their implications.

Our advice for tenants

Whilst this is useful guidance, and we may well see more ground (c) cases in the future as a consequence, nonetheless each case will turn on its own facts.

Again, if your lease is approaching expiry, and you consider that the landlord may wish to oppose renewal, you should seek early advice and take steps to remedy any breaches if required.

You should also keep clear records of any disputes to assist your position if the landlord serves a hostile notice, and be prepared to take swift action.