Key points

  • An agreement that a third party will manage a tenant's business may amount to a breach of a lease covenant not to share occupation of the premises
  • In an application for relief from forfeiture, the court will consider each breach separately. Where the tenant has committed more than one breach of covenant they do not have a cumulative effect  

Facts

Patel v K&J Restaurants Ltd involved a tenant's claim to relief from forfeiture of its lease. The tenant, K&J, held a headlease of the whole of a building. The top floors were sub-let on assured shorthold tenancies. The ground floor and basement were used as a restaurant.

It transpired that one of the flats had been used as a brothel. This was a breach of the covenant in the headlease, stating the premises should not be used for an illegal or an immoral purpose.

The landlord also alleged that K&J had breached the alienation covenant under the lease. The restaurant was managed by a company connected with K&J, called MPC. MPC was entitled to retain whatever the business turned over, and K&J was paid a fixed consultancy fee in line with an agreement it had made with MPC. MPC was obliged to keep the restaurant open for certain hours, and in return K&J agreed not to interfere in MPC's running of the business.

The covenant that the premises shall not be used for an illegal or immoral purpose

The court confirmed that, so far as the immoral use of premises is concerned, a breach consisting of direct use by the tenant is not remediable.

If the use is not direct (for example, as in this case, the immoral use is by a subtenant), the breach may be remediable as long as the tenant acts promptly on discovering the relevant use by the subtenant.

The court therefore had to decide whether K&J had acted promptly to deal with the immoral use. Although K&J had acted swiftly when receiving a formal notice from the police in February 2008, it had first become aware that the premises were being used as a brothel in November 2007.

Because K&J did not take any steps with reasonable promptness to check on the position in 2007, the breach was not capable of remedy.

The alienation covenant

K&J argued that the effect of the arrangements with MPC was that MPC occupied the premises as the agent of K&J, with the result that there was no breach of the alienation covenant.

The court disagreed. It held that a "manager" who runs the business, takes all the profit (after paying fixed sums to the owner) and bears all the loss, and is obliged to continue carrying on the business for a stated period, cannot fairly be described as carrying on the business as agent for the owner.

Although the agreements with K&J did not contain an express right for MPC to use and occupy the restaurant premises, MPC was obliged to keep the restaurant open for specified hours. As such, MPC had an implicit right, which it could enforce against K&J, to use and occupy the premises, albeit that it could not exclude K&J from the premises. This amounted to the sharing of occupation by K&J, in breach of the alienation covenant in the headlease.

The breach of the alienation covenant was remediable, although K&J had had some difficulty in evicting MPC and so had failed to remedy the breach by the time of the trial.

Relief from forfeiture?

The court dealt with each breach separately in so far as the question of relief from forfeiture was concerned. It ruled there was no question of the breaches having a cumulative effect, such that "the whole was more than the sum of the parts".

The court will be reluctant to grant relief against forfeiture for a breach involving immoral use of premises. Nonetheless, the Court of Appeal upheld the judge's decision to grant relief from forfeiture. A significant factor was the judge's finding that there was no stigma attaching the premises.

The court then considered the breach of the alienation covenant. Notwithstanding that this breach had not been remedied by the time of trial, the Court of Appeal thought that it was appropriate to grant relief. This was because:

  • the breach was not wilful;
  • although they had not yet been successful, K&J were continuing their attempts to remove MPC;
  • to give vacant possession to the Patels would give them a financial advantage out of proportion to the breaches, or any damage arising from them.