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IN THE SUPREME COURT OF JUDICATURE CCRTF 96/029/H

(His Honour Judge Barbar )

Royal Courts of Justice

Strand

London WC2

Wednesday, 12th February, 1997

B e f o r e:

LORD JUSTICE WAITE

MR JUSTICE SINGER

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SADIQ

Respondent/Plaintiff

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HUSSAIN

Appellant/Defendant

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(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR R BARRACLOUGH (Instructed by John Howell & Co S2 4HJ) appeared on behalf of the Appellant

MR G JARAND (Instructed by Messrs Irwin Mitchell) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

Wednesday, 12th February, 1997

JUDGMENT

LORD JUSTICE WAITE: On 5th December 1995 his Honour Judge Barber, sitting in the the Rotherham County Court, was required to deal with an unusual situation. The freehold owner of shop premises had mortgaged them to a bank. The mortgage excluded the mortgagor's statutory power of leasing. Nevertheless the freeholder did grant a lease to a tenant from whom the current lessee, the plaintiff in the action, in due course took an assignment. It was a lease expiring in 2006. The plaintiff lessee then sublet the premises to a sub-tenant, the defendant, at a profit rent. The Bank had no knowledge of the creation of the lease or of the assignment to the plaintiff, or of the sublease to the defendant. The freeholder fell into arrears with the mortgage payments and the Bank (having by then become aware that an unauthorised party had been let into occupation) exercised its power of sale, after first giving notice addressed to "the occupier" of the property that it was treating any tenancies in respect of their occupation as void.

The story thus far is a familiar one. The unusual feature is that the party who in due course purchased the freehold from the Bank was not (as normally happens) a newcomer. It was the defendant, the sub-tenant. From the date of his purchase he claimed to be entitled to evict the plaintiff lessee and put an end to the lease and sublease by virtue of his new role as owner. The lessee maintained that although the defendant might now be the owner of the freehold reversion, nothing else had changed. The lease and underlease were still on foot, and the lessee was still entitled to assert his leasehold interest, and to claim rent from the defendant. On the footing, moreover, that his sub-tenancy had become forfeited through denial of his lessor's title the plaintiff lessee also claimed possession. Alleged non-payment of rent was also relied on as a ground of forfeiture.

The rival contentions of the parties, in the plaintiff lessee's action for arrears of rent, possession and mesne profits, were these. The plaintiff asserted that once the sub-lessee had taken his sublease, he was estopped from denying the title of his lessor (the mesne lessee); and that since he took a transfer of the freehold from the mortgagee with express notice of the current tenancy and sub-tenancy affecting his rights of occupation, the estoppel was binding upon him both as tenant and as freeholder. The defendant's case was that the Bank was selling the freehold as a party who had evicted the lessee and underlessee by title paramount (thus extinguishing the rights of either to possession on any basis -- whether of estoppel or at all) and that as purchaser of the freehold from the Bank he was entitled to step into the Bank's shoes for all purposes and treat the lessee as a trespasser (the fact that this also involved treating his own sublease as invalid being immaterial because his rights of possession now rested upon a superior footing -- namely the ownership of the freehold).

The judge supported the claim of the plaintiff lessee. He gave judgment for the plaintiff for possession (on the basis that the underlease had become forfeited) and awarded arrears of rent and mesne profits in the sum of £9900. From that order the defendant now appeals to this court.

THE FACTS

On 28th February 1991 Zafar Iqbal ("the mortgagor") as registered proprietor of 2 Far Lane, East Dene, Rotherham, South Yorkshire ("the property") charged the property by way of legal mortgage to the National Westminster Bank Plc, ("the Bank"). The charge was by way of legal mortgage ("the mortgage") and contained a covenant by the mortgagor not to exercise the statutory powers of leasing or part with possession of the property or any part of it without the written consent of the Bank.

On 1st August 1991 the mortgagor, without the knowledge of the Bank and in breach of that covenant, demised the ground floor of the property to Mazhar Hussain ("the original lessee") for a term of 15 years ending on 31st July 2006 at a rent of £2600 with three yearly reviews for use as a hot food take away business ("the lease").

On 30th July 1992 the original lessee assigned the lease to the plaintiff.

On 3rd May 1993 the plaintiff granted a sublease of the ground floor to the defendant for a term of one year expiring on 2nd May 1994 at a rent of £4680 pounds ("the underlease").

On 12th August 1993 the Bank, having discovered that the property had been the subject of an unapproved letting, sent a letter to the property addressed to "the occupier" stating as follows:

"Dear Sir/Madam

We refer to your present occupancy of 2 Far Lane and to advise you that the Bank has a mortgage over these premises.

The Bank is seeking a sale of the property in which you reside in order to discharge indebtedness outstanding to us.

As the Banks's mortgage proceeds [I think that that should be precedes] any tenancy agreement you have drawn up with Mr Iqbal and the Bank has no notice of your tenancy, your rights as tenants are not recognised.

Accordingly, in order that this matter be settled amicably within the short term, we look forward to receipt of your acknowledgment of this letter indicating that you will vacate the property within a period of 28 days.

If you are in any doubt as to the validity of our comments we suggest you contact a solicitor or citizens advice bureau."

Some days later on 24th August 1993 solicitors instructed by the defendant wrote to the Bank describing their client as

"the tenant" of the property and requesting an opportunity to buy it at market value. That offer was, in principle, acceptable to the Bank.

On 11th March 1994 contracts were exchanged between the

Bank and the defendant for the sale of the property at a price of £27,000 with vacant possession subject to the occupancy of the defendant under an agreement of which full details were stated to have been provided to the purchaser. The relevant paragraph of the contract reads as follows:

"Vacant possession of the Property will not be given to the Purchaser on completion as the Property is sold subject to the occupation of Mr Sabir Hussain pursuant to an Agreement made between [ ] and Mr Sabir Hussain full details of such having been provided prior to the date of this Agreement the Purchaser shall make no objection or rise any requisitions in regard thereto."

On or about 27th March 1994 the defendant ceased paying any rent under the underlease.

On 22nd April 1994 the contract was completed when the property was transferred by the Bank to the defendant who provided £27,000 at completion.

THE LAW

(1) a lease granted by a mortgagor in breach of a covenant in the mortgage against exercise of the power of leasing is void, unless or until the mortgagee indicates by words or conduct that he is waiving the illegality -- Dudley & District Benefit Building Society v Emerson [1949] Ch 707; Parker v Braithwaite [1952] a AER 837.

(2) the tenant under such a lease (and any sub-tenant of his) is nevertheless estopped from denying the validity of the lease (and sublease) while his occupation thereunder remains undisturbed -- Rust v Goodale [1957] 1Ch 33; Quennel v Maltby [1979] 1 WLR 318.

(3) that estoppel ceases when either party is evicted by the mortgagee -- Pope v Briggs [1829] 9 B&C 245.

(4) to constitute an eviction it is not necessary that the tenant should be put out of possession or that proceedings should be brought. A threat of eviction is sufficient -- (italics) Halsbury's Laws of England Vol 27 (1) paragraph 240 and Bower and Turner on Estoppel by Rrepresentation (3rd Edition) paragraph 197. Where a threat is relied on, it is not necessary that it should be directed to anyone other than the person in actual occupation -- Pope v Biggs per Parke J at page 258.

(5) if the third party effecting an eviction of the tenant is not acting in good faith but a under some collusive arrangement with the lessor designed to give the lessor a right to possession to which he would not otherwise have been entitled, equity will have regard to the substance of the transaction and will set it aside as unconscionable -- Quennel v Maltby (supra).

THE JUDGE'S FINDINGS

The judge held that the interest of the plaintiff lessee had never been determined because:

(1) there had never been any eviction of the plaintiff by title paramount on the part of the Bank

(2) the estoppel in the defendant's underlease which bound him to accept the plaintiff lessee's title

(a) continued down to the moment when he acquired the freehold by purchase from the Bank as mortgagee;

(b) continued thereafter by virtue of the express statement in the contract of sale of the fact that he was taking the property subject to his own right of occupation

(3) the defendant had failed to make out a case by affirmative evidence that his purchase was not part of a collusive arrangement of the kind that equity would intervene to prevention the principle of Quennel v Maltby.

Mr Barraclough, for the appellant defendant, has submitted to this court that all these reasons were erroneous, and with respect to the learned judge I, for my part, feel bound to agree, for the following reasons.

The judge held that no eviction had taken place because the letter of 12th August 1993 (which he described as "only a recognition of adverse possession") was ineffective for that purpose; and because it was in any event defective -- being addressed to "the occupier" (i.e. the defendant) only, and never brought to the attention of the plaintiff lessee. The terms of the letter have been quoted. To my mind, in disagreement with the judge, they amount to the plainest possible intimation of an intention or threat to take possession by title paramount and treat the lease and sublease as void. The intimation of eviction was only required to be made to the party in actual occupation, and once that party had received it, the estoppel hitherto subsisting between the lessee and sub-lessee collapsed like a house of cards with the disappearance of the fiction which the law had previously imposed through estoppel but which could now no longer be maintained in reality -- namely that the lessee had title to grant to the underlessee a right to possess the property.

The rationale behind the judge's second finding was derived from the wording of paragraph 8 in the contract of sale between the Bank and the defendant whereby the latter took with express notice of his own occupation. The effect of those words (already quoted), coupled with the fact that the defendant paid rent down to 27th March 1994, was, so the judge held, to indicate that:

"It was thought by all parties concerned here, [the defendant], [the plaintiff] and the Bank, that someone was in occupation rightfully and that until further action was taken that was seen to be the case by the defendant because he continued to pay rent until March 1994."

That conclusion could not of course stand in the light of the different view I have already taken from the judge on eviction. If (as I think) the Bank had by the date of the contract already evicted the lessee and underlessee by title paramount (in the special sense in which the term eviction is used in the authorities as an act disputing rights of occupation in a way which falls short of actual dispossession), any thoughts by the parties on the lines attributed to them by the judge would be irrelevant. But, in any case, I can find no warrant for putting upon paragraph 8 the interpretation adopted by the judge. It amounted to no more than a routine disclaimer by the Bank of responsibillity for the rights (if any) under which the defendant purchaser was already in occupation.

The judge's reference to Quennell v Maltby occurred in this context in his judgment:

"Therefore, the subsequent acquisition by the defendant has occurred here of the freehold which prevents him denying the lease without more and justifying, says Mr Jarand, the test in Quennell v Maltby. It seems to me, therefore, without more, it means the lessee cannot deny the title of the lessor without either, in my judgment, beginning Court proceedings or at least raising the question of to whom rent is rightfully paid."

The judge had made no finding of mala fides or collusion on the part of the defendant, nor in my judgment would there have been the slightest evidential basis for his doing so. The direct principle of Quennell v Maltby therefore had no application. If the judge thought that the result of that case was to leave the defendant with some particular onus, beyond the ordinary burden of proof for all parties making an averment by way of claim or defence, of establishing -- by court proceedings or otherwise -- that there were particular grounds for releasing him from the obligation not to dispute his lessor's title, he misunderstood this authority. No such proposition is to be derived from it.

For all those reasons, despite the courageous advocacy devoted by Mr Jarand to a defence of the judge's approach to the case, I would allow the appeal and hear counsel as to the form of order which this court should make in substitution for that made by the judge below.

MR JUSTICE SINGER: I agree.

ORDER: Appeal allowed. Order of the judge below discharged,

and monies paid thereunder be restored to the defendant.

The respondent to pay the costs of the appeal and the costs of the hearing below. Order not to be enforced without the leave of the court. Legal aid taxation.

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