Brennan v Kettell

LORD JUSTICE PETER GIBSON: The first defendant, Alan Kettell, and the second defendant, Anthony Kettell (together "the Kettells"), trading as Diamond Fires and Fabrications, appeal against the order dated 22nd February 2003 of His Honour Judge Maddocks sitting as a High Court Judge in the Liverpool District Registry. By his order the judge dismissed with costs the Kettells' Part 20 claim against their lessor, Royal Bank of Scotland Plc ("the Bank"). The appeal is brought with the permission of the judge.

The dispute relates to the boundary between two adjacent commercial units, Unit 13 and, immediately to the north of it, Unit 14, on an industrial estate called the Wheatland Business Park in Wallasey. In 1989 New Way Developments Ltd ("New Way") acquired and subsequently developed an old factory site of three and a half acres. In 1990 New Way issued a debenture to the Bank which had a charge on New Way's property.

New Way had commissioned architects to prepare drawings for the division of the site into some 30 factory, business and office units with parking spaces. The drawings were put to prospective purchasers as proposals, but were modified to meet the purchasers' particular requirements. Unit 14 was in two parts, what the judge called "Part A" at the north end and a smaller area, "Part B", at the south end, the two parts being separated by an internal brick wall with a doorway, opposite which was a store room ("the store") along the west side of Part B. Unit 13 was a derelict building with no roof. At all material times the apparent physical boundary between Unit 13 and Unit 14 was a wall some 18 feet high, called by the judge "the flank wall". The architect's drawing showed Part B to be divided between Unit 14 and Unit 13 by partitioning off a strip of about 7 feet wide adjacent to the flank wall, up to but excluding the store, to form a separate toilet area for each unit, with a new doorway being opened in the flank wall to provide access from Unit 13. The judge called that strip "the disputed area". That scheme was never completed. The partitioning was never put up and the doorway in the flank wall was never made. This was because the claimant, Josephine Brennan, in 1991 expressed interest in the purchase of Unit 14 to convert it to a sandwich bar and cafe and required the whole of Part B. Samuel Gibson, the owner of New Way, agreed to Mrs Brennan's wishes. They calculated the total floor area of Unit 14 at 1,020 square feet as against 920 square feet in the architects' drawings. Mr Gibson produced a plan showing the revised layout. A rent reflecting that increased area was agreed.

A contract for the long lease of Unit 14 was signed by New Way and Mrs Brennan but not dated. The premises to be demised were identified by reference to a plan to the draft lease. This is no longer available, but the judge found the evidence pointed to it being the same as the plan produced by Mr Gibson. The Bank released Unit 14 from its charge. On 26th February 1991 New Way granted Mrs Brennan a 999-year lease ("the 1991 lease") of Unit 14. The counterpart lease, which Mrs Brennan signed, showed the boundary between Units 13 and 14 as a straight line. The demised premises were defined as:

On the ground, however, Unit 14 included the disputed area, there being no wall or other structure to mark out or separate it from the remainder of Part B. Mrs Brennan engaged Mr Gibson's company to fit out the premises for her business, the whole of Part B being utilised. Mrs Brennan after two years gave up the sandwich bar and cafe business. There was then another user of Unit 14 until January 1995, and after that Mrs Brennan in May 1995 negotiated a letting of Unit 14 to a taxi firm, Ferry Cars.

New Way had in the meantime run into financial difficulties. It was struck off the register and dissolved in December 1992. Receivers were appointed by the Bank in June 1993, and a surveyor, Mr Honeybourne, was engaged to dispose of the unsold units, including Unit 13. In 1995 the Kettells offered to acquire Units 12, 12A and 13, the last being described as a derelict plot. The evidence before the judge was that what was being offered to them as Unit 13 was what the judge called "the yard", being the area up to the flank wall. An increased offer by the Kettells was accepted. The Kettells, as the judge found, were well aware that they were buying as Unit 13 only the yard; and the correspondence between the solicitors, Mr Gower-Jones of Davies Wallis Foyster for the Bank and Mr Felce of Bullivant Jones for the Kettells, treats Unit 13 as a vacant plot. On 25th August 1995 Mr Felce noticed and drew the Kettells' attention to the fact that the filed plan showed a kink in the boundary, that is to say its L-shape. But the Kettells nevertheless proceeded to sign the contract. On 6th October 1995 Mr Felce's assistant spoke to Mr Gower-Jones, who had observed the difference between the filed plan and counterpart plan for Unit 14. Mr Gower-Jones took the view that the filed plan was wrong and he promised to take the matter up with the Land Registry.

On 6th October 1995 the Bank granted a 999-year lease ("the 1995 lease") from 1st January 1990 to the Kettells. The demised premises were described as:

By clause 5(c) of the 1995 lease the Bank covenanted with the Kettells to observe and perform the covenant set out in Schedule 3, paragraph 1 of which provided:

When the 1995 lease was sent to the Land Registry the conflict between the file plan and the 1995 lease plan was observed by the Land Registry. On 18th January 1996 Mr Felce sent the Land Registry the plan attached to the counterpart to the 1991 lease. The Land Registry pointed out that the boundary was shown differently in three different plans which had been supplied to it: the counterpart plan, the file plan for Unit 14 and the 1995 lease plan. The Bank, aided by Mr Honeybourne, and the Kettells took the view that Mrs Brennan had enclosed the disputed area since 1991 and that Ferry Cars were in occupation of that area as trespassers. Without referring to her and obtaining her comments, Mr Gower-Jones suggested, and Mr Felce agreed, that a fresh plan be substituted for the 1995 lease plan, that fresh plan conforming with the filed plan for Unit 14. Thus the boundary was to be L-shaped with the disputed area within the demise of Unit 13.

On 17th April 1996 Mr Gower-Jones wrote to Mr Felce to say that it seemed that the owner of Unit 14 was occupying the disputed area and the store, and asked if the Kettells accepted that situation. On 22nd April 1996 Mr Felce responded that those areas were indeed occupied by the owner of Unit 14, that the Kettells accepted that the store fell within Unit 14's occupation; but they did not accept that the disputed area also fell within Unit 14's ownership, and he said that the disputed area was occupied by a subtenant of Unit 14 and that the occupiers were trespassing. He asked what steps the Bank, as landlord, intended to undertake to procure the return to the Kettells the disputed area.

On 21st May 1996 Mr Gower-Jones wrote to Mr Felce in these terms:

Mr Felce replied on 5th June 1996, when he said:

Mr Gower-Jones appears to have felt some unease about the situation, because on 17th June 1996 he wrote to Mr Honeybourne, saying:

The response from Mr Honeybourne on 21st June was this:

Only on 27th June 1996 did Mr Gower-Jones respond to the second side letter. In that letter he said this:

The outstanding matters were not resolved by the time the parties had signed the fresh plan to the 1995 lease prepared for submission to the Land Registry. That was sent on 8th July 1996, and the filed plan for Unit 13 reflected the fresh plan. It is not in dispute that the substitution of the fresh plan amounted to a re-execution of the 1995 lease. It is to be noted that all that was sought to be effected was the substitution of the fresh plan for the original 1995 lease plan so that thereby the land demised to the Kettells ceased to contain the store. No change was made to the inclusion of the disputed area in the demised premises, and no change was made to the covenant in paragraph 1 of Schedule 3.

On 15th November 1996 Mrs Brennan's solicitor, Mr JD Carpenter, wrote to the Bank's solicitors seeking to correct the plan to her lease. There was no reply. On 9th December 1996, without notice to Mrs Brennan or to Ferry Cars, Bullivant Jones for the Kettells issued proceedings for possession of the disputed area under Order 113 of the Rules of the Supreme Court, naming Ferry Cars only as defendants. The judge strongly criticised the conduct by Bullivant Jones of those proceedings, a criticism which seems to me wholly justified. Ferry Cars did not have the means to engage in litigation and offered to settle the Kettells' claim by taking a lease of the disputed area from the Kettells. On 6th January 1997, Bullivant Jones obtained a consent order for possession of the disputed area without informing the court of Mrs Brennan's interest, although it had been fully explained and supported by documentation supplied by Mr Carpenter to Bullivant Jones on 2nd January 1997, in response to an outrageous demand by Bullivant Jones on 23rd December 1996 that Mrs Brennan pay in full the rent which she had been receiving from the whole of Unit 14 from 6th October 1995. Even more culpably, Bullivant Jones did not inform the court of a clear agreement with Mr Carpenter that the hearing on 6th January should be adjourned.

Ferry Cars then entered into a two-year lease with the Kettells but in October 1998 vacated the premises. The Kettells then moved into the whole of Part B, save for the store, locked the door to Part A, broke open a new doorway in the flank wall and did various acts as though they were entitled not merely to the disputed area but to the whole of Part B.

Mrs Brennan commenced proceedings against the Kettells and the Bank on 2nd September 1998. She thereby sought a declaration of entitlement to the disputed area and rectification of the 1991 lease plan and of the title of the Kettells, by the removal of the disputed area from their title to her title, and damages. The Kettells denied her claim. They said that they were bona fide purchasers for value without notice. By amendment, they further said that, if there was agreement between Mrs Brennan and New Way that the disputed land was to be demised to her under the 1991 lease, that agreement was not binding on the Bank as chargee or on the Kettells as successors in title to the Bank.

In the meantime, on 8th September 1998 the Kettells issued Part 20 proceedings against the Bank. The Bank had been named as defendant by Mrs Brennan, but the action against her was discontinued. In the Part 20 proceedings the Kettells claimed that, if Mrs Brennan was entitled to the relief she was claiming, they would have been evicted from part of Unit 13, the disputed area, and would suffer loss and damage in the form of (a) any damages and interest payable to Mrs Brennan, (b) the costs of the action, including any costs which they were ordered to pay to her, and (c) damages for breach of covenant. By its amended defence the Bank, having originally supported Mrs Brennan's case, adopted the denial by the Kettells of her case.

The judge dealt with Mrs Brennan's claims in a judgment handed down on 21st January 2002. He said that he was entirely satisfied that the true intention of Mrs Brennan and New Way was that the disputed area was included in the premises demised to her, and that the same intention could be attributed to the Bank in that it intended to release Unit 14, as agreed between Mrs Brennan and New Way, from the Bank's charge. He found the case for rectification of the 1991 lease clearly made out and ordered rectification, so that the disputed area was included within Mrs Brennan's title, and removed it from the Kettells' title. He also found that Mrs Brennan was entitled to damages, directed an assessment of damages and ordered an interim payment.

On the Part 20 claim the judge referred to the principle that a covenant for quiet enjoyment operates prospectively only. He said that if the 1995 lease had been granted with vacant possession of the disputed area interference with possession after the grant would be actionable, as would an interference with the taking of possession immediately following the grant. But he observed that it was evident from the side letters that the 1995 lease was not granted with vacant possession of the disputed area but was granted subject to the rights of occupation or tenancy of Ferry Cars, and thus also of Mrs Brennan as landlord. On that basis he accepted the Bank's submission that the interference with possession could not be viewed as having taken place after the re-execution of the 1995 lease but was already in existence at that time and was accepted as an incident to which that lease was subject, and so he dismissed the Part 20 claim.

The judge had placed reliance on the side letters, despite the fact that they had not been referred to in the pleadings, nor had counsel made submissions on that correspondence. He therefore gave the Kettells and the Bank the opportunity to address him further on that point. The Kettells and the Bank provided further written submissions and there was a further hearing on 21st January 2002. The judge was persuaded to reconsider that part of his judgment which related to the Part 20 claim.

However, on 14th February 2002 the judge delivered a supplemental judgment in which he again dismissed the Part 20 claim. He referred in paragraph 3 to the inclusion of the disputed area in the premises demised by the 1995 lease, subject to the occupation of Ferry Cars, as the outcome of the Land Registry both drawing attention to the mistake in the 1995 lease and raising the question of the disputed area. The judge continued:

The Kettells appealed against the dismissal of the Part 20 claim. That came on for hearing before a different constitution of this court last November. At that time the Bank was opposing the appeal on the ground (among others) that it intended to apply for rectification of the 1995 lease so as to exclude the disputed area from the premises thereby demised. Shortly before that hearing the Bank issued rectification proceedings, and this court adjourned the hearing of the appeal to enable those proceedings to be determined. On 18th March 2003 the judge dismissed the proceedings. He said that the intention of the parties to the 1995 lease was to include the disputed area in the premises which were demised, albeit that intention was for mistaken reasons, and so, the judge said, it was not a case for rectification. Further, he said the rectification claim could and should have been raised in the earlier proceedings, and that to raise the claim as the Bank had done was an abuse of process pursuant to the principles laid down by the House of Lords in Johnson v Gore Wood & Company [2001] 2 AC 1.

Mr Riddle, appearing for the Kettells, submits that the judge erred in law and advances no less than seven grounds of appeal. Miss Bristoll, appearing for the Bank, supports the judge's reasoning and conclusion. Despite the elaborate grounds of appeal further elaborated in Mr Riddle's skeleton argument and the even more detailed skeleton argument of Miss Bristoll for the Bank, the position might be thought to be relatively simple. In this case the Bank has included in a lease (both in its original form and as reexecuted) of which it is the lessor a piece of land which the Bank did not own, because it had already been let, and over which it had no power to grant a lease. The Bank gave the Kettells the covenant contained in paragraph 1 of Schedule 3. Why should it not be liable when Mrs Brennan, asserting her title paramount, interrupts the peaceable holding and enjoyment by the Kettells by obtaining an order for rectification and evicting the Kettells from the disputed area? The answer given by the judge, supported by Miss Bristoll, is that the Kettells took the disputed area, subject to the rights not only of Ferry Cars but also of Mrs Brennan, as the landlord of Ferry Cars. There being no such qualification apparent in the 1995 lease, I confess that I would find it surprising that when a landlord lets a larger area than that to which he has title and grants a covenant against interference by title paramount, such as that contained in paragraph 1 of Schedule 3, he can escape liability by saying that the tenant knew or should have known of the rights of the true owner. The Bank, being the mortgagee of New Way and the lessor to the Kettells, knew or should have known of them too, and yet it gave its covenant in the form which it did. The judge acknowledged that if the relevant covenant was a covenant for title, the fact that a purchaser knows of a defect in title does not detract from the operation and enforceability of the covenant: see Page v Midland Railway Company [1894] 1 Ch 11. As was said in that case, if the grantor wishes to create an exception because of such defect in title, it should be done expressly. But the judge distinguished that case on the footing that it concerned an unqualified covenant for title, whereas in the present case he said that the relevant covenant was a covenant for quiet enjoyment and qualified by the side letters.

Miss Bristoll submits that the covenant in paragraph 1 of Schedule 3 is prospective in nature and so does not extend to interference consequent on the condition of Unit 13 before the re-execution of the 1995 lease. She relies on statements in the speeches in the House of Lords in Southwark London Borough Council v Tanner [2001] 1 AC 1. Thus she draws attention to Lord Hoffmann saying, at page 10E:

Miss Bristoll says that in construing the covenant the court must have regard to the surrounding circumstances and the parties' intentions. As the disputed area was occupied by Ferry Cars at the time of the re-execution of the 1995 lease, she submits that the court should not hold that any covenant in respect of the quiet enjoyment of the disputed area was thereby breached. She argues that it cannot have been intended by the parties that the Bank would be at risk of being in breach of the covenant. She relies in particular on the side letters. She submits that thereby the Kettells bound themselves to raise no objection to the rights of others in the disputed area.

For my part, I accept that the court must have regard to the surrounding circumstances and the parties' intentions, provided that thereby is meant what can be ascertained objectively to have been the parties' intention. One looks not to the subjective intentions of the parties, but to the parties' actions by word or by deed.

The ordinary covenant for quiet enjoyment is, as Lord Hoffmann's remarks show, limited to interruption by the lessor and those claiming under him. That is not this case, where Mrs Brennan is neither the relevant lessor, nor claiming under the lessor. The Bank has gone further by its covenant in paragraph 1 of Schedule 3 than the ordinary covenant. It has covenanted against interruption by title paramount. That seems to me to make that part of the covenant more akin to a covenant for title. The fact that the Kettells were aware of Ferry Cars' occupation of the disputed area when the 1995 lease was re-executed cannot, in my view, detract from the enforceability of a covenant for title in respect of the disputed area, as Page shows. Some meaning and effect must be given to the concluding words of the covenant, referring to interruption by title paramount.

I cannot see how the Bank can escape liability under the covenant for the interruption to the Kettells' holding and enjoyment of the disputed area, caused by Mrs Brennan's exercise of her title paramount to recover the disputed area, unless it be the case that the judge is right in finding, outside the 1995 lease, an agreement that the Kettells were to take subject not only to Ferry Cars' rights but also to Mrs Brennan's rights. A clear concluded agreement to the suggested effect would have to be found in the side letters for the judge's conclusion to be sustainable. But, with all respect to the judge, I cannot find it in the correspondence.

First, I do not accept that a concluded agreement at all was reached in the side letters. The enquiry made by Mr Gower-Jones in the first side letter was whether the Kettells were content to have demised to them the disputed area, subject to, but with the benefit of the rights of, occupation or tenancy of Ferry Cars. The concern underlying that enquiry was explained in the last sentence of the letter. The Bank did not want a claim against it for failure to provide vacant possession. Mr Felce in the second side letter expressly answered that concern by confirming that the Kettells would not pursue the Bank for failing to give vacant possession of the disputed area. But he qualified that by saying that it was subject to the Bank having neither demised the disputed area nor acquiesced to the trespass. Mr Gower-Jones was plainly troubled by that qualification, and the correspondence between him and Mr Honeybourne could have done nothing to allay his unease. When he did respond to the second side letter he did not advert to the qualifications. He did not say that he could assure the Kettells that the Bank had neither demised the disputed area nor acquiesced in the trespass; and we know from the finding of the judge that when Unit 14 was let to Mrs Brennan the Bank had intended by its release to release Unit 14 from its charge with whatever boundaries Unit 14 had, and that was a matter to be decided by New Way and Mrs Brennan. Instead, Mr Gower-Jones put forward a fresh proposal to try to obtain agreement with Ferry Cars at a site meeting, but that proposal was not proceeded with. Accordingly, I am not satisfied that there was ever a concluded agreement effected by the side letters.

Second, even if I am wrong on that and if there was an agreement that the Kettells would take subject to and with the benefit of the rights and tenancy of Ferry Cars, I see nothing in the side letters to suggest that the Kettells were agreeing to subject their entitlement to the disputed area under the demise to them from the Bank to the rights not only of Ferry Cars but also of Mrs Brennan. The Kettells regarded Ferry Cars as trespassers. That they had said in the correspondence prior to the side letters. Further, in the second side letter from Mr Felce reference was made to the trespass. All that Mr Felce was doing was meeting the concern of the Bank that it might be sued for not giving vacant possession. The Kettells were not binding themselves to accepting that Ferry Cars had any rights to the disputed area which they could assert against the Kettells. Still less were they agreeing to subject their rights under the lease to Mrs Brennan's rights. Mr Gower-Jones, although told on 22nd February 1996 that Ferry Cars were subtenants of Unit 14, did not refer in the first side letter to the rights of Ferry Cars' lessor. Nothing in Mr Felce's confirmation in the second side letter, that the Kettells would not pursue the Bank for failing to give vacant possession, suggests that they were content that, should the person from whom Ferry Cars claimed to derive title assert her rights, the Kettells would not be able to claim against the Bank.

I therefore do not accept the judge's reliance on the side letters as justifying his conclusion. I see no injustice to the Bank in reaching the contrary conclusion that the Bank is liable to the Kettells under the covenant, even though the behaviour of the Kettells and their solicitors in this unhappy affair has been singularly unattractive. The Bank has materially contributed to the unfortunate situation. The Bank had the counterpart of the 1991 lease in its possession all along. It could have seen from what was registered at the Land Registry that there was an inconsistency with the filed plan. It knew, or ought to have known, that an alteration of the boundary between Unit 13 and Unit 14 affected Mrs Brennan's interest, and yet, without reference to her or its solicitors, the Bank suggested the substitution of a different plan to the 1995 lease, knowing of the different counterpart plan. It could have no viable argument that the premises demised by the 1995 lease excluded the disputed area. It chose to give the covenant in paragraph 1 of Schedule 3, in a form that extended the covenant beyond the conventional covenant of quiet enjoyment, to include a covenant against interruption by title paramount.

In all the circumstances, I conclude, in respectful disagreement with the judge, that there is no answer to the Kettells' Part 20 claim. I would allow the appeal, set aside the order of the judge on that claim and give judgment for the Kettells against the Bank for damages to be assessed.

LORD JUSTICE MANCE: I agree and add only this. The Kettells are to some extent obtaining a windfall under our judgment, since they would have accepted Unit 13 up to the flank wall only and originally, in 1995, thought that this was what they were on the ground obtaining. But in reality it appears to me that the Bank has itself or its advisers substantially to blame. It entered into the amended lease in July 1996, with its widely expressed covenant for quiet enjoyment, without confirming the position with Mrs Brennan and on a mere assumption that Ferry Cars were trespassers. The Bank apparently had in its possession the counterpart of Mrs Brennan's lease, showing that her boundary extended up to the flank wall. The covenant for quiet enjoyment was in terms unqualified. Separate side letters, even if they represented a clear concluded agreement qualifying that covenant, would have required to be pleaded either as an amendment of the lease, or as a side agreement, or as part of a larger overall agreement. They cannot be deployed as surrounding circumstances relevant to the construction of the sole pleaded document, the lease. However, the judge was prepared to overlook that point and gave the Bank the benefit of the side letters, and, proceeding on that basis, he considered that the covenant for quiet enjoyment was qualified.

In my judgment, however, insofar as the side letters represented any agreement, it was not as wide as the judge thought. They may have precluded any complaint about Ferry Cars' presence, leaving it, in other words, to the Kettells to remove Ferry Cars, as they at one point did. But the side letters cannot, in my view, have meant that the Kettells were taking the risk that the Bank had no title to the disputed area, an area which the Bank was, on the face of the amended lease in July 1996, clearly demising to the Kettells.

Even if one were, contrary to my view, to read the letters as waiving any claim against the Bank, unless Ferry Cars had some title generated by or acquiesced in by the Bank, the Bank had, on the judge's findings, consented to the demise to Mrs Brennan of an area including the disputed area -- see paragraphs 5 and 31 of the judge's original judgment. There he recites, firstly, the argument that Mrs Brennan put forward to the effect that the Bank in releasing Unit 14 from its charge intended to give effect to the true intention of the parties, as demonstrated by its acceptance of the plan to the counterpart, and then later finds this with regard to the Bank's intention:

In all the circumstances, the Bank, in my judgment, has no defence to the Kettells' claim for breach of the covenant when Mrs Brennan proved able to remove the Kettells from the disputed area.

LORD JUSTICE LONGMORE: I agree with both judgments. Even though we are differing from the judge, I do not find it necessary to add anything myself.