Arundel Corporation v Khokher

This is the judgment of the Court.

This appeal first came before Mummery and Keene LJJ on 24 March 2003, when the Court heard an application by the appellant, Arundel Corporation (Arundel) for permission to adduce fresh evidence on the appeal against the order of HHJ Roger Cooke sitting at the Central London County Court on 29 May 2002. The Court granted the application, allowed an amendment to the grounds of appeal, made an order for disclosure of documents and gave consequential directions for the service of evidence. The factual and procedural background to the application and the reasons for the order are set out in the judgments handed down on 9 April 2003: [2003] EWCA Civ 491.

Arundel served further evidence. The respondent Mr Khokher did not serve any further evidence. Shortly before the resumed hearing of the appeal Mr Khokher’s solicitors (now Kingsley Napley) suggested that a consent order should be made, remitting the case to the County Court to decide the issues of fact raised by the fresh evidence and the disclosed documents. Arundel opposed that proposal, contending that there were other issues on the appeal, which needed to be determined and might make a remitted hearing unnecessary. The result was that no agreement on a consent order was reached. The hearing of the appeal proceeded.

As explained in the earlier judgments there are two parts to Arundel’s appeal. They both arise out of the lease granted by Arundel, as the freehold owner, dated 21 April 1997 (the Lease) of a ground floor retail unit, with two floors above let as residential flats, at 37 Watling Avenue, Burnt Oak, Edgware (the Property). Mr Khokher took an assignment of the unexpired residue of the 20 year term on 26 March 1999.

The first issue is whether a counter-notice to Arundel’s rent review notice was validly served by Mr Khokher under the rent review provisions in the Lease. The initial annual rent payable was £14,000. There were to be rent reviews every four years, running from the commencement date 25 December 1996. The first review was due on 25 December 2000. Arundel’s solicitors, Straiton & Co, served a rent notice on Mr Khokher on 21 August 2000 (and copied it to his solicitor, Mr Pattihis of Healys) stating that the annual rent was to be increased to £30,000 as from 25 December 2000. Under the Rent Review provisions in the Third Schedule of the Lease it was stated that

“1.

The Tenant within one month after the receipt of the Rent Notice may serve on the Landlord a counter-notice calling upon the Landlord to negotiate with the Tenant the amount of the rent to be paid as from the Review date.

2.

If the Tenant shall not serve a counter-notice within the period specified he shall be deemed to have agreed to pay the rent specified in the Rent Notice.

3.

If the Tenant shall serve on the Landlord a counter-notice calling upon the Landlord to negotiate with him then the parties shall forthwith consult together to reach agreement on the rent payable but failing agreement within one month after service of the counter-notice….the question of the amount of rent payable shall be referred to an independent surveyor (hereinafter called the “Surveyor”) appointed by agreement between the parties or by the President of the Royal Institution of Chartered Surveyors on the application of the Landlord.”

Clause 9 of the Lease incorporated the regulations respecting the service of notices contained in section 196 of the Law of Property Act 1925, as amended. According to s 196(3) a notice is sufficiently served “ if it is left at the last-known place of abode or business in the United Kingdom of the lessee, lessor…or other person to be served..” In the Lease the address of Arundel was given as “200 Brent Street London NW4 IBM.” It was Arundel’s UK registered office and the address of Arundel’s accountants.

The essential dispute is whether Mr Khokher served a valid counter- notice on Arundel in compliance with the provisions of the Third Schedule. The judge found as a fact that Mr Khokher had personally left a counter-notice at 200 Brent Street on 31 August 2000, by posting it through the letter box. In making that finding he accepted the evidence given by Mr Khokher and by his solicitor, Mr Pattihis. Arundel’s evidence was that no counter-notice had been found at 200 Brent Street.

The judge rejected Arundel’s contention that the counter-notice had not been given in accordance with the Lease. The basis of that contention was that Straiton & Co had informed Healy’s by letter dated 6 July 2000 that in January 2000 the registered office of Arundel had changed from 200 Brent Street to Delaport Coach House, Wheathampstead, St Albans, Herts, which was also the new address of its accountants. It was submitted by Arundel that that was its “last known place of business” and that the counter-notice should have been given at that address.

The judge held that an effective counter-notice was given by service at 200 Brent Street and that Mr Khokher was not bound by the £30,000 rent. As for the change of address, he said that Mr Khokher did not know of the change and that the knowledge of Mr Pattihis was not Mr Khokher’s knowledge, as the solicitor never had instructions from him in the rent review.

The fresh evidence adduced on the appeal was the basis of the new ground 10, which also relates to the service of the counter-notice.

“10.The learned judge was misled by perjured evidence to make the finding of fact that the rent counter-notice was served by [Mr Khokher]. In fact, as was known by Mr Pattihis and Mr Blackburn of his solicitors, Healys, [Mr Khokher] never served the counter-notice at all, but falsely attested both in his written and oral evidence to having done so. His solicitor, Mr Pattihis also falsely attested in written and oral evidence that on or about 20 August 2000 he had advised [Mr Khokher] as to the form of the counter-notice and where it was to be served whereas no such advice was given in that date. Arundel seeks permission to rely on evidence newly disclosed to it by Naresh Bhatia, a trainee legal executive formerly employed by [Mr Khokher’s ] solicitors, contained in his affidavit dated 19 February 2003 and the exhibits thereto, and to the statement of Ms Terry Straiton dated 6 March 2003 and the account therein of what Mr Kumrai, a solicitor formerly working at Healys, told her.”

At the outset of the appeal the Court informed the parties that it was not the function of this court to hear the evidence on the disputed factual issue of the service of the counter-notice by Mr Khokher or to embark on resolving the disputed evidence on that point. That was the function of the trial court, to which the case would have to be remitted, if it became necessary to re-try that factual dispute.

Mr Jonathan Gaunt QC, appearing for Arundel, informed the court that, if his client succeeded on the point of service at “the last known place of business,” it would succeed on its appeal regarding the rent review dispute and that it would not be necessary to remit for re-trial the factual question whether a counter-notice was actually left at 200 Brent Street by Mr Khokher on 31 August 2000. We shall therefore deal first with the service point.

Service at last known Place of Business

This point assumes that, as was held by the judge, the counter-notice was in fact posted by Mr Khokher in the letter box at 200 Brent Street on 31 August 2000. Was that, so far as Mr Khokher was concerned, “the last known place of business” of Arundel? If it was not, the counter-notice was not validly served for the purposes of the Lease, although 200 Brent Street was the address stated in the Lease and the Lease had not been amended. It is necessary to consider who knew that Arundel had changed its place of business and whether they knew it before the counter-notice was served.

The judge proceeded on the basis that Mr Pattihis was informed of Arundel’s change of address in the letter of 6 July 2000, which was written to him in connection with Mr Khokher’s application for consent to sublet the ground floor shop at the Property and that the letter had not been passed by Mr Pattihis to Mr Khokher. On that approach he held that the last place of business known to Mr Khokher was 200 Brent Street. The knowledge of Mr Pattihis that the place of business of Arundel had moved from 200 Brent Street to Delaport Coach House could not, in his view, be imputed to Mr Khokher. Mr Pattihis had clearly forgotten the change of address. Further, he had not been instructed to act for Mr Khokher in the rent review. Mr Pattihis had “left it to Mr Khokher (with appropriate information) to take the necessary steps.”

In our judgment, the judge’s decision on the service point cannot be upheld. As a result of receiving the letter of 6 July 2000 Mr Pattihis knew that Arundel’s place of business had moved from 200 Brent Street. He did not cease to have that knowledge by later forgetting that there had been a change of address. He received that knowledge in the course of acting as Mr Khokher’s solicitor in relation to his Lease of the Property. In accordance with general principles Mr Khokher is deemed to have received notice of that fact, if it came to the knowledge of Mr Pattihis in the course of a matter in which he was employed to act for Mr Khokher and he was under a duty to communicate it to Mr Khokher. The fact that, at the time when the letter was received, he had been instructed to act in respect of the application for consent to sublet the ground floor shop did not in the circumstances prevent that knowledge from being imputed to Mr Khokher.

Indeed, there was evidence that Mr Pattihis advised Mr Khokher on the specific topic of service of the counter-notice. The judge failed to have regard to the evidence of Mr Pattihis that Mr Khokher telephoned him on about 30 August 2000 about the terms of the counter-notice notice and how it should be served. Mr Pattihis gave evidence that he had not forgotten Arundel’s change of address, but he had advised Mr Khokher to send it to 200 Brent Street, which he regarded as the right address for service, as the Lease had not been varied. On Mr Khokher’s evidence he consulted Mr Pattihis on the phone on about 30 August as to the form the counter-notice should take and the method of service. Mr Pattihis told him what should go into the counter-notice. When he was consulted by Mr Khokher on the very question of where the counter-notice should be sent, Mr Pattihis was retained by Mr Khokher to act as his solicitor to advise in that matter and he had a duty to pass on to him his knowledge of Arundel’s change of address. Mr Khokher is to be treated as having the knowledge of Mr Pattihis about the address of Arundel’s place of business. In Metropolitan Properties v. Cordery (1980) 39 P & CR 10 at 15 the Court of Appeal applied the principle of deemed knowledge in the law of agency, as then stated in Bowstead on Agency (14^th ed) that

“ When any fact or circumstance, material to any transaction, business or matter in respect of which an agent is employed, comes to his knowledge in the course of such employment, and is of such a nature that it is his duty to communicate it to his principal, the principal is deemed to have notice thereof as from the time when he would have received such notice if the agent had performed his duty, and taken such steps to communicate the fact or circumstance as he ought reasonably to have taken…”

We conclude that the counter-notice was not served in accordance with the Lease. Whether or not it was ever actually served at 200 Brent Street, no attempt was made by Mr Khokher to serve a counter-notice at Delaport Coach House, Wheathampstead, Arundel’s last known place of business. In those circumstances the amount of rent stated in Arundel’s rent notice cannot be disputed by Mr Khokher.

Mr Douthwaite, appearing for Mr Khokher, attempted to resist that result by relying on the proviso in paragraph 13 of the Third Schedule of the Lease:

“ 13. As respects all periods of time referred to in this Schedule time shall be deemed to be of the essence of the contract PROVIDED ALWAYS that the Landlord or the Tenant may notwithstanding anything in this Schedule require the appointment of the Surveyor or any substitute Surveyor to determine the question of New Rent payable at any time after the commencement of each relevant period of years and any delay by the Landlord or the Tenant in this respect shall not deprive the Landlord or the Tenant of their respective right to have a New Rent determined by the Surveyor as set out herein.”

Mr Douthwaite argued that the proviso meant that, even if Mr Khokher had not served the counter-notice in accordance with paragraph 1 of the Third Schedule, the consequence deemed in paragraph 2 did not follow because, notwithstanding that, Mr Khokher could require the appointment of the surveyor to determine the new rent.

In our judgment, the judge rightly rejected that submission, saying that it related to delay in appointing a surveyor after the requisite notices had been served, not to a case of delay in the service of a counter-notice by the specified date. The language of the proviso and its structure indicate that it has no application to a case in which there is a deemed agreement arising from the tenant’s failure to serve a counter-notice in due time or at all.

For these reasons we allow the appeal and declare that the annual rent payable under the Lease with effect from 25 December 2000 is £30,000. It is unnecessary to remit for retrial the issue whether a counter-notice was in fact served at all. The action the court proposes to take in the circumstances is dealt with at the end of this judgment (paragraph 33).

Damages for not consenting to sub-lease

The second issue is whether the judge was correct to hold that Arundel’s consent to a proposed sub-letting by Mr Khokher of part of the Property to Mr Chaudhry was unreasonably withheld. It is common ground that under section 1(3) (a) of the Landlord & Tenant Act 1988 Arundel was under a duty, within a reasonable time, to give consent to sub-let, unless it was reasonable not to give consent. Giving consent subject to any condition that was not a reasonable condition did not satisfy the duty under section 1(3)(a): see s 1(4). It was for Arundel to show that it was reasonable for it not to give consent: s 1(6)(c). In assessing what was a reasonable time, regard must be had to all the circumstances of the particular case. The matter must be tested by reference to the reasons put forward by Arundel before the expiry of the reasonable time and to the state of affairs existing at the expiry of the reasonable time. If, at that point, it could not be shown that it was reasonable for Arundel to withhold consent, then its statutory duty was to give consent. See Go West Ltd v. Spigarolo [2003] 2 WLR 986 where the relevant earlier authorities (Norwich Union Life Assurance Society v. Shopmoor Ltd [1999] 1WLR 531 and Footwear Corpn Ltd v. Amplight Properties Ltd [1999] 1 WLR 551) are reviewed and applied with approval

By letter of 22 June 2000 Healys submitted on behalf of Mr Khokher a request for consent to sub-let the ground floor only of the Property to Mr Chaudhry for a term of 5 years (later increased to 10 years) from 25 March 2000 at an annual rent starting at £15,000, subject to review. When the rent was reviewed the amount of the rent of the sub-lease of the ground floor of the Property was to be £1,000 more than the rent determined under the rent review provisions for the whole Property, which included the residential flats on the two floors over the shop. The annual rental value of the flats was estimated at £10,000.

On its face the proposed rent structure for the sub-lease was odd: Mr Chaudhry would be paying a rent for the ground floor only, which was liable to the rent reviews under the headlease and which would always be at the level of £1,000 a year more than the rent which Mr Khokher was liable to pay Arundel for the whole Property. No rational explanation of the formula was ever supplied by Mr Khokher or his advisers to Arundel and its advisers, who had requested further information and clarification of the proposed transaction, or to the court. Although Arundel obviously had its suspicions about the transaction, it never alleged that it was dishonest or a sham or that it was other than a sub-lease, the terms of which were set out in the draft sub-lease submitted with the application for consent. Arundel did not give its consent and, as a result of the delay, Mr Chaudhry withdrew from the transaction at the end of September.

The correspondence between the solicitors was examined letter by letter in the course of oral argument. In their letters Straiton & Co, in addition to the other points on the state of disrepair of the upper floors of the Property and Mr Chaudhry’s change of name, expressed Arundel’s concern, in the context of the level of rent payable under the sub-lease, about Mr Chaudhry’s financial standing, respectability and responsibility, and about why he should wish voluntarily to enter into the transaction and place himself in “a vulnerable if not invidious financial position,” giving rise to a “reasonable suspicion that. regardless of the rental profit which may accrue to [Mr Khokher], the prospective underlessee is of doubtful covenant strength.” The point was made that the rent was shortly to be reviewed and a significant rent increase was likely to result. An explanation was sought as to why Mr Chaudhry was proposing to place himself in such a vulnerable position.

It was contended on Arundel’s behalf that Mr Khokher failed through Healys to address Arundel’s concerns; that, as long as that state of affairs continued, Arundel was entitled to refuse consent; and that the judge ought to have held that no duty to give consent ever arose.

On Mr Khokher’s claim for damages for breach of duty in not granting consent within a reasonable time, the judge held that a reasonable time had expired by 21 August 2000; that Arundel had no reasonable ground for withholding consent; that the conditions sought to be imposed by Arundel were not reasonable; and that a reasonable landlord would have granted consent to the sub-lease. He awarded damages of £12,521.57 (including interest) calculated by reference to the loss of rental income that Mr Khokher would have derived from the proposed sub-lease had consent been given.

The judgment on this issue was criticised in several respects. It was submitted that the judge was wrong to select 21 August as the relevant date for determining the issue of a reasonable time. It was artificial to take that as the relevant date, as Arundel had still not been given any explanation of the rent structure and it never was given an explanation before Mr Chaudhry pulled out of the deal in September.

The question is whether the judge was entitled to conclude that, in respect of an application made on behalf of Mr Khokher on 22 June, a reasonable time had expired by 21 August and that by that date Arundel had not shown that it was reasonable to withhold consent to the sub-letting. In the solicitors’ correspondence Arundel had raised three matters, which it contended related to the terms of the proposed subletting and the nature of the transaction. It contends that it had reasonably sought further information and explanations about them, but Mr Khokher failed to respond to them. The first and most important point was the odd rent structure of the proposed sub-lease, as described earlier. That point had, it was claimed, the support of professional advice from the surveyor, Mr Brett Artus of Granville & Co. The second was the state of disrepair of the upper floors of the Property, in respect of which Mr Khokher should comply with the repairing covenant in the headlease. The third was Mr Chaudhry’s change of name in the context of the odd rent structure. It was submitted that at every stage Arundel had behaved as a reasonable landlord for proper reasons.

Mr Gaunt agreed that the rent structure of the proposed sub-lease was the most serious issue of concern to Arundel. It is, in our judgment, the only issue on which Arundel could possibly hope to succeed on this part of the appeal. Mr Gaunt emphasised Arundel’s concern about the possibility of the vulnerable position of the sub-tenant and the effects of the rent reviews on him. On the advice of Arundel’s surveyor, explanations were sought, but they were never given.

We agree that the rent structure in the sublease appeared to be odd. We do not think that it was unreasonable for Arundel to have some concerns about it and to raise them with Mr Khokher’s advisers to find out what, if anything, was going on. Arundel was entitled to be told the true and precise nature of the transaction, to which it was asked to consent: Fuller’s Theatre & Vaudeville Co Ltd v. Rofe [1923] AC 435 at 440-442. The objective standard of reasonableness must, however, be applied to the particular circumstances in which Arundel pursued its concerns and to the period of time during which Arundel did not give its consent. The concerns entertained by Arundel did not challenge or change certain basic facts in the overall situation. Banking, trade and accountant’s references had been supplied about Mr Chaudhry’s financial standing, which were not objected to and nothing more was requested on them. Mr Khokher and Mr Chaudhry had reached an agreement on the rent, which was beneficial to Mr Khokher. All the terms of the sub-lease were disclosed to Arundel. Mr Chaudhry, who was not paying any premium, was represented by solicitors, who had advised him against the transaction, but he did not withdraw as a result of the advice or even as a result of the rent notice served under the Headlease. As this was a sub-lease of part and not an assignment, Arundel could still look to Mr Khokher, who had paid a large premium (£35,000) for the assignment of the headlease and had spent money improving the state of the shop premises, who had maintained his rent payments to Arundel and who would retain the substantial rental income of the residential flats, for payment of all the rent due to Arundel under the headlease. As the judge said, Arundel’s solicitors had not really been pursuing the right question in the correspondence. They asked for an explanation as to how the parties had come to the deal in which Mr Chaudhry appeared vulnerable, but the real point, which was never clearly articulated or directly put to Healys or to Mr Khokher, was the need to dispel Arundel’s suspicions about the honesty of the arrangement.

The question whether a reasonable time had passed by 21 August and whether Arundel had discharged the burden of showing that it was reasonable not to grant consent to sub-let involved the application by the trial judge of the legal standard of reasonableness to the relevant circumstances of the case. On an appeal there is a real difference between the application of a relative legal standard, by which the reasonableness of conduct is measured, and the application of a precise and absolute legal rule to the facts found by the judge. In reviewing the decision of the trial judge, the Court of Appeal should be slow to differ from his measurements of reasonableness, unless it is shown that he has misdirected himself by erring in principle or in reaching a conclusion at which no reasonable judge could have arrived. In our view, HHJ Cooke did not misdirect himself in his assessments on this issue. He was entitled to find that, as regards the rent structure of the sub-lease, “a reasonable Landlord would not have pursued this as a condition” or withheld his consent to sub-let for that reason.

According to the fresh material supplied by Arundel, it is possible that untrue oral evidence was given by Mr Khokher and Mr Pattihis at the trial and that false documents were tendered in evidence relating to the alleged service of the counter-notice at 200 Brent Street. In view of the outcome of this appeal it will be unnecessary to remit the matter to the county court to decide what were the true facts about the service of the counter-notice. The matter cannot, however, simply be left to rest. There is a public interest affecting the administration of justice, which needs to be investigated, even though the dispute between the parties has been resolved. We direct the papers concerning the allegations against Mr Pattihis be referred to the Law Society and the papers relating both to him and to Mr Khokher be referred to the DPP.

Appeal allowed as per draft order provided subject to agreement as to the figures in paragraph 2. In default of agreement liberty to apply

Respondent to pay the appellant’s costs of and consequent to the application to adduce new evidence and to amend the notice of appeal, and the costs of appeal from 1 July 2003, leaving each party to bear its own costs save as aforesaid up to that date.

Minute of order to be provided by counsel.