Zarvos v Pradhan & Anor

This is an appeal brought by Mr Kyriacos Zarvos with the permission of this court against the order made by His Hon. Judge Cowell sitting at the West London County Court on 9^th May 2002 when he determined that Mr Zarvos, the landlord of business premises at Lillie Road, London SW6, was not entitled by reason of paragraph (g) of section 30(1) of the Landlord & Tenant Act 1954 to oppose the grant of a new tenancy of those premises to the tenants, Soloman Pradhan and Abdul Hakim.

The background can be quite shortly stated. The appellant, whom I shall call the “landlord”, acquired the property some time in 1977 and until about 1994 ran a restaurant known as Bitter Lemons Taverna on the ground floor and basement of the property. He and his family lived, and continue to live, above the restaurant. In 1994, at a time when he may have intended to return to Cyprus, he entered into an arrangement with the respondents, whom I shall call the “tenants”, under which they began to conduct their own restaurant business, the Tandoori Garden Restaurant, in place of the Bitter Lemons. The deed was not put before us but we were told that it was agreed that the tenants would have the use of all furnishings, fittings and equipment in the restaurant, be responsible for the maintenance, service and upkeep of all these items and deliver them up to the landlord on the termination of the agreement in the same good order and condition as when let, fair wear and tear excepted. The court was later to find that this arrangement amounted to a tenancy.

The landlord changed his mind about going to Cyprus. He opened his own sandwich bar in the West End. Then in 1999 there appears to have been some dispute about the amount of the increase in rent to be charged following the five-year rent review provided for in the deed. On 2^nd October 1999 the landlord wrote to the tenant in these terms:-

On 17^th November 2000 the landlord sought a declaration that the agreement had been terminated and he gave notice that he would oppose an application for a new tenancy on the ground allowed under section 30(1)(g) of the Landlord & Tenant Act, 1954 namely that:-

Standard disclosure was given by both sides. The tenants were dissatisfied with the adequacy of the landlord’s disclosure. The landlord’s accountants had put in a letter dated 7^th February 2002 in which they wrote:-

On 16^th April 2002 the tenants’ solicitors asked for further disclosure including the following:-

The reply came on 24^th April to this effect:-

The tenants protested that confidentiality did not justify the failure to give disclosure and that the cash flow forecasts and profit and loss accounts were clearly material. Under threat of an application, these were provided the next day. On 7^th May, the day before the hearing was due to begin, the tenants’ solicitors wrote asking for documents to be brought to court including up-to-date bank statements, details of the mortgage on Lillie Road and “a copy of your client’s application to the bank for a business loan in respect of his proposed new restaurant”.

At the trial the landlord’s daughter gave evidence and produced some menus she had prepared on her computer. The landlord himself gave evidence and was vigorously cross-examined. We were told by Mr Timothy Higginson, counsel for the tenants, that at first he refused to answer questions about his finances, gave inconsistent answers, was generally evasive and produced no new documents to support his case. At some point towards the end of the first day the judge made some comment about the inadequacy of the disclosure but precisely what happened is in dispute. There is no transcript of the proceedings to resolve that dispute, or, even more importantly, to enable us to form a view about the facts and the way the case was conducted. Whatever was said, some more documents were produced the next morning, cross-examination continued and evidence and submissions went on until late in the day.

The judge gave judgment at 5.30 p.m. and, conscious of the time, began by adopting the well-known rugby football tactic of getting his retaliation in first. He reminded the parties and he reminds us of what was said by the House of Lords in my favourite case, Piglowska v Piglowska [1999] 1 W.L.R. 1360, “about what is in the mind of the judge when he gives judgment”. Understandably enough, he wished to give judgment while the evidence was fresh in his mind and he said he hoped to mention everything of importance.

No complaint is made about the way he directed himself as to the law. He stated the principle in the words of Upjohn L.J. in Gregson v Cyril Lord Ltd. [1963] 1 W.L.R. 41, 45:-

Cunliffe v Goodman was before the judge and he referred to Asquith L.J.’s “well-known dictum”. Because there has been some discussion about the judicial gloss on “intention”, it is worth citing the lengthier passage from his judgment which followed:-

The judge reminded himself of Auld L.J.’s observation in Dolgellau Golf Club v Hett [1998] 2 EGLR 75, 79 that:-

In his judgment he also referred to Gatwick Parking Services Ltd. v Sargent [2002] EGLR 45 and must have had in mind Laws L.J.’s observation that:-

After dealing with a number of facts which have been the focus of scrutiny in this appeal, the judge concluded in paragraph 29 of his judgment:-

He refused permission to appeal stating in writing that:-

Mr Ivan Clarke and his instructing solicitors played no part in the case below and they labour under the difficulty of not having a clear account of what happened there, a problem compounded by the lack of a transcript. Nevertheless, Mr Clarke has advanced his client’s case persuasively. He accepts that this is an appeal against findings of fact and that he has an onerous task in persuading the Court of Appeal to interfere in such circumstances. He submits, first, that it is implicit in the judgment read as a whole that the judge was finding as a fact that the landlord did have the necessary bona fide intention to occupy for the purposes of his own business and, secondly, that the judge was wrong to find that in point of possibility there was no reasonable prospect of carrying that intention, principally for two reasons:-

He overlooked the fact that the landlord would be returning to fully, or at least adequately, equipped premises at which a restaurant business was being conducted and could be resumed by the landlord who, after all, had operated his taverna there for years using the very equipment which the tenants had to leave for him.

Having accepted that there was substantial equity in the property, it was simply plainly wrong to find that there was no real possibility of the landlord borrowing the necessary £40,000 or thereabouts he said he needed to set up his new business.

Mr Higginson submits that the judge found the landlord to be lacking bona fides, that conclusion following inevitably from the shifty way in which he gave evidence. Even if that finding cannot be spelt out in the judgment, there was abundant evidence compelling the clear conclusion the judge did reach that there was no reasonable prospect of carrying any intention to conduct a new business at Lillie Road into effect.

Mr Higginson’s primary submission that the landlord failed at the first fence was perhaps fuelled by the way the court dealt with the application for permission to appeal. Robert Walker L.J. had refused permission on the papers his reasons being:-

The application for permission was renewed and Waller L.J. gave the judgment with which Pill L.J. agreed. He said:-

Before analysing the judgment, it is useful to clarify whether one must start with the first limb – genuine not colourable commitment to carry on business at the premises – or whether it is sufficient first to examine the real possibility for the landlord’s doing so. There was some discussion as to whether the first and second limbs have to be dealt with sequentially. In my judgment there is nothing in principle or in practice which demands such sequential treatment. Ultimately there is a single question for the judge to decide, namely the question posed by section 30(1)(g) itself: does the landlord on the termination of the current tenancy intend to occupy the holding for the purposes of a business to be carried on by him therein? The judicial gloss put on those ordinary words arises out of Asquith L.J.’s explanation of the connotation of the word “intends”. Hence the first element of the subjective intention, the genuine settled commitment to the project, and the second, a check on reality which is demonstrated by showing, objectively, that there is the real possibility of carrying it into fruition. Pie in the sky will not be enough for this restaurateur’s business plans.

It seems to me to be plain enough that if a judge found that there was no genuine intention to run the business and that the expression of that intent was a colourable device to obtain possession and then do something different with the premises, then that is the end of the matter. The landlord falls at the first fence. One need not investigate the reality or the fantasy of his business plan. That inquiry is to be undertaken if it appears to be a case where, with the best will in the world, the landlord has no real prospect of succeeding in his aim of starting a business. There may, therefore, be cases where his subjective intent can be taken as read and where the case will, therefore, stand or fall on this second limb.

Thus, applying that approach here, if the judge was treating the second limb as crucial and was correct to find on the facts against the landlord, then the landlord’s appeal fails and there is no need to investigate his bona fides. If, on the other hand, the correct finding is that he did have real prospects of setting up in business again at his old premises, then it was necessary for the judge to find whether his intention to do so was genuine or not. If the judge was finding that he was not genuine, the landlord fails again. If the judge found that the landlord was genuine and had real prospects, then the appeal will be allowed. If the landlord establishes the second limb, but we are uncertain what his finding on the first limb was, then we would have to remit the matter to the judge for further hearing.

Accordingly in my judgment it is appropriate in this appeal to start with the second limb and ask first what did the judge decide, and secondly, was he right to do so?

I am satisfied the judge concentrated on the second limb. That appears from various passages in his judgment. In paragraph 21 he said:-

He concluded in paragraph 28:-

I have already set out paragraph 29 where the relevant passage is:-

So I am satisfied he was finding, as he summarily said in the reasons he gave for refusing permission to appeal:-

Although that is a judgment about possibilities, prospects or chances, it is nonetheless treated as a finding of fact as the cited authorities have made clear. Mr Clarke, therefore, has the extremely difficult task of persuading us that the conclusion was against the weight of the evidence.

Where is it said the judge went wrong? Mr Clarke’s first submission is that the judge erred in concentrating on the need to raise £40,000 more or less to finance the venture. This diverted him from considering the ease with which the landlord could return to his old premises, make use of his old equipment and run his restaurant business as easily as the tenants and could do so with minimal expense. There is not a hint of that having been considered by the judge in his judgment. That is no surprise, retorts Mr Higginson, because that is not the way the case was being advanced. That was not the sort of business the landlord said he was intending to operate. His intention, as appears from his witness statement, was to open a new restaurant, “Boby’s Restaurant and Wine Bar”, which would have a Mediterranean theme menu, dancing every night of the week, combining excellent service with a relaxed and comfortable atmosphere. He contemplated some restoration work and said:-

I have already adverted to the lack of a transcript to establish exactly how the case was conducted. We are informed by Mr Higginson that the case advanced was for Boby’s Restaurant, not for the resurrection of the Bitter Lemons Taverna. There is, however, I note, a hint of the alternative case in counsel’s exchanges with the judge when seeking permission to appeal when counsel said:-

As to that, evidence was given that the sandwich bar had been sold a month before the hearing and the net proceeds of sale amounted to about £30,000, £10,000 of which was held by his solicitors against the costs of this litigation and the balance used to discharge an overdraft with the result that the landlord had an account at the bank with about £100 in it. There was other evidence, though it was not clear to what extent it was vouched for by the documents, suggesting that the landlord had about £10,000 in another bank account in London, about £10,000 in Cyprus and at least one joint account with his wife or possibly two with either nearly £17,000 or only £7,000 in those accounts. His wife had about £10,000 of her own. If he succeeded in obtaining possession he would have had to have paid compensation to the tenants of £13,750. He apparently had no income apart from the rental from the property or the income he could derive as a restaurateur.

The important fact in this case is that he owned Lillie Road and suggested that it was worth about £750,000. He produced no evidence to support his valuation. Armed with a copy of the land charges register, the tenants were able to establish that the property was subject to three charges and his total borrowing was nearly £80,000. It was not information which had been volunteered. The judge said:-

That was the “matter of practicality” which troubled the judge. The figure of £40,000 which the landlord said he needed to borrow came from him alone. His accountant had, as I have set out, produced cash flow forecasts and projections of a profit and loss account of which the judge said this:-

Dealing with “the crucial point” in this case, namely the bank’s reaction to the request for finance, the judge referred to the bank’s letter of 22^nd February and then said this:-

So he concluded in paragraph 28:-

Mr Clarke’s submission is simple. His best point, and being a good point he virtually makes it his only point, is that the judge was plainly wrong to ignore the very considerable equity in Lillie Road. All the landlord had to show was a reasonable chance, a real prospect rather than a fanciful prospect, of raising £40,000 out of an equity well over £600,000. Against an apparently proven track record as a restaurateur it is he submits, fanciful to suggest that the prospects of raising the money are only fanciful. I am bound to say it is a compelling argument but I have to remind myself that the judge had the inestimable advantage over us of hearing the whole case unfold before him and he had to decide whether the prospects of borrowing were real or, as he put it, speculative. He had ample justification, given the effective cross-examination by Mr Higginson of the projections, for finding that a prudent bank manager would be sceptical about the business plan. The judge was entitled to bear in mind that banks may not be willing to lend if they cannot see a prospect of the loan being repaid. A fourth mortgagee may not relish possession proceedings as the only means of recovering its debts.

Not without a degree of hesitation, I have come to the conclusion that I cannot possibly say that the judge was not entitled to decide as he did on the evidence before him. His decision is not so outside the ambit within which reasonable views may have been taken about the prospects of raising capital that I can say he was wrong and that his finding was against the weight of the evidence. It follows that the landlord fails on this ground of his appeal.

In the course of my reading into the authorities I chanced upon this observation, which appears apposite, from Lord Evershed M.R. in Fleet Electrics Ltd. v Jacey Investments Ltd. [1956] 1 W.L.R. 1027, 1036:-

My sympathy for the landlord is made more acute by learning from the application to adduce fresh evidence that on 22^nd May 2002, a fortnight after the hearing, the Bank of Cyprus wrote to the landlord offering a fixed term loan facility of £60,000 “to fund works to convert the ground floor at 98 Lillie Road, Fulham, SW6 into a Greek restaurant, to pay compensation to existing ground floor tenant of Lillie Road and to settle costs”, repayable at £554.61 per month over 15 years, the bank continuing to hold the first charge over the property. The bank was also willing to grant an overdraft facility of £5,000 on the current account as working capital.

The application to admit that fresh evidence is strongly opposed by Mr Higginson. He no doubt recognises that the evidence was such that, if given, it would probably have had an important influence on the result of the case and in the circumstances of the case may even have been decisive and that, moreover, the evidence was apparently credible. He submits, however, that Ladd v Marshall [1954] 1 W.L.R. 1489 is still a useful starting point for the Court of Appeal in considering under CPR.52.11 whether this court should receive evidence which was not before the lower court. In that regard he is undoubtedly right. There is now abundant authority to that effect: see for example Hertfordshire Investments Ltd. v Bubb [2000] 1 W.L.R. 2318. Mr Clarke’s submissions to the contrary are misplaced. So the question is whether this evidence could not have been obtained with reasonable diligence for use at the trial.

I am satisfied it could have been obtained and refrain from expressing a view as to whether or not it should have been obtained. I set out at the beginning of this judgment the tenants’ protests about the lack of documentary evidence and their request on the day before the hearing was due to start for a copy of the application to the bank for this business loan. The only letter produced from the bank was written on 22^nd February, nearly three months before the trial and so there was ample opportunity to make a precise application to the bank and obtain a firm response from the bank. I am satisfied that the landlord cannot establish the first ground of the Ladd v Marshall test.

It now does not end there. That may be the starting point. The overriding objective is always the end point. The court has to deal with the case justly. That includes ensuring that the matter is dealt with expeditiously and fairly, saving expense and recognising in the interests of broad justice that there should be finality to litigation. This may be harsh on the landlord but it would be more harsh on the tenants to give the landlord a chance to put his house in order and subject them to a retrial. I would, therefore, refuse the application to admit this fresh evidence.

Having regard to my analysis of the issues in this appeal, the upholding of the judge’s finding that the tenant did not genuinely intend to carry on his business because he had not shown a reasonable prospect of bringing it about is the end of the matter. It makes it, strictly speaking, unnecessary to venture an opinion as to what the judge found on the first limb. Given the way the case has been presented, I think it right and fair to say a few words about it.

First, if a judge is to make a finding that a landlord does not genuinely intend that which he says he intends, then the judge, in those circumstances, is finding that he does not believe what the landlord says. If that is his finding, then he should make it plain that he does not believe him and wherever possible should explain why he does not believe him. Judge Cowell would know that and would not flinch from dealing directly with critical matters of that kind. It is, of course, a harsh finding to make. There may be many cases where the judge need not go so far. If he hangs his judgment on the second limb he does not have to disbelieve the landlord when he sets out his stall. Indeed, the second limb is there precisely to cater for the case where the landlord does genuinely believe in what he says he intends to do.

With those introductory words, what did Judge Cowell find in this regard? I confess I find it very difficult to be sure about that. Mr Higginson did mount a full-frontal attack on the landlord’s credibility and in several passages the judge voiced his suspicions about the genuineness of the landlord’s plans. He also doubted his motive. If a landlord has a genuine intention to set up his own business, his motive becomes irrelevant. An ulterior motive may lead to a conclusion that the expression of intent is not genuine but I see no error in the judge’s reference to the landlord’s motive since he immediately moved from motive to the proper test of whether he intended to occupy the holding for the purposes of a business to be carried on by him therein and he concentrated on that. The documents produced on the second day, far from denting credibility supported the evidence that had been given. All in all, I read the judgment as a whole to be one where the judge concentrated on the practicalities and focused his attention on the second limb, not on the first. My reading of his judgment leads me to conclude that he did not make any positive finding, yea or nay, about the subjective element of the landlord’s intention. Given the earlier finding which I have upheld, he did not need to do so.

Let me end where the judge began – with Piglowska. This was an extemporaneous judgment. Judge Cowell “knew how he should perform his functions and which matters he should take into account”. No doubt he could have better expressed his conclusions but the judgment is sufficiently reasoned at least on the second limb of the appropriate test. Making due allowance for “the exigencies of daily courtroom life”, I conclude that it would be wrong for us to interfere. I would, therefore, dismiss the appeal.