Scribes West Ltd v Relsa Anstalt & Ors

This appeal raises a short but important point on the right to forfeit a lease of registered land, in the period between execution of a transfer of the reversion and its registration.

The appeal has taken an unusual route to this court. Permission to appeal was first granted on paper by Chadwick LJ on 24^th November 2003. On 20^th July 2004, the Court of Appeal held that the correct route of appeal had been to the High Court judge and not to the Court of Appeal: see EWCA Civ 965. On the same day, Brooke LJ, sitting as a High Court judge, determined that permission to appeal ought to be granted and that the appeal should be transferred to the Court of Appeal under CPR 52.14 (a case raising “an important point of principle”, or “some other compelling reason”). (Before that, on 29^th June 2004, the court had used the case as a vehicle to give general guidance on the general changes to appeal procedure under CPR52, due to come into effect the next day: see [2004] EWCA Civ 835.) We now have to deal with the substance.

The relevant facts can be shortly stated. The claimants, Scribes West Ltd (“SW”), were the lessees of business premises on the ground floor and basement of the Barkers Centre, Kensington, under a lease dated 25^th January 1991 granted by House of Fraser plc. The first defendants Relsa Anstalt ("RA") were registered as the freehold proprietors of the premises on 10^th November 1993.

SW ceased trading on 1^st May 1997. On the same day they were granted a licence to assign the lease to London Sportsman's Club Limited ("LSC"), and they also entered into a second charge over the leased premises to secure a loan they had made to LSC. In November 1999 SW entered into a voluntary arrangement with its creditors.

On 28^th February 2001 RA assigned its reversionary interest to Relsa Barkers ("RB"), pursuant to the terms of a transfer document. The transfer was on a standard Land Registry form (“TR1”), under which “the transferor transfers the property to the transferee”. It recorded the receipt of the purchase price of £131m. It contained some “additional provisions”: including a statement that “the transferor assigns to the transferee the benefit of any rights claims title or covenants to which it is entitled in respect of the property”; and a covenant by the transferee “by way of indemnity” to perform all the transferor’s obligations relating to the property “at all times from the date of this transfer”. On the same day RB gave notice to LSC of the assignment and required LSC to pay the rent to it. The transfer to RB was not registered at the Land Registry until 3^rd January 2002.

On 16^th July 2001 RB peaceably re-entered the premises on the grounds of arrears of rent. On 25^th July 2001 RB granted a new lease of the premises to a company called Settle Up Limited.

The sole issue in the appeal is whether, for the purposes of a valid forfeiture by RB, it was sufficient that the transfer of the reversion had been executed and notice given to the lessee, notwithstanding that the transfer had not been registered. The judge held that it was, applying section 141(2) of the Law of Property Act 1925. SW appeals.

Section 141 provides:

“(1)

Rent reserved by a lease, and the benefit of every covenant or provision therein contained, having reference to the subject-matter thereof, and on the lessee’s part to be observed or performed, and every condition of re-entry and other condition therein contained, shall be annexed and incident to and shall go with the reversionary estate in the land, or in any part thereof, immediately expectant on the term granted by the lease, notwithstanding severance of that reversionary estate, and without prejudice to any liability affecting a covenantor or his estate.

(2)

Any such rent, covenant or provision shall be capable of being recovered, received, enforced, and taken advantage of, by the person from time to time entitled, subject to the term, to the income of the whole or any part, as the case may require, of the land leased.” (emphasis added)

In applying the section to the present case, three propositions are I believe uncontentious:

RB’s case, which the judge accepted, was that on 16^th July 2001, the date of forfeiture, although it was not the registered freehold proprietor of the premises, it had taken a valid equitable assignment of the rents, and notice had been given to the lessee. It was therefore entitled (albeit only in equity) to receive the rents of the property, which was sufficient to bring it within the emphasised words of section 141(2).

This view of the section was consistent with that expressed in a number of textbooks, notably including Wolstenholme and Cherry’s Conveyancing Statutes. (The central roles of Edward Wolstenholme and Sir Benjamin Cherry in the property reforms leading to the 1925 Acts are vividly described by Sir Robert Megarry, in his Foreword to the 13^th Edition of that work.) The notes to section 141 in the 11^th (1925) edition said that the section (as is now common ground) did no more than reproduce the effect of section 10 of the Conveyancing Act 1881. Of section 141(2), it was said:

“The latter part of this section gives to the ‘person entitled to the income’, that is, the beneficial owner as well as the legal reversioner, the right to recover, receive, enforce and take advantage of rent, lessee’s covenants and conditions.” (emphasis added)

At first sight, and subject to consideration of the authorities, this seems to me the natural reading of the section. The word “entitled” does not of itself import a distinction between legal and equitable interests. It connotes simply an enforceable right to the relevant income. An equitable assignee of the right to rent has such an enforceable right as against the assignor and, at least following notice, against the lessee (whether or not, as Mr Cherryman suggests, the assignor procedurally has to be a party). Thus, in the present case, RB is for the time-being “the person… entitled to the income… of the land leased”. Nor does it seem to me to matter if this in theory results in RB having that right concurrently with RA, as legal owner. The section is designed to extend rights to enforce, without taking away existing rights; and in any event anything done by RA could only be done as trustee for RB.

I would add that, like the judge, I see no force in the subsidiary argument that the assignment of rights was not intended to have immediate effect. The wording of the transfer seems to me clearly designed to have such effect. Further, it is very difficult to see any practical reason for the parties wishing to postpone it until registration, which would be at an uncertain time in the future.

I turn therefore to Mr Cherryman’s arguments based on the authorities. To understand and do justice to them, it is necessary to say a little more about the 1881 Act, and the earlier history.

His review starts in 1540, with the first statute (32 Henry 8, c.34) which expressly permitted assignees of a landlord’s reversionary interest to enforce tenant covenants (see Megarry & Wade 6^th Ed para 15-011). (It seems that this apparently far-sighted example of early law reform was a response to the very practical immediate problems caused by the seizure and redistribution of monastic lands: ibid para 15-047).

Moving from there to the 19^th century, Mr Cherryman identifies a problem which arose in connection with mortgages. Before the 1925 reforms mortgages were typically made by a conveyance or demise to the mortgagee, subject to a covenant for reconveyance on redemption of the mortgage. Where after the grant of a lease the lessor mortgaged his interest in that way, the legal title to the reversion immediately expectant upon the lease would vest in the mortgagee.

It seems to have been accepted that the mortgagor in possession continued to have a legal right to receive the rents in his own name (see e.g. Trent v Hunt (1853) 9 Exch 14, 22-23, per Alderson B). However, since he had no legal interest in the reversion, he could not forfeit for breach of covenants in the lease. In Fairclough v Marshall (1878) 4 Ex D 37, it was held that this position was not changed by section 25(5) of the Judicature Act 1873, which provided that a mortgagor entitled to the receipt of the rents of any land could sue for them in his own name. The position before and after the 1873 Act was explained and confirmed by this court in Matthews v Usher [1900] 2 QB 535. (The lease had been granted in 1819 and therefore was not affected by the 1881 Act.) Romer LJ said of the mortgagor before the 1873 Act:

“He had certain equitable rights and certain restricted legal rights. As an example of the former, he has a right to restrain by injunction the tenant from doing injury to the land. As an example of a legal right, he is entitled to receive the rents payable by the tenant, and to distrain at law as bailiff for the mortgagee. But before the Judicature Act 1873, the mortgagor was not entitled to say that he had the legal reversion which would entitle him to sue on the covenants of the lease. It is clear, having regard to the state of the authorities, that the mortgagor had no implied authority to act on behalf of the mortgagee and re-enter for breach of covenants…” (p 538-9)

He added that, whatever the precise effect of section 25(5) of the 1873 Act (which he did not find easy to discern), it did not give the mortgagor any power of re-entry or right of forfeiture which he did not have before (ibid.)

Mr Cherryman submits that the purpose of section 10 of the 1881 Act, reproduced but spread between sub-sections (1) and (2) of section 141, was to remedy this problem, in relation to mortgages only. He describes it as “an ingenious – yet somewhat convoluted - piece of statutory drafting”, designed to bestow upon a mortgagor a direct entitlement to enforce tenant covenants and forfeit. He draws attention to the fact that a mortgagor, though having parted with the legal interest in the reversion, was treated as having a legal right to receive the rents payable by the tenant. The reference in section 10 to the person “entitled… to the income…”, he said, is directed to someone having such a legal interest. It does not assist someone who, as in the present case, only has the equitable interest or is only an equitable assignee of the right to the rents.

Two later Court of Appeal authorities, relied on by Mr Cherryman, are important to the understanding of the section, but on analysis they do not in my view assist his case. They are:

Turner v Walsh [1909] 2 KB 484 was an action for breach of repairing covenants in a lease dated 1888 (i.e. after the 1881 Act). It was argued by the defendant that, since the lessor had conveyed his interest by way of mortgage, the right to sue lay exclusively with the mortgagee. The judgment of this court was given by Farwell LJ. It justifies citation at length, since it provides an authoritative account of the purpose and scope of the provision, in the period between the two Acts (pp 493-495):

“The section provides, in our opinion, for two distinct matters, quite independent one of the other: it first annexes rent and the benefit of covenants to the reversion, notwithstanding the severance of such reversion, and it then makes rent recoverable and covenants enforceable, ‘by the person from time to time entitled, subject to the term, to the income of the whole or any part’ of the demised land…

The question then becomes simply one of fact: Who is entitled to the income of the mortgaged property? Where land is both demised and mortgaged, the answer depends on whether the mortgagee has taken possession or given notice of his intention to take possession of the mortgaged property or not: if he has done so then he is entitled; if he has not, the mortgagor was always and is still so entitled, and he receives and retains such income for his own benefit without any liability to account either at law or in equity…

The 10th section makes no alteration in the rights of anyone, but merely alters procedure, so as to give the right of action to the person entitled to the proceeds of such action. This is plain if the true nature and character of a mortgage is borne in mind; it is a mere security for the debt, and (subject to the paramount liability to this debt) the mortgagor retains an estate which can be granted and demised, and which descends to the heir…

He then referred to the “practical difficulties” for the mortgagor in enforcing the lease covenants, although he thought it probable that difficulty seldom arose, because it was to the interest of the mortgagee as well as of the mortgagor that the lessee’s covenants should be performed. He continued (p 496):

“It is plain, therefore, that a construction of s 10 that obviates these technical difficulties interferes with no rights, but merely simplifies procedure. It is urged that s 10 falls under Part III of the Act, headed "Leases," and that "Mortgages," form Part IV, and that mortgages would have been expressly mentioned in s 10 if leases of land in mortgage had been intended. We are unable to follow this. The Act is not constructed in watertight compartments. The object of the Act was to amend the law of property generally, and mortgages and leases constantly overlap; there are probably few large estates in England all or parts of which have not been in mortgage for the last two centuries at least. The words in s 10, "person entitled to the income," are perfectly general. "Income," by s 2(3) includes "rents and profits," and it would be difficult to find a better definition of a mortgagor in possession than the person entitled to the rents and profits of the land, or to the income thereof, if the land is subject to a lease. It is certainly in accordance with the intention expressed in s 25(11) of the Judicature Act, 1873, that this should be so, and it seems probable that when, in 1878, it was suggested in Fairclough v Marshall 4 Ex D 37 that s 25(5) had this defect, s 10 of the Conveyancing Act, 1881, was framed designedly to cure it.” (pp 493-6)

This passage provides some support for Mr Cherryman, in that it relates section 10 to the particular problem of mortgages, and also treats it as intended to simplify procedure rather than to alter rights. On the other hand, it provides no support for an over-technical reading of the section; the question is “simply one of fact”. It also confirms the general nature of the 1881 reforms, in the interpretation of which rigid divisions between the treatment of leases and mortgages are inappropriate. Further it accepts that, where land is subject to a lease, the person entitled to the rents is properly regarded as the “person entitled to the income” for the purposes of section 10 (cf the John Lewis case, below).

In Schalit v Joseph Nadler Ltd, Mr Nadler was a lessee of property, part of which he sublet to the plaintiff. In 1931 he made a declaration of trust, under which he declared that the property was held in trust for his company, Joseph Nadler Ltd. Shortly after the company purported to distrain for arrears of rent under the subtenancy. The plaintiff issued proceedings for damages for illegal distress. The company argued that it was a person entitled to receive the rents, and therefore under section 141(2) it was able to enforce the covenants. This argument was rejected by the court (in a judgment given by Goddard J). It did so, first, on “the narrow ground” that the company was not entitled to the rents as such, but only to an account of the “net proceeds” after meeting any liabilities of Mr Nadler under the headlease (p 81-2).

Secondly, it accepted the broader argument for the plaintiff that the section could not be construed as enabling a mere beneficiary under a trust to enforce the rent. The subsection was to be regarded as “dealing only with procedure”. It referred to Turner v Walsh (p 83):

“That was a case of a mortgagor in possession, who has always been held in equity to be entitled to receive and recover the rents of the mortgaged property until the mortgagee enters into possession…. It is no authority for saying that both mortgagor and mortgagee are entitled to sue for, or otherwise enforce, the rent.”

There was another “fundamental objection” to the defendant’s argument:

“The right of the cestui que trust, whose trustee has demised property subject to the trust, is not to the rent, but to an account from the trustee of the profits received from the demise…The cestui que trust has no right to demand that the actual banknotes received by the trustee shall be handed over to him or that a cheque for rent drawn to the trustee should be endorsed over. What he can require is that the trustee shall account to him, after taking credit for any outgoings or other payments properly chargeable, for the profits received from the trust property”

Reference was made to the view in some textbooks (including Wolstenholme and Cherry’s Law of Property Acts), relying on Turner v Walsh, that rent can be recovered by beneficial owners. The court commented (p 83):

“For the reasons given above, we do not think that the case in question supports the proposition that a cestui que trust can sue or distrain. Were it so, the position of a tenant whose lessor was in fact, though unknown to him, a trustee, might, indeed, be unenviable. Having been accustomed, perhaps for years, to pay his rent to the person appearing in his lease as lessor, he might be faced with a demand without previous notice from someone of whom he had never heard, with the prospect that, before he had had time to interplead, a distress might be levied at the instance of both the cestui que trust and the trustee, and, apparently, neither would be wrongful. Against the opinion of the eminent text-writers quoted above is the fact that, although the provisions of this section, either as s 10 of the Conveyancing Act, 1881, or as s 141(2) of the Law of Property Act, 1926, have been in force for over fifty years, not only is there no reported case in which the cestui que trust has ever been held entitled to sue or distrain for the rent, but neither counsel, whose experience in these matters is very wide, has been able to tell us of any case within their knowledge where such a claim has ever been made. ”

That judgment usefully illustrates the limits to the application of section 141(2). However, it does not cover the present case. There was no suggestion that there had been any assignment of the rents as such, and no notice had apparently been given to the tenant. The company’s only right was the ordinary right of a beneficiary of a trust to an account of the profits if any of the trust property. It was not surprising therefore that the court held that it was not the person “entitled to the income” for the purpose of forfeiture.

Two other cases were referred to by Mr Cherryman on this issue, but in my view are of no assistance. In Crumpton v Unifox Properties Ltd (1992) 25 HLR 121, the judgments touch on the question as to the right of a transferee of the reversion to forfeit a lease in the period before registration of the transfer. Staughton LJ (at p.129) referred to the following passage in Barnsley’s Conveyancing Law and Practice (3^rd ed) p.143:

“…the absence of any legal estate until registration precludes the exercise of any right dependent upon the existence of a legal title for its validity”

However, there was no reference to section 141. Further, the point only arose as one of four points relevant to the judge’s treatment of an application to adjourn, and it is clear from the context that it was not treated as requiring a definitive ruling.

More directly in point appears to be a passage in the judgment of Lightman J, in Commissioners of Inland Revenue v John Lewis Properties Limited [2002] 1 WLR 35, supra). This concerned a complex tax avoidance scheme, one aspect of which was an assignment of rental income. An issue considered by the judge was whether this assignment “effected a transfer of an interest in land or merely a contractual right”; the answer was said to be relevant to the question whether or not it involved a “part disposal” for tax purposes (see para 6). The judge held that section 10 of the 1881 Act made no difference to the previous law that the right to rent from a lease was treated as an interest in land for certain purposes (ibid.). Having given five reasons for taking this view, he added as a final comment on this aspect (para 16):

“I should add that I reject the argument…that section 141(2) expressly confers on the bank as assignee of the right to the rents to sue for breach of covenant…. The short answer is that the bank was only entitled to the rent reserved by the lease but not (“subject to the lease” or otherwise) to the income of the land.”

Without disrespect to Lightman J, I do not think that this provides any material support to Mr Cherryman’s argument. The case was not about enforcement of covenants, and this point was not central to the reasoning. (It was not mentioned in the Court of Appeal: [2003] Ch 513). Further, as Miss Jones points out, the judge was not referred to Turner v Walsh, in which the Court of Appeal accepted that rent under a lease could be equated with the “income of the land” for the purpose of section 10 (see above). Mr Cherryman also relies on the case for the proposition that a right to rent is an “interest in land” for the purposes of the 1925 Act, and therefore cannot be assigned “informally”. However, as I understand the submission, this means no more than that the transfer had to be in writing (see per Lightman J at para 6).

Finally, I should note that, in relation to leases taking effect since January 1996, the transferee’s position may be assisted by the Landlord and Tenant (Covenants) Act 1995, section 28 of which defines assignment as including “equitable assignment” (although its relevance was disputed by Mr Cherryman).

For these reasons, and notwithstanding the attractiveness of Mr Cherryman’s arguments, the authorities do not in the end persuade me to depart from my initial view of the section. The judge was right to hold that, following the transfer, RB was the person entitled to the income of the land, and that therefore the forfeiture was valid.

I would dismiss the appeal.

I agree

I also agree.