Lay & Ors v Drexler & Ors (t/a Littlestone Martin Glenton)

This is an appeal from the order of His Honour Judge McMullen Q.C. given in the Central London County Court on 22^nd June 2006. It is an appeal against an order as to costs only by permission of Lady Justice Arden by order of 13^th November 2006. The order under appeal was made at the conclusion of proceedings brought by the Claimants, the trustees of the Portman Estate, under s.24(1) of Part II of the Landlord and Tenant Act 1954 against the Defendants, partners in the accountancy firm trading under the name of Littlestone Martin Glenton, under which, at the instance of the Claimants, an application was made for the grant of a new tenancy of the Defendants’ business premises at 2 Fitzhardinge Street and 2 Bakers Mews, London W1H 6EE (“the Premises”).

The Defendants held the Premises pursuant to a lease (“the Lease”) for a period of five years from 26^th March 2000 expiring on 25^th March 2005 at a rent of £125,000 per annum. By letter dated 9^th August 2004 from the Defendants’ solicitors to the Portman Estate, the Claimants were informed that the Defendants were “considering renewing [the Lease] under the Landlord and Tenant Act 1954…looking for an extension of three years from 25/3/2005” and asking whether the Claimants would “indicate to us whether or not this would be acceptable and at what level of rent”. In the result, and after the commencement of proceedings by the Claimants, on 20^th April 2005, in the course of which on 11^th November 2005 the Defendants’ solicitors wrote to the landlord’s solicitors indicating that the Defendants had located new premises into which they were considering moving, the claim for the grant of a new tenancy was dismissed pursuant to s.29(5) of the 1954 Act by order of Mr Recorder Merriman as a result of the Defendants having given notice to the court on 6^th April 2006 that they no longer wanted a new lease of the Premises. The Recorder ordered that the proceedings were to continue for the purpose of concluding the amount of the interim rent payable from the date that the Claimants’ notice under s.25 of the 1954 Act took effect terminating the Defendants’ tenancy on 8^th October 2005 until they gave up possession of the premises and for the purpose of disposing of the issue of the costs of proceedings. In fact, the parties had already agreed a formula for the determination of such interim rent before the Recorder’s order. The matter returned to court on 22^nd June 2006 before Judge McMullen, who had had no previous contact with it, to determine the issue of costs. For the reasons set out in his judgment he made no order as to costs. The Claimants appealed.

S.24(1) of the 1954 Act provides as follows:

The words in subsection (1) enabling a landlord to apply for the grant of a new tenancy were brought into s.24(1) as a result of the Regulatory Reform (Business Tenancies)(England and Wales) Order articles 2 and 3(1) (“the 2003 Regulations”) which came into force on 1^st June 2004. Under the previous provisions of the 1954 Act, upon a landlord giving notice under s.25 to terminate a business tenancy, the tenant had a period of two months in which to serve a counter notice to the landlord’s s.25 notice and a further period of two months in which to bring proceedings under s.24(1) claiming the grant of a new tenancy upon terms to be settled by the court. The effect of the 2003 Regulations was to remove the obligation on the tenant to serve a counter notice and to bring any proceedings within such period of two months but to grant to the landlord the right to commence proceedings for a new tenancy, the commencement of which proceedings would preclude the tenant from launching proceedings of his own for the same purpose.

In the report of the Law Commission of 4^th November 1992 which led to the 2003 Regulations, having acknowledged the ability of tenants to delay the process of arriving at the terms for a new tenancy by starting proceedings which were then not diligently pursued, the following passage appears at paragraph 2.55:-

In the second report of the Select Committee of Parliament on Regulatory Reform, dated 19^th December 2002, the following passage appears under the heading “Necessary protection”:-

Either party – the tenant or the landlord – should be able to apply to the court for the renewal of a tenancy. This would discourage unnecessary delay, since it would give either party the chance to take the initiative in bringing the matter to court.”

Thus the legislative purpose of the amendment to s.24(1), brought about by the 2003 Regulations, was to substitute for the strict time limits which previously governed the steps available to a tenant to obtain the grant of a new business tenancy, a right to landlords to commence such proceedings so that, by those proceedings, or the threat of them, landlords could compel tenants to make clear at an early stage their intentions as to whether they were seeking the grant of a new tenancy and, thereafter, to pursue negotiations to arrive at agreed terms for the grant of such a new tenancy, diligently.

S.29 of the 1954 Act provides for the court to grant a new tenancy on the termination of a current business tenancy, or for the termination of such a tenancy where the landlord establishes one of a series of statutory reasons entitling him to oppose such grant. Subsection (5) of that section provides:-

At paragraph 10 of his judgment, the judge said this:-

Sub-paragraphs 3.1 to 3.8 of paragraph 10 describe the events leading up to the commencement of these proceedings over a period of approximately eight months between the letter of 9^th August 2004, in which the Defendants’ solicitors indicated the interest of their client in the renewal of their lease of the premises for a further period of three years from its expiry on 25^th March 2005 until the Claimants issued their proceedings on 20^th April 2005 under s.24(1). Those sub-paragraphs show how, after that first approach and some initial negotiations, the Defendants failed to respond to a draft new lease submitted to them by the Claimants. Eventually on 4^th April 2005 the Claimants’ solicitors wrote to the Defendants’ solicitors as follows:-

On 6^th May 2005 the Defendants filed an acknowledgement of service indicating that they did not intend to contest the claim but stating “the Defendants/tenants do not oppose the renewal of the lease but oppose the terms of the renewal”. Since this form of acknowledgement did not comply with the rules requiring the tenant to set out its proposals for the terms of the new lease, the court ordered the Defendants to amend their acknowledgement to do so.

It is the Defendants’ contention in this court that the Claimants commenced their proceedings prematurely. Given their failure to react to the draft lease sent to them, following the initial negotiations, over such a substantial period and their failure to react to the Claimants’ letter of 4^th April, I reject this submission. I accept Miss Holland’s submission that this was indeed a classic case where the Claimants were using their newly created right to commence proceedings under s.24(1) of the 1954 Act to protect a landlord’s interest in knowing whether he is going to have to remarket his business premises, from the effect of his tenant’s delays in either coming to a decision as to his future course of action or taking appropriate or any steps to arrive at agreed terms for a new lease. However, even if that conclusion is wrong, it is clear that by filing an acknowledgement of service indicating an intention to take a new lease which, if terms could not be agreed, would be settled by the court under the provisions of s.32-35 of the 1954 Act, the Defendants must be taken to have joined in proceedings which would lead to the grant of a new lease and so to preclude them from suggesting that the proceedings had been started prematurely. The Defendants, were, in effect, commencing their own proceedings designed to obtain for themselves a new lease of the Premises on terms more favourable than the Claimants were prepared to offer.

They were therefore committed to proceedings in the course of which costs would be incurred which, depending on the result, they might themselves be ordered to pay. At any stage in those proceedings it would have been open to the Defendants to halt the increase in costs by indicating that they had no intention to accept a new lease or had changed their minds so as not to wish to do so. This could have been done after the Claimants’ letter of 4^th April 2005, in their acknowledgement of service or at any stage in the subsequent proceedings by applying for and obtaining a stay of proceedings.

The proceedings then continued on their way including a consent order for directions, including orders for expert evidence, until, on 11^th November, the Defendants’ solicitors wrote to the landlord’s solicitors indicating that their clients had located new possible premises and asking that the proceedings be stayed while they decided whether they were going to move. The landlord’s solicitors responded that they would agree to a four week stay provided that the Defendants would confirm “whether or not they will be vacating the premises on or before 16^th December 2005” and saying that “this is more than enough time for your clients to make a decision in order to give our clients some certainty”. (See their letter of 17^th November). There was no response to this offer, despite two reminders, until the Defendants’ solicitors email of 22^nd December 2005 which stated that their clients “at the moment are intending to leave the premises and are considering applying to vacate the hearing date and to stay the proceedings”. No such application was made.

The proceedings then continued towards a hearing date fixed by the court at 9^th March 2006 as described in the sub-paragraphs in paragraph 10 of the judgment. It appears from a letter from the Defendants’ solicitors of 20^th February 2006 that by that date, although the Defendants’ negotiations to obtain alternative premises had advanced, it was still not clear that they would be moving. On 16^th February the Defendants had applied to adjourn the hearing date, that application to be heard on 24^th February. On 21^st February the Claimants’ solicitors wrote to the Defendants’ solicitors:-

The court acceded to that application but the trial date was never reached because on 6^th April 2006 the Defendants gave notice to the court that they no longer wanted a new lease and, as I have already described, the application for such a new lease was dismissed by order of Mr Recorder Merriman Q.C. on 17^th May pursuant to the mandatory provisions of s.29(5).

The matter came back to court on 22^nd June 2006 in accordance with the order of the Recorder in order to deal with the two outstanding issues of an interim rent, which had in fact been agreed, and costs, when Judge McMullen made the order appealed from.

The judge sets out the basis of his decision in paragraph 12 onwards of his judgment. In making no order for costs, he concluded that the case with which he was dealing was governed by the decision of this court in BTC Software Solutions Limited v Brewer & Sons Limited [2003] EWCA Civ 939 and the judge quoted extensively from the judgments of Lord Justice Mummery and Lord Justice Chadwick in that case. That was an appeal from a decision on costs by HHJ Rich Q.C., sitting as a deputy judge of the Chancery Division, shortly after the beginning of a trial during which the judge had heard some of the evidence, when the parties brought in a draft/agreed order in Tomlin form settling all their disputes save that of costs. The judge then proceeded to deal with that issue on the merits of the case as they appeared to him, but without having heard all the evidence. In the result, the Court of Appeal dismissed the appeal on the basis that it was not possible for the appellant to demonstrate that the judge’s order had erred in principle. In doing so, however, they indicated that their preferred order would have been no order as to costs. It was their view that where parties have settled a claim on all issues save costs before a trial or where the trial is incomplete, the court should not, save in a reasonably obvious case, embark on making an order for costs because the court will have no proper basis of agreed or determined facts upon which to base its decision. In these circumstances the parties should be put to their election to proceed with the trial or accept no order as to costs.

In giving his judgment in the BTC case, Lord Justice Mummery cited the passage in the judgment of Lord Justice Stewart-Smith in Roache v Newsgroup Newspapers Limited [1998] EMLR 161 at 172 as to the proper approach of an appellate court to an appeal against a costs order, itself cited with approval by Lord Woolf MR in AEI Limited v Phonographic Performance Limited [1999] 1 WLR 1507 at page 1523 as follows:-

I have come to the conclusion that in this case the Claimants have established that this is a case where the judge’s order on costs should be set aside because his reasons for making such an order were wrong in principle and took account of a feature which he should not have considered. I have arrived at that conclusion for the following reasons:-

At the second of two paragraphs numbered 12 in his judgment, the judge concludes that the case before him amounted to a compromise, in particular, a compromise of the Claimants’ claim for a new lease. He was wrong about that. The only matter which had been compromised was the question of the interim rent of which the terms which had been agreed are in the letter of 21^st February which I have set out above. By the time the matter reached the judge, the main issue in the case, namely, upon what terms a new lease of the Premises should be granted by the Claimants to the Defendants, had already been dismissed by the order of the Recorder of 17^th May pursuant to s.29(5) of the 1954 Act. Accordingly the present case was not on all fours with the BTC case.

Notwithstanding that the judge at paragraph 14 of his judgment did not adopt what he described as the “simple approach” urged by Mr Warwick “that since the Claimants started the legal proceedings in this case, and the case had been dismissed, the Claimants should pay the costs as following the event under the CPR”, it seems to me that the judge did not fully appreciate the purpose and effect of the new regime brought in by the 2003 Regulations. He did not appreciate that the Claimants’ new right to commence proceedings for the grant of a lease was given to them so as to bring to a head the issue of the terms upon which any new lease was to be granted of the Premises, and that, by entering an acknowledgement of service assenting to such grant, the Defendants were, in effect, themselves launching proceedings for the granting of a new tenancy but upon terms more favourable to them than the Claimants were prepared to offer. He did not appreciate that those proceedings had been terminated as a result of the Defendants’ change of mind by the service of a notice on the court by the Defendants pursuant to s.29(5).

At paragraph 13 of his judgment, the learned judge said “for me to deal in two hours with the rights and wrongs of the parties in the negotiation of this new tenancy is an impossibility, particularly, as from what I have said, there are very real disputes over facts, over the attitudes of each of the parties and over the reasons for delay. I am invited to resolve those against the changing statutory framework having considered the public policy leading to the new legislation”. I have every sympathy with the judge in the task with which he was confronted. He had had no previous contact with this case and at an early stage he disclaimed any personal expertise in the area of the law with which it was concerned. However, he seems to have lost sight of the normal rule, to be found in CPR 38.6(1), that, where proceedings have been brought which are not premature and are otherwise not demurrable and which terminate because the Defendants concede the relief sought, the Defendants must pay the costs unless he can show some special circumstance justifying a different order. In the decision of the Court of Appeal in Ian Walker v John Graham Walker arising from the liquidation of a company, Walker Windsail Systems Limited [2005] EWCA Civ 247 at paragraph 24 Lord Justice Chadwick, commenting on the provisions of the Rule, said this:-

Surprisingly, there appears to be no reported case on the immediate issue. However, contrary to the submissions of Mr Warwick, it does seem to me that there is an analogy to be drawn with the series of reported cases under s.36(2) of the 1954 Act. That section empowers a tenant, where an order for the grant of a new tenancy has been made, to apply to revoke the order within 14 days of its making, in which case the sub-section provides for the existing lease to continue at the interim rent until the landlord has had a reasonable opportunity to relet. In the case of Commercial Veneer Company Limited v Printing House Properties Limited [1957] EGD 119 Mr Justice Harman was dealing with a case where the court, on the application of the business tenant, had gone through the process of settling the terms of the new tenancy after hearing the competing evidence and submissions of the landlord and the tenant, and at the conclusion of the case ordering the tenants to pay one-third of the landlord’s costs of the proceedings. The tenants then changed their minds and, taking advantage of s.36 of the 1954 Act, obtained an order from the judge revoking his previous order. The judge concluded his judgment dealing with the tenants’ application with these words:-

For these reasons, in my judgment, this appeal must be allowed and the judge’s order set aside. It follows that the discretion to dispose of the costs of the proceedings in the County Court passes to this court.

As a fallback position, Mr Warwick submitted that his clients should not be made to pay the whole of the costs of the proceedings below. He submitted that the costs order should only start at a date in October 2004 as reflecting the fact that the Claimants commenced their proceedings prematurely. I have already held that the proceedings were not premature. Mr Warwick further submitted that we should not order his clients to pay any costs after 11^th November 2005 when the Claimants’ solicitors were informed by the Defendants’ solicitors that the Defendants had found alternative business premises into which they were considering moving. In my judgment, there is no reason why the normal order for costs on a discontinuance should be varied to take account of this fact. The Claimants offered a stay of proceedings for four weeks to enable the Defendants to make plain their intentions in which case a compromise solution saving costs might have been arrived at. No application for a stay was made by the Defendants at this or any later stage in the proceedings. In my judgment the Defendants must pay the whole of the costs of the proceedings in the County Court to be assessed on a standard basis if not agreed.

It may be that measurable costs were incurred in arriving at the agreement as to the interim rent. If so, those costs should not be included in the order which we propose.

I agree with both judgments and do not wish to add anything.

This is an appeal from an order about costs. In Summit Property Ltd v Pitmans (a firm) [2001] EWCA Civ 2020, [26], I pointed out that, on such an appeal:

In the present case the judge made the order that he did because he thought that the proceedings before him had been compromised. It was on that basis that he took the view that he should follow the guidance given by this Court in BCT Software Solutions Ltd v C Brewer & Sons Ltd [2003] EWCA Civ 939. He had made no findings of fact in the proceedings and (as he thought) did not have sufficient material before him on which to exercise the discretionary powers as to costs conferred by section 51(1) of the Supreme Court Act 1981 and CPR 44.3.

If the judge had been correct in his view that these were proceedings which had been compromised in advance of a trial, his decision to make no order as to costs could not have been faulted. But, as Mr Justice Evans-Lombe has explained, the judge was wrong to approach his task on that basis. He should have appreciated that, on a correct analysis, there were three (or, perhaps, two) distinct claims in the proceedings. Only one of those claims was the subject of compromise.

First, there was the landlords’ claim, under section 24(1) of the Landlord and Tenant Act 1954, for an order for the grant of a new tenancy on terms proposed by the landlords. Second, there was the tenants’ claim, made when filing the acknowledgment of service, for the grant of a new tenancy on terms proposed by the tenants. Given that both the landlords and the tenants were seeking the grant of a new tenancy and that they were agreed as to the property to be comprised within, and the duration of, that tenancy, the court’s task under Part II of the 1954 Act was to determine the rent payable under the new tenancy and the other terms (so far as not agreed): sections 29(1), 34 and 35 of the Act. In that context the landlords’ claim and the tenants’ claim may, perhaps, be seen as two facets of the same claim, rather than as two distinct claims. But nothing turns on that: the tenants had power, conferred by section 29(5) of the Act, to bring proceedings in pursuit of those claims (or that claim) to an end. The section is in these terms:

It was important to appreciate – but, it seems, the judge did not appreciate – that the tenants’ decision to bring to an end proceedings in pursuit of the claims (or claim) to a new tenancy was not a decision reached as the result of a compromise. The decision was the tenants’ decision alone: it was a decision reached unilaterally by the tenant without input from the landlords. That was common ground: it was not a matter on which the judge needed to resolve rival contentions as to the facts.

I have said that there was a further claim in the proceedings. That was the landlords’ claim, under section 24A of the 1954 Act, for the determination of the interim rent which the tenants were to pay while the existing tenancy continued under section 24(1). That claim was made at the time of the landlords’ application under section 24(1). On the facts in this case, it was a claim for the determination of an interim rent for the period from 8 October 2005 until the commencement of the new tenancy (if granted) or (as events turned out) the expiration of three months from the final disposal of the application under section 24(1) on 17 May 2006: sections 24C, 24D and 64 of the Act. That claim was the subject of compromise: as appears from the letter of 24 February 2006 to which Mr Justice Evans-Lombe has referred.

The judge was entitled to take the view that, in so far as costs had been incurred in relation to the section 24A application for the determination of an interim rent, he should follow the guidance given in BCT Software and make no order in respect of those costs. But, he was not entitled to take that view in relation to the costs of the section 24(1) application for the grant of a new tenancy. He should have approached those costs on the basis that the proceedings had been determined by the unilateral decision of the tenants: there had been no compromise.

It is because the judge’s approach was flawed in that respect that this Court can go on to consider what order it will make in the exercise of its own discretion. I agree that, for the reasons which Mr Justice Evans-Lombe has set out in his judgment, the appropriate order is that the tenants should pay the landlord’s costs of the section 24(1) application. In particular, I agree that – on the facts in this case - the tenants’ submission that the landlord issued that application prematurely should be rejected. And I agree that the tenants’ decision unilaterally to bring to an end proceedings for the grant of a new tenancy - which it had (in effect) adopted as a vehicle for its own claim - should be seen as analogous to a decision to discontinue; and so attract the consequences as to costs which this Court explained in the Walker Windsail Systems case to which Mr Justice Evans-Lombe has referred.

For those reasons I, too, would allow this appeal and make the order which Mr Justice Evans-Lombe has proposed.