Artworld Financial Corporation v Safaryan & Ors

This is an appeal from the judgment of 16 July 2008 of HHJ Hazel Marshall QC sitting in the Central London County Court. It is about whether or not a landlord accepted surrender of a lease.

The claimant landlord is a BVI company. It is the vehicle of a trust of which the wealthy Tatanaki family are among the beneficiaries. The judge found, and there is no appeal about this, that “it is the Tatanaki family which holds this company as a vehicle for the tax-efficient running of its family interests. It is the Tatanaki family, in particular Mr Fayez Tatanaki, who give instructions about what is to be done with its property and whose wishes are followed in this regard. They are, in effect, permitted by Artworld to treat the property as their own, subject to the formality of it being carried out in Artworld’s name by its no doubt obliging directors”.

The defendants are members of a wealthy family, the Safaryans. The subject property is a very substantial residential house in Holland Villa Road. The judge described it, uncontroversially, as follows:

“Artworld owns the freehold of No 11/11A Holland Villas, London W 14, a large and extremely well-appointed Victorian family house in a most desirable area of London. It can fairly be described as an ‘ambassadorial’ residence, because, after being a family home for the Tatanaki family, it was … let to the Saudi Arabian Ambassador. With an ‘in and out’ gated drive, it comprises five floors of accommodation, with living and reception rooms on the raised ground floor, a kitchen/breakfast room, study, snooker room, utility area, staff quarters and private swimming pool complex in the extended semi-basement, a master bedroom, dressing room and bathroom suite on the first floor, and two more floors of bed and bathrooms. It has underfloor heating, and a lift. To the rear are terraces at two levels, a formal garden and a staff cottage. Major refurbishment and extension took place in 1996-8.”

The defendants took a three-year lease of the property commencing on 10 September 2004. The annual rent was commensurate with the luxury nature of the property, namely £390,000 payable by instalments, three-monthly in advance.

During the continuance of this lease there were technical troubles with the property. The Safaryans said that the central heating and swimming pool did not work properly and, notwithstanding their complaints, the problems were not fixed by Artworld, as they should have been under the lease. The details of this no longer matter. It is sufficient to record that at one point the Safaryans were contending that the landlords’ failure to remedy the defects was so serious that they were entitled to treat the lease as repudiated.

In the event, the Tatanakis decided to leave the property, and did so on 4 May 2006. All keys were returned, the last of them being handed over on 30 May 2006. At that point there were fifteen months of the three-year term left. The action began with the landlords claiming the rent for the remainder of the term, a total of £487,500, which included interest. Instead of relying on repudiation, as they had been contending before, the Safaryans defendedon a quite different ground, namely that the landlords had acted in such a way as to have accepted surrender of the lease. Mr Michael Driscoll QC, for the landlords, sought to make a point about that. He submitted it was inconsistent to say (a) that the lease had come to an end by the acceptance of repudiatory conduct, and (b) that it had come to an end by a subsequent surrender by operation of law. I just do not see any inconsistency. To decide not to rely on a belt does not prevent you relying on braces.

The judge upheld the defence of surrender, holding that the lease was surrendered in early June and before the next quarter’s rent was due. She also found for the Safaryans and their counterclaim in respect of the faulty premises during the period before they left. Although permission to appeal was sought in respect of that latter part of the judgment, it was refused on paper by Lawrence Collins LJ and has not been pursued before us. In the result, the main question before us has been whether the judge was right to hold that the lease was surrendered by operation of law.

The judge saw and heard witnesses from both sides. In a careful judgment she assessed their credibility and made findings of fact. She summarised the findings of fact she was asked to make at paragraph 34:

“1)

The landlord’s acceptance back of the keys to the property.

2)

The landlord’s instructing and obtaining ‘the checkout report’ and inventory by Mrs Walton [who had been an agent of the landlord].

3)

The carrying out of works of redecoration to the property to the taste of Mr and Mrs Tatanaki.

4)

The re-hanging of certain curtains removed from the property at the Safaryans’ request.

5)

The removal of some garden sheds from the property.

6)

The return to the property of some furniture which had been taken away to storage because the Safaryans did not want it.

7)

The use of the drive of the property for parking Mr Fayez Tatanaki’s Rolls Royce and Mr Tatanaki’s, [that is Mr Tatanaki junior] Porsche motor cars, on several occasions.

8)

Mr Tatanaki’s moving into, and staying and sleeping at the property.

9)

The moving into the property of some furniture for Mr Tatanaki, and in particular IT equipment and his games console.

10)

Mr Tatanaki’s younger sister also stayed at the property.”

At paragraph 70 of her judgment she set out to deal with those various topics:

“Examining the acts on which Mr Kremen relies, therefore, I find that the acceptance of the keys is an equivocal act, as is the making and handing over of the Check Out Report. The title of this document is of no significance, only its purpose. Faced with a tenant who has evinced an intention to leave the property regardless of the duration of the lease, and well advised landlord would reasonably want to record the state of the premises, and the inventory, at that time, to avoid future argument and protect his own interests. Similarly, carrying out works of repair to the property -- whether these were arguably required because of a breach of covenant by the landlord or by the tenant -- would come within the principle that the landlord is entitled to protect and preserve the fabric of his property.”

In her judgment she also recorded that there had been solicitors’ letters written by the landlord in which it was asserted that the lease was continuing. Those letters she identifies at paragraph 36.

I turn to the law. It was common ground that the legal test for surrender by operation of law, is essentially accurately set out in Woodfall’s Law Of Landlord and Tenant. I am reading from an edition which appears to have a date of January 2007. Paragraph 17.018 says:

“There is legal distinction between a surrender by operation of law and an implied surrender. The terms surrender by operation of law ‘is applied to cases where the owner of a particular estate has been a party to some act the validity of which he is afterwards estopped from disputing, and which would not be valid if his particular estate had continued to exist…’”

There the law treats the doing of such act as constituting a surrender. This principle does not depend on the actual intention of the parties but on estoppel. A surrender by operation of law does not depend on the intention of the parties; it takes place independently and, even in spite of intention, the foundation of the doctrine is estoppel.

Most critically for present purposes is paragraph 17.020, headed “Act must be unequivocal”:

“The conduct of the parties must unequivocally amount to an acceptance that the tenancy has ended. There must either be relinquishment of possession and its acceptance by the landlord, or other conduct consistent only with the cesser of the tenancy, and the circumstances must be such as to render it inequitable for the landlord or the tenant to dispute that the tenancy has ceased.”

The judge, having made the finding of fact to which I have referred, said this at paragraph 78:

“In my judgment, considering all the facts above, the acts of the Tatanaki family, which Artworld must be taken to have authorised, amount to much more than merely protecting the property or seeking to make the best of the Safaryans’ having departed, and go significantly beyond anything consistent with the continued existence [of] the tenancy.”

The test she applied was to look for acts significantly beyond anything consistent with the continued existence of the tenancy.

Mr Driscoll was inclined to say that that was not quite right; that he preferred the formulation in Woodfall. To my mind, it makes no difference one way or the other. If the landlord has done something significantly beyond anything consistent with the continued existence of the tenancy, he will have done something which is unequivocal. And I think the judge thought much the same, because in paragraph 68(2) she set out the legal test in the following language:

“The test is whether the landlord’s conduct is ‘so’ inconsistent ([Oastler v Henderson 1877 2 QBD 575 at 577) with the continuation of the tenant’s lease that it could only be justified as being lawful on the basis that the landlord has accepted the tenant’s implied offer to give back possession, and has taken possession of the premises beneficially for himself.”

I turn to the judge’s findings of fact. The most significant by far is that of Mr Tatanaki junior moving into the house for his own benefit and not, as had been contended before the judge, as some kind of caretaker to ensure the property was safe. Mr Driscoll accepted, as he had to, that that finding was unchallengeable. He accepted that the residence was for a period of six weeks starting in June, during which Mr Tatanaki moved in some of his own furniture; that he left to go to the south of France, leaving his furniture behind, and returned for a week in October.

The other findings, about redecoration, car-parking, return of some furniture, rehanging of curtains and garden sheds, to my mind might well on their own not be unequivocal. Their importance is not that they are each freestanding individual acts of surrender; it is that they cast a clear evidential light on the nature of the key act of taking possession, namely that of occupation for private use for a period of effectively three months (maybe rather more as Mr Dowding pointed out).

Mr Driscoll’s principal point was that the judge here overlooked the inter-solicitor correspondence. How, he asks, could the landlord be accepting by conduct the surrender when at the same time he was positively asserting continuance of the lease? To my mind, the judge dealt with that correctly at paragraph 42, where she said:

“In my judgment the question whether there has been a deemed surrender by operation of law does not depend on the landlord’s stated intention, but on the intention demonstrated on an objective basis by its conduct as a whole. Of course this includes both what it says and what it does, and what it says may assist in interpreting the true effect of acts which might otherwise be equivocal, but is not open to the landlord to turn black into white merely by assertion. Just as one cannot ‘approbate and reprobate’, where aspects of the landlord’s conduct are contradictory the court must look at that conduct as a whole, and decide what is its real effect.”

Mr Driscoll also attacked some of the findings of fact, but none of the crucial ones about occupation by Mr Tatanaki. To my mind, the only attack which really succeeded was a minor one about the moving back of furniture. I think the judge may have got the date when the furniture was moved back wrong -- it was later, and not at the time of the occupation by Mr Tatanaki. Success on this minor item does not, to my mind, make any difference.

Mr Driscoll also submitted that the finding of fact about redecoration was wrong in several respects. His first submission about it was that it was something which the landlord was allowed to do pursuant to clause 5.24 of the lease. This reads as follows:

“5.24

To permit entry

5.24.1

To permit the Landlord, the Landlord’s Agent and their workmen on reasonable written notice at reasonable hours by prior appointment except immediately in the case of Emergency using a set of keys (if necessary) to enter the Property for the purposes of:

(i)

viewing and recording the condition of the Property (including during the carrying out of the Works)

(ii)

repairing and maintaining or cleaning any part of the Property

(iii)

complying with any of its obligations under this Agreement or for any other reasonable purpose

(iv)

allowing prospective tenants to view the same during the last three months of the Term (howsoever determined) and at any time during periods of Holding Over

(v)

effecting any reasonable and necessary additions alterations and improvements to the Property

(vi)

removal of any items of Fixtures and Fittings previously identified by the Tenant within 7 days of the Completion Date

5.24.2

allowing prospective purchasers to view the same upon giving the Tenant fourteen days written notice and obtaining the Tenant’s consent to such viewings (not to be unreasonably withheld or delayed)”

Mr Driscoll said that there was some evidence that the state of decoration was poor, and that therefore this decoration was legitimately within Clause 5.24.1 (ii) or possibly (v). I do not agree. The lease as a whole entitles the tenants to redecorate the bedroom; it was their choice as to the state of the decoration whilst they were there; as to what colours, and anything else; and, as I see it, what was done was inconsistent with the lease.

Mr Driscoll pointed out that surrender by operation of law is draconian or can have a draconian effect. Here, he said, a short period of residence by just one young man, his sister for a little while and, I think a housekeeper for some of the time at least, for a relatively short period of time, would deprive the landlord of nearly £500,000 worth of rent. For that reason he submitted, and correctly to my mind, that the law requires the burden of proof to lie on he who asserts surrender. Moreover the law has a tough requirement of unequivocality, the one to which I have referred. He particularly took us to a case which he said was almost on all fours with this case, the one the judge had mentioned, Oastler v Henderson [1877] 2 QBD 575 at 577 The head note records the facts so far as we know them. I will read it:

“Plaintiffs let a house to defendant for seven years from Lady Day, 1868. Defendant entered and occupied till Michaelmas, when he left England for America. He left the keys with an agent to dispose of the house if he could, if not, to make the best bargain he could with plaintiffs for the surrender of the term. The agent was unable to find a tenant, and gave the keys in December, 1868, to plaintiffs. They employed a house agent to let the house, and he put up bills in the house and advertised it to let, but the house was not let till Lady Day, 1872, when a new tenant went in. In 1870, for a short time, some workmen of plaintiffs occupied two rooms in the house for the purpose of plaintiffs’ saddlery business.”

The key question before the court was whether the occupation of two rooms for a short period was enough to amount to a surrender of the lease. The report does not tell us much about the nature of their occupation, whether it was something that could be discontinued in a matter of moments, or what was going on at all.

The test which the court applied was expressed as follows by Cockburn CJ, at page 577. In describing the case he says as follows:

“But up to that date they had not done such an act, for they had not virtually taken possession of the premises; and in order to estop the lessors, so as to constitute a surrender by operation of law, there must be a taking of possession. I do not say a physical taking of possession, but, at all events, something amounting to a virtual taking of possession. But here there was no such taking of possession.”

And he said this about the taking of the rooms:

“As for the fact that the plaintiffs’ workmen used two of the rooms in 1870, I do not think that any jury ought to hold that to be equivalent to a taking of possession, for it is, under the circumstances, quite consistent with an intention to hold the defendant to his lease.”

Bramwell LJ, clearly evincing a lot of sympathy for the landlords, pointing out it was unoccupied and bringing in no rent, regarded the fact that the rooms were used as simply a natural thing for them to do in circumstances where they thought the defendant was not going to return. Brett LJ simply expressed it this way:

“The plaintiffs’ workmen, were, it is true, let into two of the rooms for a time, but that was not by way of taking possession.”

It is always dangerous to argue on the facts of one case to the facts of another. The judge in this case had much more material to work on than is indicated in Oastler. The question I ask myself in the end was, did she have material upon which to come to the finding that there had been a surrender? To my mind the answer is clear: she did. Going in and living in the property is in effect taking it over and treating it as your own, which is inconsistent with the continuance of a lease. Accordingly, on the main part of the appeal, I would hold the judge was right.

The final live point was about the date of surrender. Mr Driscoll submitted that since Mr Tatanaki only went into occupation in early June, one could not say there had been a surrender by the next rent day, which was a few days later. It is only when you see what has happened over the period of the next three months that you can say there has been a surrender. Again, I do not accept that argument. The better way to look at it is that the act of accepting the surrender and going in happened in June. The period of occupation is a reflection of that taking back of possession. So I see no fault in the judge’s reasoning here either.

In the result I would dismiss this appeal.

I agree that this appeal should be dismissed. The meaning of the doctrine of surrender by operation of law is not in doubt. It was well summarised by Peter Gibson LJ in Bellcourt Estates v Adesina [2005] EWCA Civ 208; [2005] 2 EGLR 33, in these terms:

“The doctrine of surrender by operation of law is founded on the principle of estoppel, in that the parties must have acted towards each other in a way which is inconsistent with the continuation of the tenancy. That imposes a high threshold which must be crossed if the tenant is to be held to have surrendered and the landlord is to be held to have accepted the surrender.”

There is reference in some of the authorities to the circumstances having to be such as to render it “inequitable” for the landlord or tenant to dispute that the tenancy has ceased: see, for example, Bellcourt, paragraphs 19-21 in the judgment of Longmore LJ. But I would accept the submission of Mr Dowding QC in his skeleton argument, at paragraph 15, where he says that the references

“are not to be read as importing inequity as a separate requirement. The doctrine is not based on conscience. Where possession is unequivocally offered and retaken, it will, without more, be inequitable for the landlord to deny that the tenancy has ended, because he cannot at one and the same time have both possession and continuing rent under the tenancy. That is clear from (amongst other things) Aldous LJ’s description, in McDougalls Catering Foods v BSE trading [1998] 2 EGLR 65 of the court’s task as being to ascertain from all the facts whether the landlord’s conduct:

‘did in fact amount to an unequivocal acceptance of cessor of the tenancy such that it would be inequitable for the landlord to dispute that the tenancy ceased’. [emphasis added]. In other words, the two are the same thing.”

In my judgment the propositions derived by the judge from the authorities and stated in paragraph 68 of her judgment are correct:

“(1)

The issue of whether there has been a surrender by operation of law after a tenant’s abandonment of the leased premises must be determined by evaluating the effect of the landlord’s conduct as a whole (cf London Borough of Brent v Sharma (1992) 25 HLR 257 at 259). I accept Mr Kremen’s argument that the totality of such acts can amount to a resumption of possession even though individual acts might each be only equivocal. With this in mind --

(2)

The test is whether the landlord’s conduct is ‘so’ inconsistent (Oastler v Henderson 1877 2 QBD 575 at 577) with the continuation of the tenant’s lease that it could only be justified as being lawful on the basis that the landlord has accepted the tenant’s implied offer to give back possession, and has taken possession of the premises beneficially for himself.

(3)

Accepting back the keys without more will always be equivocal. As a matter of practicality and common sense, one party has to hold the keys to prevent an absurd situation in which they are passed back and forth because neither party wants to risk it being suggested that it has made an admission by holding them.

(4)

Any act of the landlord which is consistent with its rights under the lease, such as entering the premises to inspect or to repair them, will not in itself give rise to a surrender because, by definition, it is not inconsistent with the lease continuing.

(5)

Any further act of the landlord which amounts to protecting or preserving the property, such as taking security measures or doing necessary repairs, will not in itself give rise to a surrender because such self-help, necessary to preserve the landlord’s interest in the value of his property, is a reasonable response to the tenant’s evinced intention not to perform the obligations of the tenancy: cf McDougall’s Catering Foods Ltd v BSE Trading Ltd 1998 P & CR 312; Relvok Properties Ltd v Dixon (1972) 25 P & CR 1, at p 7.

(6)

Similarly, any act of the landlord which amounts to the landlord’s performing the tenant’s covenants under the lease, such as keeping the garden tidy, would not necessarily amount to a resumption of possession as it is not inconsistent with holding the defaulting tenant to performing the lease.

(7)

Any further act of the landlord referable to the landlord’s seeking to re-let the premises will not necessarily give rise to a surrender by operation of law, as it is no more than what the landlord might reasonably be expected to do in the circumstance for the potential benefit of all parties: Oastler v Henderson (above). The landlord must be entitled to seek to mitigate the damage caused in reality (even if not yet technically in law so long as the lease remains extant) by the tenant’s abandoning the lease, by seeking to obtain another tenant, without thereby losing his rights against the original tenant if he is unable to do so.

(8)

However, if the landlord goes further and uses the premises for his own benefit beyond the totally trivial -- and certainly, in my judgment, if such use amounts to occupation of the premises -- then he re-takes possession of the premises inconsistently with the continuance of the lease. This will give rise to a surrender by operation of law, since it is only on the basis of having accepted such a surrender that the landlord’s acts would be lawful.”

Mr Driscoll criticises proposition (1), but again the answer to this is provided by Mr Dowding when he points out that the judge went on to accept the tenant’s submission that the totality of the landlord’s conduct can amount to an acceptance of possession even though the individual acts might each only be equivocal. The court must look at the cumulative effect of the acts relied. If taken together they amount to a resumption of possession, that is enough, even though, viewed in isolation and without regard to the others, each might be capable of being explained away, each case will depend on its own facts.

Mr Driscoll also criticises proposition (8) but, yet again, I will accept the submission of Mr Dowding that this proposition must be read in the light of the judge’s propositions (3) to (7), none of which are disputed. What the judge was saying was that a landlord who goes beyond the sort of acts referred to in propositions (3) to (7) and uses the premises for his own benefit and, a fortiori, a landlord who goes into occupation of the premises for his own benefit is ordinarily to be treated as having retaken possession. This accords with the distinction drawn by Wills J in Phene v Popplewell 12 CB (NS) 334 between “[acts] done in the exercise of ownership” and “mere gratuitous acts done for the benefit of the tenant” and also with Relvok Properties Ltd v Dixon [1973] 25 P&CR 1, in which Sachs LJ identified the question as being “whether in any individual case the landlord has done more than protect his interests.” But the judge’s proposition correctly recognises that not every instance of use of the premises by the landlord for his own benefit will necessarily amount to a retaking of possession, even where such use goes beyond the sort of acts referred to in the judge’s propositions (3) to (7). The use which is too trivial will not suffice. I would agree that that is correct.

At paragraph 69 the judge said that the principle of surrender by operation of law is more accurately viewed as a case of election than of estoppel. Mr Driscoll submits that she was wrong to do so. But a landlord who is faced with a tenant who vacates and returns the keys is faced with a choice which may aptly be described as an election. All that the judge meant was that once the landlord has elected to retake possession the surrender is complete. She went on to say, in paragraph 69:

“Having deliberately taken that of acting in a manner undeniably inconsistent with the continued existence of the estate which he has granted, he has elected to treat that estate as determined in accordance with the offer to relinquish it made by the tenant, and cannot thereafter change his mind.”

In my judgment that is a proper approach to the issue of surrender by an operation of law.

Mr Driscoll rightly concedes that the central and crucial finding of the fact is a finding that the landlord took possession of the property in a manner, and to an extent, which was inconsistent with the continued existence of the tenants. He accepts, rightly, that he cannot challenge the finding that Mr Tatanaki junior did not occupy the property as a caretaker. The judge was clearly entitled to make the findings that she made at paragraph 76, to which Jacob LJ has already referred. I should point out that he said that the finding was that Mr Tatanaki junior was in occupation only for one week in September 2006. I do not believe that the judge actually made a finding as to the duration of Mr Tatanaki junior’s occupation of the property. It is pointed out, in his skeleton argument, by Mr Dowding that the two witness statements of Marina Safaryan state that she saw Mr Tatanaki junior in June 2006 and that she visited the property on subsequent occasions in October and November when Mr Tatanaki junior was in residence and had his belongings and furniture there and a housekeeper living with him. It would appear, therefore, that the occupation was rather more extensive than my Lord has indicated. The precise length of it, however, is not disclosed by the material that has been shown to us and has certainly not been the subject of any finding by the judge.

Mr Driscoll has two particular points of criticism of the judge’s overall conclusion, at paragraph 78, to which again Jacob LJ has referred. First, he submits that the judge failed to take into account the correspondence after the beginning of June 2006 in which the landlord denied the tenant’s allegation of repudiatory breach of the agreement and continued to claim rent. Jacob LJ has already referred to the passage at paragraph 42 of the judgment, in which the judge dealt in general terms with the relevance of what a landlord or a tenant may say when the issue of surrender implied by law is under consideration. In my judgment what the judge said in general terms about that at paragraph 42 is beyond criticism. It is true that the judge did not refer specifically to the correspondence in her examination of the facts at paragraphs 70 to 77, and Mr Driscoll submits that that amounted to an omission of a material consideration. In my judgment the judge should have made specific reference to the correspondence at that point in her judgment, since it was a point relied upon by the landlord, but it is clear that if she had referred to that correspondence she would have reached the conclusion that she did reach in any event. She was plainly of the view that the landlord’s acts, taken as a whole, were inconsistent with the continuation of the tenancy. It is inevitable that she would not have decided that this was all changed by the correspondence, particularly in the light of her general direction to herself at paragraph 42, which, as I have already said, was entirely correct.

Secondly, Mr Driscoll challenges each of the findings and conclusions of the judge at paragraphs 71 to 77, as I understand it apart from the findings about the occupation of Mr Tatanaki junior and in particular it not being referable to his being in the property as a caretaker. Mr Driscoll submits that the findings that he challenges were not supported by the evidence. In my judgment there is no basis for this wholesale attempt to overturn every finding of primary fact and each evaluation made by the judge on these points.

The essential point is that the landlord did redecorate the main bedroom, did re-hang the curtains and did reinstate some, at least, of their furniture. These acts were relevant to an assessment of the quality of Mr Tatanaki junior’s occupation, and the judge was entitled to rely on them in support of her conclusion. The landlord’s acts, taken as a whole, went significantly beyond anything consistent with a continued existence of the tenancy.

In summary, in my view the judge did not misdirect herself as to the correct test to be applied. Her application of that test was not flawed. She was entitled to reach the conclusion that she reached. I would therefore reject grounds 1 and 2 for these reasons, as well as those given by Jacob LJ. I have nothing to add on ground 2.