Patel & Anor v K&J Restaurants Ltd & Anor

The Claimants, Mr and Mrs Patel, own the freehold of 116 Tottenham Court Road, London W1. The ground floor and basement are used for business purposes, as a restaurant, and each of the first, second and third floors contains a flat. The whole building is the subject of a lease dated 18 May 2005 in favour of the First Defendant, K&J Restaurants Ltd (which I will call K&J for short), with a term of 20 years from 25 December 2004. By the proceedings from which this appeal arises the Claimants sought possession of the entire premises on the grounds that they had forfeited the lease for breach of covenant. One of the breaches alleged was that the First Defendant had underlet, or parted with or shared possession or occupation of, the ground floor and basement, in favour of the Second Defendant, MP Catering Ltd (MPC, for short). The Second Defendant has played no part in the appeal, though it was represented at the trial. The First Defendant denied any breach of covenant, and alternatively claimed relief against forfeiture.

The case came to trial in the Central London County Court before His Honour Judge Bailey for four days in March 2009. On the fifth day, 3 April 2009, he gave an impressively full and clear judgment, by which he dismissed the claim for forfeiture and possession and ordered the Claimants to pay K&J’s costs of the proceedings. Permission to appeal was refused to the Claimants by the judge but granted by Lady Justice Smith.

Two quite different breaches of covenant were alleged. I have mentioned one, concerning the status of the Second Defendant as regards the restaurant premises. The other focussed on the use of one of the flats, which the police found to be used for the purposes of prostitution. On that basis, it was alleged that K&J was in breach of covenant because of the use of the flat for an illegal or immoral purpose. The two breaches are unconnected and I will need to deal with them separately.

The lease was granted by a company called Chalfords Ltd, from whom the Claimants later bought the freehold, subject to and with the benefit of the lease. The tenant’s covenants are in clause 3. The use of the premises is governed by clause 3(20)(a), as follows:

“That the demised premises shall not be used for any illegal or immoral purpose or any noise noisome or offensive trade or business or as a public house beer shop betting shop or public place of amusement or (save as hereinafter specifically permitted in respect of the upper floors) for residential purposes and not to hold or permit any sale by auction or any public meeting on the demised premises.”

Alienation is dealt with in clause 3(22)(a) as follows:

“Save as permitted in this clause in respect of under-letting of the upper part on residential a tenancy not to assign underlet agree to underlet part with or share the possession or occupation of part only of the demised premises.”

Although there is much more in that sub-clause, none of the rest seems to me to add to or alter the effect of paragraph (a) so far as relevant to this case.

Clause 5(1) is a proviso for forfeiture in conventional terms.

The Claimants gave notice to K&J dated 28 February 2008 under section 146 of the Law of Property Act 1925, relying on a breach of clause 3(20)(a). The breach was stated to be incapable of remedy. Seven days’ notice was given of the Claimants’ intention to enforce their rights. Whether that notice was valid is in dispute; this depends on whether the breach was or was not capable of remedy.

On the previous days police officers had visited first the Claimants and then Mr Kurt Albright, the person behind K&J, and had served on each of them a notice stating that there was evidence that the premises at 116A Tottenham Court Road were being used as a brothel, and requiring each of them to take immediate action to remedy the situation. The action taken by the Claimants was to serve the section 146 notice. The action taken by K&J was to evict the tenant of Flat 2, which was done by 6 March 2008.

So far as the restaurant premises are concerned, K&J and MPC had entered into a series of related agreements on 13 May 2007, the effect of which I will need to examine in detail. Under them, MPC was to manage the restaurant from then until 24 December 2009.

It seems that at the end of February 2008 Mr Mario Leale, of MPC, told Mr Patel that K&J had sublet the restaurant to MPC. The Claimants took the view (rightly) that if this had happened it would be a breach of the lease. On 29 March 2008 K&J changed the locks on the restaurant, and then terminated the agreements with MPC, on the ground that by telling Mr Patel of the position Mr Leale had broken the confidentiality clause in one of the agreements. MPC then began proceedings in the Chancery Division to get back in, which succeeded on an interim basis. Eventually, after the trial of the county court proceedings, it seems that K&J was able to get rid of MPC, on 3 May 2009 by an order made by agreement.

The Claimants gave a second notice under section 146 in April 2008, relying on breaches under both clause 3(20)(a) and clause 3(22)(a). This notice required the breaches to be remedied, insofar as they were capable of remedy, while asserting that they were not so capable. It is not in dispute that this notice was valid in itself. The issue here is whether there were breaches as alleged and, if there were, whether relief against forfeiture should be granted.

On 18 March 2008 K&J started proceedings against the Claimants seeking relief against forfeiture. On 31 March 2008 the Claimant started proceedings for possession against K&J, MPC and the tenant of flat 1. These proceedings relied on the first section 146 notice, though they also referred to other breaches having come to light since service of that notice, namely the breach as regards MPC. On 9 May 2008 the Claimants began further possession proceedings against the same Defendants relying on the second section 146 notice. K&J claimed relief from forfeiture by counterclaim in each of the possession proceedings. Eventually Counsel appeared for MPC at the trial as well, to resist the claim. The tenant of Flat 1 took no part in the proceedings. All three actions were heard together.

In order to decide the issues on the appeal it is necessary to consider the two alleged breaches separately, and first to examine the facts relating to each. I will start with the breach alleged as regards clause 3(20)(a): immoral and illegal use of the premises.

In May 2007 a fire occurred at 116 Tottenham Court Road. A police report after this incident recorded that checks were carried out which revealed that flat 2 was a brothel. No immediate action seems to have been taken by the police as a result of that. There was a further police visit to flat 2 on 2 July, attended among others by PC Emma Rickard. Mr Leale spoke to Mr Albright in August or September 2007 and raised the possibility that the comings and goings of men to and from the upstairs flats might indicate that there was a brothel in one of the flats. Although lettings of flats were dealt with by an agency, Mr Albright knew one tenant, Miss Valerie Fairchild, who had been the tenant of flat 2 but by August or September 2007 had moved up to flat 3. Mr Albright saw her about this suggestion, but she assured him that nothing of that kind was going on. On 1 November 2007 K&J let flat 2 to one Sarah Melman for 12 months.

In November 2007, on a date which the judge held to have been early in the month, Mr Albright spoke on the telephone to PC Rickard. She told him that flat 2 was being used as a brothel. According to Mr Albright’s evidence she said she would write to him about this. PC Rickard accepted that she may have said that she would send a letter confirming the police’s position as to the use to which flat 2 was being put. Mr Albright took no action as a result of the telephone conversation, pending receipt of the letter.

On 30 January 2008 the police attended the premises again, and again discovered evidence of flat 2 being used as a brothel. That led to the notices being served on the Claimants and on K&J to which I have already referred. By 6 March 2008 Mr Albright had secured Ms Melman’s departure from flat 2. The flat was then re-let, there being no suggestion at the trial that it was then being used in breach of covenant.

The cases about immoral use of demised premises draw a distinction between the case of direct use by the tenant, on the one hand, and use by a subtenant which is or may be permitted by the tenant, on the other hand. So far as K&J is concerned this case is in the latter category. A breach consisting of direct use by the tenant is not remediable. If the use is not direct, then the breach is remediable so long as the tenant acts promptly on discovering the relevant use by the subtenant. I will revert to this in more detail later. In the end, the issue is whether K&J should have taken action to check whether flat 2 was being used as a brothel, and if so to stop that use, after the telephone conversation in November 2007, or whether Mr Albright acted reasonably in waiting after that and not doing anything until he had the formal notice from the police. Once he received that notice, he acted promptly.

The judge considered the question of when K&J acquired knowledge of the breach at paragraphs 70 to 97 of his judgment. He reviewed the conflicting evidence carefully. He concluded that Mr Albright had no sufficient reason to know of or suspect the use of any flat as a brothel until early November, when he had the telephone conversation with PC Rickard. For the appellants, Mr Small Q.C. sought to challenge the finding that he had no sufficient reason to suspect at an earlier date, but it seems to me that this is an impossible argument. The issue is whether what he came to know from the telephone conversation was sufficient to require him to take action, having regard to K&J’s obligations under the lease. So far as the facts are concerned, the judge said this at paragraph 31:

“In the course of this conversation, PC Rickard told him that Flat 2 was being used as a brothel. Mr. Albright tells me that PC Rickard said that she would write to him about the matter. He assured her that he would want to remove any prostitutes from the premises. Mr Albright told me that he was waiting for a letter before taking the matter further. This is understandable. If a landlord is to inform a young lady that he wants her out on the basis that she is a prostitute, and or that her flat is being used as a brothel, he wants to be sure of his ground. It seems to me perfectly reasonable that Mr. Albright would wish to have a letter from the police stating that the flat is being used as a brothel before he took any such action. ... [PC Rickard] does however accept that she may well have told Mr. Albright that she would send a letter confirming the police stance as to the use to which Flat 2 was being put. No letter was however sent.”

Expressing his conclusion in favour of K&J at paragraph 97, he said this:

“I, therefore, reject the suggestion that Mr. Albright turned a blind eye to the prostitution. Certainly he waited until he received a letter from the police before acting. He had been promised the letter and, as I find, was entitled to wait. The delay was purely a matter for the police. I conclude, therefore, that the breach of covenant was a remediable breach.”

In Rugby School Governors v Tannahill [1935] 1 KB 87 the tenant had been convicted of permitting the premises to be used for habitual prostitution. The landlord served a notice under section 146 which did not provide for the possibility of the breach being remedied. The Court of Appeal proceeded on the basis that the evidence showed that the tenant had been knowingly and actively permitting the house to be so used, and had probably been receiving profits from the business. On that footing it held that the breach was not capable of remedy.

In Borthwick-Norton v Romney Warwick Estates Ltd [1950] 1 All ER 798, a subtenant was charged with using her flat as a brothel, to which she pleaded guilty. The tenant served notice to quit a fortnight later and she did leave. Soon after that the freeholder served a section 146 notice on the tenant. The tenant claimed not to have known about the immoral use before it learned of the conviction, but the judge held that the tenant had had ample reason to suspect it from complaints made by other subtenants of noise and riotous and disgusting behaviour, and had done nothing to check: no attempt to watch the premises or to cause them to be watched, or to speak to the police. The judge held that the tenant deliberately shut its eyes to the true state of affairs.

The later case of British Petroleum Pension Trust v Behrendt [1985] 2 EGLR 97 was of the same kind, the tenant having been held by the judge to have known of the use or at best to have shut his eyes deliberately to it. In that case, although the subtenant had been removed, the Court of Appeal held that the breach was not remediable and the continued presence on the premises of the tenant who had knowingly suffered the prostitution to take place continued the stigma on the premises.

By contrast, in Glass v Kencakes Ltd [1966] 1 QB 611, the immoral use was by a subtenant and the tenant was unaware of this use until it received a section 146 notice from the freeholder based on the alleged use. Immediately upon receipt of the notice the tenant told the relevant subtenants to leave at once, and they did. It was not alleged that the tenant had permitted the use in breach of covenant, since it had not known about it, but it was said that there was nevertheless a breach, in that the premises had in fact been used for prohibited purposes. However, the section 146 notice did not allow for the breach to be remedied. Paull J reviewed the relevant cases on the question whether a breach such as that alleged in the case before him was capable of remedy. At [1966] 1 QB 629 he said this:

“Having considered these authorities to which I have referred, I think the following propositions may be stated: (1) The mere fact that the breach complained of is a breach of user by a subtenant contrary to a covenant in the lease does not render the breach incapable of remedy. If one of the tenants of these flats in Queensway had, unknown to the defendants, carried on a small business of dressmaking in the flats, I would hold without hesitation that the breach was capable of remedy so far as the defendants are concerned, but it may be that the remedy would have to consist not only of stopping the tenant from carrying on that business but of bringing an action for forfeiture, it being then left to the court to decide whether the particular tenant should be granted relief. (2) The fact that the business user involves immorality does not in itself render the breach incapable of remedy, provided that the lessees neither knew of nor had any reason to know of the fact that the flat was being so used. The remedy in such a case, however, must involve not only that immediate steps are taken to stop such a user so soon as the user is known, but that an action for forfeiture of the sub-tenant’s lease must be started within a reasonable time. If therefore the lessee has known of such a breach for a reasonable time before the notice is served, the breach is incapable of remedy unless such steps have been taken. (3) It does not follow that such a breach is always capable of remedy. All the circumstances must be taken into consideration. For example, if the notice is not the first notice which has had to be served, or if there are particularly revolting circumstances attaching to the user, or great publicity, then it might well be that the slate could not be wiped clean, or, to use another phrase, the damage to the property might be so great as to render the breach incapable of remedy.”

He went on to hold that the breach in the case before him was capable of remedy, and had been remedied within a reasonable time:

“It is true that the user for prostitution took place either during two periods or for one lengthy period, but there was no fault on the part of the tenant and no general publicity - only publicity to those who chose to follow up the advertisements which did not give the address. Again, had the prostitutes refused to leave, the length of time before the defendants issued their writ against Dean would have been unreasonably long, but the premises were empty and were seen to be empty by anyone coming to the premises, not only by their appearance but also by reason of a “Notice of Sale” exhibited on the premises.”

On the basis of that case, Ms Holland Q.C., for K&J, submitted that the question was whether, and if so when, the tenant knew or had reason to know of the offending use of the flat which, on the facts of the present case, she said was not until February 2008.

The judge followed this approach, saying this at paragraph 69:

“I prefer to follow the approach indicated by Paull J in Glass v Kencakes, that where, as here, the tenant is not directly responsible for the immoral user, the breach may be capable of remedy. However, the tenant must act responsibly. He must take immediate steps, once he knows of immoral use by a sub-tenant, including an action for forfeiture, should the sub-tenant remain in the premises. ‘Known’ as in “so soon as the user is known” must mean just that. No court expects a tenant to act on mere suspicion. However, if there are reasonable grounds for suspicion the tenant should make enquiries. He cannot turn a blind eye. The question, therefore, whether breaches are remediable depends on the facts of the individual case.”

It seems to me that the judge was right, in that passage, to focus on what the tenant does in response to his acquiring either knowledge of the use or some reason to know of it, whether that be “reasonable grounds for suspicion” or something stronger though short of certainty. Only the fourth sentence in that passage seems to me to be at risk of being over-strict, and I doubt that the judge so intended it. It seems to me that the tenant must take some action when he has either knowledge or, at least, reasonable grounds for suspicion. What action he should take will depend on what knowledge he acquires. The judge recognised, in the sixth sentence of the passage quoted, that the tenant who has reason to suspect offending use must make enquiries. If he does not, he risks being found to have permitted the use, by not taking the action that he would have had to have taken if he had discovered the true position by making reasonable enquiries.

So the question is whether K&J failed to do what it should have done after PC Rickard’s telephone call in November 2007. For K&J Ms Holland put forward elaborately constructed submissions in support of the judge’s view favourable to Mr Albright, relying among other things on the Slander of Women Act 1891, and Shah v Standard Chartered Bank [1999] QB 241 and Hamilton v Clifford [2004] EWHC 1542 (QB) as to the risk of liability for defamation if Mr Albright had alleged to Ms Melman that she was carrying on a brothel, and Ground 14 of the grounds for possession set out in Schedule 2 to the Housing Act 1988 as to the need to prove the circumstances in support of proceedings for possession. This is all well and good in principle, but completely unrealistic in practice, as is demonstrated by the fact that, as soon as Mr Albright had received notice from the police, so that he had no alternative but to take action, he did so at once, and without worrying about any risk of proceedings for slander on the part of Ms Melman, nor needing to start proceedings for possession relying on Ground 14.

So far as his accountability to the police was concerned, and any liability under the criminal law, I do not doubt that Mr Albright may have been acting reasonably in waiting for the further communication from the police which he had been led to expect. However, Ms Holland accepted (inevitably) that the telephone call from PC Rickard did give him, at the very least, reasonable grounds for suspecting that the flat was being used as a brothel. It was therefore incumbent on him, from the point of view of his obligations under the lease, to take some action to check the position and to do so promptly. There would, no doubt, have been a range of different steps that he could have taken, involving some observation of the comings and goings in relation to Flat 2, and whether or not involving any attempt to gain access to the flat. Of course Mr Albright did not need to do any of these things himself, but he needed to do something or to see that something was done, and soon. It seems to me that the case has, in this respect, some similarity with Borthwick-Norton, cited above. I do not suggest that it is anything like so bad a case as that, but it is one in which the tenant had at least sufficient reason to suspect that a brothel was being conducted on the premises and did nothing to check whether this was or was not the case.

For my part, therefore, I would respectfully disagree with the judge in his conclusion that the tenant was entitled to wait for the letter from the police before he did anything at all to check on what was going on in the flat. In my judgment he was entitled to wait so far as his obligations in respect of the police and the criminal law were concerned, but he had enough reason to suspect a breach of covenant for it to be necessary for him to make enquiries. He could not be expected to confront the tenant at once without more and tell her to leave, but he should have taken some appropriate steps to check on the position. To do nothing, as he did, was not consistent with his duties under his lease. It may be unfair to compare Mr Albright with Lord Nelson, putting his telescope to his blind eye in order not to see the signal that he did not wish to see. He may have been motivated by inertia or embarrassment rather than by not wanting to be told that which he really knew was happening. Even on that less culpable basis, his failure in this respect allowed the prostitution and the breach of covenant to continue for some three months or so.

I would therefore hold that K&J was in breach of covenant, not immediately after the telephone conversation, but well before the service of the section 146 notice. No such steps having been taken with reasonable promptness, it seems to me that the breach was no longer capable of remedy, following the reasoning of Paull J in Glass v Kencakes towards the end of the section identified as (2) in the passage which I have quoted from his judgment at paragraph [24] above.

It follows from this that the first section 146 notice was valid, because the breach was not capable of remedy. K&J had by then failed for a significant period to take any reasonable steps to investigate or check despite having reasonable grounds for suspecting that a brothel was being conducted in flat 2 in breach of the headlease, and, no doubt, of the terms of the sublease under which the flat had been let to Ms Melman.

That leaves the question of relief from forfeiture, which the judge said that he would have granted if he had come to the conclusion that the notice was valid. I will take that question later, together with the same question in relation to the other aspect of the case.

The second notice under section 146 asserted that K&J was in breach of the lease by having underlet the ground floor and basement to MPC for a term from 13 May 2007 to 24 December 2009, or having parted with or shared possession or occupation of the premises to or with MPC. The principal allegation before and at trial was of an underletting. However, it seems to me that this could not succeed, on the footing, accepted by the judge, that the documents were intended to have the legal effect that they purport to have. The real case is that K&J parted with, or shared, possession or occupation to or with MPC.

It is necessary to set the scene with some factual background. K&J bought an earlier lease of the whole building in 2003, and at the same time bought the goodwill of a restaurant business called Amaretto which had been carried on at the premises. Mr Leale managed the restaurant business for K&J. In 2005, as already mentioned, K&J took a new lease of the whole building. The restaurant business continued under Mr Leale’s management.

In March 2007 MPC was incorporated. It has an unusual structure. It has two classes of shares: A shares which have votes but no right to any dividend, and B shares which have the sole right to dividends but no votes. All of the 100 A shares are held by K&J and Mr Albright. The 100 B shares were originally issued to Mr Leale and a Mr Boschi, 50 each. Mr Boschi had experience as a restaurateur. It was intended that both men should manage the business. Both of them entered into the agreements which were made in May, but soon after that Mr Leale and Mr Boschi fell out. The agreements were then varied so as to release Mr Boschi and to put Mr Leale alone in place of the two of them. As a result he held all 100 B shares in MPC. I will therefore describe the agreements of May 2007 as if Mr Leale had been a party to them on his own. He was the sole director of MPC.

There were several agreements, but only three matter for present purposes: first, what I will refer to as a management agreement, though it has no label as such, and could be called a consultancy agreement, secondly a hire agreement, and thirdly an option agreement. The first and second are between K&J and MPC, with Mr Leale as guarantor of the first; the third is between Mr and Mrs Albright and Mr Leale.

In the management agreement, MPC is called the Company and K&J the Consultant. By recital (A) it is recorded that:

“The Consultant owns the Amaretto Restaurant at 116 Tottenham Court Road London W1 (The Restaurant) and wishes to appoint The Company as its manager for the period contemplated by this agreement;”

The commencement date was 13 May 2007, the date of the agreement. Clauses 2 and 3 are as follows:

“2.

Appointment as Managers and Terms

2.

The Consultant appoints the Company as its manager for the Restaurant from the Commencement Date until the 24^th December 2009 or earlier termination hereunder and the Company agrees:

2.1

to keep the Restaurant open for business from 11 a.m. to 3 p.m. and 5.30 p.m. to 12.00 five days a week and 5.30 p.m. to 11.30 p.m. on Saturdays or such other working arrangements as the parties may from time to time agree and to run the Restaurant in a diligent efficient and businesslike manner

2.2

Not to make any changes to the décor or internal appearance of the Restaurant without the prior written consent of the Consultant

2.3

Not to change the name of the Restaurant on the external fascia or the menus without the prior written consent of the Consultant

2.4

To promptly pay all suppliers and all staff and all creditors such sums as may from time to time be due

2.5

To keep confidential the existence of and the terms of this Agreement and those of an Option Agreement made between Kurt Albright and Jane Albright (1) and the Guarantors (2)

3

To comply with all Health and Safety and Hygiene Legislation and regulations from time to time in force”

Clause 4 is the first of those that deal with the financial aspects of the agreement:

“4.

The Company as payment for its managerial services shall be entitled to retain for itself such sum as represents the gross annual turnover (as certified by the Auditors of the Company which certificate shall be final conclusive and binding save for manifest error) less the Fee payable to the Consultant under the provisions of Clause 7 hereof”

Clause 5 provides for K&J to be able to terminate the agreement summarily, by written notice, in four cases: (1) if the consultancy fee under clause 7 was not paid within 7 days of the due date, (2) if MPC were to breach any term which, if capable of remedy, was not remedied within 21 days of a notice specifying the breach and requiring its remedy, (3) if MPC went into liquidation or administration or administrative receivership and (4) if MPC conducted its management in any manner likely to bring MPC or K&J into disrepute.

The consultancy aspect, and the payment for it, was covered by clauses 6 and 7, as follows:

“6.

Unless prevented by ill health of a director or accident and subject to the express provisions of this agreement, the Consultant will make its services available to the Company from the Commencement Date as and when reasonably required by the Company (or as may be agreed in writing from time to time) for not less than an average of seven days per month to advise as to running of the Restaurant, promotion and publicity, marketing strategies, sourcing and establishing connection with suppliers, commercial strategy and all other expertise of a restaurateur within the competence or experience of the Consultant as may from time to time be required by the Company (“the Services”)

7.1

In consideration of the services provided by the Consultant, the Company will pay to the Consultant a consultancy fee at the annual rate of £84,500.00 (plus VAT at the standard rate) (the “Fee”). The Fee shall be paid by the Company by standing order on a weekly basis on the Monday in each week (or the Tuesday, if the Monday is a Bank Holiday) and the Consultant will provide the Company with a VAT invoice for such payment”

Clause 8 defined the period of the services as lasting until 24 December 2009, subject to prior termination.

K&J’s obligations as consultant were set out in clause 9 as follows:

“9.1

The Services shall be performed by the Consultant and the Consultant agrees to observe and perform the following obligations:

9.2

The Consultant shall carry out the duties in a diligent manner and to the best of its ability, promptly and comply with and observe all lawful and proper requests which may be made by the Company.

9.3

Throughout the term of this agreement, the Consultant will, when required, give to the Company (or to such other person or persons as it may nominate from time to time) such written or oral advice or information regarding any of the Services as may be reasonably required.”

Clause 10 made provision for reimbursement of expenses incurred by K&J as consultant. Clause 11 is headed “Consultant’s warranty”. Leaving aside a provision which does not matter as regards tax and other matters, clause 11.1 is as follows:

“11.1

The Consultant warrants and represents to the Company that it is an independent contractor. Nothing in this agreement shall render the Consultant an employee, agent or partner of the Company and the Consultant will not hold itself out as such.”

The last clause I need to quote is clause 13, headed authority:

“13.1

The Consultant shall have no authority to commit the Company to any legally binding commitments or contracts or to interfere in the running of the Company’s affairs or business

13.2

The Company may be written notice summarily terminates this agreement with immediate effect if

13.3

The Consultant breaches any term of this agreement which, in the case of a breach capable of remedy, is not remedied by the Consultant within 21 days of a written notice from the Company specifying the breach and requiring its remedy.”

The true nature and effect of this agreement is at the heart of this aspect of the case. It needs to be seen in the light of the two other agreements. The Hire Agreement is relatively simple. It provides for K&J (the Owner) to hire to MPC (the Manager) from 13 May 2007 to 24 December 2009 specified equipment, detailed in an inventory, being the fixtures fittings catering and other equipment furniture and other chattels at the restaurant premises. The rent agreed was £575 per week plus VAT. The provisions of the agreement do not appear to be out of the ordinary for such a transaction.

By the Option Agreement, Mr and Mrs Albright, who owned the entire share capital of K&J, gave Mr Leale an option to buy those shares for £325,000, exercisable by written notice given at any time between 14 May 2007 and 24 December 2009.

The judge heard evidence from Mr Albright and from Mr Leale about these agreements and the background to them. Three paragraphs in his judgment show what he derived from this evidence:

“109.

Mr. Albright’s evidence is that the sums agreed to be paid to K&J Restaurants under agreement were apportioned by the lawyers/accountants with tax considerations in mind. What was agreed with Mr. Leale, he told me, is that he and Boschi should manage the business, have the use of all the fixtures and equipment to do so and keep the turnover, paying the expenses and, therefore, the profit, in exchange for a weekly payment. This was negotiated at £2,200 a week. Mr. Albright told me, and I quite accept, that he asked for £2,500. Mr. Leale offered £2,000 and they settled on £2,200 a week.

121.

I accept Mr. Albright’s evidence that he wanted to retain the ownership of the business and dispose of it as and when the occasion arose. He saw himself as doing no more than giving Mr. Leale and Mr. Boschi the opportunity to run a restaurant business and make profits without any capital outlay themselves whatsoever. It was an attractive arrangement for both parties. Mr. Albright was getting on in years and wanted to have a lesser part to pay in the management of the business. Mr. Leale was keen to have a rather greater amount of autonomy as manager than he enjoyed before. He wanted to enjoy the profits that his efforts as manager produced.

147.

I have already made a comment about the provision for the profits to go to Mr. Leale. I entirely accept that in the ordinary course of events one expects the owner of a business to enjoy the profits of that business. However, as I understand the matter, this was an arrangement which suited both parties. Mr. Albright is, in the time-honoured expression, not as young as he was. Mr Leale, for all his extravagance and unreliability in the courtroom, may well be an excellent manager of a restaurant, although, if I may say so, he is yet to prove himself. This arrangement gives him the opportunity to manage a business without capital outlay whatever and enjoy such profits as his hard work earns.”

The case on behalf of K&J is that the effect of the agreements was that MPC was to manage the restaurant business on behalf of K&J, and accordingly that MPC’s use of the premises was not in any way distinct from that of K&J. MPC was K&J’s manager and agent and it used the premises (and occupied them, to the extent that it did) only as agent for and on behalf of K&J, the occupation therefore being only that of the principal. The judge accepted that proposition, which he expressed in his paragraphs 176 and 177 as follows:

“176.

In this case, K&J Restaurants own the business so they have that occupation. The furthest extent of any involvement that MP Catering have in possession or occupation of these premises is as managers occupying on behalf of K&J Restaurants. K&J Restaurants had entire control over MP Catering. That deals both with the questions of possession, sharing possession and occupation and the allegation that they have shared possession.

177.

I am quite satisfied that any occupation that there was of the premises by MP Catering was on behalf of K&J Restaurants.”

With respect to him, I do not find myself able to agree with the judge as to the effect of the agreements. In my judgment MPC had its own distinct right to use and occupy the restaurant premises, albeit not to the exclusion of K&J, but a right which it was entitled to assert against K&J, subject only to K&J’s right, in certain circumstances, to terminate the agreement and bring MPC’s rights to an end. It seems to me that K&J did share occupation of the premises with MPC, and thereby breached the covenant in clause 3(22)(a) of the lease. My reasons are as follows.

Before the agreements were entered into, K&J owned (a) the lease, (b) all the relevant equipment and (c) all the goodwill of the business. It also, of course, owned the A shares in MPC itself, which gave it voting control but no right to any dividends. Until the date of the agreements, Mr Leale was K&J’s agent to run and manage the business. He may have been either an employee or a contractor hired for the purpose. We do not know the terms on which he worked for K&J at this stage. Clearly K&J was entitled to both the capital assets and value of the business and also the whole of such net profits (if any) as were made from the business.

Under the agreements, MPC was entitled and obliged to carry the business on for the duration of the agreements, paying the substantial fixed sums stipulated in the management agreement and the hire agreement to K&J, keeping any net profit and bearing any net loss incurred by the business during the period of the agreements. The management agreement did not expressly provide for MPC to have a right to use the premises, but it did oblige MPC to keep the restaurant open during the hours specified in clause 1, so there must have been an implicit right to use the premises for that purpose. K&J was prohibited from interfering in the running of the business by MPC, under clause 13.1. It seems to me plain that MPC had a right, which it could enforce against K&J, to have access to the restaurant premises for the purposes of performing its obligations under the agreement. Unless and until K&J terminated the agreement, which it could not do without cause or without notice, it was MPC that ran the business, for its own profit. Conversely, MPC could not just walk away from the agreement; it could only terminate the agreement for cause under clause 13.2-3.

Certainly the agreement contained provisions designed to protect K&J’s interest in the business, such as clauses 2.1 (“diligent efficient and businesslike”), 2.2, 2.3, 2.4 and 3. K&J remained the owner of the goodwill as well as of the other capital assets, which would revert to it at the end of the agreement, and it therefore had a real interest in ensuring that the goodwill was not damaged by the way that MPC ran the business.

The judge attached importance to the agreement on the part of K&J to provide assistance, and to this having been implemented in reality by way of Mr Albright’s advice and help in a number of respects, to which he referred at paragraphs 110 to 113. I do not doubt the genuineness of that aspect of the agreement or of the way it worked in practice. On the face of the management agreement, this assistance was part of what K&J was being paid more than £7,000 per month to provide.

At paragraph 114 the judge posed the question as being what was transferred to MPC under the agreements: the management of the business or the ownership of it? This may have been how it was put to him in submissions. It does not seem to me that it was the right question. There could be no question of the ownership of the business having been transferred to MPC by these agreements. MPC would never have become the owner of the business; Mr Leale might have done so, but only if he exercised the option so as to acquire the shares in K&J, and thereby all of its assets. But it does not follow that, because MPC did not become owner of the business, it did not have any rights of its own in relation to the premises. It could not exclude K&J from the premises but it seems to me that it was entitled, while the agreement lasted, to prevent K&J from excluding it from the premises. While the agreements lasted, it was running the business for its own benefit, in terms of the current profit (or loss), not for that of K&J.

At paragraph 120 the judge addressed the question of a manager taking the profits from running the business. He rightly said that an owner who shares profits with his employees does not give them a share of the ownership of the business. He said the same was true if the owner allowed the manager to keep all the profits, he being more interested in capital growth. Again, it seems to me that the judge may have been distracted by the question of ownership of the business. A “manager” who runs the business, takes all the profit (after paying fixed sums to the owner) and bears all the loss (after paying the same fixed sums) and is obliged to continue carrying on the business for a stated period, unless the agreement is terminated for cause either way, cannot fairly be described as carrying on the business as agent for and on behalf of the owner. In such circumstances he carries the business on for his own benefit.

I agree with the judge (as I have already indicated) that the agreements did not create a subtenancy, they did not result in K&J giving up its right of access to the premises, they did not transfer ownership of the business to MPC, and they were not a sham. I would not attach importance, as the judge did, to K&J having “entire control” over MPC. It did have voting control but it was not entitled to the dividends, so MPC was an unusual subsidiary. It was not an ordinary wholly-owned subsidiary. The corporate relationship entitled Mr Leale to maintain MPC’s rights under the agreements as against K&J.

In the end, it seems to me to come down to this. MPC was not just entitled but obliged to run the business for the stipulated period, subject to the possibility of the agreement being brought to an end on either side. In order to do so, it had to have access to the premises. Unless the agreements had been terminated, K&J was not entitled to exclude MPC from access to the premises. While MPC was using the premises, it did so for its own profit and benefit. In those circumstances, K&J had brought about a position in which, although it had not excluded itself from the premises, it had given MPC an enforceable right to use the premises, and to do so for its benefit, not just as agent for K&J. Accordingly it had shared occupation of the premises with MPC. That was a breach of covenant.

I therefore conclude that the second section 146 notice was valid as regards this breach. It was a remediable breach, but that notice provided for that possibility.

The next question on this aspect of the case is whether the breach had been remedied by the time the proceedings were commenced. Ms Holland submitted that it had been, when K&J changed the locks to exclude MPC on 31 March 2008. The difficulty with this proposition is that the action taken was not effective, as MPC promptly got an injunction letting it back in. In the case of Ms Melman Mr Albright secured her removal without having to take proceedings, so that his practical steps did remedy the breach. In respect of MPC they did not.

It cannot have helped K&J that, when it changed the locks, it had not yet given written notice to terminate the management agreement, as is required under clause 5. K&J wrote to MPC on the next day relying on a breach of the confidentiality obligation in clause 2.5, and saying that this was not a remediable breach, so that it was not necessary to give time for it to be remedied. That last proposition is understandable.

The judge described the course of the proceedings brought by MPC in the Chancery Division, which he derived from a judgment of Lindsay J given on 28 July 2008: [2008] EWHC 2427 (Ch).

K&J had changed the locks and thereby excluded MPC on 31 March 2008, causing the staff to be turned out and the business to be brought to a halt. On 2 April MPC applied without notice for an injunction which Floyd J granted, restraining K&J from preventing MPC from carrying on the business of the Amaretto restaurant at the premises. That injunction was granted over to 9 April and on that date it was continued by consent to 22 April. By 22 April a further element had arisen, namely a threat that K&J might remove Mr Leale as a director of MPC, at a general meeting. Undertakings were given on 22 April which continued the protection of MPC against being prevented from carrying on the business, and also from convening a general meeting of MPC without the consent of Mr Leale. What Lindsay J had to decide was whether protection should be continued, not against preventing MPC from running the restaurant business (that was conceded), but against convening a general meeting. He held that it should, on the balance of convenience, until trial or further order in the meantime. Accordingly, at the time of the trial in the county court the position was still frozen in favour of MPC pending a trial in the High Court. Judge Bailey commented that it would have been more sensible if the issues between MPC and K&J had been tried at the same time as those between the Claimants and each of K&J and MPC, but it was not to be so.

Having held that there was no breach, the judge nevertheless went on to express a view as to whether, if there had been, it had been remedied by K&J before the service of the section 146 notice. He said that it had, because of MPC being excluded on 31 March and 1 April, even though they had to be let back in as a result of the injunction granted on 2 April. He recognised that, if in the High Court proceedings it were held that K&J had had no right to exclude MPC, the position might change.

On this point I also respectfully disagree with the judge. If a tenant successfully excludes his subtenant or licensee without taking court proceedings (as K&J did as regards Ms Melman), then the relevant breach may have been remedied, as it was as regards her position. However, if proceedings follow as a result of which the subtenant or licensee is let back in for a time, then it does not seem to me that the tenant can be regarded as having remedied the breach. The consequences of the agreements entered into on 13 May 2007 still persisted after 2 April 2008. I do not know more of the detail of the proceedings brought by MPC than appears from the judgments of Lindsay J and of Judge Bailey, but even if MPC was in breach of the agreement, K&J had not given the written notice required by the agreement to terminate it before excluding MPC. If, instead, K&J had applied for an injunction to exclude MPC, then it might be said that they had started to take the necessary steps to remedy the breach, and they might possibly have completed that task sooner than they eventually did. As it is, reliance on self-help depends on the tactics working. They did with Ms Melman but not with MPC. I would therefore hold that, by the time the second notice was served under section 146, K&J had not remedied the breach of clause 3(22)(a) which it committed by entering into the agreements dated 13 May 2007. It seems that it did not remedy that breach until it succeeded in getting MPC out after the county court trial, in May 2009, by agreement.

It follows that the second notice was valid and effective in relation to this breach of covenant, as the first had been in relation to the breach of clause 3(20)(a).

I therefore turn, finally, to the question whether K&J should be granted relief from forfeiture. I do so on the footing that K&J had committed a breach of clause 3(20)(a) of the lease, by virtue of the use of Flat 2 by Ms Melman for the purposes of prostitution, and by virtue of Mr Albright’s failure to take any steps to check on or investigate the position when he had sufficient reason to suspect such use, from PC Rickard’s telephone call early in November 2007. This was not a breach which the law regards as remediable, but K&J had at least succeeded in removing Ms Melman from the premises by early March 2008 and the flat had been re-let to a new subtenant against whom no improper imputation was made. I approach the question of relief also on the basis that K&J had committed a breach of clause 3(22)(a) by its arrangements with MPC in May 2007, and had not brought these to an effective end, so as to remedy the breach, by the time of the trial, though it was able to do so shortly afterwards.

Judge Bailey considered whether relief should be granted in either of these respects, in case a different view were taken from his on the issues of breach. He held that relief should be granted in each respect.

As regards immoral user he said at paragraph 100 that Mr Albright was not immediately responsible for the prostitution, that he had ejected Ms Melman, that there had been no more prostitutes in the flat, no further police action had taken place, and no stigma attached to flat 2. He did comment that:

“The nature of Tottenham Court Road is well known. It is not a road where such a stigma could easily attach to particular premises.”

He went on to remark at paragraph 102 that “one can be as confident as one can be that no such stigma has indeed attached” and at paragraph 105 he referred to the re-letting of the flat and there being no suggestion that the new tenant has been pestered by clients of the former prostitute tenant.

His observations about the absence of stigma amount to a finding of fact in K&J’s favour. Mr Small sought to challenge that finding, but that seems to me unarguable. The facts and matters to which the judge referred at his paragraph 100 are clear and relevant. Of course, I have disagreed with him on a point to which he does not refer in that paragraph, namely that Mr Albright was at fault in not acting on the reasonable grounds for suspicion that he acquired early in November 2007. However, since the premise on which the judge addressed the question of granting relief was (implicitly) that there had been an irremediable breach, because of that failure on Mr Albright’s part, what he said about the grant of relief has to be understood as taking that factor into account.

Another factor which the judge considered to be relevant applies also to relief against the other breach of covenant. As to that, the judge said at paragraph 184 that

“the essential rule is that the applicant should remedy any breaches or pay compensation if they are remediable and where there is a breach of a negative covenant undertake to observe the covenant in the future.”

As appears from what I have said, I disagree with the judge’s view that K&J had already remedied the breach of clause 3(22)(a) by the time of the trial, to which he referred at paragraph 184 immediately after the passage which I have just quoted: “As I have said, K&J Restaurants have thrown Mr Leale out”.

He also referred to the importance of the premises, and in particular the restaurant, for K&J as a financial asset, and to the submission for K&J that to have to give up possession to the Claimants would be out of all proportion to any damage suffered in consequence of the breach.

At paragraphs 101 and 102 he considered expert evidence as to valuation, in order to assess Ms Holland’s argument that vacant possession would give the Claimants a very substantial windfall, because of the length of the lease, despite its five-yearly rent reviews. At paragraph 102 he said that, even on the lowest of the figures, “there is a substantial profit which would accrue to the claimants should they obtain vacant possession, a profit out of all proportion to any stigma that may attach to the premises”. The judge referred back to this at paragraph 186 in relation to the other breach.

The judge rejected a submission by Ms Holland that the Claimants were motivated by the opportunistic desire for a windfall. However he went on to say at paragraph 188:

“The essential merits of the submissions by Ms. Holland still stand even if the motivation alleged by her is not made good. This was not a wilful breach. There is certainly no lasting damage to the landlord and taking not only the alienation covenant but combining it with the covenant against immoral user, considering both together, this is a case where, were it necessary to do so, I would consider it appropriate to grant relief.”

For the Claimants, Mr Small argued that the judge was wrong in principle to hold that relief should be granted because it was only in the most exceptional circumstances that relief could ever be granted for a breach involving immoral use of the premises, and this case did not qualify according to that test, and because the breach of clause 3(22)(a) was wilful and involved concealment from the Claimants of the true position, and also because both breaches were very serious.

He is able to rely on a number of comments by judges in previous cases involving immoral user in breach of covenant which show a strong aversion against the idea of granting relief in such cases. One of the more recent is that of Millett J in Ropemaker Properties Ltd v Noonhaven Ltd [1989] 2 EGLR 50 at 56K:

“The mere fact that the breach in question involves immoral user does not in itself preclude the court from granting relief … It will, however, be only in the rarest and most exceptional circumstances that the court will grant relief in such a case, particularly where the breach of covenant has been both wilful and serious. The defendants’ breaches in the present case were of the utmost gravity; they represented a deliberate and continuing disregard of their obligations under the lease. Despite the weighty considerations which tell against the granting of relief, however, I have come to the conclusion that this is an exceptional case in which relief should be granted.”

Mr Small relies on the second sentence in that passage, whereas Ms Holland points to the grant of relief by the judge despite what he said in the third sentence. It does not seem to me that a comparison of the facts of one case, in which relief was or was not granted, with those of an instant case in which the same question arises, is at all useful. One cannot tell enough about the facts of any given case, even from so clear a judgment as that of Millett J, to make any real comparison, even if such a comparison were, in principle, a relevant exercise.

I accept that the court is reluctant, and sometimes very reluctant, to grant relief against forfeiture for a breach involving immoral use of premises. There have even been dicta to the effect that relief cannot be granted in the case of such a breach of covenant, but that has not prevented the grant of relief in other cases, for example by Millett J in Ropemaker Properties Ltd v Noonhaven Ltd. This may be attributed to a disapproval of the particular breach and also to the risk of stigma affecting the premises. It may be exacerbated by particular circumstances, such as the blind eye that Millett J held had been turned to the use of the premises in question in that case. It may be alleviated by other circumstances, such as disproportionate financial consequences.

Mr Small submitted that the Court of Appeal should exercise the discretion as regards relief afresh, having got this far, because although the judge expressed a view as to what he would have done if he had held that there were breaches of covenant, inevitably he had not been able to take into account the factors to which the Court of Appeal would attach importance in coming to the conclusion that there had been breaches.

What the judge said about the grant of relief was not, of course, part of the grounds for his decision, because the question did not arise on his finding that there had not been any breach of covenant. It is, however, often salutary for a trial judge to address such points, albeit on a contingent basis, in case a different view is taken on other points and so as to avoid or reduce the risk of a need to remit the case after a successful appeal. Although I know of no authority on the point, it seems to me that the correct approach to a point which does not in fact arise for decision, because of the judge having decided the case on a prior issue, but on which the judge has stated and explained how he would have decided it if it had arisen, should be the same as applies to points which are directly part of the basis of the judge’s decision. Findings of fact can only be challenged on the basis of there being no evidence to justify them. A judge’s statement as to how he would, in certain events, have exercised his discretion is to be respected unless it can be shown to be flawed on the normal grounds of error of law or misdirection. This point was not in dispute between the parties, because Mr Small’s argument was that the judge had erred in law. For that reason the point was not debated in Counsel’s submissions. There may be a range of different possible cases, according to how briefly or fully a judge explains the basis on which he would have decided the case in the alternative. I do not seek to lay down a general rule. For present purposes, however, it seems to me right to approach the judge’s observations about whether, in principle, it would be right to grant relief from forfeiture on the footing that that was an exercise of his discretion, albeit contingent, which is only to be interfered with on the relevant principles which are well-established, as if it had been part of the basis for his decision of the case. Only if the contingent exercise can be shown to have been flawed would it be for the Court of Appeal to decide how the discretion should be exercised.

The judge considered the question of relief from forfeiture separately as regards each alleged breach: at paragraphs 100 to 105 in relation to illegal and immoral user, and at paragraphs 184 to 188 as regards sharing occupation. I have dealt with both breaches first, but nothing turns on that. The two breaches are quite distinct from each other. There is no question of any cumulative effect, or of the whole being more than the sum of the parts, so to speak.

I can find nothing in the judge’s treatment of relief from forfeiture on the ground of the use of Flat 2 for prostitution which shows any misdirection or error in principle. As I have said at paragraph [73] above, the question could only arise if there had been an irremediable breach of covenant. Therefore Mr Albright had to be regarded as not having acted with sufficient diligence once he had reason to suppose that the flat was being used for prostitution. That is the premise (albeit not expressly stated) of the judge’s conclusion as to relief in relation to this breach. On that basis, it seems to me that the judge had regard to all relevant factors, and did not take into account any irrelevant factor, nor did he misdirect himself in law in any way, nor is his conclusion plainly wrong. However strong the disinclination on the part of court to grant relief against forfeiture in the case of a breach of this kind, there are precedents for it, and it seems to me that the judge’s decision is not outside the ambit within which reasonable disagreement is possible. The judge’s finding that there is no stigma to the premises resulting from the use of flat 2 for prostitution is a significant factor, without which it might not have been legitimate to grant relief.

So far as the arrangements about the restaurant with MPC are concerned, and Mr Small’s argument that these were wilful breaches, and that they were designed to conceal the true position, his difficulty is the lack of findings of fact on which he can base those contentions. The judge commented at paragraph 142 that Mr Albright and his solicitors regarded the confidentiality clause as standard, and he rejected at paragraph 144 the suggestion that this provision should attract suspicion and concern as to the legitimacy of the arrangements. He said it was, from Mr Albright’s perspective, a very sensible provision. That clause cannot be used to show a culpable intention to conceal as opposed to an understandable wish to keep one’s own business arrangements private. The judge also observed at paragraph 173 that Mr Albright was unaware that he could not sublet without permission from the Claimants. Accordingly, it does not seem to me that Mr Small can make good the imputations of deliberate breach or of concealment of breach in this respect. Nor can it be said that this breach was especially serious in itself.

What Mr Small can rely on is not only that the arrangements were in breach of covenant, but also that they had not been put right by the time of the trial, because MPC was still in occupation, running the restaurant. Though this position changed after the trial and before the appeal came on, the breach was unremedied at the time when the judge had to consider whether or not to grant relief. The judge had held that there had been no breach and also that, if there had been, it had been remedied when Mr Albright excluded MPC. In discussing relief under this head he recognised the importance of the tenant remedying any breach, in the passage which I have quoted at paragraph [74] above, but the sentence which I have set out at paragraph [75] above shows that his consideration of relief in this part of his judgment was on the basis that the breach had already been remedied. In that respect, as it seems to me, but in no other, his reasoning about the grant of relief was incorrect. This was a material factor which he failed to take into account. Accordingly, it seems to me that his decision that he would have granted relief from forfeiture in respect of this breach was legally flawed and incorrect. It is therefore open to the Court of Appeal to consider whether relief against forfeiture should be granted in respect of this breach, and if so on what terms.

In my judgment, it is appropriate to grant relief against forfeiture to K&J, in respect of the breach of the covenant in clause 3(22)(a), on suitable terms. The factors which seem to me to make it right include those identified by the judge. The main points are as follows.

At the time of the trial, there was a significant obstacle to the grant of relief, namely that MPC had not been removed from the premises. It seems to me that, if the judge had approached the case on what I consider to be the correct basis, it would have been right for him to consider the grant of relief, but he could not properly have granted it immediately, or at any rate not unconditionally, and he would have to have deferred a final decision until it was seen whether K&J could remove MPC from the premises. Before long it did so. That would have made it possible for the judge to grant relief. We know that that did happen, so that our consideration of the question of relief does not need to be contingent, as the judge’s might have been.

The judge could properly have required undertakings from K&J not to repeat either of the breaches of covenant of which, as it seems to me, he should have found K&J to have been in breach. He referred to that at paragraphs 100 and 184, from which I take it that, if he had proceeded as far as dealing with the case on the basis of granting relief, he would have required such undertakings.

The judge said nothing about whether he would have made the payment of costs a condition of the grant of relief. I do not think that he can be treated as having decided that he would not have imposed any such condition. In my judgment this is a point which the judge left open, and it is for the Court of Appeal to consider what, if any, condition should be imposed in that respect upon the grant of relief from forfeiture, since that is now the decisive point.

Mr Small submitted that, if relief was to be granted at all, it should be on terms that K&J should pay the costs of the proceedings. In support of that he referred to a later passage in the judgment of Millett J in Ropemaker Properties Ltd v Noonhaven Ltd, already cited, where he said, at [1989] 2 EGLR 57F, that, but for a late offer made by the defendants, he would have given the claimants the whole of their costs of the action, on the standard basis. In fact he gave the claimants their costs up to the time of the offer, and the defendants theirs after that time. Mr Small further submitted that the general practice was that a tenant who resisted possession proceedings only by obtaining relief from forfeiture should be required to pay the landlord’s costs of the proceedings, and these should be quantified by assessment on the indemnity basis. Ms Holland argued that no such term should be imposed in any event, and that if any costs were to be paid they should assessed on the standard basis, and they should not be the whole of the costs, given that substantial parts of the trial were devoted to points on which the landlord had failed.

Woodfall’s Law of Landlord and Tenant deals with this issue at paragraph 17.174. It says that a term as to payment of costs is common, though it does not support payment on the indemnity basis rather than the standard basis, and it recognises that the court has a discretion which may be affected by matters such as the course of the proceedings and the reasonableness of the landlord’s attitude.

The imposition of a term as to payment of costs as a condition of obtaining relief has a different significance from making an ordinary order for costs against the tenant under CPR Part 44, because, if the costs are not paid, the tenant does not obtain relief, whereas under an ordinary order for costs, the sanctions for non-payment are the ordinary processes of enforcement.

In Egerton v Jones [1939] 2 KB 702, where mortgagees of a lease sought to intervene in a landlord’s action for forfeiture against the tenant, the Court of Appeal held that the mortgagees had to pay the landlord’s costs on the solicitor and client basis, rather than the party and party basis. Sir Wilfred Greene MR said that this was required on the principle that the landlord should be indemnified against proper expenses reasonably incurred, which party and party costs would not give them. The solicitor and client basis was later called the common fund basis, and in Grangeside Properties v Collingwoods Securities [1964] 1 W.L.R. 139 it was said that the normal practice was to require payment on that basis, though in that particular case a different order was made because of the peculiar circumstances of the litigation.

In paragraph 17.174 of Woodfall it is suggested that, when the old bases, including party and party and common fund costs, were replaced by the modern classification of standard and indemnity costs, the equivalent of common fund costs was the standard basis. In Southern Depot v British Railways Board [1990] 2 EGLR 39 Morritt J awarded indemnity costs. His judgment as reported does not explain why he did so in terms, although it reveals a number of features which would have pointed in that direction, including the fact that two of the three breaches relied on were wilful and that the chairman of a relevant company (Mr Robert Maxwell) had written a seriously misleading letter to the chairman of British Railways Board in connection with the dispute.

In Billson v Residential Apartments Ltd (No 1) [1992] 1 AC 494 at 541 Lord Templeman held that it was wrong to award costs on the indemnity basis against a tenant who failed in his application for relief against forfeiture. He also deprecated the imposition of a term for obtaining relief as to the payment of indemnity costs, as a general practice. He said:

“But it seems to me that in principle a tenant should not be at the mercy of an order made by a judge who has no means of knowing the effect of the order and imposes no impartial criterion by which costs can be taxed down.”

That suggests that Lord Templeman may have misunderstood the effect of an order for the payment of costs on the indemnity basis. Such an order does permit the taxation of costs and provides impartial criteria for the determination of the amount payable. Before 1999 the criterion was set out in RSC Order 62 rule 12(2). Now it is to be found in CPR Part 44 rule 44.4(1) and (3).

Mr Small relied on a passage from the judgment of Chadwick LJ in Bland v Ingrams Estates Ltd (No 2) [2001] EWCA Civ 1088 at paragraph 14, as follows:

“Third, the object of the court when granting relief is to put the lessor (as well as the lessee) back in the position in which he would have been if there had been no forfeiture – see Egerton v Jones [1939] 2 KB 702, 706. It is this principle which underlies the practice of requiring the applicant, as a term of relief, to pay the costs properly incurred by the lessor in connection with the re-entry and the proceedings for relief. Accordingly, the applicant will normally be required to pay the lessor’s costs of the forfeiture proceedings, save in so far as those costs have been increased by the lessor’s opposition to the grant of relief, upon appropriate terms – see Howard v Fanshawe [1895] 2 Ch 581, 592, and Abbey National Building Society v Maybeech Ltd and another [1985] Ch 190, 206. Prima facie, the costs which the applicant will be required to pay to the lessor as a term of obtaining relief will be assessed on an indemnity basis; if it were otherwise the lessor would not obtain the indemnity against proper expenses to which he is entitled – see Egerton v Jones [1939] 2 KB 702, 710. But, to the extent that costs have been increased by the lessor’s unnecessary opposition to the grant of relief, the normal rules apply: the lessor will normally be ordered to pay the applicant’s costs on the standard basis, and the applicant will be able to set those costs off against what he would otherwise be required to pay to the lessor as a term of obtaining relief from forfeiture.”

Chadwick LJ did not refer there to Billson, but the case had been cited, so I have no doubt that he was aware of what Lord Templeman had said. Factors such as those that I have mentioned at paragraph [99] above may have helped Chadwick LJ not to follow the suggestion made by Lord Templeman, and to refer to the award of indemnity basis costs as a normal requirement.

Ms Holland argued that at any rate there should not be an award in respect of all the Claimants’ costs because the judge said that he found much of Mr Leale’s evidence to be unreliable, and also that if any costs were awarded they should not be on the indemnity basis.

Of course the question whether any term as to relief should be imposed by way of a condition as to payment of costs will depend on the particular course of the proceedings and the conduct of each party. Thus, in Ropemaker Properties Ltd v Noonhaven Ltd, as already mentioned, the tenant made a relevant offer at a late stage of the proceedings which the judge considered that the landlord should have accepted.

It seems to me that it would have been appropriate in the present case for the judge to order K&J to pay all the costs of the proceedings as a condition of obtaining relief against forfeiture, especially as K&J was not yet in a proper position to seek relief, because MPC was still trading in the premises. I do not consider that the Claimants can properly be said to have been unreasonable in resisting the claim for relief from forfeiture, particularly as the breach of clause 3(22)(a) had not been put right. I would not qualify that term as to costs on the ground that not all of Mr Leale’s evidence was accepted. Having given closer consideration to the authorities on the appropriate basis of costs than was possible during the hearing of the appeal, I have come to the conclusion that the indemnity basis should apply as a general principle, despite what Lord Templeman said, and that there is nothing in the circumstances of the present case to make it appropriate either to adopt the standard basis or to disallow some part of the Claimants’ costs. As it seems to me, the factors which led the Court of Appeal in Egerton v Jones to decide in favour of a more generous basis of costs than party and party (which seems to me to be the equivalent of the modern standard basis) are still relevant as a general principle, and that normally this should require that the applicant for relief should pay the landlord’s costs on the indemnity basis, rather than only on the standard basis. I therefore consider that K&J should be required K&J to pay the Claimants’ costs of the proceedings at first instance on the indemnity basis as a condition of obtaining relief against forfeiture.

For the reasons I have given, my conclusion on the arguments presented to us at the hearing of the appeal is that I would uphold the judge’s order refusing to grant possession to the Claimants, but on a different basis. I would hold that K&J was in breach of covenant in both respects relied on by the Claimants, that the first breach was not remediable and that the second breach had not been remedied even at the time of the trial, so that both notices served under section 146 were valid. I would uphold the judge’s indication that he would have granted relief from forfeiture in respect of the breach of clause 3(20)(a). Exercising afresh the discretion whether or not to grant relief from forfeiture in respect of the breach of clause 3(22)(a), with the benefit of hindsight as regards MPC’s having eventually left the premises, I would be prepared to grant relief against forfeiture in respect of that breach. Because K&J would depend on that exercise of the court’s discretion in its favour to avoid an order for possession, and bearing in mind that K&J was able, not long after the time of the judge’s judgment, to remove MPC from the premises once and for all, I would require K&J to pay all the Claimants’ costs of the proceedings as a condition of obtaining relief (as regards both breaches of covenant), those costs to be assessed on the indemnity basis. I would also require K&J to give undertakings not to commit any future breach of either of the relevant covenants. Subject to the question what costs the Claimants should recover in respect of their costs of the appeal, payment of those costs should also be a condition of relief.

In response to the circulation of our draft judgment in advance of hand-down, we were made aware of an intervening change of position. On 30 September 2010 the parties executed a Deed of Surrender of the Lease, with immediate effect. Recital (3) to the deed states that the transaction “is entirely without prejudice to the parties’ position in the Proceedings [i.e. the claim and the appeal] and is not intended to affect the parties’ position in the Proceedings”. That position was stated, in summary form, as being that the Claimants asserted that the lease had been forfeited to them which K&J did not accept. Clause 4 of the deed provided for the payment of an agreed sum of money in an agreed manner, either as rent (if the lease had not been forfeited) or as mesne profits (if it had been). It also stated that “nothing in this Deed shall have any effect on the rights and obligations of the parties to the Proceedings”.

On the basis of this, Ms Holland submitted that, since her clients no longer wanted relief from forfeiture, they should not be ordered to pay costs on the indemnity basis, whether of the proceedings at first instance or of the appeal, because the principle as regards indemnity costs depends on it being required as a condition of obtaining relief.

I agree with the contrary submission for the appellants, to the effect that the Deed of Surrender cannot be relied on to support this submission, because that would mean that, despite its terms, it did affect the parties’ positions in the litigation. The terms of recital (3) and clause 4 referred to above seem to me to mean that we should decide the issues between the parties without regard to the deed, and on the footing that they are still maintaining the positions advanced during the hearing. I would accept that, having decided the points in principle, the formulation of the order should reflect the position as it now is. There is, for example, no point in requiring undertakings of K&J. But the principles of the disputes are to be decided without regard to the deed, and the issues of costs should also be decided on that basis.

For the Claimant, Mr Radley-Gardner asked the court to require K&J to pay costs below and of the appeal on the indemnity basis. Ms Holland submitted that the award should be on the standard basis, though she also asked the court to disallow the Claimants’ costs of one feature of the documentation for the appeal, namely the inclusion in the appeal bundles of the entire transcript of the hearing below. Her argument in favour of the standard basis was that her client was no longer seeking relief from forfeiture.

In my judgment the correct order is that K&J should pay, first, the costs below on the indemnity basis. At that stage they certainly were seeking relief from forfeiture, and on the reasoning set out above that is the basis on which the judge should have decided in their favour. Secondly they should also pay costs of the appeal on the indemnity basis, because during the appeal they maintained their contention that, if they lost on the issues of breach of covenant and the validity of the section 146 notices, they should nevertheless get relief from forfeiture. That is their position, preserved by the terms of the Deed of Surrender to which I have referred, and the order against them should be made on the basis of that being their position.

I agree with Ms Holland, however, that the inclusion of the transcript of the hearing below in the appeal bundles was entirely unnecessary. I would disallow the costs of that from those recoverable by the Claimants.

Furthermore, it seems to me that the order for costs in respect of the appeal ought to reflect the fact that the Claimants did not succeed in persuading the court that this was not a case for the grant of relief against forfeiture in principle. They succeeded on the points concerning the breaches of covenant and the validity of the notices served under section 146, and they also established that costs payable as a condition of relief against forfeiture ought to be on the indemnity basis, as a matter of principle. But their avowed objective was to obtain possession of the premises, and in that they would have failed (subject to compliance by K&J with the conditions for relief). Moreover, when Lady Justice Smith granted permission to appeal, she issued a warning on this very point. If the Claimants had wished to protect themselves they could have made an offer under Part 36 by which, subject to conditions including payment of indemnity costs, relief from forfeiture would have been agreed. Of course it is true that K&J could have made a corresponding offer itself. Neither party did. The upshot is that the Claimants are the successful party, but only up to a point. It is right to reflect that limitation on their success by awarding them a proportion, rather than the whole, of their costs of the appeal. I would fix that proportion as three quarters.

Applying those conclusions to the facts as they now stand, because K&J are no longer in possession and the lease has been brought to an end, the order only needs to record that the appeal is allowed, and to deal with the consequences in terms of costs. I would otherwise have allowed the appeal and have varied the judge’s order to record that K&J was in breach of covenant, in both respects, but that it was entitled to relief against forfeiture conditionally on (a) giving an undertaking against future breaches and (b) payment of the Claimants’ costs of the proceedings at first instance and of three quarters of their costs of the appeal, assessed on the indemnity basis if not agreed, as a condition of obtaining relief against forfeiture. As it is, I would set aside the judge’s order (apart from paragraph 5 which related to MPC, and paragraphs 6 and 7 which are spent) and instead I would order that K&J pay the Claimants’ costs of the proceedings below and three quarters of their costs of the appeal, to be assessed in detail on the indemnity basis if not agreed, subject to the disallowance from the Claimants’ costs of the appeal of the cost of including the transcript of the hearing below in the appeal bundles.

I agree.

I also agree.