Agricullo Ltd v Yorkshire Housing Ltd

This is an appeal by the claimant, Agricullo Limited, against the dismissal by HHJ Langan QC of the company’s claim to recover some £30,006.08 from its tenant, Yorkshire Housing Limited (“YHL”), under the terms of a lease of some premises known as Ryedale House at 3 Market Place in Pickering.

The premises were let to YHL under a lease dated 9^th November 2001 for a term of 29 years from 5^th November 2001. The demise comprises part of the ground floor and the whole of the first and second floors together with the roof and roof space. Under an earlier agreement of 9^th March 2001 YHL undertook to carry out certain works of repair and refurbishment to the premises with a view to their being sub-let as flats. The remainder of the ground floor was retained by Agricullo. This consists of shops which it sub-lets to commercial tenants.

The lease granted to YHL contains a tenant’s covenant to keep the premises in good and substantial repair and condition. The “Premises” are defined in the lease as including “the roof, roof void and all structural parts thereof” and “the floor boards or floors and the supporting joists thereof together with all structural parts including walls of the Building above the level of the joists supporting such floor boards or floors”.

Clause 9.3 of the lease provided that:-

“The Tenant shall pay to the Landlord, on demand, and on an indemnity basis, the fees, costs and expenses charged, incurred or payable by the Landlord, and its advisors or bailiffs in connection with any steps taken in or in contemplation of, or in relation to, any proceedings under section 146 or 147 of the Law of Property Act 1925 or the Leasehold Property (Repairs) Act 1938, including the preparation and service of all notices, and even if forfeiture is avoided (unless it is avoided by relief granted by the court);”

A dispute arose between the parties soon after the grant of the lease about the state of repair of the demised premises and, in particular, the roof. As a consequence, Agricullo on 6^th February 2003 served a s.146 notice on YHL which had attached to it a schedule of the alleged items of disrepair and the requisite notice advising YHL that it was entitled to claim the benefit of the Leasehold Property (Repairs) Act 1938 (“the 1938 Act”).

On 13^th February 2003 YHL duly served a counter-notice claiming the benefit of the 1938 Act. As a consequence, s.1(3) of the Act came into operation. This provides that: -

“(3)

Where a counter-notice is served by a lessee under this section, then, notwithstanding anything in any enactment or rule of law, no proceedings, by action or otherwise, shall be taken by the lessor for the enforcement of any right of re-entry or forfeiture under any proviso or stipulation in the lease for breach of the covenant or agreement in question, or for damages for breach thereof, otherwise than with the leave of the court.”

Leave is not to be given by the court unless the landlord can bring the case within one or more of the grounds specified in s.1(5). These include cases in which the lessor proves:-

“(a)

that the immediate remedying of the breach in question is requisite for preventing substantial diminution in the value of his reversion, or that the value thereof has been substantially diminished by the breach;

….

(d)

that the breach can be immediately remedied at an expense that is relatively small in comparison with the much greater expense that would probably be occasioned by postponement of the necessary work; or

(e)

special circumstances which in the opinion of the court, render it just and equitable that leave should be given.”

After a period of delay YHL did in fact commence works of repair in March 2005 which were finished on 22^nd July 2005. On 11^th May 2006 Agricullo issued proceedings for the recovery of the £30,006.08. This sum was made up of five heads of claim:-

Before Judge Langan Agricullo accepted that head (v) was a claim for damages which required the grant of leave under s.1(3) of the 1938 Act. But the other four heads of claim were, it contended, claims in debt which could be pursued without the grant of such leave.

The recoverability of heads (i) to (iv) turns on the construction of clause 9.3 of the lease. The judge accepted that if they fell within those terms then they were recoverable as a claim in debt on the authority of the decision of this court in Middlegate Properties Limited v Gidlow-Jackson [1977] 34 P&CR 4. But in their defence YHL took two main points. First they disputed the breaches of the repairing covenant alleged. Their case was that the s.146 notice served on 6^th February 2003 was based on a surveyor’s report which adopted an incorrect standard of repair and included defects which were not breaches of covenant at all. Secondly, they contended that clause 9.3 did not extend to costs incurred after the service of their counter-notice because that had the effect of preventing any further action by way of forfeiture or a claim for damages without the leave of the court and no such leave was either sought or obtained. The costs attributable to the period after 13^th February 2003 were not therefore costs “charged, incurred or payable by the landlord, and its advisors …. in connection with any steps taken in or in contemplation of, or in relation to, any proceedings under section 146 …”.

On 3^rd November 2008, following disclosure in the action, YHL conceded in correspondence that the s.146 notice had been validly served and that the only issue at the trial would be the quantum of the claim having regard to the limits set by clause 9.3. It was therefore agreed that the judge should be asked at the trial to determine various preliminary issues. One was whether YHL’s solicitors’ letter of 3^rd November 2008 had the effect of waiving reliance on the 1938 Act. The judge decided that issue against Agricullo and it does not form part of this appeal. The issue which is now the subject of this appeal was the construction of clause 9.3 in relation to costs incurred after the service of the counter-notice.

The costs in dispute are those incurred by Agricullo in dealing with matters arising from YHL’s breaches of the repairing covenant from the date of the counter-notice until the works were completed on 22^nd July 2005. Most of these were solicitors’ and surveyor’s costs concerning the repairs necessary to the building (and, in particular, to its roof), most of which seem to have been the result of sub-standard workmanship by the contractors engaged by YHL to convert the demised premises into flats. The resolution of the dispute does not turn, however, on a minute examination of whether each and every item of the solicitors’ and surveyor’s fees was properly incurred in connection with the s.146 proceedings. The argument for YHL was that, once the counter-notice was served, no further steps could be taken by Agricullo either to forfeit the lease or to claim damages without the leave of the court. Because no application for leave was made there never were nor could there be any proceedings in place either under s.146 or under the 1938 Act to which the costs or charges could relate.

Agricullo’s response was that the claimant never abandoned reliance on the s.146 notice which remained in place until the repairs had been completed even though it could not be used as the basis of proceedings without the leave of the court. The wording of clause 9.3 was, they contended, wide enough to allow Agricullo to recover fees and costs incurred after the service of the counter-notice without restriction as to period. Judge Langan preferred the arguments of YHL. He said in paragraph 24 of his judgment:-

“I confess to having found these arguments to be finely balanced. At the end of the day, with some hesitation, I prefer the construction placed on clause 9.3 by the defendant. The key, in my judgment, is that service of a counter notice did not necessarily deprive the claimant for all time of any costs which it might incur thereafter. If the claimant had applied for and obtained leave to bring proceedings for forfeiture and/or damages, then costs incurred in those proceedings would undoubtedly have fallen within clause 9.3. So too, I think, would the so called interim costs incurred between the date of the counter notice and the application for leave. But where, as here, a landlord decides to pursue methods of securing compliance with the repairing obligations of a tenant by means other than proceedings for forfeiture or damages, the costs of adopting that method are simply outside the words of clause 9.3.”

In support of the appeal, Mr Sterling submits that the judge clearly accepted that the costs incurred between February 2003 and July 2005 were all related to the carrying out of the defendant’s repairing obligations under the lease following the service of the s.146 notice. The judge’s view that these costs were not incurred in connection with or in relation to any “proceedings under s.146” is based on the fact that no such proceedings were commenced within that period nor could they have been without the leave of the court. But Agricullo was able to secure the carrying out of the works by YHL itself leaving it only to recover its solicitors’ and surveyor’s costs in that connection which it seeks to do by relying on clause 9.3. The phrase “proceedings under s.146” is capable of referring to the s.146 notice served by Agricullo and its subsequent attempts to secure compliance with the tenant’s covenants following the service of that notice.

Mr Sterling submits that the words “in connection with” are to be given a wide meaning such as “associated with”. The clause refers to steps taken “in contemplation of, or in relation to,” any proceedings under s.146. They are not limited to steps taken in the proceedings. The clause is therefore wide enough, he says, to include those attributable to the attempts made to enforce the covenants under the pressure generated by the s.146 notice because they were steps taken in relation to proceedings under s.146. Those words should be interpreted in a commercial way to include all of the costs which the landlord incurs from the time it decides to serve a s.146 notice to the time when that process ends.

Where one is dealing, as we are here, with a professionally drawn document it seems to me legitimate to assume that the lawyers acting for the parties chose their words with care. Clause 9.3 enables the landlord to obtain payment of the fees, costs and expenses it has incurred on an indemnity basis. These are the costs which Agricullo has incurred either directly or which have been charged by its advisors. In this case we are concerned only with the latter.

The clause then goes on to specify the source of those charges. I agree that the words “in connection with” are general words, but they merely serve to link the charges in question with the specified acts which follow. These are “any steps taken in or in contemplation of, or in relation to, any proceedings under s.146”. One can stop there because it is common ground that no steps were ever taken in proceedings under the 1938 Act or, I believe, in contemplation of such proceedings. No application for leave under s.1(5) was made in the period up to July 2005 or even as part of the proceedings issued in 2006.

So the issue is whether the costs of pursuing YHL in correspondence to do the repairs and of instructing surveyors to supervise and report on the works carried out are attributable to steps taken “in or in contemplation of, or in relation to, any proceedings under s.146”. Proceedings under s.146 are proceedings for the forfeiture of the lease which, to be effective, require (in cases of breach of covenant) the service of a s.146 notice. The lease is forfeited by the service of the claim form subject to the court’s power to grant relief or by peaceable re-entry where that is possible. It seems to me reasonable to assume that clause 9.3 was drafted with the provisions of s.146 in mind as well as those of the 1938 Act. It is clear from s.146(2) that the section is concerned only with the forfeiture of the lease and applies where the landlord is “proceeding by action or otherwise” to enforce a right of re-entry. The same phrase appears in s.1(3) of the 1938 Act.

It is common ground that no such proceedings were ever taken nor could they have been without the leave of the court under the 1938 Act. The work done by Agricullo’s solicitors and surveyors between February2003 and July 2005 cannot therefore have involved a step taken in such proceedings. To qualify under clause 9.3 it must have constituted a step or steps taken in contemplation of or in relation to any such proceedings. Mr Sterling relies on the latter. He says that the phrase “in relation to” is a term of the widest meaning but he has to accept that, however widely construed, the charges and expenses claimed for must still relate to proceedings under s.146. One therefore comes back to asking whether such proceedings were either in existence or in contemplation at the relevant time. The evidence of Agricullo’s solicitors prepared for the trial was that the period from February 2003 to July 2005 was taken up with persuading YHL to carry out repairs to the building and after March 2005 with ensuring that the repairs were properly carried out. There were a series of site meetings to discuss the complaints about the state of the premises prior to the service of the s.146 notice. After the service of the counter-notice further meetings took place to attempt to agree what needed to be done. Complications arose in relation to planning issues and listed building consent and there were disagreements about the specification of the necessary works and how they should be supervised. Ultimately, however, agreement was reached and the works were carried out, although there were issues even in this period about the rate of progress and the standard of the work. The works were scheduled to take five weeks, but in fact took fifteen.

This process, although not without its difficulties, was ultimately consensual. Mr Storey, the appellant’s solicitor, says in his witness statement that the work undertaken by YHL was a direct alternative to forfeiture proceedings and was undoubtedly due in part to the threat of such proceedings in the form of the s.146 notice. But, in my view, that is not enough to make the work carried out by the solicitors and the surveyors steps in contemplation of, or in relation to, proceedings under s.146. Faced with the tenant’s counter-notice, Agricullo had various options open to it. It could have applied under the 1938 Act for leave to bring proceedings relying on ground (a) in s.1(5). The repairs were probably serious enough for leave to have been given. Had it done so it could have recovered its solicitors’ and surveyor’s costs as costs in or in relation to those proceedings. Alternatively it could have exercised a right of entry reserved in clause 18 of the lease and have carried out the repairs itself. The costs associated with the works of repair would have been recoverable as a contractual debt under clause 18.1.3 of the lease without the need for leave under the 1938 Act: see Jervis v Harris [1996] Ch 195.

But, instead of taking either of these options, Agricullo decided to deal with the problem by negotiation. Whether this was done on legal advice or simply as a more sensible means of securing compliance, it took the steps subsequently taken by the solicitors and surveyors on Agricullo’s behalf outside the ambit of clause 9.3. There were no s.146 proceedings contemplated or in existence and none could be taken without the leave of the court. As a consequence, no steps (within the meaning of clause 9.3) were or could have been taken in relation to them. Clause 9.3 could have been worded by reference to the enforcement of the tenant’s repairing covenants. An example of such a clause can be found in the lease considered in Riverside Property Investments Ltd v Blackhawk Automotive [2005] 1 EGLR 114. Had that form of covenant been adopted these problems of construction would have been avoided. But we have to construe the clause as written and, in my judgment, the qualifying steps have to be linked in a real way to forfeiture proceedings in the sense described in s.146. I think Judge Langan was therefore right in his construction of clause 9.3.

The second issue, for which Agricullo seeks permission to appeal, is whether the judge was right to refuse Agricullo leave to bring proceedings to recover damages for the loss of rent under what was head (v) of its claim in the proceedings. As mentioned earlier, this claim was started as a claim in debt but it was accepted by the date of the trial that it was a claim in damages for which leave was required under the 1938 Act. On 29^th January 2009 Agricullo therefore issued an application notice seeking leave to bring the claim.

Before Judge Langan they accepted that the only ground for granting leave which was open to them was that under s.1(5)(e). This operates to give the court a residual power to grant leave where there are special circumstances which make it just and equitable to do so. Both limbs of the test require to be satisfied. Agricullo relied on two matters as constituting special circumstances. The first was the letter of 3^rd November 2008 in which liability for breach of covenant was admitted. The second was the argument that if leave was not given the claimant would be left without a remedy. The judge did not regard either as a special circumstance and therefore refused leave. Both were described by him as a circumstance of a most ordinary kind.

Like the judge I do not see how an admission that there had been breaches of the repairing covenant and that the s.146 notice had been validly served can operate as a special circumstance. That must be an every day occurrence in such situations and does not, of itself, put the case into a special or distinct category sufficient to qualify for leave where none of the other grounds are applicable. It is also entirely fortuitous and unconnected to Agricullo’s circumstances at the date of the application for leave which is when the conditions set out in s.1(3) fall to be tested. Agricullo ought to have sought leave when it commenced the action for the lost rent in 2006. The concession about the validity of the s.146 notice was not made until 2008.

Mr Sterling puts the matter more widely. He says that one needs to take into account the previous denials of liability, the fact that the admission was in effect forced out of YHL by the disclosure that it regarded their contractors as in breach of the building contract, the time taken to carry out the works of repair and the fact that the carrying out the works of repair have made it difficult, if not impossible, for Agricullo now to obtain leave to bring forfeiture proceedings. Unless leave is given Agricullo will have no effective remedy for the loss which it has suffered.

The real cause of Agricullo’s present difficulties is their decision to get YHL to do the work. This has meant that they cannot rely on ground (a) because the premises are now substantially in repair. It seems to me important to bear in mind that the 1938 Act was designed to greatly restrict actions based on breaches of repairing covenants during the term of the lease. All of the grounds up to and including ground (d) limit leave to cases where there is an obvious need for immediate action either in order to comply with a statute or because the breach is either too serious or too trivial to justify being left to the end of the term. Given that the measure of damages for breach of a tenant’s repairing covenant is limited to the diminution in the value of the landlord’s reversion (see Landlord and Tenant Act 1927 s.18(1)), the cases in which leave is to be granted in special circumstances ought, on principle, to be ones in which something out of the ordinary occurs to justify the immediate commencement of proceedings.

A recent example of this is the decision of Cox J in Landmaster Properties Limited v Thackeray Property Services Limited [2003] EWHC 959 where the judge gave leave under ground (e) for proceedings to forfeit the lease of a public house which had closed for business in 1998 and then had been vandalised and finally destroyed by fire. The landlord in that case owned other shops in the immediate vicinity which were affected by what had become a derelict site which encouraged vandalism and caused nuisance and annoyance to neighbouring premises. Her decision is readily understandable on those grounds. But in this case there is nothing in the circumstances outlined by Mr Sterling which, in my view, takes this case out of the ordinary. Agricullo could have made an application for leave as soon as the counter-notice was served and so avoided its present difficulties. I think that Judge Langan was entitled to come to the view that there were therefore no special circumstances justifying the grant of leave and I can see no grounds on which we can properly interfere with his decision.

I would therefore refuse permission to appeal against the judgment on this second ground and would dismiss the appeal.

I agree.

I also agree.