Hawkesbrook Leisure v The Reece-Jones Partnership

This is the hearing of a preliminary issue ordered by Deputy Master Lloyd on 4^th July 2003.

The issue arises in proceedings by the claimant, Hawkesbrook Leisure Limited, against the defendant solicitors, the Reece-Jones Partnership, for damages for negligence.

The alleged negligence was in connection with the retainer of the defendants to obtain the renewal under the Landlord and Tenant Act 1954 Part II (“the 1954 Act”) of a lease of a sports ground (“Fairlop”), at Forest Road, Fairlop, Hainault, Redbridge (“the Fairlop Lease”), and a lease of a sports ground (“Langley Park”), at Langley Park, Beckenham, Bromley (“the Langley Park Lease”).

The defendants, pursuant to the retainer, served notices on the landlord under both Leases, London Regional Transport (“LT”), pursuant to s.26 of the 1954 Act.

The defendants did not, however, apply to the County Court for new tenancies within the time limit specified in s.29(3) of the 1954 Act, that is to say, not less than two and not more than four months after service of the s.26 notices.

Hawkesbrook claims that it has suffered loss and damage by reason of that failure.

On the issue of liability, the defendants do not admit that Hawkesbrook was in occupation of Fairlop and Langley Park for the purposes of a business within the meaning of s.23 of the 1954 Act, and so do not admit that Hawkesbrook was entitled to the protection of the 1954 Act.

The preliminary issue ordered by Deputy Master Lloyd is as follows:

S.23 of the 1954 Act is, so far as relevant, in the following terms:

Hawkesbrook is a company limited by guarantee without a share capital. Its objects are set out in clause 3 of its memorandum of association (“the Memorandum”). Clause 3(a)(i) of the Memorandum is as follows:

Clause 4 of the Memorandum prohibits the distribution of profit to the members. It provides:

Clause 5 of the Memorandum provides that the liability of the members is limited. Clause 6 of the Memorandum provides that every member undertakes to contribute on winding up an amount, not exceeding £1, towards payment of the Company’s debts and liabilities and the costs, charges and expenses of winding up.

Mr Philip Harvey, Hawkesbrook’s secretary and chief executive, has made a witness statement for the purposes of the hearing of the preliminary issue. The facts and matters of which he gives evidence are not in dispute. Mr Harvey’s evidence, so far as material, is as follows.

Hawkesbrook was incorporated on 22^nd January 1996. It was established in order to run a number of sports grounds and social clubs in Greater London (“the Sports Grounds”), the freeholds of which were and continue to be owned by LT.

Until the 1990s the Sports Grounds were used almost exclusively by LT staff for sports and social purposes and were subsidised financially by LT. Each of the Sports Grounds consisted of a number of sports facilities, for example football pitches and cricket squares, and a clubhouse which could be used in conjunction with the sports facilities, for example for food and drinks after the sporting fixture, or separately, for example, for a party or other social function.

In the mid 1990s LT made a strategic decision that it no longer wished to subsidise the Sports Grounds or maintain them for the exclusive use of LT staff, but it would let each of the Sports Grounds on leases as an investment, and allow them to be available to the general public, as well as LT staff, on a normal commercial basis.

LT asked the club chairman of each of the Sports Grounds to form a company, which would then take a 5-year lease of each of the Sports Grounds from LT.

Hawkesbrook was therefore formed to take the leases of Fairlop and Langley Park as well as premises at Wembley, Hornchurch and North Cheam. In each case the lease was for 5 years, and the contractual term expired in April 2001.

Thereafter Hawkesbrook acquired further premises in Acton and Motspur Park, also comprising sports and social facilities similar to those at Fairlop and Langley Park. Hawkesbrook also purchased the Stilebridge Inn, a public house and restaurant in Maidstone, Kent, in 1999.

The Sports Grounds, including Fairlop and Langley Park, were and are all operated in a similar way. The office at each of the Sports Grounds is open between 8 am and 11 pm seven days a week. Prospective customers either telephone or visit in person to book the function room or hire sports facilities. At the time of booking, Hawkesbrook takes a deposit, with final payment being due 7 to 14 days prior to the event. All revenue derived from bar takings, catering services and booking fees are entered onto a computer system and manually onto cash sheets on a daily basis. They are then balanced up at the end of the week, normally Sunday, and subsequently all monies are deposited in Hawkesbrook’s bank account on Monday morning.

Each of the Sports Grounds operates a membership system. Membership is open to any member of the general public over 18 years of age. Members can either purchase just a social club membership (around £15), or can also (for an additional fee of £18) become a sports member, which allows them to hire sports pitches. In order to hire any of the facilities at the Sports Grounds, it is necessary to become a member, but membership is, as I have said, open to the general public, and it is possible simply to become a member for the purpose of hiring the facilities on a one-off basis, and indeed this frequently happens. Such a customer then, in common with the other members, is invited to renew membership on an annual basis, and many do so.

When Hawkesbrook took over the running of the Sports Grounds, LT became a paying customer like any other, and did not benefit from any discounted rates for hire of the facilities. Bookings placed by LT now account for only 10% of the total at the Sports Grounds, and this was also the case at Fairlop and Langley Park towards the end of the Fairlop Lease and the Langley Park Lease respectively.

Hawkesbrook’s major customers at Fairlop and Langley Park included Elite Motorcycle Training, which used the facilities for the purpose of giving motorcycle lessons, and the Old Balonians Association, which hired the sports pitches on a weekly basis at Fairlop.

Hawkesbrook advertised Fairlop and Langley Park and their facilities in such publications as ‘Scoot’ and ‘Yellow Pages’. Bookings were obtained through those means, as well as through word of mouth.

Fairlop and Langley Park were, therefore, throughout the duration of the Fairlop Lease and the Langley Park Lease available to any member of the public (subject to becoming a member) to hire for any appropriate function, such as a wedding reception or party, or a sports match and associated social function.

Hawkesbrook is registered for Value Added Tax. The turnover at Fairlop was in the region of £250,000 in 2001, and at Langley Park was in the region of £350,000 for the same period. Hawkesbrook’s turnover is and was generated largely by the charge paid by its customers to hire the facilities and also by the sale of food and drink. Hawkesbrook buys food and drink from wholesale suppliers and sells it to consumers for a higher price, to include a profit margin.

Hawkesbrook had around 100 staff, both full time and part-time, before it vacated Fairlop and Langley Park, following which the staff of those two clubs, twenty-five people, were made redundant.

There are currently five directors of Hawkesbrook. They are able to claim expenses from Hawkesbrook, but are not paid a salary. Nor do they receive any form of dividend. Mr Harvey meets the board of directors at monthly meetings at which strategic business decisions as to the future running of each Sports Ground and the company are discussed. Mr Harvey is the only full-time company officer and the only one to receive a salary.

While Hawkesbrook was and is a non-profit making organisation, in the sense that no dividends are paid and there are no issued shares, the profit made is reinvested in the business by continually upgrading and refurbishing the Sports Grounds and their facilities. Mr Harvey’s evidence is that Hawkesbrook has always been run with the aim of generating a surplus, to be ploughed back into the business and to improving the Sports Grounds, for example by resurfacing the sports pitches or refurbishing the clubhouses.

The rival contentions of the parties on the preliminary issue can be simply stated.

Mr Christopher Stoner, counsel for Hawkesbrook, submits that, in the light of the unchallenged evidence of Mr Harvey, Hawkesbrook was plainly occupying Fairlop and Langley Park for the purposes of a business within the meaning of s.23 of the 1954 Act. It was carrying on a trade there.

Mr Glenn Campbell, counsel for the defendants, submits that Hawkesbrook was not carrying on a business at Fairlop or Langley Park because Hawkesbrook was not and is not carrying on business with the predominant intention of making money, but rather with the predominant intention to maintain the facilities at the Sports Grounds. The point is put simply as follows in paragraph 11 of Mr Campbell’s skeleton argument:

A convenient starting point is Town Investments Limited v Department of the Environment[1978] AC 359. In that case the House of Lords considered the application of Orders made under the Counter-Inflation Acts 1972 and 1973 to premises let initially to the Minister of Works and then to the Secretary of State for the Environment for occupation by civil servants. Each of the relevant counter-inflation Orders contained definitions of “business tenancy” and “business” which for all material purposes mirror the relevant parts of s.23(1) and (2) of the 1954 Act. Lord Diplock said, at page 383:

The House of Lords held that, in view of the mischief at which the Counter-Inflation Acts 1972 and 1973 and the Orders made under them had been aimed, namely to curb inflation, a broad construction was to be given to “business” in the definition of the tenancies to which the Orders of 1972 and 1973 applied, and that it should be interpreted as widely as it would be in covenants and leases restricting the user of demised premises. The House of Lords held, accordingly, that that interpretation was wide enough to include the purposes for which the premises in question were occupied by the Crown, so that the premises were occupied for the purposes of a business within the meaning of the counter-inflation Orders.

I would observe, at this juncture, that Mr Campbell did not suggest that the activity carried on by Hawkesbrook at Fairlop and Langley Park would not have been in breach of a restrictive covenant against use of those premises for business or trade. It manifestly would have been.

Further, he did not suggest any reason for interpreting the words “business” or “trade” in s.23 of the 1954 Act narrowly, other than by reason of the words in s.23(2): “and includes any activity carried on by a body of persons…” His submission, which is plainly correct, is that those words were intended to provide that the expression “business”, for the purposes of the 1954 Act, has a wider ambit in the case of a body of persons than in the case of a single person.

In Customs and Excise Commissioners v Lord Fisher [1981] 2AER 147 Peter Gibson J had to consider the meaning and effect of s.45 of the Finance Act 1972, which provided that:

The case concerned VAT. Peter Gibson J said, at page 157:

In that case, the activity under consideration was the organisation and enjoyment of a shoot on the estate of the taxpayer, whose main hobby was pheasant shooting and who invariably invited friends and relations to join the shoot, asking them to make contributions towards the cost of the shoot. The taxpayer neither sought nor made any profit from the contributions. He himself made at least an equal contribution from his own pocket. It is in that context that Peter Gibson J referred, by way of contrast to the ordinary meaning of the word “business”, to “any activity which is no more than an activity for pleasure and social enjoyment.”

Once again, Mr Campbell did not dissent from Peter Gibson J’s elucidation of the ordinary meaning of the words “business, trade, profession and vocation”, but emphasised, correctly, that whether they are to be given that or a wider or narrower meaning must depend on the context.

In Re The Duty on the Estate of the Incorporated Council of Law Reporting for England and Wales(1888) 22 QBD 279 the Divisional Court had to consider whether the Incorporated Council of Law Reporting for England and Wales was established for a trade or business within the meaning of s.11(5) of the Customs and Inland Revenue Act 1885, and was therefore entitled to an exemption from the duty imposed by that section. Lord Coleridge CJ said at page 293:

Notwithstanding the eloquence of Mr Campbell, the defendants’ contention that Hawkesbrook was not in occupation of Fairlop and Langley Park for the purposes of carrying on a business is quite impossible to maintain.

At the heart of their case is the sole and simple proposition that Hawkesbrook cannot satisfy the requirements of s.23(1) and (2) of the 1954 Act because it cannot distribute its profit but can only apply the profit for maintaining, improving and enlarging its sporting facilities.

In my judgment, there is nothing whatever in the 1954 Act or the reported cases that would warrant such a narrow and artificial approach.

The conclusion from Mr Harvey’s evidence is that Hawkesbrook was and is carrying on a commercial enterprise with a view to making a surplus. It aims to make an accounting profit, but not to distribute it to its members.

It is no less carrying on a business than the Incorporated Society of Law Reporting in the case to which I have referred, and it has a greater commerciality than the business carried on by the Secretary of State for the Environment and the Minister of Works in Town Investments Limited. I see nothing in the 1954 Act or its purposes, which were intended to confer security of tenure on the vast majority of business tenants, which would warrant taking a more narrow and artificial interpretation than in those cases.

In particular, the fact that s.23(2) provides that business “includes any activity carried on by a body of persons…”, and so contrasting the meaning of “business” in the case of a single person, on the one hand, and its meaning in the case of a body of persons, on the other hand, does not lead to so narrow and artificial a meaning of the words “trade, profession or employment” as to exclude the commercial operations of Hawkesbrook. There are many activities which, through that extended definition applicable in the case of a body of persons, would be entitled to protection, even though they are not carried on commercially. That does not in any way lead to the conclusion that an enterprise which is carried on by a corporate body commercially, with a view to making a trading surplus, cannot be a business within s.23(2) of the 1954 Act merely because the surplus cannot be distributed to shareholders or members.

That is quite a different situation from, for example, that under consideration in Secretary of State for Transport v Jenkins [2000] 79 P&CR 118, in which the Court of Appeal considered whether the use of land as a community free farm, to which the members of the public had free access, was within the 1954 Act. In holding that the 1954 Act did not apply, Millett LJ (with whom the other members of the Court of Appeal agreed) said, at p.126:

By contrast, the activity carried on by Hawkesbrook at Fairlop and Langley Park was carried on with a view to making a profit or surplus, albeit not distributable to members, and it was carried on as a trading activity.

For these reasons I answer the preliminary issue in the affirmative.