Lease / licence distinction: relevance of lack of any reservation of rights in favour of the landlord

May 22, 2013

A tenant has a right to exclusive possession and can exclude others including the landlord. Thus, the fact that an agreement specifies certain limited rights of entry for the landlord reinforces the idea that the occupier has exclusive possession (Street v Mountford [1985] AC 809, 818 HL, (Lord Templeman)).

This can be turned on its head so that the absence of any such rights (in cases where one might have expected the licensor / landlord to have bargained for them) is an indicator that the occupier does not have exclusive possession (Essex Plan Ltd v Broadminster ((1988) 56 P & C.R. 353, 356 -7, Hoffmann, J.).

Michael Lower

Lease / licence distinction: sham has to be proved.

May 22, 2013

Lord Templeman made it clear that whether an agreement creates or a licence does not depend on the label but on the substance of the agreement between the parties (Street v Mountford ([1985] A.C. 809, HL). In the same spirit, the House of Lords judgments in A.G. Securities v Vaughan and Antoniades v Villiers ([1990] 1 AC 417, HL) make it clear that sham provisions (provisions that do not reflect the true intention of the parties) are to be ignored. Thus, a provision to the effect that the ‘licensee’ did not have exclusive possession and could be asked to share possession with others (including the licensor) could be ignored.

This does not mean, however, that a clause that provides that the landlord retains possession can simply be ignored. It is for the party arguing that it is a sham to prove that this is the case. Thus, in Essex Plan Ltd v Broadminster ((1988) 56 P & C.R. 353) Hoffmann J. would have been prepared to give effect to such a clause in the absence of proof that it was a sham (at 356 – 357).

Michael Lower

Exclusive occupation: licence granted as part of a ‘bigger picture. Lease or licence?

May 22, 2013

In Street v Mountford ([1985] A.C. 809, HL) Lord Templeman said:

”To constitute a tenancy the occupier must be granted exclusive possession for a fixed or periodic term certain in consideration of a premium or periodical payments.’ (818)

In two passages, however, Lord Templeman points out that there are exceptional cases where these factors are present but there is no tenancy. In the second of these, he says:

‘The intention to create a tenancy was negatived if the parties did not intend to enter into legal relationships at all, or where the relationship between the parties was that of vendor and purchaser, master and service occupier, or where the owner, a requisitioning authority, had no power to grant a tenancy.’ (821)

The ‘vendor and purchaser’ exception was explored in Essex Plan Ltd v Broadminster ((1988) 56 P & C.R. 353). In that case, the relevant agreement granted the occupier the right to call for the grant of a lease. During the option period, and until the option was exercised (if it was), the occupier had the benefit of a licence. The option was never exercised, but the occupier contended that the licence satisfied the Street criteria and was, in fact, a lease.

This argument failed. Although the Street factors were present, the licence fell within the vendor and purchaser exception. Hoffmann J. took the opportunity to explain the underlying rationale:

‘The option gave Essex Plan the right to call for the grant of the lease and therefore gave it in equity an immediate interest in the land. Its entry into occupation pending the exercise or expiry of the option was ancillary and referable to that interest. There is therefore no need to infer the creation of a tenancy which would give Essex Plan a different interest in the same land.’ (Hoffmann J, 356)

The occupation was primarily attributable to the equitable interest created by the option.

The same approach was taken in Cameron Limited v Rolls-Royce plc ([2007] EWHC 546 (Ch)). This time, the licence was contained in a conditional agreement for the grant of a lease. Here again, the occupier’s contention that the licence was actually a tenancy was unsuccessful.

Mann J. said:

‘As I have said, Mr. Small accepted that if the licence did not fall to be treated as a stand-alone document, then the vendor/purchaser exception to the prima facie Street v. Mountford position would obtain. He is right to accept that. I have come to the conclusion that this is plainly a case of a licence being granted in the context of the acquisition of the larger interest and, as such, the nature of the interest granted by Cameron and obtained by Rolls-Royce under the agreement itself and pending the grant of the lease is that of a licence only.’ ([26])

Michael Lower

Lord Neuberger on the Bruton tenancy

May 17, 2013

In Mexfield Housing Co-operative Ltd v Berrisford ([2012] 1 A.C. 955) Lord Neuberger said the following of Lord Hoffman’s judgment in Bruton:

‘The point being made by Lord Hoffman was that the fact that the tenant was only a licensee, and thefore could not grant a tenancy binding on its licensor, did not prevent the agreement with Mr. Bruton amounting to a tenancy as between him and the tenant. The tenancy would have been binding as such not only on Mr. Bruton and the trust, but also on any assignee of Mr. Bruton or the trust. The Bruton case was about relativity of title which is the traditional bedrock of English land law.’ ([65])

This is obiter but extremely interesting. The first sentence is a description of the principle to emerge from Bruton. The remaining two sentences contain a model as to how the Bruton tenancy fits into the leasehold world. Lord Neuberger is saying that the tenancy in Bruton was not merely a souped up contractual licence (souped up in the sense that the extra implied rights of a tenant were available to Mr. Bruton as against London Quadrant). It was a tenancy also in the sense that assignees of either party would stand in the shoes of the original parties so that there is a privity of estate.

The Bruton tenancy is placed firmly in the realm of the proprietary estate in land. Lord Neuberger explains that this is possible because it is an example of the relativity of title.

It is not clear how this idea (the final sentence of the above passage) is compatible with Lord Hoffman’s own view that Mr. Bruton did not have an estate in land (Bruton v London & Quadrant Housing Trust [2000] 1 A.C. 406, 415). It is arguable that Lord Hoffman saw Mr Bruton as having a contract with some lease-like features but that he did not necessarily see it as being a lease in the rather fuller sense described here by Lord Neuberger.

Michael Lower

Certainty of term and periodic tenancies

May 15, 2013

A lease must be granted for a term that is certain (Say v Smith (1563) 1 Plowden 269, 75 E.R. 410, Lace v Chantler [1944] K.B. 368, Prudential Assurance Co Ltd v London Residuary Body [1992] 2 A.C. 386). This is equally true of periodic tenancies as the Supreme Court affirmed in Mexfield Housing Co-operative Ltd v Berrisford ([2012] 1 A.C. 955). Periodic tenancies meet the certainty of term requirement because there is certainty as to when notice to quit can be given and, once it has been given, as to when the lease will end (Mexfield Housing Co-operative Ltd v Berrisford [2012] 1 A.C. 955, [87] (Baroness Hale)).

The parties to a periodic tenancy can agree to fetter the right to serve a notice to quit by, for example, stipulating that notice will not be served for a certain period of time. So long as this time itself is for a specified period then the tenancy is valid. If, however, the fetter endures for an uncertain period then the lease is void for uncertainty (Doe d Warner v Browne (1807) 8 East 165, 103 E.R. 305, Centaploy Ltd v Matlodge Ltd [1974] Ch. 1, Mexfield Housing Co-operative Ltd v Berrisford [2012] 1 A.C. 955, [33] (Lord Neuberger M.R.)).

Where the terms of a periodic tenancy give a right to serve notice to quit at a time that is uncertain, the first question is whether, as a matter of construction, the parties intended that it should be the only mechanism for bringing the lease to an end. It may be that the parties intended that this should be in addition to the normal implied right to bring the periodic tenancy to an end by giving one period’s notice. In such a case, the tenancy is valid even though there is an additional, uncertain fetter (Attorney-General v Sun Lee Godown Ltd [1968] HKLR 116).

Where, as in Mexfield Housing Co-operative Ltd v Berrisford ([2012] 1 A.C. 955) the right of one or both of the parties is subject to an uncertain contingency then the lease cannot take effect as a periodic tenancy.

In Mexfield it was held that the common law position in England was that an uncertain lease amounted to a lease for the tenant’s life, determinable before then if the contingency arose. Section 149(6) of the Law of Property Act 1925 converts such leases into leases for 90 years determinable on the death of the original lessee.

In Mexfield, the Supreme Court was of the opinion that if a periodic tenancy is void because the right of at least one of the parties is subject to an uncertain fetter, it can nevertheless take effect as a contractual licence as between the original parties determinable in accordance with its terms Mexfield Housing Co-operative Ltd v Berrisford [2012] 1 A.C. 955, [58] – [63] (Lord Neuberger M.R.)). This was obiter but is in line with the earlier English Court of Appeal decision in Joseph v Nettleton Road Housing Co-operative Ltd ([2010] EWCA Civ 228, CA (Eng)).

Michael Lower

Implied periodic tenancies

May 7, 2013

A periodic tenancy is one which continues from period to period indefinitely until determined by proper notice (see, for example, Javad v Aqil [1990] 2 EGLR 82, CA (Eng) Nicholls L.J.). Whether or not a periodic tenancy has been created depends on the intention of the parties which can be express or implied.

Implied periodic tenancies typically arise where a landowner allows another to occupy his property while accepting an obligation to pay rent at regular intervals but where the parties have failed to fully express their intentions as to the terms of the contract between them. The courts have then to consider whether they intended a periodic tenancy, some other form of tenancy (such as a tenancy at will) or a licence.

The categorisation of the arrangement can have practical consequences for the parties (concerning, for example, the way in which it is to be brought to an end). The distinction can be even more important in jurisdictions where periodic tenants have statutory rights that are not afforded to licensees or tenants at will.

Modern English authorities emphasise that, in general, whether the parties intended a periodic tenancy or some other arrangement is an open question. Where the parties have failed to express their intention with sufficient clarity, the courts seek to discover the intention from the relevant factual matrix. The question is whether it is right and proper to infer from all the circumstances of the case, including the payments, that the parties had reached an agreement for a tenancy (Longrigg, Burrough and Trounson v Smith ([1979] 2 EGLR 42, CA (Eng); Vaughan-Armatrading v Sarsah (1995) 27 H.L.R. 631, CA (Eng); Greenwich LBC v Regan (1996) 72 P & C.R. 507 at 512, CA (Eng); Burrows v Brent LBC [1996] 1 W.L.R. 1448, 1454, HL (Lord Browne-Wilkinson)).

The English courts have considered whether the only relevant intention is the objective intention of the parties (what a reasonable person would infer as to their intention from the parties’ words and actions) or whether purely subjective intentions (uncommunicated but actually harboured by one or both of the parties) might also be relevant (Brent LBC v Cronin (1998) 30 H.L.R. 43, CA (Eng). The English Court of Appeal has expressly left this question open (Dreamgate Properties Ltd v Arnot (1997) 76 P & C.R. 25, CA (Eng)).

It is for the person alleging the existence of an implied periodic tenancy to show, on the balance of probabilities, that this is what the parties intended. There is now no presumption of a periodic tenancy whenever it is established that a person was allowed into possession and pays rent at some specified interval (Javad v Aqil [1990] 2 EGLR 82).

The fact that rent is payable at certain specified intervals is an important factor and may well indicate that the parties had in mind a periodic tenancy (the period coinciding with the intervals between payment dates) (see Wing Hang Bank Ltd v Fast King Ltd [2001] HKEC 1385, [14] CFI for an example). The payment of rent at specified intervals is, however, only one factor and there may be other relevant circumstances which lead to the conclusion that no periodic tenancy was intended ((Javad v Aqil [1990] 2 EGLR 82, 84 CA (Eng) Nicholls L.J.).

Implied periodic tenancies can arise where a fixed term lease comes to an end and the tenant remains in possession and makes one or more rent payments after the end of the term (which will typically follow the arrangements for the payment of rent contained in the expired fixed term tenancy). This context forms part of the relevant factual matrix when the court seeks to discover the parties’ intentions since the terms of the expired fixed term lease provide part of the material that the court can use in its attempt to decide on the terms of an implied periodic tenancy.

If the tenant holds over and pays rent at the same intervals as before, the court might be persuaded that the parties intended to create a periodic tenancy and that the relevant period is to mirror the arrangements for payment of the rent contained in the defunct fixed term tenancy (Ladies Hosiery and Underwear Ltd v Parker [1930] 1 Ch. 304; Adler v Blackman ([1953] 1 Q.B. 146, 150 CA (Eng), Somervell L.J; Ford Chung v Ho Kwai Man [1959] HKLR 12, 16 (Gregg J.)).

Michael Lower

Service occupiers: who is in possession?

March 27, 2013

Introduction

Street v Mountford ([1985] A,C. 809, 826 – 7) decided that a person who had exclusive possession of property for a certain term is a tenant. Lord Templeman referred, however, to cases in which an occupier had (or appeared to have) exclusive possession but in which there was no lease. One of these exceptional cases was ‘occupancy pursuant to a contract of employment or occupancy referable to the holding of an office.’ (Street v Mountford [1985] A.C. 809, 826 – 7). In such cases, the employee is in possession in a representative capacity; the employer is in possession through the occupation of the employee (see Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1729 – 30 (per Lord Diplock). The employee is a licensee rather than a tenant.

For an employee to occupy property as the employer’s representative, it is not enough that a landowner employs the person who lives in the landowner’s property (Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1730 (per Lord Diplock). This article looks at the tests that have been developed to settle the question as to whether the employee is in possession on his own account or on behalf of the employer.

The cases dealing with this question occur in a range of contexts. Some are landlord and tenant cases (Norris v Checksfield [1991] 1 W.L.R. 1241, CA (Eng); Wragg v Surrey County Council ([2008] EWCA Civ 19, CA (Eng)). The question can also be relevant, however, in other contexts such as income tax (Langley v Appleby [1976] 3 All E.R. 391), rating (Glasgow Corporation v Johnstone [1965] A.C. 609, HL; Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, HL) or electoral registration (Fox v Dalby (1874 – 75) L.R. 10 C.P. 285). The content and application of the tests described below are consistently applied across these contexts.

The tests

Where an employee occupies property of the employer, it is the employer, rather than the employee, who is in possession where either (i) the occupation is necessary for the performance of the employee’s duties or (ii) the employer requires the employee to occupy the property and the occupation materially assists the employee in the performance of his duties (is for the better performance of those duties) (see, for example, Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1722 (per Lord Upjohn). In either event, the question is one of the true contract between the parties. The ultimate question is whether the provision of the accommodation is part of the employee’s remuneration (in which case the employee is in possession) or whether occupation of the property is part of the consideration given by the employee to the employer (in which case the employer is in possession).

The rationale

Lord Diplock explained how it is that the occupation of the employee can be treated as that of the employer:

 ‘Because the relationship of master and servant entitles the master to control the way in which his servants perform their duties on the premises, the power of control of the day to day use of the premises which is the legal characteristic of “occupation” of premises remains in the master.’ (Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1730)

The employee’s seeming control of the property is subordinated to, or inextricably connected with, the employer’s right to control or give directions. Thus:

 ‘[T]he general right of control by the master of the way in which the servant shall perform his duties as a servant which is implicit in the legal relationship of master and servant is sufficient in law to retain in the master the “occupation” even of a dwelling-house if his servant’s use of it as such is a duty which he has undertaken to perform under his contract of service.’ (Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1732 (per Lord Diplock).

Necessity (test 1)

The employee’s occupation will be treated as being that of the employer where an obligation to occupy the property can be implied on the basis that such an implied term is necessary to give business efficacy to the contract. Such an implied term will not be found where it is merely advantageous that the employee should occupy the property (Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1722 (per Lord Upjohn) and 1733 (per Lord Diplock).

 The requirement to occupy the property (test 2)

For an employee to occupy property as the employer’s representative it is not enough that there is an express term of the contract of employment requiring the employee to live in the property if the obligation to live in the property is separate from (collateral to) the performance of the employee’s other duties to the employer  (Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1731 (per Lord Diplock). The fact that only employees are allowed to live in the employer’s property (that the occupier was chosen because he was an employee is also irrelevant (Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1732 (per Lord Diplock).

The requirement can be satisfied even in the absence of an express contract term requiring the employee to live in the property if the requirement is the result of the exercise of a power given to the employer under the terms of the contract or the employee’s general terms of service (Langley v Appleby [1976] 3 All E.R. 391, 411 (per Fox J.)

The requirement to occupy and the agreement as to the employee’s duties that are materially assisted by such occupation can arise after the commencement of the employment relationship (Norris v Checksfield [1991] 1 W.L.R. 1241, CA (Eng)).

Better performance of the employee’s duties (test 2)

Where there is an express requirement that the employee occupy the property, there is no test of necessity: the fact that the duties can still be performed without the occupation does not settle the matter. The requirement must, however, be imposed for the better performance of the employee’s duties. It must materially assist the employee in the performance of the duties imposed by the contract of employment. As Lord Diplock explained:

‘[T]he servant’s obligation to reside must be attributable to and form an integral part of the relationship of master and servant created by a contract of employment because it is only by virtue of that relationship that the master retains sufficient control of the day to day use of the premises to amount to “occupation” of them by him in law.’ (Commissioners of Valuation for Northern Ireland v Fermanagh Protestant Board of Education [1969] 1 W.L.R. 1708, 1731)

 The phrase, ‘for the better performance of his duties’  invites a consideration of the parties’ intentions when including the express term in the contract. The intention is an objective intention: there is a need for a real, objective link between the requirement and the better performance of the duties (Wragg v Surrey County Council ([2008] EWCA Civ. 19, CA (Eng)), [40] (per Richards L.J)). That is, the contractual requirement to occupy the property must not be capricious (Glasgow Corporation v Johnstone [1965] A.C. 609, 629 (per Lord Guest)). There must be ‘a sufficient factual nexus between the commencement of the occupation of the premises and the employment which would benefit from that occupation.’ (Norris v Checksfield 1 W.L.R. 1241, 1245 (per Woolf L.J.).

‘Better’ does not mean ‘efficient’. It is a true comparative. The question is whether the inclusion of the term rests on a reasonable judgment that performance of the duties would be materially assisted by the occupation (better with the occupation than without it) (Wragg v Surrey County Council ([2008] EWCA Civ. 19, CA (Eng)), [48] (per Richards L.J)). Richards L.J. gives guidance on relevant considerations (Wragg v Surrey County Council ([2008] EWCA Civ. 19, CA (Eng)), [46] (per Richards L.J)).

Street v Mountford

March 21, 2013

Introduction

Lord Templeman’s judgment in Street v Mountford ([1985] A.C. 809) was an authoritative restatement of the defining characteristics of a lease. It provided clarity as to the factors that distinguish the lease from the contractual licence. In Street itself, this mattered because of the protection afforded to tenants (but not to licensees) by the Rent Acts. That such a restatement was necessary was due to the fact that certain Court of Appeal decisions (for example, Marchant v Charters [1977] 1 W.L.R. 1181, 1185 (per Lord Denning M.R.)) had muddied the waters by denying that the presence or absence of exclusive possession was the central issue.

Street v Mountford

Mr. Street entered into an agreement under which Mrs. Mountford would, as Mr. Street conceded, have exclusive possession of two rooms in a property owned by Mr. Street. The agreement described itself as a licence. It ended with a clause declaring that the parties did not intend to create a lease. Mrs. Mountford applied for the registration of a fair rent under the Rent Acts. Mr. Street sought a declaration that Mrs. Mountford was a licensee. The House of Lords (Lord Templeman giving the main judgment) held that Mrs. Mountford was a tenant since the agreement provided for her to have exclusive possession for a term and at a rent.

The essential elements of a lease

Lord Templeman explained the essential elements of a lease:

‘To constitute a tenancy the occupier must be granted exclusive possession for a fixed or periodic term certain in consideration of a premium or periodical payments.’ (Street v Mountford [1985] A.C. 809, 818).

Lord Templeman also said that ‘the only intention which is relevant is the intention demonstrated by the agreement to grant exclusive possession for a term at a rent.’ (Street v Mountford [1985] A.C. 809, 826). The Court of Appeal later explained that Lord Templeman had not intended to suggest that the payment of a rent was an essential characteristic of a lease (Ashburn Anstalt v Arnold [1989] Ch.1, 9 -10, Fox L.J.). Thus, one is left with the statement that the essential elements of a lease are exclusive possession and certainty of term. This is consistent with nearly all previous authority in England and in other jurisdictions (see, for example, Radaich v Smith (101) CLR 209).

Exclusive possession

To say that occupation by a tenant is exclusive possession, while that of a licensee is not, is to invite the accusation of circular reasoning or of simply replacing one term with another without explaining either. The court has ‘to ascertain the nature and quality of the occupancy’ (Street v Mountford [1985] A.C. 809, 825). Thus, Lord Templeman went further and sought to offer guidance as to how exclusive possession differs from the right to occupy enjoyed by a licensee:

‘The tenant possessing exclusive possession is able to exercise the rights of an owner of land, which is in the real sense his land albeit temporarily and subject to certain restrictions. A tenant armed with exclusive possession can keep out strangers and keep out the landlord unless the landlord is exercising limited rights reserved to him by the tenancy agreement to enter and view and repair.’ (Street v Mountford [1985] A.C. 809, 816).

The guidance offered here is that a tenant is one who (under the terms of the lease) has the control rights associated with ownership. In particular, the tenant has the right to exclude others (including the landlord).

This right to exclude others is compatible with (and may even be reinforced by) the fact that there are limited exceptions (such as the reservation of easements or a landlord’s right to enter for certain limited purposes) (Street v Mountford [1985] A.C. 809, 818). If, however, the landlord’s obligations require unrestricted access on his part then there is no exclusive possession and the agreement is a contractual licence (Westminster City Council v Clarke [1992] 2 A.C. 288). The result is that the licensee (a lodger perhaps), ‘is entitled to live in the premises but cannot call the place his own.’ (Street v Mountford [1985] A.C. 809 818).

Importance of a proper understanding of the agreement: labels and shams

The agreement in Street described itself as a licence. At the foot of the agreement was the following declaration made by Mrs. Mountford:

‘I understand and accept that a licence in the above form does not and is not intended to give me a tenancy protected under the Rent Acts.’

Lord Templeman had to consider whether these facts should carry any weight in the analysis. He leaves no room for misunderstanding on this point: it is entirely a question of whether, properly construed, the agreement offered exclusive possession for a certain term (Street v Mountford [1985] A.C. 809, 823 and 826). The parties ‘cannot turn a tenancy into a licence merely by calling it one.’ (Street v Mountford [1985] A.C. 809, 821). The court should, ‘be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy.’ (Street v Mountford [1985] A.C. 809, 825. See also A.G. Securities v Vaughan and Antoniades v Villiers [1990] 1 A.C. 417). There is a slightly troubling statement in National Car Parks Ltd v Trinity Development Co (Banbury) Ltd ([2001] EWCA Civ. 1686) to the effect that, when making the lease / licence distinction, some weight might be given to the label employed by two professionally advised parties with equal bargaining power.

The lease as an estate in land

Lord Templeman takes it for granted that a lease is always an estate in land. At the very beginning of his judgment he explains that if the agreement created a tenancy then Mrs. Mountford had acquired a legal estate in land (Street v Mountford [1985] A.C. 809, 814).When the court ascertains the nature and quality of the occupancy with a view to seeing whether or not exclusive possession has been granted, the ultimate question is ‘to see whether the occupier has or has not a stake in the room’ (Street v Mountford [1985] A.C. 809, 823). Is the degree of control that the occupier can exercise in accordance with the terms of the agreement so extensive as to amount to ownership for the time being? Is the land ‘his land albeit temporarily and subject to certain restrictions’? Or, by contrast, is the occupier a mere licensee with the result that he ‘cannot be said to own any estate in the land’? (Street v Mountford [1985] A.C. 809, 816).

Lord Templeman’s express understanding, then, is that the lease is always an estate in land. In Bruton v London & Quadrant Housing Trust ([2000] 1 A.C. 406), however, the House of Lords decided that the lease need not be an estate in land. Once there is an agreement that offers exclusive possession for a term then a lease has been created. This is true even though the ‘landlord’ has no estate in land (is himself a licensee for example). Paradoxically, a literal reading of Street has resulted, in the eyes of some commentators at least,  in a blurring of the distinction between the lease and the contractual licence. The paradox is that Lord Templeman had insisted that the grant of exclusive possession for a term would be what distinguished the lease (an estate in land) from the contractual licence (a non-proprietary arrangement).

Exceptional cases

Lord Templeman states that while exclusive possession is an essential element of a lease, an occupier with exclusive possession is not necessarily a tenant (Street v Mountford [1985] A.C. 809, 818). In discussing these special cases, Lord Templeman draws a distinction between ‘conduct which negatives an intention to create legal relations’ and ‘special circumstances which prevent exclusive possession from creating a tenancy’ (Street v Mountford [1985] A.C. 809, 822). The former category catches informal arrangements where a landowner allows someone else (perhaps a family member or friend) to occupy property but where there is no contractual intent (as in Marcroft Wagons Ltd v Smith [1952] 2 K.B. 496).

As for the latter category, Lord Templeman says:

 ‘Sometimes it may appear from the surrounding circumstances that the right to exclusive possession is referable to a legal relationship other than a tenancy. Legal relationships to which the right of exclusive possession might be referable and which would or might negative the grant of an estate include occupancy under a contract for the sale of land, occupancy pursuant to a contract of employment or occupancy referable to the holding of an office.’ (Street v Mountford [1985] A.C. 809, 826 – 7)

It would have been better to say that while the occupier in such cases might appear to have exclusive possession, the reality is that he does not. One reason for saying so is that it would have avoided any blunting of the message that a person enjoying exclusive possession as a result of an agreement with a landowner is a tenant. Another reason is that the occupiers in these exceptional cases do not have exclusive possession at all. One who occupies property between contract and completion will do so either as licensee or as tenant; either is possible and whether a lease or licence has been created will depend on the terms agreed between the parties. In the other two cases mentioned, it would be appropriate to say that the occupier is there on behalf of the employer or the organisation in which he holds an office. It is the employer or organisation which is in exclusive possession through its employee or office-holder.  In fact, this is the explanation given by Lord Templeman himself earlier in the judgment (Street v Mountford [1985] A.C. 809, 818).

Michael Lower

Faculty of Law

The Chinese University of Hong Kong

Herbert v Doyle: certainty and the common intention constructive trust

February 22, 2013

Introduction

Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 requires agreements for the sale or other disposition of an interest in land to be in writing and section 2(3) requires the written agreement to be signed by or on behalf of the parties to the agreement. Land contracts that do not comply with section 2(1) are invalid. Section 2(5), however, provides that resulting, implied or constructive trusts are not subject to these formality requirements.

The common intention constructive trust arises when A, the owner of an estate in land, enters into an agreement with B to the effect that B will have a beneficial interest in respect of that estate and B relies on that agreement to his detriment (Lloyds Bank v Rossett [1991] 1 AC 107, p. 132). While the common intention constructive trust often arises in the domestic context, it  can arise even out of commercial bargains entered into between sophisticated business people. The necessary agreement can even arise when the parties have negotiated a detailed formal agreement which they expect to be in a form that would comply with section 2(1) but which does not do so. This seems surprising since the constructive trust then seems to offer a relatively easy way to by-pass the formalities requirements of section 2.

In fact, it is not so easy to persuade a court that the agreement necessary to the common intention constructive trust has been formed. If the parties intend to enter into a formal written agreement, their failure to do so will usually be a signal that the parties were still negotiating and that their mutual assurances were, in effect, ‘subject to contract’. If some details of the informal agreement have not been fully articulated and agreed upon, there may be an argument that the ‘agreement’ is not sufficiently certain or complete to be made enforceable by means of the common intention constructive trust.

In Herbert v Doyle ([2010] EWCA Civ 1095), the English Court of Appeal had to consider whether a commercial land contract that did not comply with section 2 nevertheless gave rise to a constructive trust. The facts of the case required the court to examine the degree of certainty required for the purposes of the common intention constructive trust. It also had to decide whether the parties intended to be bound by their mutual assurances.

The facts in Herbert v Doyle
Mr Herbert was the freehold owner of a house and large garden. Mr Doyle and Mr Talati owned the freehold of a neighbouring property in which they carried on their practice as dental surgeons. Mr. Herbert got planning permission to build houses on the garden of his property. To carry out the development, Mr Herbert needed to acquire some of the parking spaces on his neighbours’ land.

In essence, the parties agreed to a land exchange; Mr Doyle and Mr Talati were to have title to car parking spaces on Mr Herbert’s land. In return, they would convey car parking spaces on their land to Mr. Herbert. Mr. Herbert was also to grant leases of two other parts of his land to them. Mr. Doyle and Mr. Talati were to pay a premium to Mr. Doyle. These terms had been agreed in principle in February 2003. It was, however, in April 2003, when Mr. Herbert was getting ready to begin the development work, that the parties had a further meeting at which they agreed that these terms would be immediately binding upon them despite the lack of the anticipated formal written contract. This arrangement was altered as a result of two later variations that the parties agreed. Other variations were discussed but these discussions did not lead to any further agreed variations.

Mr. Herbert later decided that he did not wish to proceed with the agreement. The question was whether the April 2003 agreement gave rise to a constructive trust so that it could be enforced by Messrs. Doyle and Talati notwithstanding the failure to comply with section 2(1).

Cobbe-compliant?
Mr. Herbert argued that the conditions for the creation of a common intention constructive trust were not satisfied. Arden L.J. identified the essence of what the House of Lords had said in Cobbe v Yeoman’s Row Management Ltd ([2008] 1 WLR 1752) about the element of certainty required:

‘[I]f the parties intend to make a formal agreement setting out the terms on which one or more is to acquire an interest in property, or, if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified, neither party can rely on constructive trust as a means of enforcing their original agreement.’ (Herbert v Doyle [2010] EWCA Civ 1095 [57]

There had to be clarity both as to the intention to be bound and as to the interest in property that is the subject matter of the trust. Mr. Herbert contended that each of these types of certainty was lacking as regards the April 2003 agreement.

Intention to be bound or mere agreement in principle?
Was this a case, like Yaxley v Gotts ([2000] Ch. 162) in which the parties intended to be bound by an informal agreement? Or was it, like Cobbe, one in which the parties regarded themselves as being bound in honour only until a formal written agreement had been prepared and signed? The judge at first instance had found that the April 2003 agreement was not ‘subject to contract’  and that the parties intended to be bound by it. Arden L.J. regarded this as being surprising but thought that there was no basis on which the Court of Appeal could hold that this conclusion was clearly wrong (Herbert v Doyle [2010] EWCA Civ 1095 [79]).

Certainty as to the relevant property and terms
The April 2003 agreement could only give rise to a constructive trust if the relevant property and the terms of the agreement were sufficiently certain. While the number of spaces to be transferred by Mr. Herbert to Messrs. Doyle and Talati had been agreed in April 2003, one of the spaces had not been. The Court of Appeal upheld the decision at first instance to the effect that the parties had impliedly agreed that the court could identify a suitable space if Mr. Herbert refused to do this himself (Herbert v Doyle [2010] EWCA Civ 1095 [71] – [72]). The way to this conclusion was eased by the fact that the judge at first instance had found that the agreement was to transfer ‘reasonably accessible parking spaces on the site, so far as possible adjacent to [Mr. Herbert’s property].’ As Morgan J. (sitting in the Court of Appeal) pointed out, when the judge at first instance nominated a space, he did no more than to give effect to the term that the parties had already agreed (Herbert v Doyle [2010] EWCA Civ 1095 [87]).

Second, the fact that the parties continued to negotiate after the April 2003 had been reached did not mean that the April 2003 agreement was not sufficiently certain at the time when the parties’ property interests were agreed (Herbert v Doyle [2010] EWCA Civ 1095 [73]).

The April 2003 agreement provided for Mr. Herbert to grant leases of parts of his property. He argued that the terms of these leases had not been agreed and so there was a lack of certainty in this respect too. This failed since it had been agreed that the terms of these leases would follow the terms of an existing lease between the parties (Herbert v Doyle [2010] EWCA Civ 1095 [76]).

The question is whether the parties intended to be bound by their assurances
As Arden L.J. remarked, there is something surprising about the idea that the common intention constructive trust can be based on a sophisticated commercial agreement negotiated by experienced business people. Its more natural home is the agreement between a co-habiting couple as to how the beneficial ownership of their home is to be shared between them. In this domestic context it is easy to understand that the parties might be reluctant to reach a formal agreement when so much depends on trust and where even to raise the question of ‘shares’ seems incongruous. Herbert v Doyle is a striking illustration of the fact that in either context the question is ultimately whether each party was entitled to believe that their legal rights and duties had been affected by the agreement. Must the parties be taken to have gone past the negotiation stage of the discussions? Did they have an intention to create legal relations?

Inconsistent with principle?
Tanney (Anthony Tanney, ‘Constructive trusts to grant leases: have we not been here before?’, (2012) 16 L. & T. Review 53) has expressed some doubts as to whether the agreement in Herbert v Doyle can properly be thought of as a common intention constructive trust. Tanney questions whether this development is consistent with principle.

First, while it is true that an enforceable land agreement gives rise to an equitable interest (Walsh v Lonsdale (1882) L.R. 21 9 Ch.D. 9) the agreement in Herbert v Doyle was not enforceable since it did not comply with section 2(1). Second, some aspects of the agreement in Herbert v Doyle required the grant of new leases; that is they were agreements for the grant of new estates in land rather than for the sharing of the beneficial ownership of an existing interest. Where the enforceable contract is for the grant of a lease, the equitable interest relates not to the reversion but is a new equitable interest. Typically, however, the common intention constructive trust arises out of an agreement to share an existing interest in land.

Proprietary estoppel the appropriate remedy
Concerns have been expressed, then, as to whether all aspects of the agreement in Herbert v Doyle could all be properly take effect as a common intention constructive trust. Were it not for section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989,  Herbert v Doyle could have been dealt with as a proprietary estoppel claim; Mr. Herbert had encouraged his neighbours to believe that they would acquire an interest in land and they had relied on that assurance to their detriment. Since Yaxley v Gotts ([2000] Ch. 162), however, the courts have thought it necessary, in the case of some types of informal land bargain, to think only in terms of the common intention constructive trust. The saving  for constructive trusts in section 2(5) has led to doubts as to whether there is any room for proprietary estoppel to work in relation to agreements concerning land.

Owen and Rees (Gwilim Owen and Osian Rees, ‘Section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989: a misconceived approach?’ [2011] Conv. 495) argue that this concern is misconceived. Proprietary estoppel is entirely independent of contract and proprietary estoppel claims do not engage section 2(1). Cases like Herbert v Doyle could more easily be dealt with as proprietary estoppel claims.

Michael Lower
Faculty of Law
The Chinese University of Hong Kong

Proprietary estoppel in contract-like settings

February 7, 2013

I have just posted a brief note on SSRN on the operation of proprietary estoppel in contract-like (or bargain) cases. It is available here. In Yaxley v Gotts and Kinane v Alimamy Mackie-Conteh, the English Court of Appeal had to consider agreements for the grant of an interest in land that did not comply with the need for a written contract (or the exchange of written contracts) bearing the signatures of both parties (section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989). The claimant in each case relied on proprietary estoppel. In each case, the court held that section 2(1) was engaged but that the arrangement also constituted a constructive trust and so fell within section 2(5). In the rather earlier case of E.R. Ives Investment Ltd v Highhowever, estoppel operated on similar facts even though this seemed to give effect to a contract that ought to have been registered in accordance with the Land Charges Act 1925 but had not been. The note considers these contrasting approaches.


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