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||Neutral Citation Number:  EWCA Civ 1504
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM NORWICH COUNTY COURT
(HIS HONOUR JUDGE DARROCH)
||Royal Courts of Justice
||9th October 2006
B e f o r e :
LORD JUSTICE MUMMERY
LORD JUSTICE JACOB
LORD JUSTICE NEUBERGER
||- v -
||KEN THOMAS LTD
(DAR Transcript of
WordWave International Limited
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR E JOHNSON (instructed by Masseys LLP) appeared on behalf of the Appellant.
MR I RIDD (instructed by Frasers) appeared on behalf of the Respondent.
HTML VERSION OF JUDGMENT
Crown Copyright ©
- LORD JUSTICE NEUBERGER: This appeal, which has been cogently and economically argued on both sides, is from a decision of HHJ Darroch in the Norwich County Court. It raises three points. The first concerns the inter-relationship to the law of appropriation and that of waiver of forfeiture of leases. The second point relates to the inter-relationship of the law of voluntary arrangements and that of forfeiture of leases. The third concerns the terms on which relief from forfeiture should be granted for non-payment of rent.
- On 13 May 2004 the claimant, Mr John Thomas, let a substantial warehouse at Wisbech, Cambridgeshire, to Ken Thomas Ltd, a haulage contractor ("the company") under a lease ("the lease") for a period of 10 years. The rent payable under the lease for the first two years was £400,000 per annum, exclusive of VAT, and it was payable on the first day of each month.
- The lease included a right in favour of the landlord to re-enter the premises in the events, inter alia, of the rent being in arrear for more than 21 days, whether formally demanded or not, or of the tenant becoming "insolvent", which was defined as including the tenant being unable to pay its debts or a proposal being made for a voluntary arrangement under part I of the Insolvency Act 1986 ("the 1986 Act").
- Between April and October 2004 the company paid the rent but, contrary to its obligation, without any VAT. During Autumn 2004, the company got into financial difficulties, and it did not pay the rent due on 1 November 2004.
- By December 2004 the company had appointed KSA (ME) Ltd ("KSA"), to advise on its deteriorating financial situation. On 3 December 2004, Mr Campbell of KSA wrote to Mr Thomas informing him that the directors of the company had instructed KSA to prepare and propose a company voluntary arrangement (CVA) under the provisions of part I of the 1986 Act. The letter continued:
"With reference to our previous telephone conversation regarding the payment of the rent for the premises ... we are writing to inform you that Ken Thomas Ltd propose to make a payment of £19,583.00 on Tuesday 7th December 2004. This payment represents 50% of the rent for December 2004 including VAT. The balancing payment of £19,583.00 will be made on Tuesday 14th December 2004.
"However, with reference to the amount owed for the rent for November 2004, c£33,333.33, this will go into the CVA as an unsecured amount. In addition to the rent for November 2004, the amount outstanding for the VAT on the rent prior to 1 December 2004 will also go to the CVA as an unsecured amount. Any payment in relation to the above detailed amounts may constitute a preference under s239 of the Insolvency Act 1986 ...
"We anticipate that the CVA proposal will be circulated to all creditors within the next 21-28 days. If you are agreeable to a meeting in order to discuss this matter further please contact us in order to suggest a time and date which will be suitable to all parties."
- On or around this date the company received a rent demand from Mr Thomas, in respect of the rent due on 1 December 2004. On 6 December, Mr Thomas had a telephone conversation with Mr Campbell of KSA, on behalf of the company. Mr Thomas made it clear that he would not accept the allocation of the payments as described in the letter of 3 December, and that he would be accepting those payments on the basis that they were in respect of the rent due on 1 November 2004. In the ensuing discussion, Mr Thomas and Mr Campbell stuck to their respective positions. The payments proposed in the first paragraph of the letter of 3 December were duly made through the CHAPS system, ie direct from the company's bank account into Mr Thomas's bank account, in the amounts described in the 3 December letter. These sums were not returned and were retained by Mr Thomas.
- On 1 January 2005, Mr Thomas sent a rent demand for the rent due on 1 January 2005. On the previous day, 31 December 2004, Mr Campbell had sent Mr Thomas a letter in these terms:
"With reference to our telephone conversation earlier today we appreciate (and so do the directors of Ken Thomas Ltd) the opportunity to continue our dialogue in the New Year without any action being taken today to discuss and agree a payment structure which the company can afford to make, and you are agreeable to, with respect to the one month's rent that is due.
"We also take this opportunity to confirm that we have received an email from Mark Kirkman [a director of the company] stating that your bank should receive a payment of c9k today which is the first weekly payment of rent going forward, ie this payment will be in relation to rent for the first week in January 2005. The amount has been calculated by Mark by taking the annual rent figure and multiplying by 1/52. This payment has been paid by standing order, set out by Mark Kirkman."
- As I understand it, the proposal set out in that letter was and has been complied with, so that the company has been paying about £9,000 per week in respect of the rent due under the lease. In other words, it has been paying the rent in full, albeit weekly rather than monthly.
- Meanwhile, proposals for a CVA were being prepared by KSA, and they were sent to all creditors of the company, including Mr Thomas, on or about 2 February 2005. These proposals were lengthy. In summary, they explained that the only alternative to a CVA was liquidation of the company, and that the unsecured creditors of the company were likely to be much better off as a result of a CVA. Their anticipated dividend, according to the proposals, would be nil under a liquidation, and about 23p per pound under the proposed CVA. The CVA was intended, according to the proposals, to last for five years "unless completed earlier" and it was proposed that the creditors would receive a "monthly periodic payment" starting two weeks after the CVA was approved, and a further "profit related" payment, in respect of their respective debts.
- On 1 February 2005, Mr Thomas began the current proceedings, claiming to forfeit the lease on the basis of non-payment of one month's rent. The claim was also based on non-payment of the VAT on the rent in respect of the period from 1 May to 1 October 2004. On 10 March 2005, the CVA was approved at a meeting of the creditors of the company, which was attended by Mr Thomas, who voted against the proposal.
- Mr Thomas's action for forfeiture came on for hearing before HHJ Darroch in October 2005. There were four issues, one of which concerned the question of whether Mr Thomas was entitled to claim VAT on the rent. This was determined in his favour, and that determination is not challenged by the company on this appeal.
- The other issues, in summary terms, were as follows. 1) Had Mr Thomas waived the right to forfeit the lease for arrears of rent? 2) If he had not waived the right to forfeit, had he nonetheless lost the right to forfeit the lease for non-payment of rent by virtue of the CVA? 3) If he had not lost the right to forfeit the lease, on what terms should relief from forfeiture be granted?
- The judge gave judgment on 2 November 2005. He effectively determined all three questions in favour of Mr Thomas, holding that he had not waived the right to forfeit, that he was entitled to forfeit for non-payment of rent notwithstanding the CVA, and that the company should be granted relief if it paid the one month's rent due and all the VAT arrears, as well as Mr Thomas's costs which the judge assessed.
Had the right to forfeit been waived?
- I turn to the first argument, which is whether or not Mr Thomas had waived the right to forfeit. The company's case, that he had waived the right to forfeit, can be summarised in the following propositions:
1(a). The two payments made on 8 and 15 December 2004 were in respect of the rent due on 1 December 2004 (see the letter of 3 December 2004).
1(b). The four weekly payments made during January 2005 were paid in respect of the rent due on 1 January 2005 (see the letter of 31 December 2004)
2. Those payments were accepted by Mr Thomas and he is therefore bound by the terms of the two letters.
3. This means that the only rent outstanding, as at 1 February 2005 when the forfeiture proceedings were started, other than the VAT to which I have referred, was the rent due on 1 November 2004.
4. By accepting the payments in respect of the rent accruing due in December 2004 and January 2005 the landlord was unequivocally acknowledging the lease was in existence as at a) 1 December 2004 and b) 1 January 2005.
5. Accordingly, the landlord had waived his right to elect to forfeit the lease for the non-payment of rent due on 1 November 2004, which had arisen on 22 November 2004, 21 days after that rent fell due.
- If the first two propositions are correct, it seems to me that the other propositions follow. The failure to pay rent on 1 November 2004 was a "once and for all" breach in the sense that, once the right to forfeit in respect of it had arisen, any subsequent unequivocal affirmation of the continuation of the lease with effect from a subsequent date operated to waive the right to forfeit; see London & County Ltd v W Sportsman Ltd  1 Ch 764. Subsequent acceptance of rent, ie that due on 1 December 2004 and 1 January 2005, indeed any subsequent demand for rent at those dates, due as it was after 22 November 2004, are classic ways in which a landlord can waive the right to forfeit: see Segal Securities v Thoseby  1 QB 887 and Expert Clothing Services & Sales v Hillgate House  1 Ch 340.
- This is a very well-established if, to some people, a rather archaic rule. In this connection, the law is accurately summarised in Woodfall on Landlord and Tenant Vol 1 [2006 edition] at paragraph 17.095, in these terms:
"It is not necessary that the landlord should intend to waive the right to forfeit. If, objectively, his act recognises the continued existence of the tenancy, a waiver will result in respect of his intention. Thus the acceptance of rent because of a clerical error will amount to a waiver, as will the receipt of rent 'without prejudice', or under protest. It is a question of fact whether the money is tendered and accepted as rent, but once it has been decided that money was tendered and accepted as rent, the question that the right to forfeit has been waived is a question of law."
- Where, as here, the payment was made by banker's transfer, the position is a little more complicated, and again it is accurately summarised in Woodfall, this time at paragraph 17.098:
"Where the rent was paid into the landlord's bank account despite his instruction to the bank not to receive it, and the landlord took no steps to repay it to the tenant, it was held that there was sufficient acceptance to amount to a waiver. But it is considered that where rent is paid directly into the landlord's bank account (eg by banker's order) it is not accepted if the landlord rejects the payment or repays it as quickly as circumstances permit. It is considered that save in exceptional circumstances the receipt by the landlord of a cheque for the rent which he does not present for payment does not amount to waiver."
- Accordingly, it seems to me that the questions which arises in connection with this first point is whether (a) the two sums paid and received in December 2004 and/or (b) the four sums paid in January 2005 were paid and received in respect of rent due on 1 December 2005 and/or 1 January 2005, as the company contends.
- The company's case in this connection is based on the law of appropriation. The relevant principles are accurately set out in Chitty on Contracts, 29th Edition Vol 1 at paragraph 21.059-21.061:
"21.059: Rights to appropriate payments. Where several separate debts are due from the debtor to the creditor, the debtor may, when making a payment, appropriate the money paid to a particular debt or debts, and if the creditor accepts the payment so appropriated, he must apply it in the manner directed by the debtor; if, however, the debtor makes no appropriation when making the payment, the creditor may do so.
"21.060: Debtor's rights to appropriate. It is essential that an appropriation by the debtor should take the form of a communication, express or implied, to the creditor of the debtor's intention to appropriate the payment to a specific debt (or debts) so that the creditor may know that his rights of appropriation as creditor cannot arise. It is not essential that the debtor should expressly specify at the time of the payment, which debt or account intended the payment to be applied to. His intention may be collected from other circumstances showing that he intended at the time of the payment to appropriate to a specific debt or account. ....
"21.061: Creditors' right to appropriate. Where the debtor has not exercised his option, and the right to appropriate has therefore devolved upon the creditor, he may exercise it at any time "up to the very last moment" or until something happens which makes it inequitable for him to exercise it. [I omit the rest of the paragraph]."
- In this case, the company made it clear in advance through its agent, Mr Campbell, that it would be appropriating the two payments, made in December 2004, to the rent due on 1 December 2004 (see the letter of 3 December), and the four payments, made in January 2005, to the rent due on 1 January 2005 (see the letter of 31 December). The fact that Mr Thomas purported in clear terms not to accept it does not render the appropriation ineffective, in my opinion.
- First, it cannot be right that the creditor can deprive the debtor of his right to appropriate by unilaterally denying that the debtor's appropriation is valid or effective; the principle set out in paragraph 21.059 of Chitty would be of little value if it was otherwise. Secondly, if the debtor had validly appropriated the payment to one debt, the creditor cannot somehow effectively appropriate the payment to another debt. The payment must obviously be appropriated to the same debt as between both of them.
- Thus, it does not appear to me that, where a debtor communicates an appropriation in advance of a payment, it is open to a creditor to defeat the debtor's appropriation by challenging it, or disagreeing with it, before the payment is made. That appears to be the main ground upon which the judge found that the company's argument failed and that Mr Thomas was entitled to appropriate the payments made in December to the November rent.
- The judge said this in relation to the first payment made in December 2004:
"The payment, as I understand it, was on 8th December, but there was not, it seems to me an allocation at the time. It is more like an offer of acceptance case where the parties were bouncing terms backwards and forwards to each other. Mr Thomas made it very clear he did not accept the CVA, therefore he did not accept any such allocation as was proposed, therefore it is not possible to say that the rent has been allocated so as to leave the November rent in a vacuum.
"Having heard from Mr Thomas, having seen the correspondence, having considered that he is a businessmen with experience and clearly a wealthy man, owed large sums of money, I really do not think it plausible to say that he accepted the basis upon which the rent was being put forward. I therefore find there was no allocation at the time of payment and Mr Thomas' evidence, which was not in any way contradicted because I did not hear from Mr Campbell, but, of course, was challenge in cross-examination, is in fact correct."
To my mind, this analysis is flawed. It is inappropriate to treat bilateral contractual negotiations as akin to a unilateral right to appropriate.
- It appears to me that the central question must be whether the discussions between Mr Thomas's receipt of the letter of 3 December 2004, by which the company's proposed appropriation was communicated, and 8 December 2004, when the first payment was made, operated to discharge the company's appropriation with communication to Mr Thomas.
- It seems to me that the answer to that must be in the negative. It is clear that the company was making and communicating an appropriation in its letter of 3 December, and it is clear that Mr Thomas objected to the appropriation in the conversation of 6 December 2004. However, there is nothing to suggest that it was indicated to him that the appropriation communicated to him on 3 December was being withdrawn.
- The argument was put slightly differently by Mr Ian Ridd in his attractive submissions on behalf of Mr Thomas. He said that it was made clear to the company that Mr Thomas would not accept payment on the basis indicated in the letter of 3 December, and therefore the choice was for the company either to pay on the basis that Mr Thomas had indicated was acceptable to him, or not to pay. While that argument has its attractions, I consider that it wrongly involves depriving the company of the right to make a payment with its own choice of appropriation.
- Mr Ridd also contended that it was unrealistic to treat the landlord as having waived his right to forfeit for non-payment of the November rent by accepting a payment of the December rent, in circumstances where he had made it as clear as could be that he was only prepared to accept the payment as being in respect of the November rent. I see the force of that, but it seems to me that, in light of the passages in the text books to which I have referred, the law is tolerably clear.
- In relation to the two payments made in December 2004, the position is as follows. (1) One must decide whether the payments were in respect of the November rent or the December rent. The answer must be the same for both landlord and tenant. (2) It is just as unrealistic from the tenant's point of view to treat the payments as having been paid in respect of the November rent as it is from the landlord's point of view to treat them as having been accepted in respect of the December rent. (3) Therefore, there must be a machinery for deciding whose viewpoint prevails, and the machinery is to be found in the law of appropriation. (4) That law, properly applied, shows that, if he exercises the right, it is the tenant debtor who can appropriate, and that it is only if he does not do so that the creditor landlord is entitled to appropriate. (5) If the creditor landlord is unhappy with the appropriation to the extent of not being prepared to accept the money on the basis that it is offered, he can refuse it or if, as in this case, it is paid by CHAPS or a similar system, he can return it within a reasonable time. (6) Once the money is accepted or retained on the basis selected by the tenant, then, subject to any question of contrary agreement, estoppel or the like, the recipient of the money, the landlord, is as a matter of law fixed with the appropriation -- and with its consequences in terms of waiver of forfeiture, which do not depend on what he intended.
- Finally, on this issue, the judge seems to have thought that the company had not effectively appropriated because it did not communicate its appropriation to Mr Thomas at the moment of payment. That cannot be right, either as a matter of law or in practice. As to the law, see the second and third sentences in paragraphs 21.060 in Chitty. As to practice, the facts of the present case show how impractical it would be if, as the judge appears to have thought, the law required a debtor to appropriate, or communicate his appropriation, at the precise moment the payment is made by the bank, which almost inevitably he will not know.
- In my view, therefore, the waiver argument should have succeeded and Mr Thomas's right to forfeit the lease was lost. Although in these circumstances the remaining issues could be said to be academic, they have been fully argued and they raise points of some significance, so it seems to me that it is appropriate to express a view on them. They both concern the question of forfeiture.
The effect of the CVA on the right to forfeit
- I turn to the second issue, which assumes that the landlord had not waived the right to forfeit for the rent due on 1 November 2004. The issue raises the inter-relationship between the contractual right to forfeit for non-payment of rent (and indeed the statutory right to relief from forfeiture) and the existence of the CVA. In this connection, the CVA arises pursuant to statute, so it is necessary briefly to look at certain provisions of part I of the 1986 Act. Section 1 identifies "Those who may propose an arrangement." I pass over sections 1A and 2. Section 3 is concerned with meetings of creditors.
- Section 4, "Decisions of Meetings", provides as follows:
"(1). The meetings summoned under section 3 shall approve the proposed voluntary arrangement (with or without modifications).
"(3). A meeting, though summoned, shall not approve any proposal or modification which affects the right of a secured creditor of the company to enforce his security, except with the concurrence of the creditor concerned.
"(4). Subject as follows, a meeting though summoned shall not approve any proposal or modification under which-
(a) any preferential debt of the company is to be paid otherwise than in priority to such of its debts as are not preferential debts …
"However, the meeting may approve such a proposal or modification with the concurrence of the preferential creditor concerned."
- Section 4A deals with the approval of the arrangement; section 5 deals with the effect of the approval in these terms:
"(1) This section applies when a decision approving a voluntary arrangement has effect under section 4A.
"(2) The approved … arrangement-
a) takes effect as if made by the company at the creditors' meeting, and
b) binds every person in accordance with the rules-
(i) was entitled to vote at that meeting (whether or not he was present or represented at it), or
(ii) would have been so entitled if he had had notice of it,
as if he were a party to the voluntary arrangement.
- There is no doubt but that the rent, which accrued due but was not paid, before the CVA was proposed in this case, would be expected to be caught, at least in its capacity as a debt, within the CVA. As at present advised, it appears to me that the rent falling due after the CVA should by no means necessarily be expected to be caught by the terms of the CVA, even if it is capable of being so caught (as was held first instance in Re Cancol Ltd (1996) 1 All ER 37). It strikes me that, at least normally, it would seem wrong in principle that a tenant should be able to trade under a CVA for the benefit of its past creditors, at the present and future expense of its landlord. If the tenant is to continue occupying the landlord's property for the purposes of trading under the CVA (and hopefully trading out of the CVA) he should normally, as it currently appears to me, expect to pay the full rent to which the landlord is contractually entitled -- see by analogy, in the administration context, Re Atlantic Computer Systems PLC  Ch 505 542(g)-543(b) and, in a liquidation context, Re ABC Coupler & Engineering Company Ltd (No.3)  1 WLR 702. Therefore as at present advised, I consider that a CVA should so provide, or if it does not provide, in the absence of special circumstances the landlord may well be entitled to object to the proposals as unreasonable. Certainly, that is how the company and its advisers in the present case appear to have proceeded.
- The position between the date the CVA was proposed and the approval of the CVA seems to me a little more opaque and we need not consider it here. The essential point is that it is common ground that, if there was a right to forfeit, it was only in respect of one month's rent, and, for the reasons I have given, it would be in respect of that due on 1 November 2004. In this connection, although Mr Ridd accepts that Mr Thomas could sue for the rent in question (because Mr Thomas's right to that rent has been replaced by his rights under the CVA), he contends that he was not deprived of the proprietary right to forfeit for non-payment of rent, and to insist on the company paying the whole of that rent as a condition of obtaining relief from forfeiture. In other words, he says that although the landlord has been deprived of his right to sue for the rent in his capacity as a creditor, he has not been deprived of his right to forfeit the lease for the non-payment of rent in his capacity as owner of a proprietary interest, namely the right of re-entry.
- Support for this argument is said to be found in two decisions at first instance. The first is Re Naeem (a bankrupt)  1 WLR 48. In that case Hoffmann J said at 50C that a CVA:
"… was only intended to bind the creditors in their character of creditors, it did not affect proprietary rights such as those of the landlord to forfeit the lease".
A little later, at 50E-F, he observed:
"What the arrangement does is to bind the landlord to the creditor for the unpaid rent. To that extent is has indirectly an effect on the landlord's right to forfeit for non-payment of rent, apart for the arrangement the bankrupt would only have been relieved against forfeiture for non-payment of rent on condition that all the arrears were paid."
- Then at 50F-H he said this:
"While the terms of relief are a matter for the discretion of the judge to whom the application is made, it is unlikely that, after the landlord's right to arrears of rent has been extinguished and replaced by its rights in the arrangement, any condition of full repayment will be imposed before the bankrupt or an assignee could obtain relief. Mr Lewison submits that this would be unfair prejudice to the landlord. I do not agree. The right to forfeit for non-payment of rent is in order to provide the landlord with security for payment of that rent, whatever it may be. The effect of the arrangement is to modify the landlord's claim for the arrears of rent in the same way as the claims of other creditors. It does not appear to me to be unfair prejudice that after such modification the right to forfeit should only stand as security for recovery of the modified debt rather than the original one."
- In March Estates Plc v Gunmark Ltd  2 BCLC 1 Lightman J considered "voluntary arrangements and leases" at 7(c)-8(a), and concluded as follows:
"A voluntary arrangement may postpone, modify or extinguish the lessor's right as a creditor of the company to the reserved rent whether past or future … and excuse the company (whether original lessee or assignee) personally from performance. The voluntary arrangement in such a case by operation of law absolves the lessee from, or limits or postpones, his personal liability. Nonetheless (a) the voluntary arrangement cannot prejudice the lessor's right to forfeit the lease if the full rent reserve by the lease is not paid. This is implicit in the judgments in Doorbar v Alltime Securities Ltd (No 2) ... of Knox J  2 BCLC 513 at 527) and … of Gibson LJ 1996 ... 1 WLR 456 at 466, 467-8); and b) the covenants in the lease remain unchanged and the right of the lessor to enforce those covenants against third parties (including any assignee of the lease) are fully preserved.
"If the lessor's right to enforce his security is not to be affected by a voluntary arrangement save with the lessor's consent, upon forfeiture by the lessor the grant of relief should be on the same terms as those on which it would be granted if there was no voluntary arrangement, and therefore (in accordance with well-established principles) relief should only be granted on terms that all arrears of rent are paid. It is clearly the assumption upon which Doorbar v Alltime Securities was decided. With all respect, the suggestion by Hoffmann J to the contrary in Re Naeem ... cannot be correct."
- Despite the high respect that one must give to the observations in these two cases, especially bearing in mind their respective sources, I am of the view that it was not open to the landlord in this case to seek to forfeit the lease for non-payment of rent which had been, as it were, subsumed into the CVA and replaced by the payments to be made under the CVA. It is true that, at the time the claim was issued and served, the CVA had not yet been approved, but, in my judgment, Mr Edwin Johnson (who appears for the company) is right to say that the matter had to be looked at the date of the hearing of the claim, not at the date the forfeiture claim was issued or served (even though, of course, the service of the forfeiture proceedings notionally operated to effect the forfeiture). To my mind, however, both principle and the terms of section 138 of the County Courts Act 1984 (which I discuss below) make it clear that the court primarily looks at the arrears of rent as at the date of the hearing of the claim and not as at the date of the issue or service, for the purpose of deciding whether to order forfeiture. I do not understand Mr Ridd to argue otherwise.
- There are a number of reasons why I take a different view from that taken by Hoffmann J and Lightman J in the two cases I have read. First, the CVA, as is clear from the terms of sections 1 to 5 of the 1986 Act, is concerned with obligations, not remedies. There is nothing in Part I of the 1986 Act which relates to the manner of enforcement of any rights whether claiming in debt or exercising a forfeiture. There is therefore no warrant, to my mind, for holding that, if one right is lost in relation to a particular payment as a result of a CVA, another right can remain.
- Secondly, the notion that the landlord can forfeit a lease for a debt under the lease which had been replaced by a different debt under the CVA seems to me to be inconsistent with the rescue culture embodied in the 1986 Act.
- Thirdly, there is the wording of section 5(2) and the wording of the CVA in this case. In respect of the single payment of rent which was, it is common ground, caught by the CVA, the landlord is bound to accept payments in accordance with the CVA in substitution for the rent. In other words, his right to recover the rent has been replaced by his rights under the CVA. So his right to forfeit for the rent, just as much as his right to sue for the rent, has gone because there is no rent owing; it has been substituted by the sums due under the CVA.
- Fourthly, the 1986 Act makes it clear what sort of creditors are to be excluded from the class of creditors who are to be bound by the CVA, namely secure creditors, and, to the extent described in section 4(4), preferential creditors. While it is true that it was, at one time, thought that a landlord with a right to forfeiture was to be treated for these purposes as a secure creditor, that is now seen to be wrong -- see Razzaq v Pala  1 WLR 1336 1341(e)-1343(d) and Re Lomax Leisure Ltd  Ch 502 at 510(b)-517(d). It does not seem as if the legislature intended a creditor with a right to forfeit should be treated in a different or better position under a CVA than any other sort of unsecured creditor. In his judgment below, the judge, after considering the authorities, felt that he was led:
"… to the conclusion that the somewhat anomalous situation arises that the landlord does have what one might think of as a hybrid status".
I agree with Mr Johnson that there is no statutory warrant for such a hybrid status, which would, as the judge said, be the effect of accepting Mr Ridd's argument.
- Finally, there are the authorities which I have read which point to a contrary conclusion. There is a slightly cheap point that the two first instance judgments do not speak by any means with one voice; see the last two sentences of the passage I have cited from Gunmark.
- As to Naeem, the fact that the landlord does not lose his proprietary right to forfeit as result of the CVA is not in dispute any more than it can be suggested that he loses the right to sue. The question is in respect of what he can forfeit, just as it would be for what he can sue. If rent arrears are caught by the CVA it seems to me that the mere fact that forfeiture amounts to a proprietary right should not enable the landlord to invoke the provision as if the rent was still owing when it is not.
- Lightman J's reasoning on this point in Gunmark is plainly unsafe in the light of his reconsideration of his anterior conclusion, that the right of forfeiture would render the landlord the secure creditor -- see Razzaq, to which I have referred. As to Doorbar (cited by Lightman J in Gunmark), although it was a decision of this court, it seems clear that the point at issue went by concession and was based on the reasoning in Naeem; see at 466(g)-(h).
- In these circumstances, I consider that the forfeiture proceedings were perfectly properly commenced based on the single arrears of rent (if I am wrong in my view on waiver), but, by the time the proceedings came to court, there was no rent owing and forfeiture could not have been claimed. Even if that is wrong it was not open to the judge to require the rent, which was not owing because of the terms of the CVA, be paid as a condition of relief from forfeiture.
- I do not regard this as a particularly unfair result for a landlord. As I have indicated, in the normal run of case, as it presently seems to me only past rent which has fallen due should be caught up in the CVA, not future rent. Therefore the landlord is being treated like any other unsecured creditor. He is not being deprived of his right to forfeit: he is merely unable to forfeit for rent which he can no longer claim for, because it has been replaced by debt under, and pursuant to the terms of, the CVA. In any event, the landlord is not deprived of his right to forfeit the lease if, as in this case, as under any well-drafted lease, he has the right to forfeit in the event of insolvency including the proposing of the CVA, or any other act of insolvency, and he does not waive it.
- Furthermore, although the landlord, like any other creditor, might feel prejudiced by CVA, particularly, as in this case, if it is one which he has opposed, that is a problem faced by any creditor on the company of the CVA and it is part of the price of the rescue culture.
The terms for relief from forfeiture.
- The final question concerns the terms on which relief should have been granted, if the judge had been right in forfeiting the lease (ie on the assumption that there had been no waiver and the company had not been subject to a CVA). The judge, having determined the lease should be forfeited on the grounds of non-payment of one month's rent, held that relief from forfeiture should be accorded on condition that (a) the tenant paid that one month's rent and (b) that the tenant paid the VAT which had not been paid in respect of the rent due between 1 February to 1 October 2005. (He also imposed a further condition of relief that the company pay the claimant's costs, but nothing hangs on that).
- There is no doubt that, in the absence of the CVA, the judge would have been quite right in requiring the one month's rent, in respect of which the forfeiture on this hypothesis was based, be paid as a condition of relief from forfeiture. The question is whether the judge was right to require the VAT, which had not been paid in respect of the rent paid for earlier months, also to be paid. The argument advanced by Mr Johnson is that it was not an appropriate condition of relief to require a tenant to pay rent or other sums which, while they were indeed due under the lease, could not have been the subject of forfeiture proceedings because the right to forfeit in respect of them had been waived.
- Mr Ridd's case for Mr Thomas on this point is based on the provisions of section 138 of the County Courts Act 1984 which, as he rightly says, governed the basis upon which the judge granted relief from forfeiture. So far as relevant it provides as follows:
"(1) This section has effect where a lessor is proceeding by action in a county court ... to enforce against a lessee a right of re-entry or forfeiture in respect of any land for non-payment of rent.
"(2) If the lessee pays into court [or to the lessor] not less than 5 clear days before the return day all the rent in arrear and the costs of the action, the action shall cease, and the lessee shall hold the land according to the lease without any new lease.
(a) the action does not cease as under subsection (2); and
(b) the court at the trial is satisfied that the lessor is entitled to enforce the right of re-entry or forfeiture,
the court shall order possession of the land to be given to the lessor at the expiration of such period ... unless within that period the lessee pays into court [or to the lessor] all the rent in arrear and the costs of the action.
"… (5) If:
(a) within the period specified in the order ...
the lessee pays into court [or to the lessor]-
(i) all the rent in arrear; and
(ii) the costs of the action,
he shall hold the land according to the lease without any new lease.
- These provisions generally reflect, at least on the face of it, the normal principles which have long applied when a landlord forfeits a lease for non-payment of rent. The tenant will obtain relief, virtually as a right, provided he pays all the arrears of rent and any costs, and it is almost always wrong to impose any other conditions for relief -- see for instance Gill v Lewis  2 QB 1.
- This was reflected in the decision of this court in Maryland Estates Ltd v Joseph  1 WLR 83, where it was held that the trial judge was wrong to limit the condition for relief to the rent payable in arrear at the date of proceedings. The condition should have included all the notional arrears up to the date on which relief was to take effect. Beldam LJ, with whom Bracewell J agreed, said this at 91C-D:
"I accept … that the effect of the relief against forfeiture given in the County Court is from start to finish statutory. But in construing the words of section 138 of the Act of 1984 it seems to me important not to lose sight of the purpose of the Act which was to grant relief against forfeiture and where there is to be found in the section wording which bears a close similarity to words which have been used to grant relief at law in the High Court it seems to me [that] the court should not resort to a literal construction of words which have been given a purposive interpretation in Acts granting similar relief unless driven to do so."
- At 91F-G, he said this:
"In my view it is not straining the interpretation of the language to hold that all rent in arrears means the rent in arrears at the time when the court was making its order assumes that payment of that rent will result in the lease continuing for all purposes. Thus if the lease is not forfeit, the rent plus the amount claimed for use and occupation is the amount of "rent in arrear" and on condition that this amount is paid the court declares that the lease is not forfeit. In my view it was not Parliament's intention that the words used in section 138.3 should be construed to mean that the court could order payment only of the rent in arrear at the date of service of the summons as a condition of granting relief. The tenant granted relief, continues to hold 'the land according to the lease without any new lease'."
- The question therefore in this case is whether "the rent in arrears" includes rent which fell due under the lease before it was forfeited but in respect of which the landlord had lost the right to forfeit, in this case the VAT which had fallen due but had not been paid up to 1 October 2004. In my view, if the judge was right to forfeit the lease for the November 2004 rent, he was also right to grant relief on terms that the rent was paid, but he was wrong to conclude that the terms for relief should have extended to payment of the VAT, or other payments in respect of which the right to forfeit had been waived.
- First, if there was no right to forfeit in respect of an earlier sum due, I consider it to be wrong in principle to require that earlier sum to be paid as a condition of relief from a forfeiture validly effected in respect of a later sum. It seems to me that the accident of the landlord being able to forfeit for non-payment of the later sum should not enable him to use the forfeiture clause to extract the earlier sum from the tenant in circumstances where he has in fact lost the right to invoke the forfeiture clause as a means of extracting that earlier sum from the tenant.
- Secondly, although at first blush the provisions of section 138 might appear to be inconsistent with this conclusion, it seems to me that consideration of the reasoning in the Maryland Estates case shows that it is not. In the first passage I quoted from the judgment of Beldam LJ, he made it clear that section 138 of the 1984 Act should be construed by reference to, and, if at all possible, conformably with "words which have been used to grant relief in the High Court".
- When one turns to section 212 of the Common Law Procedure Act 1852, which he had set out earlier in his judgment at 88B, one finds this:
"If the tenant ... do, or shall at any time before the trial in such ejectment pay or tender to the lessor or landlord or pay into court ... all the rent and arrears, together with the costs then and in such case all further proceedings on the said ejectment shall cease and be discontinued."
It seems to me clear that the expression "all the rent and arrears" there referred to must be a reference to all the rent and arrears in respect of which the landlord could rely to effect a forfeiture. In this case, the expression would not therefore include the VAT in respect of which the right to forfeit had been waived. I also consider that this conclusion is consistent with the approach of the High Court as explained by the Court of Appeal in Gill v Lewis. In his submissions Mr Johnson rightly encapsulated the point when he said that the reference to "rent" in section 138(3) means rent which will result in the lease continuing.
- In all these circumstances, I consider that the three points raised on behalf of the company on this appeal are well founded, and I would allow the appeal.
- LORD JUSTICE MUMMERY: I agree.
- LORD JUSTICE JACOB: I agree.
Order: Appeal allowed.
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