STRIKING DOWN A RENT REVIEW CLAUSE

Since writing about derogation from grant as a possible remedy to the Leasehold Mis-selling Scandal, in particular in a two part article “Notes on a scandal: freeholders and medieval robber barons” in New Law Journal last year I have been asked whether there is a case of a rent review clause having been struck down for it and the answer is, in the case of a long lease, not so far as I am aware, but it has been used where an escalating rent clause has taken an assured tenancy out of statutory protection.

The case is Bankway Properties Ltd v Pensfold-Dunsford [2001] EWCA Civ 528 [2001] 1 W.L.R. 1369 in which a previous landlord had entered into what was expressed to be an assured tenancy under the Housing Act 1988 but it appeared that the landlord wanted the lease to qualify as an assured tenancy to obtain the tax benefits of the business expansion scheme.

The tenants were two individuals on housing benefit, who, being desperate to obtain accommodation, did not read the agreement very carefully and possibly not at all. The initial rent was £4,680 per annum. The tenants did not notice that there was a provision in the lease for the rent to increase to £25,000, a sum which there was no prospect of their paying and caused the tenancy to cease to be an assured tenancy because it was above the upper rent limit..

The landlord’s thinking seems to have been that possession could be recovered by increasing the rent and either relying on the existence of rent arrears, which he duly sought to do, or because the tenant would voluntarily surrender possession when asked for the increased rent.

The case was heard in the Court of Appeal by a two judge court consisting of Lady Justice Arden and Lord Justice Pill, who found for the tenants but their primary reasons for doing so was on different grounds.

Arden LJ relied on the principle that the provision allowing the rent to be increased to £25,000 was an improper attempt to evade the mandatory statutory scheme for security of tenure, while Pill LJ relied on the inconsistency between that provision and the intention of the parties to grant an assured tenancy as a matter of true construction of the agreement (see [58]).

Arden LJ commented at [42] that because there was no common intention to create a different obligation for the purpose of misleading the parties there was no sham in the sense used in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (CA). Nor were the appellants misled or under a mistake.

However, as she explained at [43]:

“… there is a variant on the usual definition of sham where a question arises whether an agreement is not intended to have the effect stated but is intended to evade the operation of a statute out of which the parties cannot contract. This doctrine has been developed and applied by the courts not only in the context of the Rent Acts (see Antoniades v Villiers , above) but also in the context of agricultural tenancies ( Johnson v Moreton [1980] AC 37 and Gisburne v Burton [1989] 1 QB 391 ), the question whether a hire purchase agreement is in fact an unregistered bill of sale (see for example Re Watson (1890) 25 QB 27 ), the question whether a sale and repurchase agreement is an unregistered company charge (see for example Re George Inglefield Ltd [1933] Ch.1 ), the question whether an absolute conveyance is in fact a mortgage (see for example Re Duke of Marlborough [1894] 2Ch 133 ), the question whether a transaction is in substance an unauthorised reduction of share capital contrary to the Companies Acts (see for example Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 ) and the question whether a sum payable under a contract is a penalty (see for example Bridge v Campbell Discount [1962] AC 600 ). In these types of situations, as Lord Ackner put it in Antoniades v Villiers , above at 466, the question is: what was the substance and reality of the transaction entered into by the parties? The Court is not bound by the language which the parties have used. It may for instance conclude, when it examines the substance of the transaction, that what the parties have in their agreement called a sale and repurchase of book debts is in truth a registerable charge over them.

44. For this purpose, the court can look at all the relevant circumstances, including the subsequent conduct of the parties (see per Lord Jauncey in Antoniades v Villiers , above, at 475). There does not have to be a common intention to enter into other obligations or to deceive a third party: in Antoniades v Villiers for instance, the “licensees” acknowledged in writing that their agreements with the landlord did not have the protection of the Rent Acts (see Antoniades v Villiers , above, at 457-8). Lord Templeman points out in Antoniades v Villiers that the earlier case of Street v Mountford , above, had established that “where the language of licence contradicts the reality of the lease, the facts must prevail. The facts must prevail over language in order that parties may not contract out of the Rent Acts” (at 463). Or, as Lord Esher MR put it in Re Watson , above, “the Court ought never to let a sham document, drawn up for the purpose of evading an Act of Parliament prevent it from getting at the real truth of the matter”.“

Arden LJ went on to consider the relevant provisions of the Housing Act 1988 and concluded at [49] that they did not permit parties to an assured tenancy to agree to vary the statutory scheme for security of tenure so as to reduce the level of protection available to the tenant.

The provision allowing the rent to be increased to £25,000 was not in substance or reality a provision for the fixing of rent (the landlord never expected to receive rent of that amount), and was instead a provision to enable the landlord to recover possession otherwise than in accordance with the mandatory scheme, and amounted to an unenforceable contracting out ([51] and [54]).

It was a device masquerading as a provision for increase in rent, the sum not being rent at all on a true analysis ([55] and [56]).

Pill LJ, on the other hand, expressed having some difficulty with the concept of unlawful contracting out from the legislation, and based his decision on an analysis of the contract, which made it clear that an assured tenancy was intended. The statutory purpose of the assured tenancy was to give long-term security ([66]).

The clause providing for the rent increase was “inconsistent with the statutory purpose which it was the main object of the agreement to achieve” ([67]) and had to be ignored.

Arden LJ endorsed this approach at [58] saying:

“… Pill LJ reaches the same conclusion as myself on the basis of the inconsistency between clause 8(b)(iii) and the intention of the parties to grant an assured tenancy as a matter of the true construction of the agreement: see Glynn v Margetson & Co [1893] AC 351 . The citations from the speeches of Lord Bridge and Lord Templeman set out above show that inconsistency, or repugnancy, and pretence are alternative bases for their decision in Antoniades v Villiers [1990] 1 AC 417 , and I accept that inconsistency is relevant and applicable in this case too.“

Glynn v Margetson is one of those shipping cases in which the term ‘derogation from grant’ is not used but the doctrine that an individual term must not undermine a contract’s ‘main purpose’ is identical and the link was acknowledged by Rowlatt J in M Isaacs and Sons, Limited v William Mcallum and Company, Limited [1921] 3 K.B. 377.

Is there a case of a rent review clause having been struck down for derogating from grant? The answer is “Yes”.