Patel v K&J Restaurants [2010] EWCA Civ 1211 deals with a number of interesting questions concerning relief from forfeiture. Although the lease in question (of a restaurant and residential flats) fell within the Landlord and Tenant Act 1954, the case has wider implications for anyone dealing with relief from forfeiture, particularly where there has been immoral use of the premises.

Patel were the landlords and K&J the tenants. K&J were in breach of their lease in two ways. First a sub-tenant of one of the flats had been using the flat for prostitution — the type example of “immoral user” see Rugby School (Governors) v Tannahill [1935] 1 KB 87.

Second, Mr Albright, “the person behind K&J”, wished to reduce his involvement in the restaurant business. Unfortunately for him, the lease contained a usual covenant against assignment, underletting or parting with or sharing possession. A rather complicated arrangement was made with Mr Albright’s restaurant manager, a Mr Leale, whereby he would run (though not have voting shares in) a company called MPC which would operate the restaurant business from the premises, with some support from Mr Albright as a consultant.

In my experience this sort of arrangement intended to bypass covenants against assignment etc are often made. In this case, the Court of Appeal found that because the agreement required MPC to keep the business open at certain times, it impliedly gave MPC a right to enter the premises to do so and thus was a sharing of possession, though not a subletting. Thus the arrangement was in breach of covenant.

The story unfolded as follows. In early November 2007, the police telephoned Mr Albright to warn him that one of the flats was being used for prostitution. His uncontradicted evidence is that he was told to write to him about it, but they did not. In late February 2008 the police served notices on Mr Albright and his landlord informing them that the prostitution was taking place and requiring them to take immediate action to remedy the situation.

The landlord’s response on 28 February was to serve a s146 notice, relying on a breach of a covenant in the lease against immoral user and stating that the breach was incapable of remedy. In my view this was a mistake. Stating that a breach is incapable of remedy in a s146 notice risks a court later finding that the breach was capable of remedy and therefore that the notice was invalid. Nor is there ever a good reason to do so. It is simple enough to require that the breach be remedied “if it is capable of remedy” — an approach endorsed in Glass v Kencakes [1966] 1 QB 611.

K&J did then evict the offending tenant by 6 March (we are not told how he achieved this relatively speedy eviction) and started a claim for relief from forfeiture on 18 March 2008.

Things carried on going badly for Mr Albright, for around this time Mr Leale (the restaurant manager) told the landlord that K&J had sublet the restaurant to him. Mr Albright got wind of this and on 29 March changed the locks on the restaurant so as to exclude Mr Leale (and MPC) on the ground that their telling the landlord was a breach of a confidentiality clause in their agreement.

On 31 March the landlords started proceedings for possession, based on their first s146 notice.

By 2 April MPC were back in the property on the back of an interim injunction, so the landlords served another s146 notice on the grounds of breaches of both the covenant against immoral user and the covenant against assignment etc. This time they had the good sense to say that both breaches were capable of remedy. They began a second claim for possession on 9 May 2008.

(So that is 2 claims for possession, one for relief from forfeiture and parallel chancery proceedings concerning MPC’s right to access the premises — lawyers at least were doing well out of all this).

This involved history raised a number of issues. First, was the immoral user capable of remedy so that the original s146 notice was invalid?

There is a long line of authority, including Tannahill that where a tenant is themselves in breach of a covenant against immoral user, that breach is never capable of remedy. But where a tenant is unaware of immoral user by a sub-tenant and takes prompt steps to stop it and seek forfeiture of the sub-lease (or otherwise evict the sub-tenant).

I do wonder how long this absolute line can be sustained. The courts have increasingly accepted that whether or not a covenant is remediable is a matter of fact and so a pragmatic approach should be taken. It is hard to see why immoral user should be so special as to be invariably incapable of remedy, especially because the effect on a landlord of immoral use does not depend on whether a tenant or a sub-tenant carried it out. Lord Justice Neuberger (as he then was) commented that “it is not entirely easy to justify this” (Akici v LR Butlin [2005] EWCA Civ 1296).

So, the question was whether Mr Alrbight should have taken action when the police telephoned him in November, or whether he was entitled to wait until they wrote to him (as they promised he would). The Court of Appeal found that he had not acted promptly; the breach was incapable of remedy and so the first s146 notice was valid. This is, in my view, a clear indication of how speedily a tenant must act against the immoral user of a subtenant.

The other issue – sharing possession – is interesting to me in that it established that the arrangements of the kind between MPC and Mr Albright are a sharing of possession, but I do not expect that will come up in many residential property situations.

The Court of Appeal also reaffirmed that the normal terms of relief will include a requirement that the tenant pay the landlord’s costs on an indemnity basis.

K&J had argued that a by the way statement made by Lord Templeman in Billson v Residential Apartments Ltd (No 1) [1992] 1 AC 494 to the effect that “I consider that the practice of ordering indemnity costs as a condition of granting relief is ripe for reconsideration” should be followed in preference to Chadwick LJ’s statement of principle in Bland v Ingrams Estates Ltd (No 2) [2001] EWCA Civ 1088 at paragraph 14:

“Third, the object of the court when granting relief is to put the lessor (as well as the lessee) back in the position in which he would have been if there had been no forfeiture – see Egerton v Jones [1939] 2 KB 702, 706. It is this principle which underlies the practice of requiring the applicant, as a term of relief, to pay the costs properly incurred by the lessor in connection with the re-entry and the proceedings for relief. Accordingly, the applicant will normally be required to pay the lessor’s costs of the forfeiture proceedings, save in so far as those costs have been increased by the lessor’s opposition to the grant of relief, upon appropriate terms – see Howard v Fanshawe [1895] 2 Ch 581, 592, and Abbey National Building Society v Maybeech Ltd and another [1985] Ch 190, 206. Prima facie, the costs which the applicant will be required to pay to the lessor as a term of obtaining relief will be assessed on an indemnity basis; if it were otherwise the lessor would not obtain the indemnity against proper expenses to which he is entitled – see Egerton v Jones [1939] 2 KB 702, 710. But, to the extent that costs have been increased by the lessor’s unnecessary opposition to the grant of relief, the normal rules apply: the lessor will normally be ordered to pay the applicant’s costs on the standard basis, and the applicant will be able to set those costs off against what he would otherwise be required to pay to the lessor as a term of obtaining relief from forfeiture.”

The Court of Appeal’s view was that Lord Templeman had not properly appreciated the fact that indemnity costs were the subject of taxation by the court, so that a tenant was not entirely at the mercy of the landlord and could challenge the costs bill to a limited extent.

K&J were required to pay the landlord’s costs on an indemnity basis subject to the exclusion of one item.

An oddity of the case is that by the time of the appeal hearing, the landlord and tenant had agreed a deed of surrender so that relief was no longer possible, let alone sought. The deed stated that it: “is entirely without prejudice to the parties’ position in the Proceedings [i.e. the claim and the appeal] and is not intended to affect the parties’ position in the Proceedings”. The Court of Appeal felt that meant they could not take the deed into account in deciding how to dispose of the appeal, and in particular could not entertain K&J’s argument that they should not have to pay costs on an indemnity basis, there being no requirement for relief by that stage.

A case perhaps of over clever drafting perhaps?