Экзамен зачет учебный год 2023 / Dixon, Principles of Land Law

CHAPTER 6

LEASES

6.1The nature of a lease

The leasehold is one of the two estates identified in s 1 of the Law of Property Act (LPA) 1925 as capable of existing as either a ‘legal’ or ‘equitable’ interest. Asweshallsee,whetheranygivenleaseislegalorequitablewilldependprimarily on the way in which it is created. However, irrespective of whether a leasehold is legal or equitable, there is no doubt that it is one of the most versatile concepts known to the law of real property. Even the terminology of leases reflects the manypurposestowhichtheymaybeput.The‘termofyears’,‘tenancy’,‘sublease’ and ‘leasehold estate’ are all terms in common use, and all of them describe the existence of a ‘landlord’ and ‘tenant’ relationship. For example, a ‘lease’ or ‘term of years’ is most often used to describe a commercial or long term letting, whereas the description ‘tenancy’ is used for residential or short term lets. This variety does not mean that different substantive rules apply to different types of lease (although this may be the case where a statute applies only to one kind of lease), but it does indicate the importance that the leasehold plays in the world of commercial and residential property management. In this respect, three fundamental features of the leasehold should be noted at the outset.

First, the leasehold allows two or more persons to enjoy the benefits of owning an estate in the same piece of land at the same time: the freeholder will receive the rent and profits, and the leaseholder will enjoy physical possession and occupation of the property. Indeed, if a ‘subtenancy’ (also known as an ‘underlease’)iscreated,beingwhereashorterleaseiscarvedoutofthe‘headlease’, the number of people enjoying the land or its fruits increases further. For example, if a freeholder (A) grants a 99 year lease to B, and B grants a 50 year subtenancy to C, then A receives rent from B, B receives rent from C and C enjoys physical possession of the land. In theory, there is no limit to the number of underleases that can be created out of a freehold estate, and each intermediate person will be the tenant of their superior landlord and the landlord of their own tenant. It is the ability of the leasehold to facilitate this multiple enjoyment of land that gives it its unique character. It allows the landlord to generate an income through rent (and so, land may be an investment vehicle), while, at the same time, the tenant ‘buys’ an estate in land through the payment of that rent.

Secondly,itisinprincipleinherentintheleaseholdestatethatboththelandlord and tenant (and all subtenants) have a proprietary right in the land (but see the discussion of Bruton v London and Quadrant Housing Trust (1999), below). Thus, the tenant owns the lease, and the landlord owns the ‘reversion expectant

181

Principles of Land Law

on the lease’ (that is, the right to possession of the property when the lease ends). Importantly, both of these proprietary rights can be sold or transferred after the lease is created. The tenant may sell his lease to a person who becomes the new tenant (an assignee of the lease), and the landlord may sell his reversion to a person who becomes the new landlord (an assignee of the reversion).Again, the assignees of the lease and reversion may assign their interests further. The result is that the current landlord and tenant under a lease may be far removed from the original landlord and tenant who actually negotiated its creation. Nevertheless, as explained below, the landlord and tenant currently ‘in possession’ may well be bound by the terms of the lease as originally agreed. Figure 1 represents this diagrammatically.

Thirdly, all leases will contain covenants (or promises) whereby the landlord and tenant promise to do, or not to do, certain things in relation to the land. These may either be ‘express covenants’, as where they are agreed between landlord and tenant and written deliberately into the lease, ‘implied covenants’, being covenants read into the lease as a matter of law (for example, the repairing covenant implied in certain leases by s 11 of the Landlord and Tenant Act 1985) or ‘usual’ covenants being those that are not expressly mentioned but are so common in the landlord and tenant relationship that they are taken to be part of the lease (for example, the tenant’s obligation to pay rent under an equitable lease: Shiloh Spinners v Harding (1973)). Typical examples of express covenants are the landlord’s covenant to repair the buildings and the tenant’s

Figure 1

182

Leases

covenant to pay rent or not to carry on a trade on the premises. All these types of covenant are enforceable between the original landlord and tenant and, as we shall see, also between assignees of the lease or reversion. The particular rules concerning the enforceability of leasehold covenants are discussed below, 6.4, but the important point is that the ability to make rights and obligations ‘run’ with the land is a special feature of the landlord and tenant relationship. It is the reason why the leasehold estate is a particularly useful investment vehicle because the freeholder can generate an income while, at the same time, preserving the value of the land through properly drafted covenants (for example, that the tenant must repair, may not keep pets, etc), which will bind the original tenant and any subsequent assignees. Moreover, given that both the benefit of a leasehold covenant (the right to enforce it) and its burden (the obligation to observe it) can run with the land, the use of a leasehold with appropriate covenants can achieve what covenants affecting freehold land cannot: that is, that even positive obligations can be made to run with the burdened estate: see Chapter 8.

6.2The essential characteristics of a lease

There are various definitions of a lease, both in statute (for example, s 205 of the LPA 1925) and in common law, but one of the most commonly cited is that of Lord Templeman in Street v Mountford (1985): viz, that the essential qualities of a lease are that it gives a person the right of exclusive possession of property, for a term, at a rent. These three conditions are commonly regarded as the indicia of a leasehold, irrespective of the purpose for which the estate is created and have been affirmed many times in a residential context (Aslan v Murphy (1989)) and a commercial context (Vandersteen v Angus (1997)). These three indicia will be examined in turn.

6.2.1Exclusive possession

A lease is an estate in the land; it signifies a form of ‘ownership’ of the land for a stated and defined period of time. Yet, there are many other ways in which a person may enjoy a limited right to use or occupy land owned by another person and it is sometimes necessary to distinguish these relationships from the leasehold estate. For example, a person may be given a ‘licence’ to occupy the land of another which, in many ways, might resemble a lease (for example, the occupier pays a regular ‘occupation fee’, and a defined period of occupation is agreed). However, a licence is a mere personal right, binding only the parties that created it (Lloyd v Dugdale (2001)). A lease, on the other hand, is properly regarded as a proprietary interest in the land itself and it may be assigned to, and become binding on, any subsequent owner of the reversion. Moreover, ‘leases’ fall within the statutory regulatory machinery of the Rent Act 1977 and the Housing Act 1988, so restricting

183

Principles of Land Law

the ability of landlords to remove tenants and set rent; licences do not. There are other differences too. For example, a tenant may sue any person in trespass (including his landlord), but a licencee enjoys only a very narrow right (Manchester Airport v Dutton (1999); a tenant may sue in nuisance, a licencee may do so only in exceptional circumstances (Hunter v Canary Wharf (1996)); and only a landlord is entitled to the old feudal remedy of distress for rent or may avail himself of the remedy of forfeiture (and hence only a tenant may claim ‘relief’). In fact, in years past, these differences, particularly the absence of statutory protection and rent control for licencees (as opposed to tenants) prompted landowners (be they themselves leaseholders or freeholders) to attempt to draw up agreements with potential occupiers of the land that give mere licences and not leases. In most cases, this has been attempted by seeking to deny the grant of ‘exclusive possession’ to the occupier, thereby removing a vital element in the creation of a lease. Consequently, a series of cases in the House of Lords and Court of Appeal have sought to draw a legal and practical distinction between a lease and a licence, and this battle has been fought largely over the concept of ‘exclusive possession’. Indeed, although legislative changes have made the distinction between a lease and a licence less critical (for example, the removal of rent control and security of tenure under the Housing Acts), these cases still provide the basic tools for making the distinction.

As a basic proposition, a lease will exist when the occupier of land has been granted exclusive possession of the premises. This is a question of fact, to be decided in each case by reference to the surrounding circumstances, the course of any negotiations prior to the grant of the right of occupation, the nature of the property and the actual mode of occupation of the occupier. Further, the landowner cannot avoid granting a lease by merely calling the arrangement between the parties ‘a licence’, even if this is expressly stated. Labels are not decisive. Generally, it is not the parties’ intentions (whether expressly stated or not) that are relevant, but the substance of the rights they have created by their agreement (Street v Mountford (1985); overruling Somma v Hazlehurst (1978) on this point).

However, there are certain exceptional situations where the occupier of land will have exclusive possession of the property but, for special reasons, no lease will exist. These are cases where the grant of exclusive possession is referable to some other bona fide relationship between the parties. Examples include a mortgagee going into possession of the property under the terms of a mortgage, usually where the borrower cannot repay the loan (Chapter 10), occupancy of the purchaser under an enforceable contract for the sale of the land (Bretherton v Paton (1986)), and where the occupation is based on charity (see, for example, Gray v Taylor (1998)) or friendship, when there is no intention to create legal relations between the owner and the occupier (Marcroft Wagons v Smith (1951)). These exempted categories were explained at length by Lord Denning in Facchini v Bryson (1952) and a good example is Norris v Checksfield (1991), where the occupier of a cottage with exclusive

184

Leases

possession was held to be a ‘service occupier’ (and, hence, a licensee).A‘service occupier’ is a person who occupies property for the better performance of his duties under a contract of employment with the landowner. Although such an occupier may have exclusive possession of the property, that occupation feeds off their employment contract and does not exist because of the existence of the landlord and tenant relationship as in Carroll v Manek (1999) where a hotel manager was held to have a licence of a hotel room (despite being in exclusive possession) because the possession was entirely referable to this employment relationship. The effect is, then, that as well as having only a personal right in the land, the exclusive possession of the employee must end when the employment ends.

According to Lord Templeman in Street, the practical effect of the principle that an occupation agreement is to be assessed according to its substance, not its label, is that a genuine licence can exist in only very limited circumstances. In fact, apart from the Facchini exceptions, Lord Templeman’s view is that an occupier of premises must be either a ‘tenant’ or a ‘lodger’. This is another way of saying that the only genuine occupation licence that can exist is that held by a lodger. In law, a lodger is someone who receives services and attendance from the landlord, such as room cleaning or meals. Moreover, as Markou v Da Silvaesa (1986) illustrates, a mere promise by the landowner to provide such services is not sufficient to generate a lodging agreement (that is, licence): they must actually be provided. What this means, then, is that it should be a relatively straightforward task to distinguish between a lease and a licence: if the occupier receives ‘board and lodging’, he holds a mere personal licence. Otherwise, he must be a tenant, unless one of the exceptional situations exists. Unfortunately, things are never this simple, for if it is true that an occupier is either a lodger or a tenant, this means that no other kind of ‘occupation licence’ can exist. There would be no intermediate category of licensee who, while not a lodger, is still not a tenant. Obviously, this has far reaching consequences for it restricts the options open to a landowner when seeking to make use of his property. It is the triumph of property law over freedom of contract, and it is precisely this legal straitjacket that cases subsequent to Street found difficult to accept. Indeed, many of the apparently inconsistent decisions of the Court of Appeal that followed Street have resulted from attempts to identify some middle way, some form of occupation that can still give rise to a licence, but where the occupier is not a lodger. For example,

Hadjiloucas v Crean (1988) and Brooker Estates v Ayers (1987), both decisions of the Court of Appeal quite soon after Street, are of this type. In fact, although the primacy of the tenant/lodger distinction has been preserved by the House of Lords in cases such as Antoniades v Villiers (1990), Westminster CC v Clarke

(1992) and by the Court of Appeal in Aslan v Murphy (1989), there has been an acceptance that property rights, or rights to use property, are not as black and white as the tenant/lodger distinction suggests. Necessarily, this has resulted in a certain refinement of the principles, and some other guidelines have emerged.

185

Principles of Land Law

It is now clear that a licence (as opposed to a lease) may exist in cases where two or more persons occupy the same property, as in snared houses. It is not that the persons occupying the property under a ‘multiple occupancy agreement’ cannot be leaseholders, rather it is that to be leaseholders of the entire property the ‘four unities’ must be present, so as to support a joint tenancy of the leasehold estate (AG Securities v Vaughan (1988)). Therefore, the issue turns on the nature of the multiple occupancy agreement. For example, if four people occupy a four bedroomed house, but each sign a different agreement, on different days and for different rents, there can be no ‘exclusive possession’ of the entire premises, because there is no unity of interest, title, or time. The house, as a whole, cannot be held on a leasehold, because the necessary conditions for a joint tenancy of this estate do not exist. Of course, each occupier may have a lease of his individual room, with a licence over the common parts, but this is very different from one jointly owned leasehold of the whole premises. Note, however, that while it is perfectly understandable and indeed practical that no joint leasehold should exist in respect of a property occupied by a shifting population of previously unrelated persons (for example, house sharing in London), the same considerations do not apply where the ‘multiple’ occupancy is that of a romantically linked couple who, for all intents and purposes, are living in the property together, not as separate individuals. In such cases, as explained below, the court might well regard the existence of a multiple occupancy licence agreement as a deliberate and artificial attempt to avoid artificially the grant of a joint leasehold interest.

The cases also suggest that there are certain types of public sector landlords who may be able to grant licences in circumstances where a private landlord could only grant leases. Examples are Westminster CC v Basson (1991), Ogwr BC v Dykes (1989), and the House of Lords’ decision in Westminster CC v Clarke (1992). In these situations, the landowners may be able to deny exclusive possession to the occupiers (and hence deny a lease) because to do otherwise would be to hinder them in the exercise of their statutory housing duties. In other words, the denial of exclusive possession with all that this entails, is necessary if local authorities and the like are to be able to carry out their duty to accommodate the homeless and provide temporary accommodation to the needy. Such landlords should be able to grant personal licences in order to be able to manage their housing stock more effectively without being ‘caught’ by the greater obligations owed by landlords to their tenants. Seen in this light, the privileged position of public sector landlords is justified by policy rather than principle, but, of course, that does not make it any less sensible. A similar view was taken in Gray v Taylor (1998), where one ground for denying that the occupier of a charity almshouse was a tenant was that it would be inconsistent with the duty of the particular trustees of the charity to have granted a tenancy and with it, a measure of residential security.

Importantly, however, this view of the Westminster cases (that it is the identity of the landlord in these cases that is the decisive factor in drawing the lease/

186

Leases

licence distinction) has been challenged. In Bruton v London and Quadrant Housing Trust (1999), the House of Lords were considering the status of Mr Bruton who held a property on an express ‘licence’ from the Trust. The Trust itself held a licence from the freeholder, Lambeth LBC, and was acting in support of Lambeth’s housing functions. In deciding that Mr Bruton held a lease (on which see immediately below), Lord Hoffmann noted (obiter) that the law does not accept that the identity or type of landlord is relevant in determining the existence of a lease or licence. However, as the earlier cases demonstrate, this may well be going too far, at least in the sense that the identity of the landlord can help to establish whether the giving of a licence to an occupier (as opposed to a lease) was a genuine response to the unique circumstances of a case rather than an attempt to avoid the grant of a lease per se. So, the fact that Westminster Council had statutory housing functions must impact on the genuineness of its attempt to give some of its occupiers ‘mere’ licences, just as in Mehta v Royal Bank of Scotland (1999) where the Court of Appeal decided that a hotel occupier had ‘only’ a licence as against the hotel owners (as per his agreement) because this was the only sensible interpretation of the relationship between the particular parties. In fact, as discussed below, Bruton is a case that raises other concerns when considering the distinction between a lease and a licence.

As mentioned, in Bruton the claimant contended that he held a lease from the Housing Trust on the basis that he enjoyed exclusive possession. However, the Trust itself held only a licence from the freeholder, not because of some clever draughtsmanship by the freeholder, but because any grant of a lease by Lambeth LBC (the freeholder) would have been ultra vires its powers under s 32 of the Housing Act 1985. Naturally (one might think) the Trust resisted the claim that Bruton held a lease on the simple ground that because it (the Trust) held no estate in the land (no lease), it could not grant such an estate in the land to Mr Bruton. Nemo dat quod non habet: a person cannot grant what they do not own. This was accepted by the Court of Appeal but, somewhat surprisingly, was rejected by the House of Lords. According to Lord Hoffmann, giving the leading judgment and deciding in favour of a lease for Mr Bruton, the test of whether an occupier held a lease was the ‘exclusive possession’ test of Street. Bruton had exclusive possession, so he had a lease. Unfortunately, this deceptively simple (and, with respect, simplistic) reasoning has far reaching consequences. It means, as acknowledged by Lord Hoffmann, that a lease is not always a proprietary right in the land. Apparently, it is a state of affairs between ‘landlord’ and ‘tenant’ and whether it is also proprietary in the sense of being capable of binding third parties can depend on the circumstances in which the ‘lease’ arises. To put it another way, apparently there is in English law the ‘normal’ proprietary lease that has been with us for centuries and also the ‘non-proprietary lease’ being a ‘lease’ between the parties, but not so counted for other purposes. It is an understatement to say that this muddies the waters. The decision in Street itself is premised on the assumption that a lease is proprietary and that is

187

Principles of Land Law

why it must be distinguished from a licence. To take the ratio of Street and apply it to Bruton in the manner suggested by Lord Hoffmann does great violence not only to established principles of property law but goes against the very purpose of Lord Templeman’s judgment in the earlier case. No doubt, the decision in Bruton was convenient in that it enabled Mr Bruton to compel the Trust to perform the repairing obligations that may be implied into a ‘lease’ under s 11 of the Landlord and Tenant Act 1985. On the other hand, the ‘non-proprietary lease’ is a strange creature in English property law and, we might suggest, it already has a name: that is, it is a licence! Of course, where the law develops from here remains to be seen. It may well be that Bruton will come to be regarded as decided ‘by reference to its own special facts’ and that it is not taken as authority for the destruction of one of the most fundamental distinctions connected with the use of land: that is, the distinction between proprietary leases and personal licences.

There is, then, some uncertainty as to the extent to which a bona fide intention to grant only a licence, in circumstances where the need to do so is manifest and genuine, permits the landowner to deny the occupier a proprietary lease.

In similar vein, Lord Oliver in Antoniades v Villiers (1990) suggests that there may be circumstances where a landlord can genuinely reserve to himself a right to make use of the premises that they have given over to an occupier and, if such use is made, no exclusive possession will be given and a licence will result; for example, if a landowner grants occupation of her house to a student for £50 per week, but reserves a right (subsequently used) to enter at any time and make use of the study, dining room, etc. In effect, this is no more than a restatement of the distinction between exclusive possession and exclusive occupation: the former establishing the legal relationship of landlord and tenant, the latter describing a factual situation, devoid of proprietary effect. However, the ability of a landowner to reserve a right to himself which effectively destroys the grant of exclusive possession is controversial as it appears to offer landowners a way out of the rigors of Street v Mountford (1985). For that reason, it must constitute a rare exception to the Street ratio, and the ‘pretence’ rule (discussed below) may invalidate most attempts by land owners to achieve such an outcome. In any event, this ‘exception’ would not be applicable if the right reserved by the landowner was consistent with the grant of a lease. For example, a landowner may reserve the right to enter the premises, in order to inspect and carry out repairs, but such a right actually confirms the grant of a tenancy rather than denies it, for this is just the sort of right a landlord would expect to have under a lease.

Finally, as just noted, all attempts by the landlord to deny the grant of exclusive possession are subject to the court’s powers to ignore ‘pretences’ (or ‘sham devices’). According to Antoniades v Villiers (1990), a ‘pretence’ exists where a clause in an agreement for the occupation of land is inserted into that agreement deliberately in order to avoid the creation of the lease that

188

Leases

would otherwise arise and where either party do not intend to rely in practice on the clause. A pretence may be established from an examination of the surrounding circumstances of the case and may be confirmed by the parties’ subsequent practice. For example, in Antoniades, an unmarried couple signed separate agreements for the occupation of what was clearly going to be their joint home and these agreements gave the landlord certain rights over the property which were unlikely to be enjoyed in practice (for example, the right to nominate another occupier). This was an attempt by the landlord to avoid the grant of a tenancy by artificially destroying the ‘four unities’ necessary to give the couple a joint tenancy of the leasehold and by reserving to himself some power over the property. This was held to be a pretence, created only to deny artificially the grant of exclusive possession. Hence, the parties held the property under a lease.

6.2.2For a term certain

Another essential ingredient in a lease is that the exclusive possession granted to the tenant must be for a defined and certain period of time: for example, one year, one month, seven years, 99 years, etc. This means not only that the lease must start at a clearly defined moment, but also that the length of the term granted must be certain. At the commencement of the lease, it must be possible to define exactly the maximum duration of the lease, even if it is possible to end the lease at some time before this. So, a lease for 3,000 years is perfectly valid, even if the lease contains ‘break clauses’ entitling the landlord and tenant to terminate the lease by notice on, say, every 10th anniversary. Any lease, or rather any intended lease, that fails to satisfy this condition is necessarily void, because it does not amount to a ‘term certain’. Of course, in the great majority of cases, this condition is easily satisfied, as in the above example, because the landlord and tenant will state clearly the duration of the lease. However, problems can arise where the term of the lease is set by reference to some other criteria, such as the happening of an uncertain event. For example, in Lace v Chandler (1944), a lease for the duration of the Second World War was held void as being of uncertain maximum duration. In recent years, the principle of ‘time’ or ‘term’ certain has been under attack, and there was an attempt to accept as leases certain arrangements which, on a proper construction, could not be said to create a certain term. So in Ashburn Anstalt v Arnold (1989), an arrangement whereby a tenant occupied property indefinitely until the landlord gave three months’ notice was held to be a lease on the ground that the term could be rendered certain by action of one of the parties. In reality of course this does contradict the rule that a lease must be certain at the date of its commencement and it came as no surprise when the House of Lords in Prudential Assurance v London Residuary Body (1992) reaffirmed the rule that a leasehold term must be certain from the outset. Consequently, it is not enough that an uncertain term can, in fact, be rendered

189