Breaking Bad tenancies

16 Jul 2018

In the 2018 county court case of Vanezis & Vanezis v Ozkoc and others the claimant landlords failed in their claim for possession of a café premises for breaches of covenant in the lease arising from, amongst others, the defendant tenant’s criminal conviction for conspiracy to supply class A drugs.

The first and second claimants were the husband and wife freehold owners of a building containing a café on the ground floor with offices above. The first claimant (a qualified barrister and solicitor) administered matters for the claimants; the second claimant (his wife) was rarely involved. The café, known as L’Auberge, is located in Leather Lane in London where there is a successful street market open during lunchtimes.

The 15 year lease, protected by the Landlord and Tenant Act 1954, was originally granted in 2005 and assigned to the second defendant (“D2”) in 2008 (proceedings were discontinued against the first defendant). D2 and his friend the third defendant (“D3”) reached an oral agreement to conduct a café business from the premises with D3 installed as the day to day manager. D2 and D3 set up and were shareholders in a company called L’Auberge Limited who paid the rent to the claimants from 2008 to 2014.

The fourth defendant was a company known as Chill & Relax Limited (“D4”) which was incorporated in 2014 and whose shareholders were D3 and the brother of D2. D4 made 5 payments during 2014 and 2015 to the claimants although the final payment, in June 2015, was returned.

The reason behind the various changes in entity making payment of the rent to the claimants was that D2 was charged with and pleaded guilty to conspiracy to supply class A drugs and was sentenced in March 2015 to 17 years in prison. As a result, D2 protected his financial interest in the café via his brother’s shareholding in D4.

The first claimant, who wanted to re-develop a neighbouring property to the extent it would necessarily interrupt the café business, met with D3 on two occasions in April 2015. D3 lied to him each time as to D2’s whereabouts. It was only following that meeting in around May 2015 that the first claimant became aware of D2’s imprisonment. The claimants returned rent payment from D4 and served a notice pursuant to section 146 of the Law and Property Act 1925 in order to forfeit the lease and relied upon, inter alia, the covenants in the lease including: (i) breach of the covenant that the premises could not be used for any illegal or immoral purpose; and (ii) breach of the covenant not to share occupation or part with possession of the premises.

The claimants pursued the matter to trial to seek a possession order but ultimately failed before Mr Recorder Stephen Gee QC whose judgment examined the position in detail and looked at the wider circumstances of the case including the effect on D3 and the employees of the café business when exercising the court’s discretion to grant relief.

In relation to the covenant not to use of the premises for illegal or immoral purposes the Court found that the claimants had failed to prove that the café itself had been used for the illegal or immoral purpose. The judge was not satisfied that the evidence demonstrated that anything by way of conspiracy had taken place at the café. The criminal proceedings demonstrated D2 had made and received calls and had meetings but not that they had taken place at the café.

The judge found that the commercial objective of the covenant was to prevent the café being used for a purpose which:

“..could adversely affect future use, reletting, sale or value of these premises, including the value of the premises to the freeholders.”

This, the judge decided, would suggest the café needed to be used to manufacture or deal drugs or be “..sufficiently connected with the conspiracy to amount to use of the premises for the purpose of concluding or carrying out the illegal conspiracy..”.

In dealing with the alleged breach of covenant not to share occupation or part with possession it was held that D2 (the tenant) was in breach because he was not the sole occupier and had allowed directors and employees of D4 to access and carry on business from the café premises. However, on the facts it was held that the first claimant was aware of the dealings which ultimately provided for D4 to occupy the premises and conduct the café business. The claimants had accepted rent from L’Auberge Limited for over 6 years and knew the café was not being run by D2 personally. The judge found that:-

“In 2014 and 2015 he [the first claimant] did not focus on the identity of who was paying rent but he knew of the breach and accepted the rent knowing that D2 was not in sole occupation.”

As such the claimants had waived their right to forfeit the lease because they had known (or had shut their eyes) to the reality of the occupation by D4. Furthermore, the judge held that the covenant could have been remedied by an assignment from D2 to D4 and so he would have granted relief on that basis in any event. In the judge’s opinion, the claimants could not have refused consent to such an assignment.

The Judge made a number of interesting comments regarding the exercise of the court’s discretion when granting relief pursuant to section 146(2) LPA 1925. He firstly commented that, in the event he had found the premises had breached the illegal/immoral user covenant, he considered the covenant would still have been capable of remedy by the tenant within the meaning of section 146(1)(c). The issue in every case would involve a:-

“meticulous examination of all the facts, including consideration of the effects of the particular breach”. 

In this case, the alleged behaviour was not ‘notorious’ and given the public were unaware of the alleged criminal conduct that had taken place at the café (i.e. D2s alleged meetings and calls) they would not have associated the premises with that illegal behaviour which would cause them to avoid using the premises. The Judge did not think the illegal use would affect the value of the claimant’s freehold or whether it could be re-let. He therefore did not consider the claimants had suffered any loss.

The Judge also directed himself to the statutory wording in s146(2) and to consider “all the other circumstances” when considering the application of the court’s discretion to grant relief. In this respect, the facts that the café business had operated since 2008 and D3 and the café employees were innocent were pertinent issues. Serious consequences (i.e. termination of employment) would result for those employees and the businesses that the café supplied would also be inconvenienced. He also noted that goodwill had built up since 2008 and a significant investment in the business from the D2 and D3 would be lost. D3 would suffer, despite not being involved in or aware of any illegal activity and D2 would be punished twice. The judge also no doubt had in mind that this was a 1954 Act protected lease and financial advantages would accrue to the claimants in obtaining possession prior to their proposed redevelopment.

The Judge noted D3’s admission to have lied to the claimants regarding the imprisonment of D2 (and his apology in court for doing so) but he considered that there were adequate reasons for this and that there was no reason why D3 and the claimants could not continue a commercial relationship. In summary, the judge stated that on the facts in this case:-

“.. I would have regarded it as disproportionate, unjustified and unfair for the lease to be forfeited... I would without hesitation have exercised the statutory discretion to grant relief from forfeiture”.

All in all an interesting decision with judicial commentary that highlights the extent of the court’s statutory discretion when considering applications for relief from forfeiture. The claimants may feel somewhat hard done by in this case but, whenever you deal with courts and discretion, ‘you pays your money and takes your choice’.

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