Bankway Properties Ltd v Pensfold-Dunsford

A provision in an assured tenancy cannot be enforced where, viewed in substance and in its surrounding circumstances, it masquerades as a rent clause but was designed to secure possession by imposing a sum which the landlord never genuinely expected to receive.

Such a provision defeats the intended security of tenure. It may be invalid as an evasion of the mandatory statutory scheme or ignored as repugnant to the agreement’s main purpose. Partial evasion of statutory protection is sufficient. An onerous term in a signed agreement may nevertheless be incorporated where the landlord fairly draws attention to the relevant clause.

The appellants held a flat under an agreement expressly described as an assured tenancy under the Housing Act 1988. The initial annual rent was £4,680, but clause 8(b)(iii) purported to increase it to £25,000 within two years. The landlord knew that the tenants depended on housing benefit, and the increased sum greatly exceeded the market rent and their means.

The Brighton County Court granted Bankway possession and judgment for £12,261.25 in rent arrears. It regarded the clause as a permissible device and held that the signed term was binding. The tenants appealed, contending that the clause was either inadequately incorporated or an unlawful means of defeating the security attached to an assured tenancy.

1. Appeal allowed unanimously. Arden LJ and Pill LJ agreed that clause 8(b)(iii) could not be enforced. The possession order and the judgment for arrears attributable to that clause were set aside.
2. Per Arden LJ, the tenants were bound in principle by the signed agreement. Although the clause was onerous and unusual, the landlord had sufficiently drawn attention to the rent-review clause. It was unnecessary to decide whether the principle in Interfoto could apply generally to a signed contract.
3. In determining whether an apparent contractual term is a sham, pretence or statutory evasion, the court examines the substance and reality of the transaction. It may consider all relevant circumstances, including subsequent conduct. The usual requirement of a common subjective intention to deceive does not govern the distinct doctrine preventing evasion of mandatory legislation.
4. Per Arden LJ, sections 5 and 7 of the Housing Act 1988 prevent parties to an assured tenancy from reducing the statutory security of tenure. A genuine agreement about rent would remain binding. Clause 8(b)(iii), however, was not in substance a rent provision. The excessive figure had not been negotiated, was far above market rent, was not demanded when it first became payable, and was never genuinely expected to be paid. Its real purpose was to cause surrender or manufacture mandatory rent arrears as a route to possession. It therefore improperly evaded the statutory scheme and was unenforceable. Evasion of part of a statutory scheme is sufficient.
5. Per Pill LJ, the same result followed as a matter of contractual construction. The agreement’s main purpose was to create an assured tenancy providing long-term security. The artificial increase was inconsistent with and repugnant to that purpose and had to be ignored. Pill LJ expressed difficulty with characterising the statutory regime as one from which the parties could never contract out, since they could have chosen another form of tenancy, but agreed that this particular clause could not defeat the agreement’s main object.

1. Court of Appeal: The appeal was allowed unanimously. The possession order and the judgment for rent arrears above the rent otherwise reserved were set aside. Leave to appeal to the House of Lords was refused.
2. Brighton County Court: His Honour Judge Kennedy QC granted Bankway possession and judgment for £12,261.25 in arrears. He held that the rent provision was incorporated and constituted a permissible device. He granted permission to appeal and certified the case for transfer to the Court of Appeal under rule 52.14(a) of the Civil Procedure Rules 1998.