Smith v Spaul

For the purposes of a forfeiture notice, the relevant lessee is the person who, as against the lessor, is bound to remedy the breach or pay compensation. A mortgagee does not become that lessee merely by taking possession of leasehold premises. The mortgage leaves the lessor-lessee relationship unchanged. A mortgagee’s existing protection under the Law of Property Act 1925 does not extend to the additional protection under the Leasehold Property (Repairs) Act 1938. A mortgagee in possession therefore cannot serve an effective counter-notice preventing forfeiture proceedings without leave of the court.

The appellant, the freeholder of Flat C, appealed against a costs order made after the Central London County Court struck out her forfeiture proceedings. The proceedings relied on a notice under section 146 of the Law of Property Act 1925. The county court held that Halifax Building Society, which had taken possession as mortgagee, could serve a counter-notice under the Leasehold Property (Repairs) Act 1938, so that leave was required before proceedings could be brought.

The appeal, for which limited permission had been granted, concerned whether a mortgagee in possession was the lessee for the purposes of section 146 and section 1 of the 1938 Act.

The appeal was allowed. Lady Justice Arden gave the judgment, and Lord Justice Kay agreed.

1. Section 1(4) of the Leasehold Property (Repairs) Act 1938 makes the person entitled to receive the statutory counter-notice the same person as the person entitled to receive notice under section 146(1) of the Law of Property Act 1925.

2. Although section 146(5)(b) defines lessee in wide and non-exhaustive terms, the particular person to be served under section 146(1) is the person who, as against the lessor, is bound to remedy the breach or make compensation. A mortgage of a leasehold interest does not alter the relationship between lessor and lessee. That remains so when the mortgagee takes possession. The court relied on the reasoning in Egerton v Jones [1939] 2 KB 702 and Bonner v Tottenham and Edmonton Permanent Investment Building Society [1899] 1 QB 161.

3. Possession is not the touchstone for entitlement to statutory notice. A tenant may still redeem the mortgage or remedy the breach with the mortgagee’s consent. The mortgagee is not liable to the lessor under the lease to remedy the breach or pay compensation. The mortgagee already has protection under section 146(4), including the right to seek an order vesting the leasehold interest in him. Nothing in the authorities showed that the mortgagee was entitled to the additional protection under section 1 of the 1938 Act.

4. The decision in Church Commissioners for England v Ve-Ri-Best Manufacturing Co [1957] 1 QB 238 applied equally where the mortgagee was in possession. The reasoning in Target Home Loans Ltd v Iza Ltd [2000] 1 EGLR 23, which treated possession as decisive, was rejected. Halifax was therefore not entitled to serve a counter-notice, and the proceedings were not instituted in breach of section 1 of the 1938 Act.

5. The county court judge’s exercise of discretion as to costs was set aside. The estoppel issue was not under appeal. Unless the parties agreed the appropriate apportionment, the costs issue was to be remitted to the Central London County Court.

• Court of Appeal (Civil Division) — allowed the appeal and set aside the county court judge’s exercise of discretion as to costs.
• Central London County Court — struck out the forfeiture proceedings in part on the basis that the mortgagee in possession could serve a counter-notice under the Leasehold Property (Repairs) Act 1938, and ordered the appellant to pay costs on account.