Thomas v Ken Thomas Ltd

A debtor who clearly appropriates a payment to a particular debt before payment controls its application. The creditor cannot defeat that appropriation by objecting. If the creditor retains the money, the appropriation binds both parties. Acceptance of rent attributable to a period after a once-and-for-all breach objectively affirms the lease and waives forfeiture, regardless of the landlord’s intention.

Where pre-arrangement rent is replaced by rights under an approved company voluntary arrangement, no rent remains owing on which forfeiture can be based. The landlord retains the proprietary right of re-entry but cannot exercise it for the replaced debt.

Relief from forfeiture for non-payment may require payment of arrears supporting the forfeiture and costs. It cannot require payment of earlier sums for which the right to forfeit has been waived.

The claimant landlord let a warehouse to the defendant company. After the company failed to pay one month’s rent, it expressly appropriated later payments to subsequent rent. The landlord objected to that appropriation but retained the money. The unpaid earlier rent was later included in an approved company voluntary arrangement under Part I of the Insolvency Act 1986.

HHJ Darroch in Norwich County Court held that the landlord had not waived forfeiture, could forfeit despite the voluntary arrangement, and could require payment of the unpaid month’s rent, VAT arrears and costs as conditions of relief.

The company appealed on three questions: whether the later payments waived forfeiture; whether the voluntary arrangement removed the basis for forfeiture; and whether relief could require payment of sums for which forfeiture had already been waived.

1. Appeal allowed unanimously. The company validly appropriated the December and January payments to the rent identified in its communications. A creditor cannot defeat a debtor’s prior appropriation merely by objecting to it. The landlord could have refused or promptly returned the transferred money. By retaining it, he became bound by the company’s appropriation.

2. The acceptance of rent allocated to later periods objectively affirmed the continuing lease after the earlier breach. The landlord therefore waived his accrued right to forfeit for the November default. Waiver did not depend on his subjective intention or his expressed protest.

3. Although unnecessary to the disposition, the court also concluded that an approved company voluntary arrangement removed the basis for forfeiture in respect of rent caught by it. Section 5(2) of the Insolvency Act 1986 replaced the landlord’s claim to that rent with his rights under the arrangement. The proprietary right of re-entry survived, but it could not be exercised for rent which was no longer owing.

   A landlord’s right of re-entry does not give the landlord the hybrid status of a secured creditor. The contrary approach in March Estates Plc v Gunmark Ltd was displaced. The relevant point in Doorbar v Alltime Securities Ltd (No 2) had proceeded by concession and was not followed.

4. The court observed that future rent should not normally be included in a voluntary arrangement where the tenant remains in occupation and trades for creditors’ benefit. A landlord may ordinarily expect full payment for continuing occupation and may object if the arrangement provides otherwise without special circumstances.

5. On the assumed basis that forfeiture remained available, relief could require payment of the rent supporting the forfeiture and the action costs. Section 138 of the County Courts Act 1984 did not permit an additional condition requiring payment of earlier VAT arrears for which forfeiture had been waived. “Rent in arrear” for that purpose meant rent whose payment would restore the lease and in respect of which forfeiture remained available.

Lord Justice Mummery and Lord Justice Jacob agreed with Lord Justice Neuberger.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The landlord had waived forfeiture. The court also held that the company voluntary arrangement removed the basis for forfeiture and that waived arrears could not be imposed as conditions of relief. [2006] EWCA Civ 1504.
2. Norwich County Court: HHJ Darroch held that forfeiture had not been waived, remained available despite the company voluntary arrangement, and could be relieved against only upon payment of one month’s rent, VAT arrears and costs.