Patel & Anor v K&J Restaurants Ltd & Anor

Where prohibited immoral use is by a subtenant, the tenant must act promptly once it has knowledge or reasonable grounds for suspicion. It must make appropriate enquiries; certainty or a formal police notice is unnecessary. Failure to act may make an otherwise remediable breach incapable of remedy. An arrangement described as management can amount to shared occupation where the manager has an enforceable right to use premises for its own benefit, even though the tenant retains access and control. Relief against forfeiture remains discretionary. There is no absolute bar for immoral use. Relevant considerations include wilfulness, remediation, stigma, lasting damage and disproportionate financial consequences. Relief may be granted on terms, ordinarily including indemnity costs and undertakings against future breaches.

The appellants owned the freehold of premises leased to K&J Restaurants Ltd. The lease prohibited immoral or illegal use and prohibited assignment, underletting, parting with or sharing possession or occupation. The appellants served two notices under section 146 of the Law of Property Act 1925, alleging prostitution in a flat and shared occupation of the restaurant with MP Catering Ltd.

After a four-day trial, His Honour Judge Bailey dismissed the possession claim, finding no breach, but indicated that relief against forfeiture would have been granted if breaches had been established. The appeal concerned whether the alleged conduct constituted breaches, whether the notices were valid, and whether relief should be granted.

The appeal was allowed in the formal order, although the refusal of possession was upheld on a different basis.

1. Immoral use. The court distinguished direct use by the tenant from use by a subtenant. Under the approach in Glass v Kencakes Ltd [1966] 1 QB 611, a subtenant’s immoral use does not automatically create an irremediable breach. The tenant must act responsibly once it knows of the use or has reasonable grounds to suspect it. That includes making prompt and appropriate enquiries. The tenant need not wait for certainty or a formal police letter. The telephone call from the police gave K&J reasonable grounds for suspicion. Its failure to investigate for about three months meant that the breach was no longer capable of remedy. The first notice under section 146 of the Law of Property Act 1925 was therefore valid.
2. Shared occupation. The agreements with MPC did not create a subtenancy or transfer ownership of the business. They nevertheless gave MPC an enforceable right and obligation to use the restaurant, prevented K&J from excluding it except by terminating the agreements, and allowed MPC to run the business for its own profit. K&J had therefore shared occupation in breach of the alienation covenant. The second notice was valid. Although the breach was remediable, changing the locks did not cure it because MPC obtained interim relief and resumed occupation.
3. Relief against forfeiture. The trial judge’s contingent exercise of discretion was to be respected unless affected by error of law, misdirection or a plainly wrong conclusion. Relief for immoral use is approached with reluctance, but there is no absolute bar or inflexible exceptional-circumstances rule. The absence of lasting stigma, the lack of disproportionate damage to the landlord, and the financial disproportion of forfeiture supported relief for the first breach. The judge’s approach to the second breach was flawed because he assumed it had already been remedied. Exercising the discretion afresh, the Court of Appeal granted relief because the breaches were not wilful, there was no culpable concealment, K&J continued seeking MPC’s removal, and MPC was eventually excluded.
4. Terms and costs. Relief was to be conditional on undertakings against future breaches and payment of the claimants’ costs. Applying Egerton v Jones [1939] 2 KB 702 and Bland v Ingrams Estates Ltd (No 2) [2001] EWCA Civ 1088, the costs were ordinarily recoverable on the indemnity basis. The court preferred that approach to the contrary view expressed in Billson v Residential Apartments Ltd (No 1) [1992] 1 AC 494. Because the lease had subsequently been surrendered without altering the parties’ positions, only the costs consequences required determination. K&J was ordered to pay all costs below and three quarters of the appeal costs on the indemnity basis, excluding the unnecessary transcript cost.

1. Court of Appeal (Civil Division) [2010] EWCA Civ 1211: allowed the appeal in the formal order, substituted findings that both covenants had been breached and both notices were valid, and made a costs order following the subsequent surrender of the lease.
2. Central London County Court: His Honour Judge Bailey dismissed the possession claim and ordered the claimants to pay K&J’s costs. He found no breach, but indicated that relief against forfeiture would have been granted if breaches had been established.