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Rent claims

Appropriation of rent and forfeiture

Thomas v Ken Thomas Ltd
[2006] EWCA Civ 1504

The question

Who has the right to appropriate payments? The landlord or the tenant? If there are two months rent due and the tenant makes a payment equivalent to one month and appropriates it to the second month is the landlord bound to accept that position? Can he reject the appropriation in writing or verbally; or must he send the money back? What happens if he does not return the money and accepts a further payment - has he waived the right to foreit?

The principle

To quote Chitty on Contracts: "Where several separate debts are due from the debtor to the creditor, the debtor may, when making a payment, appropriate the money paid to a particular debt or debts, and if the creditor accepts the payment so appropriated, he must apply it in the manner directed by the debtor".

This case

In this case, the rent was payable monthly. The rent which fell due on 1 November 2004 was not paid. On 3 December 2004 a letter was written on behalf of the tenant to the landlord stating that the tenant proposed making two payments on 7 and 14 December, in respect of the rent due on 1 December 2004. The letter stated that the rent due for November (and some outstanding VAT on earlier rent payments) would go into a company voluntary arrangement as an unsecured amount. In a telephone conversation the landlord made it clear that he would not accept the appropriation made on behalf of the tenant but would only accept the money on the basis that the payment was made in respect of the rent due on 1 November 2004. The sums were paid by CHAPS directly into the landlord's bank account and not returned.

By a letter dated 31 December 2004 the tenant stated that the January rent would be paid weekly, rather than monthly. On 1 January 2005 the landlord sent a rent demand for the rent due on 1 January 2005. Weekly payments were then made as stated in the letter of the previous day and were accepted.

On 1 February 2005 the landlord commenced forfeiture proceedings in respect of one month's rent.

The tenant argued that the landlord had waived the breach. According to the tenant's appropriation the rent outstanding was that due for 1 November 2004. By accepting the rent for December 2004 and January 2005 the landlord had waived that breach. The landlord argued that it had made clear that it had not accepted the appropriation that the tenant purported to make so that the rent outstanding on 1 February 2005 when the proceedings were issued was the rent for January 2005 - which had not therefore been paid.

The decision

The problem with the landlord's argument is that a creditor cannot unilaterally reject an appropriation made by a debtor. If he does not accept the appropriation he must return the money. In the case of a CHAPS payment this means that he must repay it as quickly as the circumstances permit. Neuberger LJ at paras 20-23:
    "In this case, the [tenant] company made it clear in advance through its agent, Mr Campbell, that it would be appropriating the two payments, made in December 2004, to the rent due on 1 December 2004 (see the letter of 3 December), and the four payments, made in January 2005, to the rent due on 1 January 2005 (see the letter of 31 December). The fact that Mr Thomas purported in clear terms not to accept it does not render the appropriation ineffective, in my opinion.

    First, it cannot be right that the creditor can deprive the debtor of his right to appropriate by unilaterally denying that the debtor's appropriation is valid or effective; the principle set out in paragraph 21.059 of Chitty would be of little value if it was otherwise. Secondly, if the debtor had validly appropriated the payment to one debt, the creditor cannot somehow effectively appropriate the payment to another debt. The payment must obviously be appropriated to the same debt as between both of them.

    Thus, it does not appear to me that, where a debtor communicates an appropriation in advance of a payment, it is open to a creditor to defeat the debtor's appropriation by challenging it, or disagreeing with it, before the payment is made."
And at para 28:
    "(4) That law, properly applied, shows that, if he exercises the right, it is the tenant debtor who can appropriate, and that it is only if he does not do so that the creditor landlord is entitled to appropriate. (5) If the creditor landlord is unhappy with the appropriation to the extent of not being prepared to accept the money on the basis that it is offered, he can refuse it or if, as in this case, it is paid by CHAPS or a similar system, he can return it within a reasonable time. (6) Once the money is accepted or retained on the basis selected by the tenant, then, subject to any question of contrary agreement, estoppel or the like, the recipient of the money, the landlord, is as a matter of law fixed with the appropriation -- and with its consequences in terms of waiver of forfeiture, which do not depend on what he intended."

CVA's and forfeiture

Thomas v Ken Thomas Ltd
[2006] EWCA Civ 1504

There was was a further point discussed in the case. It became academic because of the CA's decision on appropriation and waiver which deprived the landlord of the right to forfeit but as there had been full argument Neuberger LJ gave his views on this further point, which related to the relationship between company voluntary arrangements and forfeiture. A CVA prevents the landlord from suing in respect of past rent but does it prevent him from forfeiting in respect of that rent?

Between the date of the claim for forfeiture and the hearing a company voluntary arrangement was made (over the objection of the landlord). Counsel for the landlord accepted that the CVA prevented the landlord from suing for the whole rent due once the CVA was made but argued that it did not prevent the landlord from forfeiting in respect of the non-payment of rent. Neuberger LJ reviewed the earlier authorities which provided some support for that argument but rejected it. Neuberger at paras 47 to 49:
    " .. I consider that the forfeiture proceedings were perfectly properly commenced based on the single arrears of rent (if I am wrong in my view on waiver), but, by the time the proceedings came to court, there was no rent owing and forfeiture could not have been claimed. Even if that is wrong it was not open to the judge to require the rent, which was not owing because of the terms of the CVA, be paid as a condition of relief from forfeiture.

    I do not regard this as a particularly unfair result for a landlord. As I have indicated, in the normal run of case, as it presently seems to me only past rent which has fallen due should be caught up in the CVA, not future rent. Therefore the landlord is being treated like any other unsecured creditor. He is not being deprived of his right to forfeit: he is merely unable to forfeit for rent which he can no longer claim for, because it has been replaced by debt under, and pursuant to the terms of, the CVA. In any event, the landlord is not deprived of his right to forfeit the lease if, as in this case, as under any well-drafted lease, he has the right to forfeit in the event of insolvency including the proposing of the CVA, or any other act of insolvency, and he does not waive it.

    Furthermore, although the landlord, like any other creditor, might feel prejudiced by CVA, particularly, as in this case, if it is one which he has opposed, that is a problem faced by any creditor on the company of the CVA and it is part of the price of the rescue culture."
As Neuberger LJ stated the principle only (clearly) applies to past rent. In relation to future rent he made the following statement earlier in his judgment at para 34:
    "As at present advised, it appears to me that the rent falling due after the CVA should by no means necessarily be expected to be caught by the terms of the CVA, even if it is capable of being so caught (as was held first instance in Re Cancol Ltd (1996) 1 All ER 37). It strikes me that, at least normally, it would seem wrong in principle that a tenant should be able to trade under a CVA for the benefit of its past creditors, at the present and future expense of its landlord. If the tenant is to continue occupying the landlord's property for the purposes of trading under the CVA (and hopefully trading out of the CVA) he should normally, as it currently appears to me, expect to pay the full rent to which the landlord is contractually entitled .. Therefore as at present advised, I consider that a CVA should so provide, or if it does not provide, in the absence of special circumstances the landlord may well be entitled to object to the proposals as unreasonable. Certainly, that is how the company and its advisers in the present case appear to have proceeded."



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