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Section 146 notices

Getting the notice right

Akici v LR Butlin Ltd
[2005] EWCA Civ 1296

Introduction

This case concerns the meaning of sharing possession in a tenants covenant in the context of a company, the validity of s146 notices, and remedying breaches against sharing possession.

The covenant

The covenant in the lease was in the following terms:
    "Not to .. part with possession of a part of the demised premises nor to share possession of the whole or any part of the demised premises nor to part with possession of the whole of the demised premises (except as hereinafter permitted) all of which are expressly prohibited."
Sharing possession or occupation

It was held that there is a distinction between possession and occupation so that the covenant would only be breached if T parted with, or shared possession, but was not infringed if T merely parted with, or shared, occupation. Neuberger LJ:
    " .. it is perfectly possible for a lessee to permit a company, in which he has an interest, to occupy the demised premises for the purpose of its business, without parting with possession of those premises to that company."
Mistake in the notice

In fact T had shared possession with a limited liability company, and that represented a breach of the covenant. However, the s146 notice that was served by L did not allege that T was sharing possession. It only alleged that T had parted with possession to the company. It was therefore ineffective. Neuberger LJ:
    "54. I accept the submission that the approach of the majority of the House of Lords in Mannai to contractual notices would apply to section 146 notices ... However, I have nonetheless come to the conclusion that Mr. Lloyd's defence of the notice cannot stand. Even applying Mannai, the notice has to comply with the requirements of section 146(1) of the 1925 Act, and if, as appears pretty plainly to be the case, it does not specify the right breach, then nothing in Mannai can save it.

    55. Quite apart from this, if, on its true construction, the section 146 notice did not specify sharing possession as a breach complained of, it can be said with considerable force that it neither informed the recipient of the breach complained of, nor indicated to him whether, and if so how, he must remedy any breach. On the basis that there was a sharing of possession, a reasonable recipient of the section 146 notice would have been entitled to take the view that he need do nothing, because the lessors were only complaining about the presence of the company if there was a parting with of possession (or assigning or underletting) by Mr. Akici to it.

    56. Accordingly, a reasonable recipient in this case (and it is the understanding of such a hypothetical person by reference to which the validity of the notice is to be assessed according to Mannai) could, to put it at its lowest, reasonably have taken the view that the lessors were not objecting to any sharing of possession, and consequently that no steps need to be taken, either with a view to remedying the breach or with a view to improving the prospects of obtaining relief from forfeiture."
Conclusion

As the notice was defective, the forfeiture carried out by L was defective. However, the CA did also go on to consider whether or not a breach of the covenant against sharing possession was capable of remedy and held that it was. Neuberger LJ:
    "73. in the absence of special circumstances, a breach of covenant against parting with possession or sharing possession, falling short of creating or transferring of legal interest, are breaches of covenant which are capable of remedy within the meaning of section 146."
The judge at the trial had concluded that the breach had been remedied by the lessee acquiring all the shares in, and becoming the sole director of, the company. That was a conclusion that he was entitled to come to.

(See also Sub-letting and sharing occupation)


Mortgagee in possession

Still serve notice on the tenant

Smith v Spaul
[2002] EWCA Civ 1830

Summary

A mortgagee in possession is not a "lessee" for the purposes of s146 of the 1925 Act and the Leasehold Property (Repairs) Act 1938. Thus, it is not necessary to serve a s146 notice on a mortgagee - nor can the mortgagee take the benefit of the 1938 Act by serving a counter-notice. The mortgagee has a right to apply for a vesting order under s146(4) but it does not have the additional benefit of the 1938 Act. (Target Home Loans Ltd v Iza Ltd [2000] 1 EGLR 23 disapproved.)

Citation
    "Although the expression 'the lessee' is defined in very wide terms by s146(5)(b) .. the particular lessee required to be served under s146(1) must be the person who vis-a-vis the lessor is bound to remedy the breach or to make compensation in money...

    The reasoning in Target is effectively that possession should be the touchstone for entitlement to a notice under s1 of the 1938 Act because the person in possession - whether the tenant or a mortgagee - is the person who was able to remedy the breach set out in the s146 notice. However, the fact that the mortgagee is in possession is not an absolute bar to the tenant remedying the breach. He can first redeem the mortgage or remedy the breach with the mortgagee's consent. Accordingly, it does not necessarily follow that the fact that the mortgagee is in possession means that the mortgagee is the only person able to remedy the breach. Moreover, the mortgagee is not the person who is liable to the lessor to remedy the breach or to make compensation. Accordingly even if the mortgagee is in possession, I see no reason why he should receive a notice under s146(1) or a notice under s1 of the 1938 Act." (Arden LJ at paras 25 and 28).

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