Patel & Anor v K&J Restaurants Ltd & Anor

Factual and Procedural Background

The Plaintiff, owners of the freehold of a mixed-use building at 116 Tottenham Court Road, leased the entire premises to the First Defendant, Company A, for a 20-year term starting December 2004. The ground floor and basement were used as a restaurant, with flats on the upper floors. The Plaintiff sought possession on grounds of forfeiture due to alleged breaches of covenant by Company A, specifically (1) underletting or sharing possession of the restaurant premises with the Second Defendant, Company B, and (2) the use of one flat for prostitution, constituting illegal or immoral use.

The trial took place over four days in March 2009 before Judge Bailey in the Central London County Court. The judge dismissed the Plaintiff's claim for forfeiture and possession and ordered the Plaintiff to pay Company A's costs. Permission to appeal was initially refused but later granted by Lady Justice Smith.

The Plaintiff issued two notices under section 146 of the Law of Property Act 1925, alleging breaches of covenant: one for immoral/illegal use and the other for alienation issues related to the restaurant. Company A denied breaches and alternatively claimed relief against forfeiture. Company B did not participate in the appeal but was represented at trial.

Legal Issues Presented

1. Whether Company A breached the lease covenant by permitting immoral or illegal use of the flat for prostitution.
2. Whether Company A breached the lease covenant by underletting or sharing possession/occupation of the restaurant premises with Company B.
3. Whether the breaches, if established, were capable of remedy.
4. Whether relief from forfeiture should be granted to Company A in respect of any proven breaches.
5. The validity of the section 146 notices served by the Plaintiff.
6. The appropriate conditions and terms (including costs) for any relief from forfeiture.

Arguments of the Parties

Plaintiff's Arguments

• Company A was in breach of covenant by allowing the flat to be used as a brothel, constituting illegal and immoral use.
• Company A breached the alienation covenant by underletting or sharing possession of the restaurant premises with Company B without consent.
• The breaches were serious, wilful, and involved concealment, negating entitlement to relief from forfeiture.
• The Plaintiff contended that relief from forfeiture should be refused given the gravity of breaches and lack of prompt remedial action.
• Costs of the proceedings should be awarded against Company A on an indemnity basis if relief were granted.

Company A's Arguments

• Company A denied any breach of covenant, asserting that Company B was merely a manager and agent, not a subtenant, thus no alienation occurred.
• In respect of the immoral use, Company A argued that it acted reasonably and promptly once formally notified by the police and that the breach was remediable.
• Company A sought relief from forfeiture on both alleged breaches, relying on the absence of wilful conduct and the lack of lasting damage or stigma.
• Company A contended that any costs award should be on the standard basis, especially as it no longer sought relief from forfeiture following a Deed of Surrender.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analyzed the two alleged breaches separately, applying established principles concerning lease covenants and forfeiture.

Regarding the immoral use of the flat, the court distinguished between direct use by the tenant and use by a subtenant. It recognized that a breach by subtenant use can be remediable if the tenant acts promptly upon knowledge. The court found that Company A's representative had reasonable grounds to suspect the flat's use as a brothel following a police telephone call in November 2007 and that Company A failed to make reasonable enquiries promptly, instead waiting for a formal police letter that never arrived. This inaction constituted a breach of covenant that was no longer remediable at the time of the first section 146 notice. The court rejected the trial judge's view that waiting for the letter was reasonable under the lease obligations.

On the alienation issue, the court carefully examined the agreements between Company A and Company B. It concluded that Company B had a distinct, enforceable right to use and occupy the restaurant premises for its own benefit during the term of the agreements, rather than acting purely as an agent of Company A. This arrangement amounted to shared occupation, breaching the covenant against underletting or sharing possession without consent. The court found that Company A had not effectively remedied this breach before the trial because although it changed the locks to exclude Company B, Company B obtained an injunction reinstating access, and Company A had not given the required written notice to terminate the agreements.

On relief from forfeiture, the court accepted the trial judge's conclusion that relief would have been granted for the immoral use breach despite its irremediable nature, given the absence of stigma and prompt eviction of the offending subtenant. However, it disagreed with the judge's finding that the alienation breach had been remedied and found that relief should be granted conditionally, requiring Company A to exclude Company B from the premises.

The court considered costs as a condition of relief. It reviewed relevant authorities and concluded that costs should be paid by Company A on the indemnity basis as a condition of relief from forfeiture, reflecting the principle of indemnifying the lessor against proper expenses and the conduct of the proceedings. The court rejected Company A's argument that costs should be on the standard basis due to the subsequent surrender of the lease, holding that the legal issues and costs consequences should be decided as if the litigation positions remained unchanged.

Finally, the court adjusted the costs order for the appeal, disallowing costs related to the inclusion of the full trial transcript in the appeal bundles and awarding the Plaintiff three quarters of their appeal costs on the indemnity basis, reflecting partial success.

Holding and Implications

The court's final decision was to allow the appeal in part, overturning the trial judge's dismissal of breaches but upholding the refusal to grant possession. The court held that Company A was in breach of covenant in both respects:

• The breach regarding immoral use of the flat was irremediable due to failure to act promptly on reasonable suspicion.
• The breach regarding alienation and shared occupation of the restaurant premises had not been remedied at trial.

Relief from forfeiture was granted to Company A on both breaches, subject to conditions including:

• Undertakings by Company A not to commit future breaches of the relevant covenants.
• Payment of the Plaintiff's costs of the proceedings at first instance and three quarters of their appeal costs on the indemnity basis, with some costs disallowed.

Subsequent to the judgment, the parties executed a Deed of Surrender of the lease, but the court decided the legal issues and costs consequences on the basis that the litigation positions were preserved for decision. The direct effect of the decision is to uphold relief from forfeiture on terms, preventing immediate possession by the Plaintiff. No new legal precedent was established beyond the application of existing principles to the facts.