Michael v Lillitos

Factual and Procedural Background

The Appellant, an accountant, had been a tenant of the Respondent, the landlord of business premises at 497 Green Lanes, for over 30 years. In February 2017, the Respondent issued a claim seeking rent arrears for the 1st and 2nd floors of the property, later amended to claim £62,946.46 plus costs, comprising rent arrears, reimbursement of business rates paid by the Respondent, and interest.

The Appellant defended the claim and counterclaimed, alleging that after a ceiling collapse in 2008, possession of the 2nd floor was returned to the Respondent, reducing rent to £300 per month. The Appellant further contended entitlement to set off accountancy fees provided to the Respondent and damages for disrepair. The Appellant also disputed liability for business rates under the tenancy agreement.

In August 2018, the Appellant issued a claim for a new lease under the Landlord and Tenant Act 1954. On 12 September 2017, a District Judge ordered consolidation of the claims and set payment terms for mesne profits at £300 per month by bank transfer, though the timing of payments was not specified.

The Appellant made some payments by cheque rather than by bank transfer, which the Respondent challenged. Following non-payment by bank transfer on specified dates, the Respondent applied for an unless order requiring payment by bank transfer of £1,200 by 1 March 2018 and £300 monthly thereafter, failing which the Appellant's defence and counterclaim would be struck out and judgment entered for the Respondent.

The Appellant partially complied but failed to make payments by bank transfer on 1 April, 1 May, and 1 June 2018, instead sending cheques. The Respondent's solicitors held a cheque for £900 without informing the court or the Appellant. Judgment was entered in favour of the Respondent on 18 May 2018, with the Appellant unaware of the application for judgment until receiving the order in June 2018.

The Appellant subsequently made payments and applied for relief from sanction, which was refused by Recorder Cohen. Permission to appeal was granted by Stewart J.

Legal Issues Presented

1. Whether the lower court erred in refusing the Appellant relief from sanction for failure to comply with the unless order requiring payment by bank transfer.
2. Whether the breach of the unless order was serious or significant under the Denton test.
3. Whether the court properly considered all circumstances of the case, including proportionality of the sanction.

Arguments of the Parties

Appellant's Arguments

• The breach was not a failure to pay but a failure to pay by the specified method (bank transfer), which should not be treated as serious or significant.
• Payments by cheque should be treated as equivalent to bank transfer for the purposes of compliance.
• The requirement for payment by bank transfer was not discussed or emphasized at hearings and had not been consistently enforced.
• The breach had no impact on the efficient conduct or cost of litigation.
• The refusal of relief from sanction was disproportionate given the substantial detriment to the Appellant, who would be prevented from defending the claim or pursuing counterclaims.

Respondent's Arguments

• The breach of the unless order was serious and significant because it involved failure to comply with a clear court order specifying payment by bank transfer to avoid disputes.
• The Respondent emphasized the importance of strict compliance with unless orders and the consequences of non-compliance.
• The Respondent disputed that the cheque held constituted proper payment under the order.
• The Respondent argued that the judgment entered was correct and that the Appellant was not entitled to relief from sanction.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Denton v TH White Limited [2014] 1 WLR 3926	Framework for assessing relief from sanctions in three stages: seriousness of breach, reason for default, and all circumstances including efficiency and justice.	The court applied the Denton test to assess the seriousness of the breach and the proportionality of the sanction, ultimately finding the breach significant but relief should have been granted.
British Gas Trading Ltd v Oak Cash & Carry Ltd [2016] 1 WLR 4530	Emphasizes the seriousness of breach of an unless order and the automatic sanctions attached.	The court acknowledged that breach of an unless order is a strong indicator of seriousness but noted not every breach is serious or significant, citing this precedent in assessing the breach.
Utilise TDS Ltd v Davies [2014] 1 WLR 3926	Clarifies that minor or trivial breaches of unless orders (e.g., 45 minutes late) may not be serious or significant.	The court referred to this case to distinguish the present breach from trivial breaches, reinforcing that the breach here was more than trivial.

Court's Reasoning and Analysis

The court reviewed the refusal of relief from sanction by applying the Denton three-stage test. First, it identified the breach as failure to pay by the specified method of bank transfer, not a failure to pay altogether. The court found this breach to be serious and significant because the order expressly required payment by bank transfer to avoid disputes about timing and receipt, and because it was an unless order with automatic sanctions.

The court rejected the Appellant's argument that payment by cheque equated to payment by bank transfer, emphasizing the importance of strict compliance with the order's terms. It also noted that the Respondent's solicitors had failed to inform the court or the Appellant that they held a cheque for three months' rent, which undermined the Respondent's position.

In considering the third stage of Denton, the court weighed all circumstances, including the absence of disruption to litigation efficiency or cost, the lack of an underlying breach of court rules, and the substantial detriment to the Appellant if relief were denied. The court found the sanction disproportionate given these factors and the Respondent's conduct regarding the cheque.

Holding and Implications

The court ALLOWED THE APPEAL and held that the refusal of relief from sanction was wrong. The sanction of striking out the Appellant's defence and counterclaim and entering judgment against him was wholly disproportionate in the circumstances.

The direct effect of this decision is that the Appellant may pursue his defence and counterclaim, including challenging the Respondent's claim for business rates and seeking set-offs for accountancy fees and disrepair damages. No new legal precedent was established; rather, the decision applies established principles to the facts, emphasizing proportionality and fairness in relief from sanction applications.