Avoiding tenancy legislation: Sham and contracting out revisited

Cambridge Law Journal

Volumn 61, Issue 1, 2002, Pages 146-168

  Bright, Susan ^a  

^a UNIVERSITY OF OXFORD   (United Kingdom)

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EID: 85011438696     PISSN: 00081973     EISSN: 14692139     Source Type: Journal    
DOI: 10.1017/S0008197302001563     Document Type: Article

References (121)

1. Bankway Properties Ltd. v. Pensfold-Dunsford [2001] EWCA Civ. 528 at para. [56], per Arden L.J.
2. [2001] 1 W.L.R. 1369.
3. See Barrett v. Morgan [2000] 2 A.C. 264.
4. Johnson v. Moreton [1980] A.C. 37
5. Gisborne v. Burton [1989] Q.B. 390
6. Featherstone v. Staples [1986] 1 W.L.R. 861.
7. Street v. Mountford [1985] A.C. 809
8. AG Securities v. Vaughan
9. Antoniades v. Villiers [1990] 1 A.C. 417.
10. Barton v. Fincham [1921] 2 K.B. 291
11. Appleton v. Aspin [1988] 1 W.L.R. 410.
12. Hilton v. Plustitle Ltd. [1989] 1 W.L.R. 149.
13. Jones v. Wrortam Park Settled Estates [1980] A.C. 74
14. Belvedere Court Management Ltd. v. Frogmore Developments Ltd. [1997] Q.B. 858.
15. The Unfair Terms in Consumer Contracts Regulations 1999, S.I. 1999/2083.
16. Bankway Properties Ltd. v. Pensfold-Dunsford [2001] EWCA Civ. 528
17. [2001] 1 W.L.R. 1369.
18. Bankway Properties Ltd. v. Pensfold-Dunsford [2001] EWCA Civ. 528
19. [2001] 1 W.L.R. 1369. By the Finance Act 1988 these tax concessions were available only for a five year period and many BES companies were planning to exit the rental market at the end of that period.
20. Bankway Properties Ltd. v. Pensfold-Dunsford [2001] EWCA Civ. 528 at para. [54]
21. [2001] 1 W.L.R. 1369.
22. [1960] 1 Q.B. 170
23. confirmed by Court of Appeal [1960] 2 Q.B. 384.
24. Belvedere Court Management Ltd. v. Frogmore Developments Ltd. [1997] Q.B. 858.
25. Jones v. Wrotham Park Settled Estates [1980] A.C. 74, 113.
26. Reviewing cases on sham, Staughton L.J. said in Welsh Development Agency v. Export Finance Co. Ltd. [1992] B.C.L.C. 148, 185 “The problem is not made any easier by the variety of language that has been used: substance, truth, reality, genuine are good words
27. disguise, cloak, mask, colourable device, label, form, artificial, sham, stratagem and pretence are ‘bad names’, to adopt the phrase quoted by Dixon J. in Palette Shoes Pty. Ltd. v. Krohn (1937) 58 C.L.R. 1 at 28.”
28. [1921] 2 K.B. 291.
29. Similar schemes of protection applied under the 1948 and 1986 Acts hut for new lettings entered into after the Agricultural Tenancies Act 1995 there is much less regulation.
30. Either through an agreement to give up possession, Barton v. Fincham [1921] 2 K.B. 291
31. Appleton v. Aspin [1988] 1 W.L.R. 410
32. or agreeing not to serve a counter-notice, Johnson v. Moreton [1980] A.C. 37
33. or agreeing not to serve a counter-notice without the consent of a company controlled by the landlord, Featherstone v. Staples [1986] 1 W.L.R. 861.
34. Barrett v. Morgan [2000] 2 A.C. 264.
35. Gisborne v. Burton [1989] Q.B. 390 may appear not to fit this analysis, hut it will he argued below that, if correct, this is a case of re-routing as the tenancy to the wife was not genuine.
36. Belvedere Court Management Ltd. v. Frogmore Developments Ltd. [1997] Q.B. 858.
37. Per Sir Thomas Bingham M.R. at p. 876.
38. Welsh Development Agency v. Export Finance Co. Ltd. [1992] B.C.L.C. 148, 186
39. drawing on the comments (inter alia) of Lord Hanworth M.R. in Re George Inglefield Ltd. [1933] 1 Ch. 1 at pp. 19, 23.
40. See also Re Curtain Dream pic [1990] B.C.L.C. 925, 935, per Knox J.: “… a cloak may he liable to he torn aside for one of two reasons. One may he that the documents are shams, in the sense that they are not genuine documents and they say things which the parties did not intend actually to govern their relationship. The other way is by analysing the effect of the totality of the transaction and seeing whether, on its true construction, the totality of the relationship between the parties was one which amounts to a creditor-debtor relationship or a vendor and purchaser and repurchase relationship.”
41. Snook v. London & West Riding Investments Ltd. [1967] 2 Q.B. 786, 802.
42. 32 H.L.R. 302.
43. See also Duarte v. Mount Cook Land Ltd. Q.B.D. 26.7.01
44. Crowley Q.C. in which documents presented as contracts for the sale of a lease were held to he shams.
45. Hitch v. Stone [2001] E.W.C.A. 63
46. [2000] S.T.C. 214.
47. Hitch v. Stone [2001] E.W.C.A. 63 at para. [69]
48. [2000] S.T.C. 214.
49. Hitch v. Stone [2001] E.W.C.A. 63 at para. [85]
50. [2000] S.T.C. 214
51. Hitch v. Stone [2000] E.W.C.A. 63 at para. [65]
52. [2000] S.T.C. 214.
53. Per Knox J. in Chase Manhattan Equities Ltd. v. Godman [1991] B.C.L.C. 897, 921.
54. See also Megarry J. in Miles v. Bull [1969] 1 Q.B. 258, 264
55. Neuherger J. in National Westminster Bank plc v. Jones [2001] 1 B.C.L.C. 98 at para. [37].
56. “… they were sham documents designed to conceal the true nature of the transaction”, AG Securities v. Vaughan, Antoniades v. Villiers [1990] 1 A.C. 417, 470.
57. AG Securities v. Vaughan, Antoniades v. Villiers [1990] 1 A.C. 417, 462, per Lord Templeman: “It would have been more accurate and less liable to give rise to misunderstandings if I had substituted the word ‘pretence’ for the references to ‘sham devices’
58. and ‘artificial transactions’ [in Street v. Mountford [1985] A.C. 809 at p. 825].”
59. Asian v. Murphy
60. Duke v. Wynne [1990] 1 W.L.R. 766, 770–771.
61. Clause 16, and the use of two separate agreements. Similarly, in Asian v. Murphy; Duke v. Wynne [1990] 1 W.L.R. 766, 772–773 Lord Donaldson M.R. saw sham as operating on the whole, whereas pretence can operate on part---“What [the judge] should have done … was to consider whether the whole agreement was a sham and, if it was not, whether in the light of the factual situation the provisions for sharing the room and those depriving Mr. Murphy of the right to occupy it for 90 minutes out of each 24 hours were part of the true bargain between the parties or were pretences.”
62. [1989] Q.B. 390.
63. Bright, “Beyond Sham and Into Pretence” (1991) 11 O.J.L.S. 136.
64. Hilton v. Plustitle Ltd. [1989] 1 W.L.R. 149
65. Kaye v. Massbetter [1991] 2 E.G.L.R. 97.
66. Hilton v. Plustitle Ltd. [1989] 1 W.L.R. 149, 155, per Croom-Johnson L.J.: “[The company] was the only tenant to whom [the landlord] was prepared to let the property, and the covenants in the lease were perfectly capable of being complied with by the company through its nominee … and enforced against the company … [The] transaction did represent the true position.”
67. The “Ramsay” principle itself is still evolving with recent cases displaying a less interventionist approach: see, especially, Macniven v. Westmoreland Investments Ltd. [2001] UKHL 6
68. [2001] 2 W.L.R. 377.
69. There is also considerable doubt about whether the same approach applies to real property cases: “I am not for my part satisfied that in the field of real property the principles in WT Ramsay Ltd. v. IRC [1982] A.C. 300
70. and Furniss v. Dawson [1984] A.C. 474 entitle the court simply to ignore or override apparently effective transactions which on their face confer an interest in land on the transferee.”
71. Belvedere Court Management Ltd. v. Frogmore Development Ltd. [1997] Q.B. 858, 876, per Sir Thomas Bingham M.R.
72. Hilton v. Plustitle Ltd. [1989] 1 W.L.R. 149, 155.
73. [1989] Q.B. 390, 402–403.
74. [1989] Q.B. 390, 402.
75. Yorkshire Railway Wagon Co. v. Maclure (1881) 21 Ch. 309
76. Stoneleigh Finance Ltd. v. Phillips [1965] 1 All E.R. 513.
77. (1881) 21 Ch. 309, 314.
78. Midland Bank v. Wyatt [1995] 1 F.L.R. 696.
79. Abdel Rahman v. Chase Bank (CI) Trust Company Ltd. [1991] J.L.R. 103, 147: “… the settlement was a sham on the facts, in the sense that it was made to appear to be a genuine gift when it was not”, per Tomes, Deputy Bailiff for the Royal Court of Jersey.
80. See National Westminster Bank plc v. Jones [2001] 1 B.C.L.C. 98 at para. [45], per Neuberger J.
81. In Miles v. Bull [1969] 1 Q.B. 258, 264 Megarry J. said that to show sham “it must be shown that the outward and visible form does not coincide with the inward and substantial truth.”
82. A sham document will usually be hiding a true agreement between the parties but it is not necessary to prove that there was an alternative “real” agreement: Chase Manhattan Equities Ltd. v. Goodman [1991] B.C.L.C. 897, 922, Knox J.
83. See, for example, Bhopal v. Walia 32 H.L.R. 302 where the tenant was able to prove that the true rent was £300 rather than the £450 presented in the sham tenancy agreement.
84. Compare National Westminster Bank plc v. Jones [2001] 1 B.C.L.C. 98, Neuberger J. especially at para. [59] and para. [68]. Throughout his judgment it is clear that a claim that a transaction is not genuine will he hard to prove.
85. See National Westminster Bank plc v. Jones, [2001] 1 B.C.L.C. 98 at para. [60], per Neuherger J.: “If a tenancy agreement is a sham, and an innocent third party accepts it as security for a aloan to the tenant, then it seems to me that the third party is entitled to treat the tenancy in existence as against the landlord and as against the tenant: it can scarcely lie in the mouth of either of them to contend that the tenancy agreement does not exist as against the mortgagee in such circumstances.”
86. By contrast, in Bhopal v. Walia (1999) 32 H.L.R. 302 the tenant was not estopped from proving the sham as against the purchaser of the reversionary interest as the purchaser had not relied in any way upon the terms of the sham agreement.
87. Midland Bank v. Wyatt [1995] 1 F.L.R. 696.
88. As in AG Securities v. Vaughan, Antoniades v. Villiers [1990] 1 A.C. 417.
89. For example, Midland Bank v. Wyatt [1995] 1 F.L.R. 696. In Eaton Square Properties Ltd. v. Eamon Oliver Plunkett Laserian O'Higgens (CA, 20.10.2000) counsel had argued an analogy with the cases on illegality and trusts whereby a court cannot hear a party argue his own iniquity as a reason why a particular document cannot take the effect that it appears to have. The Tinsley v. Milligan line of cases do appear to involve similar principles in that the case is usually that the apparent transfer of ownership is a pretence in order to disguise or hide the true ownership from a third party, although in these cases the “shammer” may he allowed to prove it was a sham.
90. Hill explores this issue in the context of proprietary rights: Intention and the creation of proprietary rights: are leases different? (1996) 16 L.S. 200. He argues that the general rule is that where an interest displays the substantive characteristics of a proprietary right, the parties can nonetheless choose to characterise the interest as personal. The lease/licence distinction is treated differently because of inequality of bargaining power.
91. Street v. Mountford [1985] A.C. 809 at 819.
92. See also Asian v. Murphy
93. Duke v. Wynne [1990] 1 W.L.R. 766, 770, per Lord Donaldson M.R., “The labels which parties agree to attach to themselves or to their agreements are never conclusive and in this particular field, in which there is enormous pressure on the homeless to agree to any label which will facilitate the obtaining of accommodation, they give no guidance at all.”
94. McMeechan v. Secretary of State for Employment [1997] I.C.R. 549.
95. Welsh Development Agency v. Export Finance Co Ltd. [1992] B.C.L.C. 148.
96. See also, Mustill L.J. in Hadjiloucas v. Crean [1988] 1 W.L.R. 1006 at p. 1019: “the document does precisely reflect the agreement between the parties, hut where the language of the document (and in particular its title or description) superficially indicates that it falls into one legal category, whereas when properly analysed in the light of surrounding circumstances it can he seen to fall into another”.
97. This echoes the steps proposed by Lord Hoffmann in response to tax avoidance schemes in Macniven v. Westmoreland [2001] UKHL 6
98. [2001] 2 W.L.R. 377.
99. See also Buckley L.J. in Shell-Mex & BP Ltd. v. Manchester Garages [1971] 1 All E.R. 841, 846: “One has first to find out what is the true nature of the transaction and then see how the Act operates on that state of affairs, if it bites at all.”
100. In a similar vein, see Landlord and Tenant Act 1954, s. 38(10)
101. and in an employment context, Employment Rights Act 1996, s. 203.
102. [1980] A.C. 37.
103. Later cases in which specific speeches in Johnson v. Moreton [1980] A.C. 37 have been drawn on have been in the agricultural tenancy context
104. and have referred to Lords Salmon, Hailsham and Russell (Gisborne v. Burton [1989] Q.B. 390
105. and Feather stone v. Staples [1986] 1 W.L.R. 861).
106. [1980] A.C. 37, 69.
107. Barrett v. Morgan [2000] 2 A.C. 264.
108. [1921] 2 K.B. 291.
109. A similar case based on more recent legislation is Apple ton v. Aspin [1988] 1 W.L.R. 410.
110. [1986] 1 W.L.R. 861.
111. The Court of Appeal rejected arguments that the term had not been properly incorporated. In the future, the Unfair Terms in Consumer Contracts Regulations 1999, S.I. 1999/2083, might well strike down such provisions, but they were not in force when the tenancy agreement in Bankway was entered into.
112. For discussion of the Regulations, see, Bright, “Winning the Battle against Unfair Contract Terms” (2000) 20 L.S. 331.
113. In re Watson; Ex p Official Receiver in Bankruptcy (1890) 25 Q.B.D. 27, 37, per Lord Esher M.R.: “I do not deny that people may evade an Act of Parliament if they can, but, if they attempt to do so by putting forward documents which affect to be one thing when they really mean something different, and which are not true descriptions of what the parties to them are really doing, the Court will go through the documents in order to arrive at the truth.”
114. Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600, 634, per Lord Devlin.
115. In re Duke of Marlborough; Davis v. Whitehead [1894] 2 Ch. 133. The property had only been conveyed to him to enable him to raise mortgage finance.
116. Aveling Barford Ltd. v. Perion Ltd. [1989] B.C.L.C. 626.
117. Compare “… it is most unusual for a tenancy to he granted at a rent significantly in excess of the market rent … particularly to a company with no significant property … While that emphasises the artificiality of the transaction, these points do not render the agreements shams.” Per Neuberger J. in National Wesminster Bank plc v. Jones [2001] 1 B.C.L.C. 98 at para. [61].
118. [1893] A.C. 351, 357.
119. An Indian Supreme Court decision, Skandia Insurance Co. Ltd. v. Kokilaben Chandravan, A.I.R. 1987 S.C. 1184
120. does so and is referred to by Rix J. in Deepak Fertilisers v. ICI [1998] 2 Lloyds Rep. 139, but noting at para. [74] that “Skandia was itself a somewhat special case, and not one from which it is easy to draw wide conclusions.”
121. It is not always the case, however, as an assured tenancy can be brought to an end, for example, if the landlord wants to occupy the house himself, or if it is a winter let: see Housing Act 1988, Sch. 2.