There can be few statutes that have caused more controversy, engendered more litigation or caused more sleepless nights for professional advisers than the Landlord and Tenant Act (LTA) 1954. There seems to be no end to the tactical manoeuvring and ingenious interpretations that have led to case after case challenging various provisions of LTA 1954 – not least in relation to the criteria that determine whether or not an occupier is entitled to the protection of security of tenure which the Act potentially affords. One of the less scrutinised subsections is 23(2), which relates to occupation of the premises for the purposes of a business. This was the issue considered in the recent case of Hawkesbrook Leisure Ltd v The Reece-Jones Partnership [2003].

The 1954 Act checklist

It is worth reminding ourselves of the criteria that need to be satisfied before LTA 1954 can be said to apply:

• There needs to be a tenancy (ie, not a licence or a tenancy at will).
• The tenancy must include premises that are capable of being occupied and those premises must be so occupied by the tenant (or its beneficiary or associated company within the meaning of LTA1954).
• The occupation must be for the purposes of a business carried on by the tenant (or their beneficiary or associated company as above).
• The business use must be permitted under the terms of the tenancy (whether expressly or otherwise).
• The tenancy must not fall within certain specific exceptions set out in LTA 1954, including: an agricultural holding; a service tenancy; or a term certain of less than six months.

Although, as widely publicised, LTA 1954 is being amended by the Regulatory Reform (Business Tenancies) Order 2003, which comes into effect on 1 June 2004, most of the above criteria will remain untouched by the new rules.

Section 23(1) and (2)

Section 23(1) states:

Subject to the provisions of this Act, this part of this Act applies to any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of business carried on by him or for those and other purposes’

Subsection (2) goes on to define the expression ‘business’ as including:

… a trade, professional employment and includes any activity carried on by a body of persons, whether corporate or unincorporated.

The effect of this seems to be that an individual must show that they carry on a ‘trade, profession or employment’, whereas a ‘body of persons’ (such as a company) can also carry on an ‘activity’ in order to satisfy the criteria.

That would all seem to be quite selfexplanatory, hence perhaps the fact that there has been relatively little case law on the point. However, in Hawkesbrook Leisure, the defendant solicitors contended that if the claimant company was not trading with the predominant intention of making a profit, this did not constitute occupation for the purposes of a business and Hawkesbrook was not, therefore, entitled to protection under LTA1954.

The facts

The Hawkesbrook case was a straightforward claim in professional negligence against the company’s solicitor, the Reece-Jones Partnership. Hawkesbrook occupied a number of sports grounds, including two known as Fairlop and Langley Park (the sports grounds), pursuant to five-year leases granted by London Regional Transport, which later became London Underground Ltd. Those leases were due to expire in March 2001. Reece-Jones acted for Hawkesbrook in the setting-up of the company and the negotiation of the leases which, at the time, all parties had always understood to be protected by LTA 1954.

Hawkesbrook’s claim arose from the solicitors’ failure to make applications to the court for new tenancies within the requisite time limit specified in s29(3) of LTA 1954. That section stipulates that such applications must be made not less than two and not more than four months after service of the Section 26 notice; this notice, requesting a new tenancy, had been served on the landlord in October 2000.

Reece-Jones sought to defend the claim on the basis that Hawkesbrook was not in occupation of the sports grounds for the purposes of a business within the meaning of s23 and was, therefore, not entitled to the protection of LTA 1954. Since this was essentially the only basis on which the solicitors were seeking to avoid liability per se, this line of defence was tried as a preliminary issue. The issue in question was:

…Whether Hawkesbrook, a company limited by guarantee carried on a business and occupied the [subject] premises for the purposes of that business within the meaning of Part II of the Landlord and Tenant Act 1954 such as to entitle it to the protection afforded to business tenants by that part of the Act.

Etherton J considered the somewhat limited authorities on the matter (see box below).

The nature of the business

Hawkesbrook is a company limited by guarantee but without a share capital. Its objects were set out in its memorandum of association and included the following:

To carry on all or any of the business as proprietors managers tenants lessors and lessees of leisure and sports grounds and other places of amusement and entertainment… to acquire construct equip maintain carry on and manage clubs, sports grounds… for the use and accommodation of persons admitted to membership and their friends.

In essence, the sports grounds consisted of various sporting pitches and facilities, together with a hall or pavilion which could be used for related sporting events and/or independent social functions such as birthday parties, wedding receptions, etc.

The memorandum also specifically prohibits the distribution of profit to members, the history being that the sports grounds were previously used by London Regional Transport staff for sports and social purposes. However, in the mid-1990s, LRT made a strategic decision to let each of the sports grounds on long leases as an investment and allow them to be available to the general public, as well as staff, on a normal commercial basis. The club chairmen of each of the sports grounds (together with other similar grounds) were asked to form a company to take a lease of each ground – thus Hawkesbrook Leisure Ltd was born.

Both sports grounds were operated in a similar way – prospective customers would either telephone or visit in person to book a function room, or hire sports facilities, with revenue being derived from hire payments, bar takings, catering services and so on. The sports grounds operated a membership system, but it was possible for a member of the general public to become a member simply for the purposes of hiring the facilities on a one-off basis for, say, a wedding reception or a sports match and associated social function.

Hawkesbrook was also registered for VAT and generated a substantial turnover that resulted in a surplus. However, any such surplus was reinvested into the business by continually upgrading and refurbishing the sports grounds and their facilities, rather than paying dividends to its members.

Hawkesbrook’s case

In other words, the claimant’s evidence was that Hawkesbrook had always been run with the aim of generating a surplus, but this surplus was to be ploughed back into the business and used for improving the sports grounds, rather than being distributed to shareholders. Therefore, Hawkesbrook submitted, it was plainly occupying the sports grounds for the purposes of a business within the meaning of s23 of LTA 1954 and was carrying on a trade there within the ambit of that section.

Reece-Jones’s case

Reece-Jones contended that Hawkesbrook was not carrying on a business because its predominant intention was to maintain the facilities at the sports grounds rather than to make money. The firm argued that it was a prerequisite of qualification under LTA 1954 to be trading for profit, in which case neither the Fairlop nor Langley Park lease would have been protected at the all-important contractual expiry date.

The decision

Etherington J applied the principles of previous case law to the present case. He rejected Reece-Jones’ contention that Hawkesbrook was not in occupation of the sports grounds for the purposes of carrying on a business because it could not distribute any profit made, but could only apply the profit for maintaining improving and enlarging its sporting facilities in accordance with its memorandum of association.

The judge considered that there was nothing whatsoever in LTA 1954 or the reported cases that would warrant such a narrow and artificial approach. He equated Hawkesbrook’s situation to that in the Incorporated Society of Law Reporting case (see ‘Meaning of "business" – the case law’); indeed, he indicated that Hawkesbrook Leisure had a greater commerciality than the business carried on by government departments in Town Investments Ltd. It was held that Hawkesbrook was carrying on a commercial enterprise with a view to making a surplus, notwithstanding that the accounting profit was not distributed to its members.

The judge also focused on the fact that s23(2) provides that business ‘includes any activity carried on by a body of persons’ and so contrasted the meaning of business in the case of a single person to its meaning in the case of a body of persons.

The judge said that there were many ‘activities’, which, through this extended definition that applies in the case of a body of persons, would be entitled to protection under LTA 1954, even though they might not be carried on commercially. It could not therefore be said that an enterprise that is carried on commercially, with a view to making a trading surplus, cannot be a business within the meaning of LTA 1954, merely because the surplus cannot be distributed to shareholders or members.

Hawkesbrook’s situation was contrasted with that of the occupier in the case of Secretary of State for Transport v Jenkins [2000] in which the Court of Appeal considered whether the use of land as a community free farm, to which members of the public had free access, was within LTA 1954. In that case, the court held that this did not constitute a protected tenancy. Not only was the enterprise not carried on with a view to profit, it was not carried on as a trading activity, but rather in the spirit of public benevolence. As such, it was not a trade, profession or employment, nor any kind of business.

The judge considered that, on the evidence, the activity carried on by Hawkesbrook at the sports grounds was carried on with a view to making a profit or surplus, albeit not distributable to members, and it was carried on as a trading activity.

Conclusion

It is clear that the definition of business will be widely construed by the courts. However, this case should still act as a warning that there will still undoubtedly be circumstances, particularly if the tenant is an individual and/or has objectives other than pure financial ones, where a landlord may try to argue that LTA 1954 does not apply.

Meaning of ‘business’ – the case law

There is surprisingly little direct authority on what might constitute a ‘business’ for the purposes of LTA 1954 and it was therefore necessary to look further afield to other legislation. The court first considered the case of Town Investments Ltd v Department of the Environment [1978]. In that case, the House of Lords considered the application of orders made under the somewhat obscure Counter-Inflation Acts 1972 and 1973 in respect of premises let to government departments for occupation by civil servants. Each of the relevant counter-inflation orders contained definitions of ‘business tenancy’ and ‘business’ which mirrored the relevant parts of s23 of the 1954 Act. In Town Investments, Lord Diplock gave a very wide definition of ‘business’, calling the word an ‘etymological chameleon’. He also referred back to a definition set out as long ago as 1884 in the case of Rolls v Miller, which defined business thus:

Almost anything which is an occupation, as distinguished from a pleasure – anything which is an occupation or duty which requires attention is a business.

The House of Lords, therefore, held that a broad construction was to be given to ‘business’ and it should be interpreted as widely as it would be in the context of lease covenants restricting the user of demised premises. Therefore, in this case, occupation by government through its servants was indeed a business. The next case to be examined was Customs and Excise Commissioners v Lord Fisher [1981], where the court had to consider the meaning and effect of s45 of the Finance Act 1972 which provided that ‘business includes any trade profession or vocation’. In that case, the activity under consideration was the organisation and enjoyment of a pheasant shoot on the estate of a taxpayer who invited friends and relations to join the shoot, asking them to make contributions towards the costs. The taxpayer neither sought nor made any profit from those moneys and made at least an equal contribution from his own pocket. In this case, the court contrasted the ordinary meaning of the word ‘business’ as against ‘any activity which is no more than an activity for pleasure and social enjoyment’.

In the case of Re the Duty on the Estate of the Incorporated Society of Law Reporting for England and Wales (1888), the court had to consider whether the named party was established for a trade of business within the meaning of s11(5) of the Customs and Inland Revenue Act 1885 and would therefore be entitled to an exemption from the duty imposed by that section. In that case it was said that:

It is not essential to the carrying on of a trade that the persons engaged in it should make, or desire to make, a profit by it. Though it may be true that in the great majority of cases, the carrying on of a trade does, in fact, include the idea of profit, yet the definition of the mere word ‘trade’ does not necessarily mean something by which a profit is made.

Case references

Customs and Excise Commissioners v Lord Fisher [1981] 2 All ER 147

Re The Duty on the Estate of the Incorporated Council of Law Reporting for England and Wales (1888) 22 QBD 279

Hawkesbrook Leisure Ltd v The Reece-Jones Partnership [2003] EWHC 3333

Rolls v Miller (1884) 27 Ch D 71

Secretary of State for Transport v Jenkins [2000] 79 P&C 118

Town Investments Ltd v Department of the Environment [1978] AC 359

Vanessa Watson is a senior solicitor in the property litigation group at Stephenson Harwood.  © Property Law Journal