[2024] UKUT 255 (LC)

The first ground of appeal is that Mr Kumar was not a person against whom a rent repayment order could be made because he was not the respondents’ immediate landlord.

Section 40(1) and (2), 2016 Act, provide:

“40.

Introduction and key definitions

(1)

This Chapter confers power on the First-tier Tribunal to make a rent repayment order where a landlord has committed an offence to which this Chapter applies.

(2)

A rent repayment order is an order requiring the landlord under a tenancy of housing in England to—

(a)

repay an amount of rent paid by a tenant, or

(b)

pay a local housing authority an amount in respect of a relevant award of universal credit paid (to any person) in respect of rent under the tenancy.”

In Rakusen v Jepsen, Lord Briggs and Lord Burrows JJSC (with whom the other three Justices agreed) referred to section 40(1) and (2) as “the central relevant provisions” of the 2016 Act. They analysed their effect, at [26], by reference to a hypothetical example in which a freeholder, X, grants a tenancy of a building containing 10 flats to Y who in turn grants a tenancy of a single flat to Z (“the sub-tenancy”), as follows:

“Thus the description of a rent RRO is that it is an order “requiring the landlord under a tenancy of housing in England to… repay an amount of rent paid by a tenant”. To what rent does “rent paid by a tenant” refer? Plainly, in our view, those words refer to rent paid by a tenant under the “tenancy of housing in England” referred to earlier in the same sentence. That is the sub-tenancy in the hypothetical example, if the tenant seeking repayment is (as in this case) the occupier Z. It will necessarily have been paid to the landlord under that tenancy, to Y in the example, so that an order for “repayment” naturally requires that landlord to pay back what he, she or it (henceforth “it”) has received to the tenant who paid it.”

They continued, at [28]:

“This straightforward interpretation links the landlord with the tenancy that generates the relevant rent. It renders it artificial and unnatural to construe the opening words of section 40(2) as referring to any landlord other than the landlord under the tenancy which generates the relevant rent, that is the rent to be repaid under section 40(2)(a) and the rent in respect of which the universal credit is paid under section 40(2)(b). It excludes a superior landlord because it is not the “landlord under” the tenancy which generates the rent.”

Further, at [31], referring to the words “repay … rent paid by a tenant” in section 40(2), Lord Briggs and Lord Burrows added:

“Those words naturally refer to the landlord repaying the rent paid to the landlord by the tenant or, put another way, repaying the rent received directly from the tenant. Repayment of rent paid most naturally refers to a direct relationship of landlord and tenant. It is forced language to say that a superior landlord would be repaying rent to a tenant from whom it had never received any rent. In our example, Z has paid rent to Y not X and it is Y, not X, that may be required to “repay” that rent to Z.”

There were two strands to the argument advanced by Mr Morris on behalf of Mr Kumar, each of which is said to be sufficient to justify allowing the appeal and setting the FTT’s decision aside as having been made without jurisdiction.

The simplest way of putting the case is that because the respondents did not pay their rent to Mr Kumar, but paid it only to LML, Mr Kumar cannot be ordered to repay anything to them. That proposition is based solely on the FTT’s finding of fact, which was not disputed, that the respondents continued to pay their rent to LML after 30 September 2019, and did not pay anything to Mr Kumar. It does not require consideration of the effect of the grant of sub-tenancies for longer than the remaining term of the Headlease.

Referring to Rakusen v Jepsen Mr Morris submitted that a rent repayment order can only be made in respect of rent which is paid by a tenant directly to the landlord the subject of their application. It is not enough for there to be a direct relationship of landlord and tenant between the paying and receiving party. The respondent to an application for a rent repayment order must be both the immediate landlord of the applicant and a recipient of rent from the applicant under a tenancy between them. In this case Mr Kumar had received no rent from the respondents, so could not be required to repay anything to them.

This most basic way of putting the case is not undermined by consideration of the effect of the grant by LML of sub-tenancies longer than unexpired residue of its own Headlease. Mr Morris did not dispute the FTT’s analysis that, when each of the sub-tenancies was granted, it took effect as an assignment of LML’s legal estate in the particular room from LML to the individual sub-tenant. That was the effect of the principle in Milmo v Carreras which Mr Morris did not challenge.

Mr Morris and Mr Neilson did not disagree on the consequences of the assignment of the Headlease by operation of law. As a result there was privity of estate and a direct landlord and tenant relationship between Mr Kumar and the respondents on the terms of the Headlease; the tenant covenants in the Headlease became binding on the respondents (section 3, Landlord and Tenant (Covenants) Act 1995 (the 1995 Act)). The respondents could therefore sue Mr Kumar, or be sued by him, on the covenants in the Headlease, including the covenant to pay rent (see Woodfall: Landlord and Tenant, at 16.082). But the purported sub-tenancies were still valid contracts and LML was also entitled to sue the respondents for the rent due under them (or the profit rent if the respondents had paid the Headlease rent to Mr Kumar) because there was a binding contract between them, notwithstanding that it took effect in law as an assignment (see Woodfall, at 16.157).

Mr Morris therefore submitted that any payments made to LML by the respondents after 30 September 2019 were made to discharge their contractual liability to LML and were not payments of rent to Mr Kumar. Moreover (and this was the second limb of Mr Morris’s argument), after 30 September 2019 LML continued to pay rent to Mr Kumar every month and an implied periodic tenancy thereby came into existence between them on the terms of the Headlease. As the respondents continued to pay their rents to LML, an implied periodic tenancy also came into existence between them and LML. The intended chain of title was restored by the first payments of rent after the expiry of the Headlease.

Mr Neilson accepted that, as between LML and Mr Kumar, the continued payment and acceptance of rent from 30 September 2019 gave rise to a new landlord and tenant relationship which was an implied periodic tenancy of the whole House on the terms of the Headlease. The relationship which had formerly existed between Mr Kumar and LML and which had been brought to a partial but premature end as the purported sub-tenancies of each of the rooms were granted, was re-established. But Mr Neilson did not accept that the chain of title was restored and suggested instead that the arrangement took effect as a lease of the reversion to the tenancies which now existed between Mr Kumar and the respondents (which was said to be the effect of section 15, 1995 Act). By that route, he proposed, the respondents remained in a direct relationship of landlord and tenant with Mr Kumar and the sums which they paid to LML should be regarded as payments of the rent due under the tenancy which existed between each of them and Mr Kumar.

The first difficulty I have with Mr Neilson’s submission is that it does not overcome the objection that the respondents made no payments to Mr Kumar. He suggested that it was not necessary to read the decision of the Supreme Court in Rakusen v Jepsen as requiring that the rent to be repaid must first have been received by the landlord against whom the rent repayment order is to be made. That submissions seems to me to be clearly inconsistent with the reasoning of the Supreme Court and I reject it.

It is therefore a sufficient and complete answer to the application for a rent repayment order that nothing was paid by the respondents to Mr Kumar so nothing can be ordered to be repaid by him to them.

In any event, I reject Mr Neilson’s artificial analysis of the relationships between the various parties after 30 September 2019. The parties themselves had no intention of disturbing their pre-existing relationships and knew nothing of the assignment of the Headlease by operation of law. The arrangements which should be implied from the payments and acceptance of rent should mirror those which the parties understood and intended to exist, rather than being constructed simply for the purpose of sustaining a claim for a rent repayment order which would otherwise be unavailable.

As the FTT found, all parties continued as before, with the respondents paying rent for their individual rooms to LML and it paying rent to Mr Kumar for the whole House. The consequence of a landlord granting a tenancy to a third party with the agreement of the tenant is that the original tenancy is surrendered by operation of law and replaced by the new tenancy between the landlord and the third party (Metcalfe v Boyce [1927] 1 KB 758). By continuing to pay rent to LML the respondents must be taken to have acknowledged LML’s entitlement to let to them. Additionally, the payments of rent by the respondents were inconsistent with the requirements of the Headlease (both as to the recipient and as to the amount of rent) and the proper inference from their continuing to pay their own rent to LML, thereby recognising it and not Mr Kumar as their immediate landlord, is that new implied periodic tenancies of their individual rooms came into existence. Any rights the respondents might unknowingly have had under the Headlease were surrendered by operation of law. It was those implied tenancies which conferred the respondents’ rights of occupation, and not a statutory continuation of the Headlease after its contractual expiry (see section 5(4), Housing Act 1988 which provides that an assured periodic tenancy will not arise on the expiry of an assured tenancy for a fixed term if the tenant is entitled to possession of the same dwelling by virtue of another tenancy).

It follows that Mr Kumar was not the respondents’ immediate landlord and they paid no rent to him. He was not a person against whom a rent repayment order could be made in their favour.

For these reasons I allow the appeal and set aside the rent repayment order made by the FTT.