Introduction
The appropriate role of the courts in matters of commercial tenancies continues to be a vexed question. There is a considerable amount of uncertainty in this area, in particular lease/licence distinctions, due to conflicting judicial determinations. Smith v CIE is of particular significance, in that it marked a stark departure from the criterion as set out in S.3 of the Landlord and Tenant Law Amendment Act, Ireland 1860. This case note will detail the state of law antecedent to Smith and the implications of extending the paternalistic approach adopted in Street v Mountford to commercial contexts. Furthermore, it will discuss the likelihood that the courts might employ the principles set out in this case in future judgments.
Facts
The case was brought before the High Court after the applicant, Noel Smith, appealed from the order of the Circuit Court whereby an application for a new lease from Irish Rail under the provisions of Section 21(2) of the Landlord and Tenant (Amendment) Act 1980 was dismissed. The parties purported to enter into a licencing agreement allowing Mr Smith to operate a newsagent at a site in Tara Street station in return for a monthly licence fee. These facts were undisputed. The applicant held that notwithstanding its description, on its true construction, the arrangement had the effect of creating a tenancy. Therefore, he was entitled to a new tenancy subject to his tenant rights under the 1980 Act. The respondent submitted that the intention of the parties to create a licence was clear and unambiguous. The respondent also claimed that the creation of a tenancy would be ultra vires its powers subject to the Dublin, Wicklow and Wexford Railway (City of Dublin Junction Railways) Act 1884.
Background
The enactment of Deasy’s Act grounded the law of landlord and tenant firmly within the scope of the law of contract. Section 3 of the Act provides that the relation of landlord and tenant shall be founded on the express or implied contract of the parties. Theoretically, one would expect the test for determining a lease/licence distinction should be that of a reasonable person. That is to say, by looking at the outward conduct of both parties and the terms of any written agreement, a reasonable person would believe that they intended to enter into such a relationship. In practice, the judiciary has proved reluctant to carry through the implications of this provision. Antecedent to Smith, the Irish Courts looked at a number of criterion in determining if an agreement constituted a tenancy agreement.
Firstly, there must be deemed to be an intention by the parties to enter into a landlord-tenant relationship subject to S.3 of the Act. This criterion is seen in Irish case law with the adoption of an “on the ground” holistic approach. The case of Whipp v Mackey first introduced the courts right to discard the label placed on an agreement and consider the substance of the relationship between the parties when determining their intentions. This principle was reiterated in the Gatien Motors case, whereby Griffin J reiterated that “to find whether it was intended to create a relationship of landlord and tenant, one must look at the transaction as a whole and at any indications that are to be found in the terms of the contract between the two parties…”. This encompassed the courts unwillingness to abide by a formalistic approach to landholding disputes.
Subsequent to this there must be a payment of rent as specified in s.3 of the Act, as well as exclusive possession, which is not a requirement detailed in s.3. This criterion indicates the survival of common law through statutory change. It is worth noting the great influence English case law has had on the Irish courts in this area. Irish Shell Ltd. v Costello Ltd adopted the English test of “more than a personal privilege” as set out by Lord Denning in Shell-Mex. Lord Denning strayed from the traditional common law view that exclusive possession was indicative of a lease and a decisive factor in landholding disputes. The test penetrates the core of the matter by making it clear that the type of landholding agreement depends on whether the agreement gives a of personal right of proprietary interest to the landholding party. The test therefore appears to require an assessment of the intentions of the parties based on the operation of the agreement and not merely on the formal terms concluded between the parties. This test was applied in Governors of National Maternity Hospital v McGouran , in which it was found that a licencing agreement could not be construed as a lease due to the limitations on exclusive possession imposed by the landlord. These cases suggested a progression by the Irish courts towards a realistic approach to landholding agreements.
Judgment
The appeal centred on the question of whether the agreement between the parties constituted a lease or a licence. Peart J began his discussion of the issue by re-affirming the principle set out in Shell and McGouran whereby the label of the agreement as a licence and the negotiations and correspondence preceding the agreement did not determine the issue. Peart J otherwise distinguished the case from the ambit of the McGouran case due to the unrestricted exclusive possession enjoyed by Mr Smith in relation to the premises in Tara Street Station.
The court then dealt with English case of Street v Mountford in detail and referred to Professor Wylie’s comment that the Irish Court would approve of the approach taken in Street. Peart J also referred to Lord Denning’s judgment in Errington v Errington and Woods in which it was held that an individual with exclusive possession of a premise with be prima facie considered a tenant. This presumption may be rebutted if the circumstances fail to show any intention to create a tenancy agreement.
The respondent’s argument that the applicant’s occupation of the premise was in the nature of “personal privilege” was rejected by Peart J. He referred to the Shell-Mex decision in which a “personal privilege” arose due to the non-exclusive limitation of the occupation.
Before concluding his judgment, Peart J considered Mr Gaffney’s argument based on the ultra vires doctrine. He submitted that for the respondent to either grant a lease or enter into any agreement which could be interpreted as creating a tenancy, the respondent would be acting ultra vires its powers subject to the Dublin Wicklow and Wexford Railway (City of Dublin Junction Railway) Act 1884. Peart J held that this contention was misplaced.
In concluding his judgment, Peart J allowed he appeal and granted an order pursuant to Section 21(2) of the 1980 Act declaring the applicant entitled to a new tenancy in the premises.
Analysis
The first significant point arising from the High Court judgment is Peart J’s re-affirmation of the Supreme Courts ?? whereby pre-eminent weight is attached to the objective substance of the terms agreed between the parties and their overall legal character, as opposed to the label which they had chosen to place upon the relationship.
A striking point of the judgment is Peart J’s reliance on Street v Mountford and Errington v Errington and Woods, notwithstanding the fact that these cases were merely persuasive and dealt with residential occupancy agreements. A question arises as to the appropriateness of employing the paternalistic principles set out in these cases to commercial contexts. It is inevitable that commercial parties are not always in equal bargaining positions. Smith seems to suggest that the courts will intervene to protect the smaller entity from ‘sham’ arrangements similar to the protection provided to tenants in residential contexts. An elderly tenant may fear homelessness in the depths of Winter if they push back against harsh terms presented by a landlord. Abuse of such power surely warrants the intervention of the courts. It seems harder, however to justify court intervention between commercial entities where one party is significantly larger, or more sophisticated. Indeed, if larger contracting parties were to fear their business dealings were to be held to a higher standard than that of a smaller entity, it would undermine confidence in all commercial tenancy dealings. There are, however, certain circumstances in which a court may decide that a stronger party is abusing its power to such a degree, that the contract should be set aside. The Law Reform Commission supports this deferential approach, as well as recommending that more legislation is needed in the area.
The paternalistic approach adopted in Smith may also prove problematic in that it renders it almost impossible to create a licensing agreement where exclusive possession is present. It is interesting in this regard, that the UK authority on which Peart J relied on heavily in Smith appears to be moving in favour of the right to create a licence. The Court of Appeal in Clear Channel UK Ltd v Manchester Council held that an express statement that the parties did not intend to create a landlord-tenant relationship was effective to stop a tenancy arising. Similar to Smith, the agreement essentially involved a transfer of exclusive possession in return of rent. The case signifies a discernible retreat of the English courts to a more formalistic approach to occupancy agreements where the express terms of parties may be treated as indicative of their intention.
Subsequent to the Smith decision, the law reform commission published a consultation paper detailing the recommended changes to the area of law of landlord and tenant. Interestingly, the commission seems to disregard the approach taken in Smith in favour of an approach which is more consistent with S.3 of Deasy’s Act. Seemingly contrary to the precedence set out in Smith, the report advocates the retainment of the provision in Irish law. Furthermore, the paper suggests that a court should only be free to disregard the explicit “terms of the agreement if the evidence before it establishes that it does not reflect accurately what the parties intended”. In this regard, it is questionable whether the principles in Smith will be applied in future cases. Indeed, if the Landlord and Tenant Bill put forward by the Commission is to be enacted, this seems unlikely.
Conclusion
It is interesting to note the holistic approach the courts seem to follow in relation to issues arising over the lease/licence distinction. The significance of Peart J’s judgment remains to be seen; yet it showcases the courts willingness to pro??? If fully adopted, the impact on landlords will be momentous. In any case, the judgment promotes the protection of small commercial entities from “sham” arrangements that may be imposed on them by larger, more powerful landlords. The appropriateness of applying this paternalistic approach to commercial contexts is debatable.
– Smith marks the rapid ?? to a paternalistic approach
– Hard to reconcile with deasys act which previously dictated law in this area paired with case law
The judgment of Peart J in Smith marks the departure of Landlord and Tenant Law from the realm of the Law of Contracts. It is ?? that the decision has been critiqued disregarding the requirements ?? set out in S.3 of Deasys Act. If fully adopted into Irish law, the paternalistic approach to commercial tenancy agreements ?? in Smith will have vast implications for commercial landlords. The effects of the decision will render it almost impossible to ?? a licencing agreement where exclusive possession is present. Furthermore, we must question the appropriateness of adopting such a paternalistic approach to commercial contexts. It seems however, that the precedence