Legal wonderland

What do seven Supreme Court judges do when faced with an 'ancient and technical rule of law', which leads to an 'outcome which is not one that could ever have been contemplated by the parties'? The answer: rely on another ancient rule, dating from at east 1481, to secure an unintended '“ but fair '“ result. The judgments in Mexfield Housing Co-operative Ltd v Berrisford [2011] UKSC 52 make repeated references to Alice in Wonderland. Despite that, the case is set to have important implications, not just for the tenants of housing co-operatives, but for any party to an agreement that purports, but fails, to give rise to a lease.

The case concerns a sale and rent back scheme. In 1993 Mrs Berrisford was in difficulties with her mortgage. She sold her flat to Mexfield, a fully mutual housing co-operative set up under a mortgage rescue scheme. She signed an 'occupation agreement' stating the flat would be 'let' to her on a weekly rent, and that she would take it 'from month to month until determined as provided in this agreement'. Mexfield had the right to terminate by re-entry, but only in specified circumstances. These included if the rent was 21 or more days in arrears, if Mrs Berrisford otherwise breached the agreement, or if she ceased to be a member of the co-operative.

By 2008 there were arrears owing to unpaid housing benefit. Mexfield sought summary possession, which was granted on appeal. It was held that the occupation agreement was unenforceable. Mrs Berrisford had no more than a periodic tenancy which Mexfield could end on notice at any time, irrespective of rent arrears.

By the time the case reached the Court of Appeal, the arrears had been cleared and Mexfield had agreed to let Mrs Berrisford remain. The case nevertheless continued as a test case. The court upheld the grant of possession. First, it is an ancient and established rule of land law that any leasehold estate must have a fixed maximum term '“ see Prudential Assurance Co Ltd v London Residuary Body [1992] 2 AC 386 (HL). In this case, as a result of the termination provisions, the duration of the proposed lease was uncertain. Therefore the agreement failed to grant any valid estate in land. Second, since the agreement sought to do something that was not achievable in law, it was void and unenforceable as a contract. However, Mrs Berrisford had taken up possession in return for weekly rent. From this it could be inferred that she held a periodic tenancy, which Mexfield had the unfettered right to determine.

Curiouser and curiouser

Poor Mrs Berrisford. Like Alice down the rabbit hole, she found her interest in the flat had shrunk to that of a mere periodic tenant, determinable by notice. However, by a further alchemy the Supreme Court was able to transform her into a relative giant: a long leaseholder with a 90-year lease.

Lord Neuberger explains how. Under pre-1925 case law, a purported grant to an individual of a lease of uncertain duration was treated as the grant of a tenancy for life. This applied irrespective of the parties' intentions. Section 149(6) of the Law of Property Act 1925 then operated to convert Mrs Berrisford's tenancy for life into a lease for 90 years, determinable by one month's notice after her death.

Mrs Berrisford's counsel was 'kind enough' to point out that this argument would not have benefited Prudential, and therefore had not been raised in that case ('kind', presumably, to Prudential's advocate David Neuberger QC).

Lord Dyson noted the reliance on a rule that 'had nothing to do with the intention of the parties', to produce a 'just result which plainly accords with the intention of the parties'. 'Curiouser and curiouser,' commented Lady Hale. Both agreed with the result. Almost all of the panel expressed their dissatisfaction with the state of the law, and called for reform.

That was sufficient to decide the appeal. However, four of the panel (Lords Neuberger, Mance, Clarke and Dyson) remarked on what the outcome might have been, had Mrs Berrisford been unable to rely on the life-tenancy rule. Each affirmed that a tenancy agreement is to be interpreted in the same way as any other written contract. While the legal consequences of the agreement might be frustrated or modified as a result of principles of land law, that need not affect the validity of the contract. In this case, the agreement could have survived the failure of the lease, and operated to create a contractual licence. Therefore, even if Mrs Berrisford had failed to establish her tenancy, she could nevertheless have relied on her contractual rights in defence to any claim for possession brought in breach of the agreement.

So, Mexfield is authority for a number of propositions. First, that Prudential remains good law, so that any lease must be of certain duration and there can be no valid periodic tenancy if the agreement includes an unlimited fetter on either party's right to serve notice. Next, that where the purported lessee is an individual, the agreement to grant a lease of uncertain duration will nevertheless take effect as the grant of 90-year lease, determinable upon the death of the tenant. This does apply where the lessee is a company. And finally '“ although obiter '“ that if parties contract to a grant a lease that lacks certainty, and if they cannot rely on the life tenancy rule, the contract may nevertheless take effect to grant a licence and remain enforceable. This last point is potentially the most wide-reaching. No longer can it simply be inferred that a party to a failed lease agreement, who takes up possession in return for periodic payments of rent, is a periodic tenant.

Immediate and long-term consequences

The decision has immediate consequences for individual tenants whose tenancy agreement restricts indefinitely the landlord's right to recover possession. These will include many tenants of housing co-operatives. In 1989 the Housing Corporation issued guidance directing all co-operatives that are publicly funded to offer their tenants contractual security of tenure. Similar provisions may apply to other tenants who lack statutory security; for example, because of the high rateable value or the low-rent provisions in the Housing Act 1988.

There are also long-term consequences of long-leaseholder status, good and bad. First, recovery of possession before the expiry of the term will amount to forfeiture. The tenant may be able to seek relief (see Berrisford and Clays Lane Housing Co-operative v Patrick [1985] 17 HLR 188). Second, the lease, being for a term of more than seven years, is registrable (but see the comments about housing benefit, below). Third, the implied covenants for repair set out in section 11 of the Landlord and Tenant Act 1985 will not apply. And fourth, and perhaps most importantly, it is unclear whether the tenant under a Mexfield-type lease will be able to claim housing benefit.

The benefit position

Under the Housing Benefit Regulations 2006, payments 'under a long tenancy' are excluded and cannot be claimed (regulations 2 and 12(2)(a)). Instead they may be recoverable as 'housing costs'; for example, under the Jobseekers' Allowance Regulations 1996 (schedule 2, using the same definition). A converted life tenancy has been treated as a 'long tenancy' for these purposes (for example, see CH/3586/2005). However, it only falls within the definition of 'long tenancy' if it is a legal tenancy (i.e. registered) (see the R(H)/3/07, affirmed in SSWP v UP [2010] UT 262 (AACR).

In both these cases it was considered that the claimant occupying under an unregistered long lease might be entitled to housing benefit, as they were a weekly periodic tenant. However, following Mexfield, that is unsustainable. Therefore, if any claim for housing benefit is to succeed, the benefit decisions may need to be revisited. Perhaps an unregistered converted life tenancy might be sufficient for the purposes of claiming rent under regulation 12(1) of the Housing Benefit Regulations, but not excluded by the definition of long tenancy in regulation 12(2). This is one example of the possible consequences of the Mexfield decision, which are likely to be played out in tribunals and courts over the years to come.