Sri Lanka Law Reports
NIZAM v. MUSTAFFA
MUSTAFFA v. NIZAM
SAMERAWICKRAME. J., ISMAIL. J. AND WIMALARATNE, J.S.C. APPEAL 41 /80 -C. A. 473/78 (F) — D.C. KANDY 12475/MR.S.C. APPEAL 53/80—C.A. 473/78(F)-D.C. KANDY 12475/MR.DECEMBER 8.9 AND FEBRUARY 6.1981.
Lease-Whether letting of a business or premises-Is agreement letting a businessrequired to be notarielly attested—Prevention of Frauds Ordinance (Cap. 701,section 2 – Whether sum stipulated in agreement a penalty.
The question that arose for determination in this appeal was the effect of a writtenagreement PI by which the plaintiff purported to lease to the defendant a businessknown as "Thai Hotel". The agreement was not notarially attested. The defendantcontinued to carry on the business under the same name in contravention of theagreement after the expiry of the leese.The learned District Judge had held that thedocument was one required to be notarially attested and that the plaintiff had toprove such attestation despite the defendant's admission that he had signed thedocument and accordingly he dismissed the plaintiff's action.
The Court of Appeal reversed the finding that notarial attestation was required. Italso held that the stipulation in PI for the payment of Rs 1,000 per day was in thenature of a penalty and awarded only Rs. 250 per day.
A consideration of all the terms and conditions of Pi clearly showed that it was only alease of ths business and the defendant therefore only became a licences of the premisesin which the business was carried on in order to enable him to carry on the same. Wherethe dominant or primary intention of the parties to a transaction is to effect the tease ofa business, then the fact that the lessee of that business has a personal privilege ofoccupying the land exclusively does not give him any interest affecting land such aswould require notarial attestation in terms of section 2 of the Prevention of FraudsOrdinance. The plaintiff's action was therefore entitled to succeed. The sum of Rs. 1,000per day stipulated in P1 was however in the nature of a penalty and a reasonableestimate of the damages would be Rs. 150 per day.
Cases referred to
Charles Appuhamy v. Abeysekera. (1954) 56 N.L.R. 243.
Sediris Singho v. Wijesinghe, (1965) 70 N.L.R. 185.
Nicholas Hamy v. James Appuhamy, (1950) 52 N.L.R. 137.
Path,rang v. de Silva. (1978) 79 (2) N.L.R. 265.
Arsecularatne v. Percra, (1927) 29 N.L.R. 342.
Addiscombe Garden Cstate Ltd. v. Craboe, (1957) 3 AH C. R. 563; (1958) 1 O.B.513; (1957) 3 W.L.R. 980.
Nizam v. Mustaffa (Wimafantne. J.)
Isaac v. Hotel de Paris Ltd., (I960) 1 All E.R. 348; (1960) 1 W.L.R. 239.
Booker v. Palmer, (1942) 1 All E.R. 674.
Wijesuriya v. The Attorney-General, (I960) 51 N.L.R. 361 (P.C.).
Thomas v. Sorrel, (1973) Vaugh 330.
Samanhamy v. Silva, (1860-62) Ram. Reps. 101.
Fernando v. Themaris. (1892) 2 C.L. Rep. 183.
APPEAL from a judgment of the Court of Appeal.
Walter Jayawardena. Q.C., with P. Somatilakam, H. L. de Silva. Faiz Mustapha andA. Mandaleswaran, for the defendant-appellant in S.C. 41/80 and defendant-respondentin S.C. 53/80.
K. N. Choksy, with Lakshman de AMs, for the plaintiff-respondent in S.C. 41/80 andthe plaintiff-appellant in S.C. 53/80.
Cur. adv. vult.
March 10, 1981.
The plaintiff is the owner of a business known as the "ThajHotel", an eating house situated at 50, Dalada Veediya, Kandy.Upon a written agreement P1 he purported to lease the businessto the defendant for a period of one year commencing from1.2.76, the defendant agreeing to pay as rent a sum of Rs. 18,000in monthly instalments of Rs. 1,500 each. The defendant enteredinto possession and carried on the business under the same name;but he continued to do so even after 1.2.1977 in contravention ofthe agreement. The plaintiff thereupon instituted the presentaction for the ejectment of the defendant and his agents from thebusiness, for the recovery of arrears of rent and of the articles offurniture and utensils set down in a schedule to P1 (or theirvalue estimated at Rs. 50,000) and for continuing damages atRs. 1,000 per day from 1.2.77 until he be restored to possession.
The defendant admitted his signature in P1, but denied thatP1 was his act and deed because he signed in the belief that it wasa sale of the business to him. He pleaded further that P1 is of noforce or avail in law as it has not been duly attested by a notaryand two witnesses in terms of section 2 of the Prevention ofFrauds Ordinance (Cap. 70). The claim for Rs. 1,000 per day wasresisted on the ground that it was a penalty and not a genuinepre-estimate of damages.
At the trial it was admitted that the defendant signed P1, andthat the defendant continued to be in possession of the business
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even after 1:2.77. Thereupon learned Counsel for the plaintiffraised an issue as to whether, on the admissions recorded, theplaintiff was entitled to judgment as prayed for. The defendantraised some fifteen issues. Neither party led evidence, butaddressed the Court on two questions, viz:
Whether P1 required notarial attestation, and if so,
Whether the defendant's admission of his signature on P1relieved the plaintiff from proving that P1 was dulyattested in terms of section 2 of the Prevention of FraudsOrdinance.
The learned District Judge held in favour of the defendant onboth questions, and dismissed the plaintiffs action. The Courtof Appeal (Ranasinghe, J., Atukorale, J. agreeing) reversed thefinding on the first question. That is to say, the Court of Appealhas taken the view that an agreement such as is embodied in P1does not constitute "an agreement for establishing any interestaffecting land or other immovable property" within the meaningof the said section 2 and hence does not require notarial attesta-tion. Although that decision was sufficient to dispose of theappeal, the Court of Appeal went on to answer the secondquestion as well, and decided that if P1 is an agreement thatrequired notarial attestation, the plaintiff had not discharged theburden of proving due attestation. The Court of Appeal also tookthe view that the stipulation in PI for the payment of Rs. 1,000per day was in the nature of a penalty, and hence unenforceable;but went on to award a sum of Rs. 7,500 per month (or Rs. 250per day) as continuing damages from 1.2.77 until the plaintiff isrestored to possession.
The defendant's appeal to this Court from the decision on the■first question as well as from the award of damages, is numberedSC No. 41/80. The plaintiff's appeal from the decision on thesecond question as well as on the inadequacy of the awardeddamages is numbered SC No. 53/80.
Document PI, which is termed an indenture of tease, has beenexecuted before a notary public, it describes the lessor as theowner of the business known as the "Thaj Hotel" situated at 50,Calada Veediya, Kandy. What has been let, leased and demised tot)>e lessee, for a period of one year are "all That and those fullydescribed in the schedule hereto, together with ail and singular the
Nizam v. Mustaffa (Wimataratne, J.)
rights and privileges of the said business". The schedule gives listsof furniture, fittings and utensils (all movable) in the office, stores,kitchen, ground floor and top floor. The lessee was "to hold the
said businesswith all and singular the rights and privileges
thereto". The lessee was to pay the lessor Rs. 18,000 in twelvemonthly instalments of Rs. 1,500 each. He was also to pay theelectricity and water bills, whilst the lessor was to pay themunicipal rates and taxes. The lessee was not entitled to joinhands with any other person to run the business, nor to conducton the premises any business other than the hotel business. There-after followed the stipulation regarding the payment of damagesif the lessee failed to hand back the business, together with thescheduled items, to the lessor.
Indentures similar to P1 have been the subject of interpretationin two earlier cases to which reference has been made in thejudgment of the Court of Appeal. In both cases the questionwhich the Supreme Court was called upon to decide was whetherthe relationship created between the parties is one of letting andhiring of immovable property or whether the delivery of possessionof immovable property was ancillary to the delivery of possessionof a business—in both cases a hotel and tea kiosk. In the formercase, that of Charles Appuhamy v. Abeysekera (1), Nagalingam,
S.P. J., found it "impossible to resist the conclusion that thetransaction entered into between the parties was not one of lettingany immovable property for the purpose of enabling one party tocarry on a business nor the letting of the building to that partywith the option to him to carry on or not the business previouslycarried on there, but of placing the 'lessee' in charge of a businessthat had been and was being carried on for the sole purpose of itsbeing continued as a going concern and with a view to its beingdelivered back as such going concern together with the goodwilland the improvements and advantages gained or accrued theretoin the meantime; and as ancillary to the object which the partieshad in contemplation it was that possession of the premises wasdelivered. The defendant's position was no more than that of alicensee and is far removed from that of a tenant". In the latercase of Sediris Singho v. D. H. Wijesinghe 12), Sansoni, C.J., whilstbeing in entire agreement with the reasoning of Nagalingam, S.P.J.,in the former case, distinguished the case of Nicholas Hamy v.James Appuhamy (3), where the building, and not the businessthat was being carried on in that building, was the subject of thelease.
Sri Lanka Law Reports
A recent decision, not referred to in the judgment of the Courtof Appeal, is that of Pathirana v. de Silva (4). The lessor enteredinto an informal agreement whereby he gave the lessee certainpremises in Maradana "together with the bakery business, thefurniture and the fittings thereto" for a period of 2 years. It wasobligatory on the lessee to maintain the bakery and the bakerybusiness, and not to use the premises otherwise than as a bakery.Samarakoon, C.J., observed that in deciding the question as towhether a document, such as the one in that case, is a lease of abusiness or merely a letting of premises, one has to look at thetotality of its provisions and the object it seeks to achieve; andthat whether the facts established show that in fact it has achievedsomething different and whether the document is only a coverfor it.
The agreements in all three cases referred to above were nodoubt considered against the background of claims for protectionunder the provisions of the Rent Restriction Act (Cap. 274). Thequestion as to whether the agreements incorporating the terms ofthe lease required notarial attestation did not arise for considera-tion. But the principles set out in the judgments are, in my view,applicable to the construction of the true nature and scope ofagreements such as P1.
The Court of Appeal distinguished the decision of the PrivyCouncil in the case of Arsecularatne v. Perera (5), where theappellant agreed with the respondent to prospect for plumbago oncertain conditions, and the respondent agreed to give over hisinterest in the lease which he had taken from the owners of themins, and which had yet eight years to run. Both the DistrictCourt and the Supreme Court held that as the agreement had notbeen attested in terms of section 2 of the Prevention of FraudsOrdinance, it was void in law, and dismissed the plaintiff's actionfor 1 commission, a dissolution of the partnership and for anaccounting. The Privy Council held that though the agreement wasvoid to effect a transfer of the lease, it was nevertheless valid forthe purpose of establishing a partnership, and that the plaintiffWas thus entitled to an accounting. There could be no doubt thatas agreement required the respondent to "give over" hisinterests in a subsisting lease of immovable property, notarialexecution was essential. It seems to us that the Court of Appealright-V distinguished that case from the present.
Nizam v. Mustaffa (Wimaiaratne, J.i
It has been contended before us on behalf of the defendant thatthe agreement gave the lessee a right to the exclusive possession ofimmovable property, and that that was an important circumstancein deciding the question as to whether the defendant was a lesseeor a mere licensee of the premises. The decision of the Court ofAppeal in Addiscombe Garden Estate Ltd. v. Crabbe (6), has beenrelied upon for the proposition that the fact of exclusivepossession is an event of the first importance. In that case theowner of certain property comprising a club-house and tenniscourts authorised a lawn-tennis club, by a written agreement, tooccupy and enjoy the property for a period of two years. Afterthe period had expired the tennis club continued to occupy thepremises. A clause in the agreement expressly entitled the grantors"to enter the premises to inspect the condition thereof and for allother reasonable purposes". That clause was considered to be anindication that the right to occupy the premises granted by thegrantor to the grantee was intended to be an exclusive right ofoccupation, and that that was a strong circumstance in favour ofthe view that there was a tenancy as opposed to a licence.Jenkins, L.J., observed that "there could be no doubt that the factof exclusive possession, if not decisive against the view that thereis a mere licence, as distinct from a tenancy, is at all events aconsideration of the first importance" (p. 571). We note that inthe agreement in the present case there is no similar clausereserving to the plaintiff the right to enter the premises.
On the other hand in Isaac v. Hotel de Paris Ltd. (7), where theproposed terms of an agreement acted upon included, inter alia, acondition that the appellant (Isaac) was to remain in occupationof a Hotel (of which the respondent was a lessee) and was to payall expenses incurred in running the Hotel, including the monthlyrent which the respondent company paid to their landlord, thePrivy Council took the view that conditions in the agreementshowed that all that was intended was that the appellant shouldhave a personal privilege of running a night bar on the premiseswith no" interest in the land at all. Lord Denning cited withapproval the following passage from the judgment of Lord Greene,M. R. in Booker v. Palmer (8).
"There is one golden rule which is of very general application,namely, that the law does not impute intention to enter intolegal relationships where the circumstances and the conduct ofthe parties negative any intention of the kind." (at p. 677).
Sri Lanka Lam Repons
Where the circumstances are such that they negative anintention to create a tenancy of immovable property, it wouldobviously be unjust to saddle the grantor with a tenancy with themomentous consequences that that entails nowadays. A considera-tion of all the terms and conditions of P1 clearly shows that allthat was intended when the parties entered into it was that thedefendant should, whilst being the lessee of the business, begranted a personal privilege, with no interest in the land. He thusbecomes only the licensee of 50, Dalada Veediya, in order toenable him to carry on the business which formed the subjectmatter of the agreement. The Court of Appeal was thereforecorrect in its conclusion that the defendant was only a licenseeand not a tenant of the premises.
The second argument of Counsel for the defendant has beenthat even if the relationship between plaintiff and defendant isthat of licensor and licensee in respect of the premises, apartfrom the business, yet as such licence is an interest affecting land,it is of no force or avail in law as it has not been granted incompliance with the provisions of section 2 of the Prevention ofFrauds Ordinance. Counsel relied very much on the decision ofthe Privy Council in Wijesuriya v. The Attorney General (9). Inthat case the appellant had an oral agreement with the Crown toiap and take the produce of certain rubber trees standing on adefined area of crown land. The Privy Council took the view thatthe agreement was in respect of a permit, which was not a 'lease'but a 'licence', and that the rights of occupation or possession andother ancillary rights as are necessary to make the primary righteffective fell within the ambit of section 2 of the FraudsOrdinance.
The object of the licence granted to the lessee to occupy thepremises on which the business was conducted was merely tonegative any suggestion of a trespass by him during the pendencyof the lease of the business, and thus to enable him to opposeany claim for ejectment during such period. The classic definitionof a licence as propounded by Vaughn, C. J., in Thomas v. Sorrel(10) at 331, and adopted in subsequent cases, that it is "adispensation which passeth no interest, nor alters nor transfersproperty in anything, but only makes an action lawful, whichwithout it would have been unlawful'' supports the view taken byme regarding the object for which occupancy of the premises waspermitted.
Nizam v. Mustaffa (Wimalaratne, J.)
It seems clear that in English Law a mere licence does not createany interest in the property to which it relates. It only makes anact lawful which without it would be unlawful. Consequently anagreement for a licence is not "an agreement for an interest inland" such as is required to be in writing under section 40 of theLaw of Property Act, 1925: Halsbury's, Laws of England, (3rdEdition) Vol. 23, page 430, para. 1026. This, indeed, had been theprinciple on which our Courts have acted. For example, inSamanhamy v. Silva (11), a Divisional Court whilst holding that acontract for the sale of fructus industrials, such as corn, is not acontract for the sale of any interest in land, but is merely onefor the sale of goods, observed that "the question is whether inorder to effectuate the intention of the parties, it be necessary togive the buyer an interest in the land, or whether an easement ofthe rights to enter the land for the purpose of harvesting andcarrying them away is all that was intended to be granted to thebuyer" (at p. 103). Likewise in Fernando v. Themaris (12), a.licence to enter land for the purpose of drawing toddy from acertain number of coconut trees growing on it was held to pass nointerest in land.
In Wijesuriya's case (above) it would appear that although thesubject matter of the oral agreement between Wijesuriya andthe Assistant Government Agent of Badulia was described in aGazette notification as being related to the lease of the right totap and take the produce of the rubber trees on 278 acres ofCrown land, the evidence as accepted by the District Judge, andacted upon by the Privy Council, showed that what was given toWijesuriya was in fact a lease of this large extent of land. Thereceipt issued to him for the payment of Rs. 6,000 was describedas "rent (per annum) on Kemapitiya Estate pending issue oflease". A letter from the Chena Surveyor was to the effect that hehad been instructed by the Government Agent "to put him(Wijesuriya) in possession of the lands in question". There couldthus be no doubt that such an agreement related to an interest inland, and required notarial attestation. The facts of that case aretherefore easily distinguishable.
It seems to me that where the dominant or primary intentionof the parties to a transaction is to effect a lease of a business,then the fact that the lessee of that business has a personalprivilege of occupying the land on which the business is beingconducted, albeit exclusively, does not give the lessee any interest
Sri Lanka Law Reports
affecting land such as to require notarial execution in terms ofsection 2 of the Prevention of Frauds Ordinance. Applying thisrule, it seems to us that as the dominant intention in executingthe agreement P1 was to lease the business known as the "ThajHotel" to the defendant, and not to lease No. 50, Dalada Veediya,as well, the defendant had only a personal privilege of occupyingthe premises without hindrance for the purpose of carrying on thebusiness during the stipulated period. Such grant of a licence orpersonal privilege to occupy the premises did not require notarialexecution. The Court of Appeal has therefore been right in itsanswer to the first question.
As this decision would suffice to dispose of the questionregarding the validity of P1 it is, in our view, unnecessary todetermine the second question whether there was a burden on theplaintiff of proving that P1 has been duly attested.
There remains the question of damages. The Court of Appealhas rightly concluded that the stipulation for the payment ofRs. 1,000 per day is in the nature of a penalty. The Court hasconsidered as reasonable a sum of Rs. 7,500 per month (i.e.Rs. 250 per day) as continuing damages from 1.2.77 until theplaintiff is restored to the possession of the business. Now, theconsideration for the lease of the business, as stipulated in P1, isRs. 1,500 per month, which is only one-fifth of the amount ofdamages awarded. We are of the view that a sum of Rs. 4,500per month (i.e. Rs. 150 per day) is a reasonable estimate ofdamages. In arriving at this amount we have taken intoconsideration the fact that the defendant has had, and is having,the use of a large quantity of furniture, cooking utensils, crockeryand cutlery, as itemised in the schedule to PI.
Appeal SC No. 41/80 is dismissed, subject to the reduction inthe amount of damages payable by the defendant to the plaintifffrom Rs. 250 to Rs. 150 per day from 1.2.77 until the plaintiffis restored to possession. The defendant will pay half the costs ofthis appeal.
Appeal SC No. 53/80 is also dismissed, but without costs.
SAMERAWICKRAME, J.-I agree.
ISMAIL, J.-1 agree.
NIZAM v. MUSTAFFA