A critical analysis of the Irish High Court decision in Smith v Irish Rail

The case of Smith v Irish Rail [1] appeared before the Irish High Court in October 2002. The case raised the question of whether an agreement, deemed in writing, to be a licence can be declared to be a lease in substance. This is a question with which Irish Courts have long grappled, and a series of case law has resulted in the emergence of conflicting approaches being applied to very similar cases. The decision in Smith appears to reassert the courts’ ability to look beyond the paper upon which an agreement is written, considering instead the conduct of the relevant parties. However, I believe that the court’s intervention in this instance goes too far. Also, the High Court decision relied significantly upon the questionable application of English case law, disregarding, and even ignoring, persuasive and leading Irish precedent. All of this works to create a weak and poorly justified decision, which exacerbates the uncertainty and complexity of this issue.

 

The facts and procedural history of the case

The case in question concerned a young man, Mr. Smith, who entered into a ten-year licence agreement with Irish Rail, concerning a small convenience store at Tara Street Station in Dublin. Both parties entered into the agreement “following a course of negotiations and the taking of legal advice” [2]. The final document contained a clause which stated that “[n]othing in this licence shall be construed as giving the licencee any tenancy in or right to possession of any right or easement over or with respect to any part of the property” [3]. In line with the terms of the agreement, at the end of the ten-year period, the respondent informed the applicant that he was to vacate the premises. Mr. Smith argued that what had operated between the two parties had been a lease, in all but name. As such he made an application for a new lease of the premises, purporting that his interest in the property was protected by the Landlord and Tenant (Amendment) Act 1980.

The case was first heard in the Circuit Court in January 2002, where the application under s. 21 (2) of the beforementioned Act was dismissed by Linnane J. Mr. Smith took leave to appeal and the case was subsequently brought before the High Court in October 2002. Peart J., delivering the decision of the court, held that the arrangement between the two parties constituted a lease. As such the appeal was allowed, and Mr. Smith was “entitled to a new tenancy in the premises”[4].

 

Protection owing to parties to a commercial agreement

Section 3 of Deasy’s Act decrees that “the relation of landlord and tenant shall be deemed to be founded on the express or implied contract of the parties”[5]. This provision is controversial, in that it is a matter of some debate as to how literally it should be applied to every case. Judges often disregard s. 3 in order to dispel dangers that landlords are taking advantage of their superior bargaining power in order to strip vulnerable occupiers of their rights as tenants. Such a paternalistic approach is seen in O’Siodachain v O’Mahony, where a licence was deemed to be a lease in substance [6]. Here the court ruled that the landlord had exercised undue influence over a vulnerable couple in order to deprive them of protection under certain tenancy laws. Such cases are the reason as to why courts have the capacity to “give effect to the true nature of [an agreement] based on how it operates in practice”[7]. “Such a judicial attitude is perfectly understandable” with regard to residential arrangements, but I feel that extending this process to commercial cases would be going too far[8].

The case at hand did not concern a residential arrangement, and yet the Court applied case law as though it did. Much of Peart J.’s logic was based on the application of Street v Mountford [9], an English case which involved a “residence being let to a poor person who may or may not have had legal advice” [10]. Given the marked disadvantage the occupier was at, the licence was deemed to be a lease in reality. The logic applied in Street is clear and consistent with the approach adopted by Irish Courts with regard to residential agreements. Nonetheless, in applying the decision in Street to the circumstances of Smith, Peart J. is asserting that Irish Courts afford to same protection to commercial arrangements as to residential. This is a preposterous assertion.

Individuals entering into licence arrangements are inherently vulnerable as it is unlikely that they have had the opportunity to avail of legal advice. Business or commercial actors are in an entirely different position. The courts have displayed a considerable degree of respect for contractual freedom in the context of commercial agreements. “[I]n the case of mortgages, for example, courts will be far slower to “save” commercial entities from the hard bargains they have agreed to than to save individuals”[11]. This same approach ought to be applied when determining the lease/licence distinction.

In Smith, not only was the applicant “an experienced businessman”, he had been “well advised by the solicitor whom he had consulted” and as such, “knew exactly what he was getting, namely a licence” [12]. With this in mind, it is clear that neither party exuded superior bargaining power over the other. Therefore, I think it is wholly inappropriate for the courts to have intervened in this instance. I believe that Irish Courts should follow the English approach adopted in the later case of Clear Channel UK v Manchester [13],which held that a licence was correctly defined as a licence given the equal footing of the parties at the conception of the agreement.

Contractual freedom is an important part of Irish law, and I believe that the courts should only engage in determining the nature of a contract in cases where there is a very real risk of one party being blatantly taken advantage of. No such risk presents itself in this case, and so no such intervention ought to have been employed. This paternalistic treatment of commercial agreements leads to uncertainty for licensors, who legitimately enter into agreements which can be turned on their heads by the Court, and is also contrary to the approach taken with regard to other areas pertaining to commercial arrangements. Also, the selection of Street as an authority on this issue was not justified in the judgement, with Peart J. failing to acknowledge the fundamental differences between these two cases.  

 

The importance of intention

As has already been iterated, Peart J. places considerable significance on Street as a relevant authority in this instance. A substantial proportion of the judgement is dedicated to outlining the logic adopted by Lord Templeman in Street, and yet Peart J. completely disregards one of the fundamental principles set out in that case – the intention of the parties to enter into a lease. Lord Templeman ultimately decided that what the landlord in that case had intended to create was in fact a lease, and the title of ‘licence’ had merely been utilised to dispel any obligations and rights stemming from tenancy laws. This blatant intention to create a lease made it impossible for the courts to rebut the argument that the licence would be more fittingly defined as a lease. From this it is clear that Street establishes the importance of intention in the lease/licence distinction.

Kenny Homes & Co Ltd v Leonard was an Irish case which echoed Lord Templeman’s assertion that the intentions of the parties is of considerable consequence [14]. The circumstances of that case were very similar to those in the present case. The parties entered into an agreement, which explicitly provided that it was not the intention of the document to create a landlord-tenant relationship. The defendant later argued that they were properly described as tenants as opposed to licencees, and as such were entitled to certain protections and rights under tenancy law. In the High Court, Costello P. remarked that the provisions of the agreement “could not have been … clearer” [15] in indicating the intention of the parties not to create a leasehold arrangement. This decision was endorsed by the Supreme Court on appeal, where the agreement was described as being “crystal” clear. The occupiers could not be said to have had a lease.

In Smith the only fact that went undisputed was that there was a lack of intention to create a lease. Pear J. explicitly states that “[i]t is clear from the licence agreement itself, and indeed from the evidence given by the applicant himself and on behalf of the Respondent that the intention of the parties was that a licence would be granted for a period of 10 years at an annual licence fee”[16]. The legal representatives of Mr. Smith were competent, and even edited out clauses that were “not appropriate for a licence as the agreement herein is in fact just a licence”[17]. Notwithstanding the obvious lack of intention in this case, Peart J. deems the agreement to be a lease. It is also worth noting that when offered a leasehold part way through his licence agreement, Mr. Smith refused. The stance taken by Peart is completely at odds with that adopted in Kenny Homes. In Smith the provisions of the agreement are disregarded in their entirety, even though it is acknowledged that they reflect the intentions of the parties.

Peart J. misapplies Street in this instance by unjustifiably stripping the provisions of the agreement of any real value or relevance. This shows how inappropriate Street is as a justifiable basis for the ultimate decision in this case. Peart J. also fails to make any reference to Kenny Homes, despite its standing as a Supreme Court decision. The decision in this case goes against not only preceding Irish case law, but against the ruling in the very authority selected for the basis of the judgement.

 

Academic opinion

The issue of the lease/licence distinction has led to a series of case law, resulting in considerable uncertainty. This complex and unsatisfactory facet of land law has received harsh criticism from a variety of sources[18], and many target Smith as being one of the most culpable contributors to this uncertainty.

The Law Reform Commission issued a report in 2003, detailing the main issues impacting on the general law of landlord and tenancy. Chapter 1 part G, considers the issue of the lease/licence distinction. A series of case law is considered, with Smith being held as the most problematic. The Commission considers the way in which the case interacts with Irish precedent, and questions the application of Street as opposed to leading Irish case law. Perhaps the most interesting argument put forward by the Commission concerns Peart J. overextending the power of the court to interfere with commercial agreements. Paragraph 1.30 argues that “it is one thing to scrutinise the terms of an agreement in order to protect a party from unfair advantage being taken by the other party through a weak bargaining position and to prevent “sham” transactions, but it is quite another to disregard terms which, the evidence confirms, reflect both parties’ intention and understanding”[19]. They consider, as I do, that this is taking the supervisory role of the court much too far. The commission concedes that Smith has overcomplicated this area of tenancy law, and legislative intervention is now necessary to achieve a balanced and consistent approach to this all important distinction. De Londras supports such interventions, reflecting that it “is a matter of some regret that this proposal has not yet been enacted into law”[20].

This academic commentary on the case works to compliment my view that the decision in Smith lacks sufficient justification. The decision has contributed nothing to this issue, save for further complications and uncertainty. I find myself in agreeance with the opinion that the only real solution with regard to this judgement is to supersede it with legislation.

 

Conclusion

I strongly disagree with the decision reached by the High Court in this case. There are irreconcilable differences between the case at hand and Street v Mountford, the authority upon which this entire judgement relied. There was no point made throughout the course of the judgement to appease these differences. Thus, I believe that the application of Street to the circumstances of Smith was inappropriate. There was far more relevant case law that ought to have been considered. Such case law would have helped to establish some semblance of cohesion in this area, as well as providing for a more satisfactory outcome. Peart J. also went beyond the supervisory role of the court with regard to the formation and execution of commercial agreements. “What was on offer was a licence and [Mr. Smith] accepted that”[21], the courts have no place to try and rewrite an agreement in such an instance. Given the complexity and uncertainty cemented by this judgement, I believe that legislative intervention is the only feasible step towards improving this area of tenancy law in light of this questionable decision.

 

 

[1] [2002] IEHC 103

[2] Fiona de Londras, Principles of Irish Property Law (2nd edn, Clarus Press 2011), 401

[3] [2002] IEHC 103, p 4

[4] Ibid, p 37

[5] S 3, landlord and Tenant Law (Amendment) Act, Ireland 1860

[6] [2002] 4 IR 147

[7] Fiona de Londras, Principles of Irish Property Law (2nd edn, Clarus Press 2011), 402

[8] LCR, Consultation Paper on the General Law of Landlord and Tenant (2003).

[9] [1985] A.C. 809

[10] [2002] IEHC 103, p 17

[11] Fiona de Londras, Principles of Irish Property Law (2nd edn, Clarus Press 2011), 403

[12] [2002] IEHC 103, p 17

[13] [2005] EWCA Civ 1304

[14] Supreme Court, unreported 18 June 1998

[15] High Court, unreported 11 December 1997

[16] [2002] IEHC 103, p 5

[17] Ibid, p 8

[18] Fiona de Londras, Principles of Irish Property Law (2nd edn, Clarus Press 2011) 404; Andrew Lyall and Albert Power, Land Law in Ireland (3rd edn, Round Hall 2010) 588; LRC, Consultation Paper on the General Law of Landlord and Tenant (2003) pp 22-31

[19] LRC, Consultation Paper on the General Law of Landlord and Tenant (2003), pp 29

[20] Fiona de Londras, Principles of Irish Property Law (2nd edn, Clarus Press 2011) 404

[21] [2002] IEHC 103, p 17

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