Landlord and tenant – Qualifying tenant – Right of first refusal – Landlord granting leases of roof space of building to appellants without giving notice of first refusal to qualifying tenants – Respondent nominee purchaser seeking transfer of leases from appellants – County court making orders to that effect – Appellants appealing – Respondents cross-appealing – Whether judge erring in law – Appeal dismissed – Cross-appeal dismissed
The appellants were granted leases over part of the roof space in a block of flats in London by the freeholder whose shares were owned by tenants of the building (the landlord). The building consisted of 19 flats, all let on long leases.
In 2011, concerns were raised about the state of the roof. In 2012, the landlord granted to the appellants, as leaseholders of flats on the top floor of the building, leases of the roof space on the basis that they would take over financial responsibility for the necessary improvements to the roof.
In 2015, some tenants became aware that the leases had been granted without any notices being given to qualifying tenants under section 5 of the Landlord and Tenant Act 1987 offering the necessary right of first refusal.
A majority of qualifying tenants made a participation agreement that recorded their intention to exercise their rights under the 1987 Act. The first respondent was established as nominee purchaser to take a transfer of the leases from the appellants. A purchase notice was served under section 12B(2) of the 1987 Act requiring the appellants to dispose of their leases to the first respondent on the terms “on which it was made (including those relating to the consideration payable)”. That was followed by documents purporting to be default notices under section 19(2).
The county court judge agreed and made orders to that effect. The appellants appealed. The respondent cross-appealed arguing that the terms of the transfer should be varied.
Held: The appeal was dismissed. The cross-appeal was dismissed.
(1) Section 19 of the 1987 Act gave the court power to make an order requiring any person who had defaulted in obligations imposed under Part I of the Act to make good the default. However, by section 19(2), an application to the court could not be made unless a notice had previously been served on the person in question requiring the default to be made good. No particular form needed to be used.
In the present case, the default notices served under section 19 were valid. They referred to the purchase notices which had been served, made it clear that the appellants were obliged to dispose of the leases to the first respondent and, combined with a threat of legal enforcement proceedings, conveyed the clear message to the appellants that the first respondent was requiring them to make good their default in complying with their duty under section 12B(2).
(2) Section 19 provided that the court “may” make an order rather than stipulating that it “must” make an order. For present purposes that gave the judge a discretion whether to make an order under section 19 if the necessary requirements were satisfied. That discretion involved more than a high-level analysis of whether it would be “fair” for the appellants to be obliged to transfer the leases. It also involved an analysis of whether they should be relieved from a duty that parliament had imposed on them. The judge had not erred in the way he expressed the breadth of his discretion. The appellants had argued that the judge’s conclusion that he had only a “narrow” discretion was at odds with Michaels and another v Harley House (Marylebone) Ltd [1997] 1 WLR 967 (Ch), [1998] PLSCS 289; [2000] Ch 104 (CA) but that decision did not set out any legal principles of general application with respect to the exercise of discretion.
(3) The exercise of discretion did not involve the application of any established equitable principles. The appellants’ criticism of the judge’s self-direction, that it was necessary to consider whether it would be “inequitable” to give effect to rights under the Act, involved a misreading of the judgment. The judge was using the word “inequitable” in the sense of “unfair or unjust” rather than as indicating a reference to any specific principle of equity. The judge did not misdirect himself on the scope of his discretion.
Where the appeal court was considering an appeal on the exercise of a discretion it was necessary to pay a high degree of deference to the judge’s exercise of the discretion. It was not enough simply to persuade the appeal judge that they would have exercised the discretion differently: R v Competition and Markets Authority and others [2022] 4 WLR 2940 followed.
The appellants’ argument, that the landlord would benefit from its own “illegal act” of granting the leases without first serving a notice under section 5 of the Act, was rejected. The landlord was not seeking to enforce any agreement, still less an illegal agreement that engaged the principles in Patel v Mirza [2017] AC 467 and/or Welwyn Hatfield Borough Council v Secretary of State for Communities and Local Government [2011] UKSC 15; [2011] 2 EGLR 151.
(4) Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 applied to the agreement whereby the appellants agreed to a common parts contribution in return for the landlord granting the leases since the contract was not in writing.
Therefore, the question was whether the “terms” referred to in section 12B(2) on which the first respondent was to acquire the leases was a reference only to “enforceable” terms. A “purposive” construction of section 12B was required. The section was engaged when all had not gone according to plan. An intermediate purchaser had acquired land from a landlord in circumstances where qualifying tenants had not been offered the necessary right of first refusal under section 5. Both the ordinary meaning of the statute and a purposive construction indicated that terms were not restricted only to “enforceable” terms for the purposes of section 12B(2): Woodridge v Downie [1997] 2 EGLR 193 not followed.
Although the covenant by the appellants to carry out works to the roof was not “consideration”, the obligation in the leases to perform the works was a “term” on which the appellants obtained the leases. Accordingly, a natural interpretation of section 12B(2) was that the obligation to perform those works should be taken into account for the purposes of section 12B(2): York House (Chelsea) Ltd v Thompson [2019] EWHC 2203 (Ch); [2019] EGLR 46 considered.
Henry Legge KC and Michael Buckpitt (instructed by Wallace LLP) appeared for the appellants; Wayne Clark (instructed by Withers LLP) appeared for the respondents.
Eileen O’Grady, barrister
