Landlord and tenant — Landlord and Tenant Act 1987 — Tenants’ rights of first refusal — Whether exchange of contracts a ‘relevant disposal’ — Whether landlords proposed to make a relevant disposal — Whether omission to serve section 5 notices a failure to comply with statutory duties
In October 1994 the respondent landlords
applied under section 70(1) of the Leasehold Reform, Housing and Urban
Development Act 1993 to the leasehold valuation tribunal for approval of a
proposed estate management scheme relating to parts of their Kensington Estate,
London. In July 1995 the landlords exchanged contracts with W for the sale of a
block of flats, the contract providing that the vendor had not served any
notice on the tenants under section 5 of the Landlord and Tenant Act 1987, but
that W would serve notices under section 18. W duly did serve such notices. The
application of the appellant, who was a statutory tenant of a flat in the
building, to the county court for an order compelling the landlords to serve
section 5 notices on all the tenants was dismissed. The tenant appealed and the
landlords cross-appealed seeking to vary undertakings ordered by the judge.
contracts between the landlords and W was not a ‘relevant disposal’ for the
purposes of section 5 of the 1987 Act. The landlords did ‘propose’ to make a
relevant disposal within the meaning of section 5; it is necessarily implicit
in the legislation that a proposal is none the less such because the tenants
may assert their right to buy. The landlords had bound themselves to sell by
the contract with W, and the contractual adoption of the section 18 procedure
was only appropriate where a disposal by a landlord was proposed. The landlords
should have served their section 5 notices on the appellant and the other
qualifying tenants within a few days of the contract and possibly even sooner;
under section 5 a landlord must serve section 5 notices as soon as he proposes
to make a relevant disposal.
The following cases are referred to in
this report.
Belvedere Court Management Ltd v Frogmore Developments
Ltd, ex parte [1996] 1 All ER 312; [1996] 1 EGLR 59; [1996] 05 EG 131
Central Trust & Safe Deposit Co v Snider [1916] 1 AC
266
Cunliffe v Goodman [1950] 2 KB 237; [1950]
1 All ER 720, CA
Magdalen and Lasher Charity Trustees,
Hastings v Shelower,
ex parte (1968) 19 P&CR 389; 206 EG 23, CA
Wilkins v Horrowitz [1990] 2 EGLR 217;
[1990] 29 EG 57
This was an appeal by Zipporah
Mainwaring, and a cross-appeal by Henry Smith’s Charity Trustees, from a
decision of Judge Uziell-Hamilton in West London County Court who had refused
the appellant’s application for an order that the respondent landlords serve
section 5 notices under the Landlord and Tenant Act 1987.
The appellant appeared in person; David
Neuberger QC and Erica Foggin (instructed by Denton Hall) represented the
respondents.
Giving judgment, Sir Thomas Bingham MR, said: Henry
Smith, a well-to-do salter, died in 1628, making in his will a number of
charitable bequests. Among these were two bequests of £1,000, to be invested in
land for the benefit of charitable causes. His trustees invested the money in
84 acres of land which, happily for posterity, lay close to the village of
Brompton, just to the west of what was then the built-up area of London. Over
the centuries the tide of development flowed westwards and on the land there
was built what came to be known as the Kensington Estate of the Trustees of
Henry Smith’s Charity, now comprising some 58 acres of prime residential and
commercial development. The value of the estate became very great and large
sums were over the years paid to charity as a result.
In July 1995 the Henry Smith’s Charity
Trustees (‘the Smith Trustees’) agreed to sell the Kensington Estate to the
Wellcome Trust Ltd as the trustees of the Wellcome Trust (‘Wellcome’), another
famous charity. Ms Zipporah Mainwaring (‘the applicant’) is a tenant of the
Smith Trustees. She complains that the Smith Trustees’ omissions at the time of
this agreement and since have violated her rights under the Landlord and Tenant
Act 1987 (‘the Act’). Her complaint was rejected by Judge Uziell-Hamilton in
West London County Court on November 20 1995. The applicant appeals to this
court against that decision.
The Master of the Rolls touched on the
genesis of the Act in section VI of his judgment in Belvedere Court
Management Ltd v Frogmore Developments Ltd [1996] 1 All ER 312* at
p325. The Act provides that if, in certain closely defined situations, a
landlord proposes to dispose of his interest in premises of a certain kind, the
tenants living in those premises shall have a priority right to acquire that
interest on the same terms as those on which the landlord is willing to dispose
of the interest to another. The long title of the Act describes it as ‘An Act
to confer on tenants of flats rights with respect to the acquisition by them of
their landlord’s reversion …’.
*Editor’s note: Also reported at [1996] 1
EGLR 59
Section 1 of the Act provides (in part):
Qualifying tenants to have rights of
first refusal on disposals by landlord
(1) A landlord shall not make a relevant
disposal affecting any premises to which at the time of the disposal this Part
applies unless —
(a) he has in accordance with
section 5 previously served a notice under that section with respect to the
disposal on the qualifying tenants of the flats contained in those premises
(being a notice by virtue of which rights of first refusal are conferred on
those tenants); and
(b) the disposal is made in
accordance with the requirements of sections 6 to 10.
(2) Subject to subsections (3) and (4),
this Part applies to premises if —
(a) they consist of the whole or
part of a building; and
(b) they contain two or more flats
held by qualifying tenants; and
(c) the number of flats held by
such tenants exceeds 50 per cent of the total number of flats contained in the
premises.
The applicant lives as a statutory tenant
in a flat at 40 Yeoman’s Row, London SW3, which is part of an unpretentious
block built in the 1950s containing flats numbered 38–62 (even numbers)
Yeoman’s Row (‘the building’). It is common ground in these proceedings that
the building falls within the scope of the Act, that the Smith Trustees are the
applicant’s landlord and that the applicant herself is a qualifying tenant
within the meaning of the Act. The meaning of the expression ‘relevant
disposal’ is governed by section 4 of the Act: the construction of that section
is central to one of the issues in these proceedings, and the section is quoted
in section III below.
Section 5 of the Act is important. It
opens:
Requirement to serve notice concerning
rights of first refusal
(1) Where, in the case of any premises to
which this Part applies, the landlord proposes to make a relevant disposal
affecting the premises, he shall serve a notice under this section on the
qualifying tenants of the flats contained in the premises.
(2) A notice under this section must —
(a) contain particulars of the
principal terms of the disposal proposed by the landlord, including in
particular —
(i) the
property to which it relates and the estate or interest in that property
proposed to be disposed of, and
(ii) the
consideration required by the landlord for making the disposal;
(b) state that the notice
constitutes an offer by the landlord to dispose of the property on those terms
which may be accepted by the requisite majority of qualifying tenants of the
constituent flats;
(c) specify a period within which
that offer may be so accepted, being a period of not less than two months which
is to begin with the date of service of the notice; and
(d) specify a further period
within which a person or persons may be nominated for the purposes of section
6, being a period of not less than two months which is to begin with the end of
the period specified under paragraph (c).
Subsection (4) provides that where a
landlord has not served a notice under the section on all of the qualifying
tenants on whom it was required to be served by subsection (1), he shall
nevertheless be treated as having complied with that subsection if he has
served the notice on not fewer than 90% of the qualifying tenants on whom it
was required to be served. It is a notable feature of the section that although
it lays a clear mandatory duty on a landlord, there is apparently no sanction
against a landlord who fails to comply: in practice, neglect of the statutory
duty has been common and has given rise to considerable litigation.
Section 6 governs the situation where the
requisite majority of qualifying tenants inform the landlord that they wish to
accept the offer contained in his notice and nominate someone to act on their
behalf. In that event the landlord may not during a period of 12 months
following acceptance dispose of his interest except to a person or persons
nominated for the purposes of the section by the requisite majority of
qualifying tenants of the constituent flats. Sections 7 and 8 of the Act govern
rejection of the landlord’s offer, the making of a counter-offer by the tenants
and the making of a fresh offer by the landlord. All offers and counter-offers
are treated as if made subject to contract: section 20 (2).
Section 9 provides for the withdrawal of
either party from the transaction. By subsection (4) the landlord may indicate
an intention no longer to proceed with the disposal of his interest, and in
that event he is not entitled to dispose of it (unless he embarks on the
section 5 procedure all over again). The person nominated by the requisite
majority of qualifying tenants to act on their behalf may similarly withdraw
from the transaction and must do so if he becomes aware that the number of
qualifying tenants of the constituent flats desiring to proceed with the acquisition
of the landlord’s interest is less than the requisite majority of qualifying
tenants of those flats: subsection (3). The landlord’s offer lapses if the
building in question ceases to be one to which the Act applies and the landlord
gives the appropriate notice: section 10.
Sections 11–17 govern the rights of
qualifying tenants against a purchaser from a landlord who has disposed of his
interest to such purchaser without fulfilling his obligations under sections
1–9. In such event, the qualifying tenants have rights (although lesser rights)
against such purchaser or a subsequent purchaser.
Section 18 provides:
Notices served by prospective purchasers
to ensure that rights of first refusal do not arise
(1) Where —
(a) any disposal of an estate or
interest in any premises consisting of the whole or part of a building is
proposed to be made by a landlord, and
(b) it appears to the person who
would be the transferee under that disposal (‘the purchaser’) that any such disposal
would, or might, be a relevant disposal affecting premises to which this Part
applies,
the purchaser may serve notices under
this subsection on the tenants of the flats contained in the premises referred
to in paragraph (a)(‘the flats affected’).
(2) Any notice under subsection (1) shall
—
(a) inform the person on whom it
is served of the general nature of the principal terms of the proposed
disposal, including in particular —
(i) the
property to which it would relate and the estate or interest in that property
proposed to be disposed of by the landlord, and
(ii) the
consideration required by him for making the disposal;
(b) invite that person to serve a
notice on the purchaser stating —
(i) whether
the landlord has served on him, or on any predecessor in title of his, a notice
under section 5 with respect to the disposal, and
(ii) if
the landlord has not so served any such notice, whether he is aware of any
reason why he is not entitled to be served with any such notice by the
landlord, and
(iii) if
he is not so aware, whether he would wish to avail himself of the right of
first refusal conferred by any such notice if it were served; and
(c) inform that person of the
effect of the following provisions of this section.
(3) Where the purchaser has served notices
under subsection (1) on at least 80 per cent of the tenants of the flats
affected and —
(a) not more than 50 per cent of
the tenants on whom those notices have been served by the purchaser have served
notices on him in pursuance of subsection (2)(b) by the end of the
period of 28 days beginning with the date on which the last of them was served
by him with a notice under this section, or
(b) more than 50 per cent of the tenants
on whom those notices have been served by the purchaser have served notices on
him in pursuance of subsection (2)(b) but the notices in each case
indicate that the tenant serving it either —
(i) does
not regard himself as being entitled to be served by the landlord with a notice
under section 5 with respect to the disposal, or
(ii) would
not wish to avail himself of the right of first refusal conferred by such a
notice if it were served,
the premises affected by the disposal
shall, in relation to the disposal, be treated for the purposes of this Part as
premises to which this Part does not apply.
There are significant distinctions
between this section and section 5.
It is, first of all, plain that whereas
section 5 imposes a mandatory statutory duty on landlords, section 18 grants a
permissive right to prospective purchasers. This distinction is not hard to
explain. Section 5 is directed to ensuring that the object of the Act, to give
qualifying tenants an opportunity to purchase their landlord’s reversion if he
proposes to sell, is effectually achieved. By contrast, the primary object of
section 18, as the heading of the section makes clear, is to enable a
prospective purchaser to protect himself against the risk that he may buy the
landlord’s interest only to find that the tenants assert their right to acquire
that interest from him. Section 18 enables a prospective purchaser to protect
himself against that risk by ascertaining whether the tenants have rights under
the Act, and if they do calling upon them to assert those rights; if the
tenants fail to assert those rights, they lose them and the prospective
purchaser can proceed without the risk of losing the fruits of his purchase.
This procedure has the incidental result of alerting a tenant, hitherto unaware
of the impending purchase and of his rights, to his rights under the Act, but
that would not appear to be the main object of the section.
The second important distinction concerns
the provisions for
the qualifying tenants, the prospective purchaser under section 18 need only
serve 80% of the tenants. This distinction is again readily understandable. The
landlord is in a position to know who his tenants are and whether or not they
are qualifying. The prospective purchaser, by contrast, may have little
information about who the tenants are and whether they are qualifying tenants
or not. Since the prospective purchaser must in a notice served under section
18(2)(b) invite the tenants whom he serves to state whether the landlord has
served on those tenants a notice under section 5, it is to be inferred that the
prospective purchaser is likely to be unaware whether such a notice has been
served or not. But where the original landlord and the prospective purchaser
are acting in concert, the possibility of abuse exists, as the applicant showed
by a hypothetical example. If a qualifying building had 20 tenants, of whom 11
were qualifying and nine not, the original landlord and the purchaser, with
access to full information, could combine to serve the requisite percentage of
80% of tenants under section 18 by serving the nine non-qualifying tenants and
seven qualifying tenants. The nine non-qualifying tenants would either fail to
respond, or respond correctly acknowledging no entitlement to service of a
section 5 notice. It would then be impossible for the qualifying tenants to
muster the requisite 50% majority of the tenants served. In this way, the
rights of the qualifying tenants (where the landlord had not himself served
section 5 notices) would be defeated. The applicant did not suggest that this
hypothetical example matched the facts of this case, which it plainly does not.
The possibility of abuse does, however, exist and it appears that section 18
has been abused by unscrupulous landlords.
The third obvious distinction between the
two sections concerns the period allowed to the tenants to respond to the
notice served by the landlord and the prospective purchaser, a minimum of two
months under section 5 and 28 days under section 18. The distinction is again
understandable. In responding to a section 5 notice, the qualifying tenants
have to make a decision whether they wish to buy on the terms of the landlord’s
offer, which involves the making of a joint decision whether they can between
them raise the necessary purchase price. In a case such as the present, the sum
involved may be very considerable, and the raising of finance may inevitably
take some time. The tenants served under section 18 do not have, at that stage,
to carry out that task: they simply have to decide whether they are qualifying
tenants and whether they would wish to avail themselves of the right of first
refusal conferred by a section 5 notice if it were served. It is not surprising
that the time allowed for a response to that notice is very much shorter. The
possibility does, however, exist that if a tenant is absent from his flat,
whether on holiday or for reasons of business or sickness, the section 18
notice may simply fail to come to his attention in time for him to respond to
it, and in such a situation the benefit of the Act will be lost unless the
landlord has observed, or observes, his duty to serve a notice under section 5.
Reference should lastly be made to
section 19 of the Act which provides:
Enforcement of obligations under Part I
(1) The court may, on the application of
any person interested, make an order requiring any person who has made default
in complying with any duty imposed on him by any provision of this Part to make
good the default within such time as is specified in the order.
(2) An application shall not be made
under subsection (1) unless —
(a) a notice has been previously served on the person in question
requiring him to make good the default, and
(b) more than 14 days have elapsed since the date of service of that
notice without his having done so.
(3) The restriction imposed by section
1(1) may be enforced by an injunction granted by the court.
On October 12 1994 the Smith Trustees
applied to the leasehold valuation tribunal for approval of a proposed estate
management scheme relating to parts of the Kensington Estate. This application
was made under section 70(1) of Part I, Chapter IV of the Leasehold Reform,
Housing and Urban Development Act 1993. In making this application the Smith
Trustees appreciated that their tenants could exercise rights of
enfranchisement under the Leasehold Reform Act 1967, the Act and the 1993 Act.
The object of the scheme, if approved, was to enable the Smith Trustees to
continue to exercise powers of management over parts of the Kensington Estate
of which they had ceased to be freehold owners. At the time when this
application was made, the Smith Trustees were in communication with Wellcome,
but it appears that no bargain had yet been made.
On July 24 1995 the Smith Trustees and
Wellcome executed 144 contracts by which the Smith Trustees were to sell the
entirety of the Kensington Estate to Wellcome. One of these was a main contract
and covered all the properties believed by the parties to be subject to no
claims for enfranchisement under the Act. The remaining 143 contracts related
to separate buildings in relation to which it was thought that the tenants
might enjoy such rights. One of these contracts related to the building.
By the contract the Smith Trustees agreed
to sell and Wellcome to buy this building for £1,057,255 on the conditions set
out in the contract. In recognition of the difficulty of finalising a sale
contract of this kind when the affairs of the estate were inevitably in a
constant state of flux, the parties adopted a ‘deadline date’ of June 2 1995.
Clause 13 of the contract is material to the present proceedings and must be
quoted so far as relevant:
Service of Notices under the Act
13.1 The Vendor has not served any
notices on the Tenants under the provisions of Section 5 of the Act and the
Property is sold subject to and notwithstanding the rights (if any) which the
Tenants may have by virtue of the provisions of the Act
13.2 The Purchaser will procure that the
Purchaser’s Solicitors will on the second Working Day following the date of
this Agreement serve upon each of the Section 18 Tenants at the relevant
address set out in the schedule headed ‘Blocks and tenants on Smith’s Charity
where Landlord & Tenant Act 1987 applies’ supplied by the Vendor’s
Surveyors to the Purchaser’s Solicitors dated 6th June 1995 as varied by
written alterations notified to the Purchaser’s Solicitors by the Vendor’s
Surveyors prior to the date hereof a Section 18 Notice provided that where any
such address is within the Kensington Estate such service will be effected by
personal delivery through the letterbox of the relevant flat or building
containing the relevant flat (the person effecting such personal delivery
making an affidavit of due service forthwith thereafter) and in all other cases
such service will be effected by sending the Section 18 Notice by recorded
delivery post
13.3 The Purchaser will procure that the
Purchaser’s Solicitors will supply to the Vendor’s Solicitors a copy of each
Section 18 Notice and will further supply to the Vendor’s Solicitors a copy of
any written reply which may be received to any Section 18 Notice as soon as
reasonably practicable after the same has been received by the Purchaser’s
Solicitors
13.4 As soon as reasonably practicable
after the expiry of a period of twenty-nine days after the date of delivery or
posting of the Section 18 Notices (or if all Section 18 Notices shall not be
delivered or posted on the same day then the date of delivery or posting of the
last of them) the Purchaser will procure that the Purchaser’s Solicitors
confirm to the Vendor’s Solicitors which Section 18 Tenants have given a
written response to their respective Section 18 Notice (if they have not
already provided a copy of the same to the Vendor’s Solicitors)
13.5 If as a result of the Section 18
Tenants’ responses as referred to in Clause 13.4 the Property shall be treated
for the purposes of the Act as premises to which the Act does not apply
completion of the sale and purchase hereby agreed will take place in accordance
with Clause 17 on the Initial Completion Date
13.6 If as a result of the Section 18
Tenants’ responses as referred to in Clause 13.4 the Property shall be treated
for the purposes of the Act as premises to which the Act applies in accordance
with the provisions of Section 18(3) of the Act then the following provisions
shall apply:–
(a) The Completion Date shall be
postponed until the last Working Day of the Calendar month in which the date
falls (‘the Date’) on which the Vendor shall no longer be obliged to transfer
the Property to the Tenants or their nominee pursuant to the Act in accordance
with Clause 13.6(d) or the last Working Day of the calendar month following the
calendar month in which the Date falls if the result would otherwise require
the Completion Date to occur less than 6 Working Days after the Date;
(b) The Vendor will procure that the
Vendor’s Solicitors shall:–
(ii) (if the Property is within the area
of the Estate Management Scheme
Scheme Application has been withdrawn dismissed or approved (with or without
amendments) and the provisions of Section 74(2) of the Leasehold Reform, Housing
and Urban Development Act 1993 have therefore ceased to apply in relation to
the Property; —
serve a notice under Section 5 of the Act
upon each of the Tenants who are ‘qualifying tenants’ as defined in the Act and
supply a copy of each such notice and any response thereto to the Purchaser’s
Solicitors as soon as reasonably practicable after the same has been served or
received as the case may be;
(c) The Vendor will comply with all the
requirements of Section 5 of the Act and as quickly as reasonably possible and
will keep the Purchaser’s solicitors informed of progress thereon and supply
copies of all relevant correspondence notices or other relevant papers under
the Act
(d) If at any time the Vendor ceases to
be obliged under the provisions of the Act to transfer the Property to the
Tenants or their nominee then the Vendor will procure that the Vendor’s
Solicitors will forthwith notify the Purchaser’s Solicitors. provided that for
the avoidance of doubt it is not the parties’ intention to serve the said
notices prior to an appeal being lodged by the Tenants against the approval of
the Estate Management Scheme Application where it is known or believed that
such an appeal is to be lodged
13.7 Nothing in this Agreement contained
shall prevent the Vendor from selling the Property to the Tenants or their
nominee if the Vendor is obliged so to do pursuant to the Act and in such a
case the Vendor’s obligation to sell and the Purchaser’s obligation to purchase
the Property pursuant to this Agreement will become void and of no further
force or effect simultaneously with completion of the sale of the Property to
the Tenants or their nominee as aforesaid and the Purchaser will forthwith
after such completion remove any entries which it may have made in the Land Charges
Register or any other register protecting its right to purchase the Property.
13.8 In the event that on the 30th March
1997 completion of the sale of the Property (whether to the Purchaser or to the
Tenants or their nominee) has not taken place then the following provisions
shall apply:–
(a) The Vendor shall withdraw from any
negotiations then continuing with the Tenants and/or their nominee;
(b) The Vendor and the Purchaser shall
endeavour to agree the open market value of the Property as at the 30th March
1997 such value being calculated on the same basis as the basis used to agree
(on behalf of the Vendor and the Purchaser respectively) the Price as stated in
the Information Sheet annexed hereto but if the parties are unable to agree
such open market value then the same shall be determined by an independent
chartered surveyor experienced in the Central London residential market
appointed by the President of the Royal Institution of Chartered Surveyors on
the application of either of the parties and that surveyor shall act as an
expert and shall afford to each of the parties the opportunity to make
representations to him on such value;
(c) The said open market value agreed or
determined as aforesaid shall be substituted for the Price for all purposes as
between the Vendor and the Purchaser and as between the Vendor and the Tenants
or their nominee;
(d) If once the said open market value
has been agreed or determined as aforesaid the Act applies to the Property the
Vendor shall forthwith serve a notice under Section 5 of the Act upon each of
the ‘qualifying tenants’ and the provisions of Clauses 13.6(a)-(d) and 13.7
shall apply;
(e) If the Vendor is not obliged to serve
notice(s) under Section 5 of the Act pursuant to Clause 13.8(d) then completion
of the sale of the Property to the Purchaser will take place in accordance with
the provisions of Clause 13.6(a) as though ‘the Date’ therein referred to was
the date on which the said open market value as agreed or determined as
aforesaid.
The expression ‘Section 18 Tenants’ was
defined to mean those tenants whose names and addresses were included in the
schedule referred to in clause 13.2.
The Smith Trustees undertook that they
would not after the date of this contract grant or enter into any agreement to
grant a new lease, licence, tenancy or occupation of the building or take a
surrender of or enter into an agreement to surrender any lease. Condition 3 of
the Law Society’s national conditions, giving a right to rescind, was
specifically excluded. A schedule to the contract prescribed the form of
section 18 notice to be served by Wellcome.
On the same day, July 24 1995, the
Chairman of the Smith Trustees wrote to the applicant among other tenants and
said:
I am writing to let you know that my
fellow Trustees and I have decided to accept an offer for the sale of the whole
of the Kensington Estate (which includes your property), which has been made by
the Wellcome Trust …
On July 25 the Chairman of the Board of
Governors of Wellcome wrote to the applicant, among other tenants, and said:
You should by now have received a letter
from Smith’s Charity explaining that they have contracted to sell the
Kensington Estate to the Wellcome Trust …
On July 26 1995 estate agents acting for
the Smith Trustees and Wellcome wrote to the applicant and other tenants
explaining why the Smith Trustees had sold and Wellcome bought the Kensington
Estate. On July 27 1995 solicitors acting for Wellcome issued to the applicant
among others a notice under section 18 of the Act. Signed on behalf of Wellcome
the notice read:
We are proposing to take a disposal of an
interest in the property known as 38–62 (even) Yeomans Row London SW3 2AL from
the Trustees of Henry Smith’s Charity at the price of £1,057,255.
The notice contained an invitation to the
applicant substantially in the terms required by section 18(2)(b) of the Act.
On August 2 1995 the applicant wrote to
the Smith Trustees complaining that a notice under section 5 had not been
served and contending that this omission had not been remedied by service of a
notice by the prospective purchaser under section 18. With her letter she enclosed
a notice under section 19 of the Act requiring the Smith Trustees to serve on
her and on the other qualifying tenants of the building a notice under section
5 within seven days of the date of the notice. The Smith Trustees promptly
replied: they did not accept that the legal requirements of the Act had not
been observed, and pointed out that section 5 notices would be served on those
tenants whose responses to the section 18 notices required it.
A majority of the qualifying tenants in
the building (including the applicant) responded to the section 18 notices by
stating that they would wish to avail themselves of the right of first refusal
conferred by a section 5 notice if it were served, which it had not been. On
September 6 1995 solicitors acting for the Smith Trustees wrote a letter in
which they agreed that more than 50% of the qualifying tenants of the building
had served positive responses within the time-limit, but they continued:
The provisions of the Contract between
our clients and Wellcome now require Section 5 notices to be served on the
qualifying tenants of your building. However, since your building falls within
the area of the Estate Management Scheme application dated 12 October 1994, the
Contract provides that Section 5 notices will not be served until after that
application has been finally determined. We are hoping that the application
will be heard before the Leasehold Valuation Tribunal in the latter half of
October, but we obviously do not know how long thereafter it will take before the
application is finally determined.
Accordingly, you and your
fellow-qualifying tenants of the building will not be receiving Section 5
notices immediately, but please rest assured that no further steps will be
taken with regard to the disposal of your building to Wellcome until after
Section 5 notices have been served and the necessary procedures complied with
thereafter.
On September 15 1995 solicitors for the
Smith Trustees wrote to the leasehold valuation tribunal asking that Wellcome
should be joined with the Smith Trustees as an applicant for approval of the
estate management scheme already submitted. The original scheme has since been
amended and it is the subject of considerable opposition. There have been
various adjournments of the hearing, which has not yet begun although we
understand it is due to begin during this month. An aggrieved party has a right
of appeal to the Lands Tribunal.
On September 19 1995 the applicant issued
her application in these proceedings. On November 20 1995 Judge Uziell-Hamilton
ruled against the applicant. Having studied the Act, the judge reluctantly
concluded that the time had not yet passed by which section 5 notices had to be
served. She concluded that that time would not come until the result of the
application to the leasehold valuation tribunal was known. The judge was,
however, concerned at the risk of prejudice to the applicant and other
qualifying tenants if the hearing of that application was unduly delayed and
accordingly invited undertakings to be given which would ensure the expeditious
prosecution of that application.
The first issue argued before us was
whether the July 24 1995 contract between the Smith Trustees and Wellcome for
the sale of the building was a ‘relevant disposal’ within the meaning of the
Act. The applicant (who argued her case in person with uncommon clarity, skill
and good humour) submitted, perhaps surprisingly, that it was. Mr David
Neuberger QC, for the Smith Trustees contended that it was not. The answer to
this question must turn primarily on the construction of section 4 of the Act
which, as amended and so far as relevant, reads:
Relevant Disposals
(1) In this Part references to a relevant
disposal affecting any premises to which this Part applies are references to
the disposal by the landlord of any estate or interest (whether legal or
equitable) in any such premises, including the disposal of any such estate or
interest in any common parts of any such premises but excluding —
(a) the grant of any tenancy under which the demised premises consist
of a single flat (whether with or without any appurtenant premises); and
(b) any of the disposals falling within subsection (2).
[(1A) Where an estate or interest of the
landlord has been mortgaged, the reference in subsection (1) above to the
disposal of an estate or interest by the landlord includes a reference to its
disposal by the mortgagee in exercise of a power of sale or leasing, whether or
not the disposal is made in the name of the landlord; and, in relation to such
a proposed disposal by the mortgagee, any reference in the following provisions
of this Part to the landlord shall be construed as a reference to the
mortgagee.]
(2) The disposals referred to in
subsection (1)(b) are —
(a) a disposal of —
(i) any
interest of a beneficiary in settled land within the meaning of the Settled
Land Act 1925, [or] …
(iii) any
incorporeal hereditament;
[(aa) a disposal consisting of the
creation of an estate or interest by way of security for a loan]
(b) a disposal to a trustee in
bankruptcy or to the liquidator of a company;
(c) a disposal in pursuance of an
order made under section 24 or 24A of the Matrimonial Causes Act 1973 or
section 2 of the Inheritance (Provision for Family and Dependants) Act 1975;
(d) a disposal in pursuance of a
compulsory purchase order or in pursuance of an agreement entered into in
circumstances where, but for the agreement, such an order would have been made
or (as the case may be) carried into effect;
(e) a disposal by way of gift to a
member of the landlord’s family or to a charity;
(f) a disposal by one charity to
another of an estate or interest in land which prior to the disposal is
functional land of the first-mentioned charity and which is intended to be
functional land of the other charity once the disposal is made;
(g) a disposal consisting of the
transfer of an estate or interest held on trust for any person where the
disposal is made in connection with the appointment of a new trustee or in
connection with the discharge of any trustee;
(h) a disposal consisting of a
transfer by two or more persons who are members of the same family either —
(i) to
fewer of their number, or
(ii) to
a different combination of members of the family (but one that includes at
least one of the transferors);
(i) a disposal in pursuance of —
(i) any
option or right of pre-emption binding on the landlord (whether granted before
or after the commencement of this section), or
(ii) any
other obligation binding on him and created before that commencement;
(j) a disposal consisting of the
surrender of a tenancy in pursuance of any covenant, condition or agreement
contained in it;
(k) a disposal to the Crown; and
(l) where the landlord is a body
corporate, a disposal to an associated company.
(3) In this Part ‘disposal’ means a
disposal whether by the creation or the transfer of an estate or interest and —
(a) includes the surrender of a tenancy and the grant of an option or
right of pre-emption, but
(b) excludes a disposal under the terms of a will or under the law
relating to intestacy;
and references in this Part to the
transferee in connection with a disposal shall be construed accordingly.
(4) In this section ‘appurtenant
premises’, in relation to any flat, means any yard, garden, outhouse or
appurtenance (not being a common part of the building containing the flat)
which belongs to, or is usually enjoyed with, the flat.
It would be absurd if, in a transaction
of this kind, there were two relevant disposals, one on the exchange of
contracts and another on completion, and neither party contended for this
construction. It is therefore necessary to choose between these two events as
the ‘relevant disposal’.
In support of her contention that the
exchange of contracts was the relevant disposal for purposes of the Act, the
applicant drew attention to the reference in section 4(1) to ‘any estate or
interest (whether legal or equitable)’ and relied on the familiar principle
that a purchaser of real property becomes the equitable owner of the property
upon exchange of contracts.
This, she said, was reflected in the
ordinary rule which transfers the risk in the property to the purchaser on
exchange, so obliging such purchaser to insure the property in the absence of
any contrary provision. She relied by analogy on section 4(3) and subsection (2)(i)(i),
which made it clear that it was not the exercise of an option or right of
pre-emption which constituted a relevant disposal under the Act, but the grant
of such an option or right of pre-emption.
Mr Neuberger relied on Wilkins v Horrowitz
[1990] 2 EGLR 217 as authority for the proposition that it is the completed
conveyance and not the exchange of contracts which constitutes the relevant
disposal under the Act. He adopted the extensive reasoning which led the
Yorkshire Leasehold Valuation Tribunal to that conclusion. Prompted by the
court, he pointed out that in subsection (2)(d) the draftsman had excluded as a
relevant disposal not an agreement made to anticipate a compulsory purchase
order but a disposal made in pursuance of such an agreement. He pointed out
that on the applicant’s construction it would not have been necessary for the
draftsman to exclude from the definition under subsection (2)(i)(ii) a disposal
in pursuance of any other obligation binding on the landlord and created before
the commencement of the section, since such a disposal would not have been a
relevant disposal anyway. More generally, Mr Neuberger accepted that on
exchange of contracts a purchaser of real property is ordinarily regarded as
the equitable owner of the property in question. But that, he submitted, was on
the assumption (usually sound) that such a contract is specifically
enforceable: see Megarry & Wade, The Law of Real Property, 5th Ed,
at p602; Central Trust & Safe Deposit Co v Snider [1916] 1 AC
266 at p272. Here, said Mr Neuberger, the court would not on any showing order
specific performance of the contract at this stage, since if the requisite
majority of tenants served positive responses to section 18 notices the
contract was subject to a condition (the approval of the estate management
scheme) which had not been fulfilled, and the court would not in any event
order the parties to complete this contract so long as the Smith Trustees had
not complied with their statutory obligation to serve section 5 notices.
With any other Act we would think it
extraordinary that doubt should exist on a point as fundamental as this. We
have to say that we do not find the answer indicated with an acceptable degree
of clarity in the language of the section itself or elsewhere in the Act. It
would, however, appear that in subsection (2) of the section the draftsman has
been primarily (although not consistently) concerned to exclude as relevant
disposals certain forms of final transfer, which may perhaps indicate that it
was the final transfer and not the preliminary agreement which he intended to
be treated as the relevant disposal. We agree with Mr Neuberger that the
reasoning in Wilkins v Horrowitz is persuasive, and it has (as we
understand) been treated as authoritative for the past five years. We would
also accept Mr Neuberger’s argument that an application by the prospective
purchaser for specific performance of the sale contract in respect of this
building would not as matters now stand succeed, for the reasons which he gives.
On balance, therefore, we prefer Mr Neuberger’s argument on this point and
would hold that there has not been a relevant disposal of the building.
If, as the applicant contends, that
conclusion is wrong and the exchange of contracts is the ‘relevant disposal’
under the Act, she would certainly have rights which she could pursue against
Wellcome
Trustees had performed their duty under the Act to serve section 5 notices or
even order the Smith Trustees to perform their statutory duty to serve notices
if they were in breach of duty in failing to do so. Having regard to the
conclusion we have reached we do not think it necessary to explore these
possibilities.
The second major issue argued on the
appeal was whether, within the meaning of section 5, the Smith Trustees have at
any time in the past, or do now, ‘propose’ to make a relevant disposal
affecting the premises.
It is, in our view, clear that the
expression ‘proposes’ describes a state of mind somewhere between mere
consideration of a possible course of action at one extreme and a fixed and
irrevocable determination to pursue that course of action at the other. As Lord
Denning MR observed in Trustees of Magdalen & Lasher Charity, Hastings
v Shelower (1968) 19 P&CR 389 at p392, contrasting different
expressions to be found in the Landlord and Tenant Act 1954,
The word ‘proposes’ is different from the
word ‘intends’. A man may propose to do a thing without having formed a fixed
and settled intention to do it.
A ‘proposal’ under the Act means that a
project must have moved out of ‘the zone of contemplation … into the valley of
decision’: Cunliffe v Goodman [1950] 2 KB 237 at p254 per Asquith
LJ.
Mr Neuberger submitted that on the
present facts the Smith Trustees had never at any stage ‘proposed’ to dispose
of their interest in the building to Wellcome, since they had at all times
acknowledged and provided for the possibility that the tenants might assert
their rights to buy the interest of the Smith Trustees themselves.
Alternatively, he argued that if the Smith Trustees had at the time of contract
‘proposed’ to transfer their interest to Wellcome, they had ceased so to
propose when the tenants made positive responses to the section 18 notices
served by Wellcome.
In our opinion both these arguments face
insuperable difficulties. It is necessarily implicit in the legislation that a
proposal is none the less such because the tenants may assert their right to
buy. Furthermore, it flies in the face of commonsense to suggest that a party
does not propose to do that which he binds himself to do by contract. The fact
that a third party may succeed in defeating or frustrating his proposal does
not mean that he ceases to propose, only that he may be unsuccessful in
implementing his proposal.
If the requisite majority of qualifying
tenants had not made positive responses under section 18, the Smith Trustees
would have been legally bound to sell their interest in the building to
Wellcome. If the tenants’ purchase were to founder, perhaps because two of the
qualifying tenants died or moved out of their flats so that there was no longer
the requisite majority of qualifying tenants, or because the tenants were
unable to raise the necessary finance, the Smith Trustees would remain bound to
sell to Wellcome. Cases could well arise in which it might be very doubtful
whether a landlord’s plans had hardened sufficiently to be regarded as a
proposal, but on the facts here it is impossible to feel any doubt. The
unreality of Mr Neuberger’s argument is, we think, underlined by the
contractual adoption of the section 18 procedure, which is (as section 18(1)(a)
makes plain) only appropriate where a disposal by the landlord is proposed, and
Wellcome stated in the section 18 notices which they issued that they were
‘proposing’ to take a disposal of the interest of the Smith Trustees in the
building. We have no hesitation in rejecting the arguments of Mr Neuberger on
this issue.
Under the contractual scheme adopted by
the Smith Trustees and Wellcome, section 5 notices were not to be served in the
first instance by the Smith Trustees but were to be served (after final
determination by the leasehold valuation tribunal or the Lands Tribunal on
appeal of the application for approval of the estate management scheme) if the
requisite majority of qualifying tenants in the building made a positive
response within the time limited to the section 18 notices to be served by
Wellcome. The applicant argued that that was not a sufficient compliance with
what the Act required: in her submission, it was the statutory duty of the
landlord to serve section 5 notices as soon as he proposed to make a relevant
disposal. Mr Neuberger took issue with that contention. He argued that there
was no provision in the Act governing the time at which the section 5 notices
were to be served, provided that service preceded the making of the relevant
disposal. It was open to the landlord, he argued, to delay service of section 5
notices as long as he wished provided that he served them before making a
relevant disposal.
The applicant pointed out that delay
after the exchange of contracts in serving section 5 notices could prove
prejudicial to the tenants. Several of the qualifying tenants of the building
were elderly, and their death or departure could deprive the tenants of their
rights under the Act altogether. Furthermore, on July 24 1995 the tenants’
interests were not the subject of an estate management scheme; if service of
section 5 notices were delayed until an estate management scheme in some form
had been approved (if it ever was), the value of the tenants’ interests would
be diminished since the development rights in the property would be controlled
by Wellcome and not by the tenants themselves. These points are not without
force, but, in our judgment, the choice between the competing contentions on
this point must be governed by the proper construction of the Act and not by
consideration of how the proper construction may in practice affect either one
party or the other.
While there is no express provision in
the Act which prohibits the use of the section 18 procedure in the manner for
which the parties have provided by contract in this case, it seems to us
obvious that this is not what the draftsman intended. The requirement that a
prospective purchaser should only have to serve 80% of all the tenants in a
building rather than 90% of the qualifying tenants makes no practical sense in
a situation where the prospective purchaser, as a result of comprehensive
disclosure by the original landlord, is in full possession of details of the
terms upon which the various tenants hold their interests. It makes even less
sense for a prospective purchaser to inquire of tenants whether they have
received a section 5 notice from their landlord when the prospective purchaser
knows that the original landlord has contracted with him that no such notice
shall be served. While, as pointed out above, the section 18 procedure may
operate so as to confer an incidental benefit on the tenant, the primary
purpose of the section (as we have suggested) is to afford protection to the
prospective purchaser, and the present situation is not one in which the
prospective purchaser has any conceivable need for such protection. That the
section 18 procedure is capable of abuse has been demonstrated above. We are
quite sure that the Smith Trustees, who have throughout acted on the most
eminent advice, have not in any way intended to abuse the rights of their
tenants. We do, however, regard the use of section 18 in the present
circumstances as highly artificial and a far cry from what the draftsman of the
Act can have intended.
Since ‘propose’ is not an expression apt
to denote an instant of time, and since the Act prescribes no time period for
service of a section 5 notice, it cannot be held that there is any precise
period within which a section 5 notice must be served by a landlord who
proposes to make a relevant disposal. We also agree with Mr Neuberger that
‘Where’, the opening word of section 5(1), is a somewhat odd word for a
draftsman to use: an expression such as ‘as soon as’, ‘once’, ‘when’ or ‘if’
might have been clearer. But the effect of section 5(2)(c) and (d)
is to require the notice to be served a minimum of four months before the date
of relevant disposal, and the natural reading of the section is, in our view,
that a landlord must serve a section 5 notice on the qualifying tenants as soon
as he proposes to make a relevant disposal to a third party (which of course
involves settlement of the purchase price and the terms upon which the landlord
proposes to sell). Section 18 plainly envisages that a section 5 notice should
have been served by the time that a prospective purchaser may, if he wishes to
protect himself, serve a notice under section 18.
On our reading of the Act, the Smith
Trustees should have served section 5 notices on the applicant and the other
qualifying tenants of the building at or within a few days of the date of their
contract with Wellcome and possibly even sooner. We consider that they were in
breach of their statutory duty in failing to do so and remain in breach. We
hold that such notices should now be served. We would allow the applicant’s
appeal on this point.
We have not heard full argument on what
section 5 notices, if served now, may or should contain. There may well be a
difference between the parties on that question. If there is, and it cannot be
resolved, we would wish to hear argument before making any final order.
These conclusions make it unnecessary for
us to consider an argument raised by the Smith Trustees by a notice of
cross-appeal concerning the undertakings which they gave in the county court.
This is the judgment of the court.
