Receiver appointed by court to carry out repairs urgently needed to block of flats allowed by lessors to fall into a serious condition of disrepair — Action by leaseholder on behalf of himself and 109 other long leaseholders — Lessors’ covenant to maintain, repair, decorate and renew the structure not carried out — Substantial disrepair in respect of common parts, roof, external walls, guttering and so forth — Premises alleged to be deteriorating and becoming dangerous — Decision of Goulding J in Hart v Emelkirk Ltd cited as a
precedent for appointment of a receiver — Leaseholders in present case paid fixed ground rents plus a service charge to meet the cost inter alia of repairing the structure, including main walls, roofs, foundations, chimney stacks, gutters and rainwater pipes — Although there was a provision for a reserve or sinking fund to be built up in order to meet future liabilities for major works, no such fund had been created, at least in recent years — The enjoyment of the leaseholders had been affected and the value of their leasehold interests imperilled by the lessors’ neglect — It was true that the case differed from Hart v Emelkirk in as much as the lessors here had not abandoned the property but had continued to perform some of their duties — Nevertheless, the properties here also demanded urgent action and the necessary works were unlikely to be done without the court’s intervention — Held, accordingly, that a receiver and manager would be appointed in the place of the lessors to receive the rents and exercise the powers, duties and authorities of the lessors, as he may be advised, in managing the block — Appointment made, with liberty to apply in Chambers
This was a
motion by the plaintiff, Michael Salis Daiches, seeking, on behalf of himself
and 109 other persons, the appointment of a receiver in respect of Elm Park
Mansions, Park Walk, Chelsea, London SW10. The first defendants, Bluelake
Investments Ltd, in which the ownership of the block was vested, were a
wholly-owned subsidiary of the second defendants, Bluelake Management Ltd.
The plaintiff
appeared in person; Mark Warwick (instructed by Grangewoods) represented the
defendants.
Giving
judgment, HARMAN J said: I have before me a motion by Mr Michael Salis Daiches,
who sues on his own behalf and on behalf of 109 other persons who he says form
a class with him and with whose consent he acts. The defendants are two
companies, Bluelake Investments Ltd and Bluelake Management Ltd. Mr Daiches has
appeared in person and has conducted the matter with skill and effect, my only
comment being that perhaps, as is normal with litigants in person, his time
estimates were not of the most accurate.
The motion
seeks the appointment of a receiver in respect of a block of flats known as Elm
Park Mansions in Chelsea. The motion is brought under section 37(1) of the
Supreme Court Act 1981, which provides:
The High
Court may by order (whether interlocutory or final) . . . appoint a receiver in
all cases in which it appears to the court to be just and convenient to do so.
The history of
the matter set out in Mr Daiches’ statement of claim, and in broad terms not
much contested by the defendants as to its bones, is that Elm Park Mansions is
a large block, containing 189 flats, built, as I understand, around the turn of
the century and occupied as to the most part by leaseholders holding
substantial terms granted in the 1960s, probably 99-year terms in origin, with
substantial periods to run, at fixed ground rents but subject also to a service
charge to the landlord. Mr Daiches is one such tenant by assignment. The 109
other tenants whom he claims to represent are all themselves leaseholders of
terms of a similar duration and nature to Mr Daiches’. The remaining 70-odd
flats are in part owned by persons who have similar interests to Mr Daiches and
his co-class owners, but who do not wish to join or have not joined with him in
this application, and in part comprise some 30 flats which have been called in
argument, and I think also in the evidence before me, the Crocker flats. These
flats are not let upon long leases but are let upon short leases, I think
primarily to Rent Act-protected tenants at controlled rents. Perhaps nowadays
they are not controlled rents but regulated rents. I have not gone into and it
does not matter what the details of those provisions are.
The claim by
the plaintiff for a receiver is based upon the proposition that the lessor is
in substantial breach of its repairing covenants in respect of the block — the
common parts, roof, guttering, external walls and so forth — and that the only
way in which the covenants can be enforced is by the appointment of a receiver,
or perhaps, on an interlocutory application, the appointment of the receiver
will be in aid of the eventual enforcement of the repairing obligations.
The history of
the matter in recent years is that the second defendant company, Bluelake
Management Ltd, acquired the freehold reversion on the block in June 1983.
Quite recently — I forget the precise date — the second defendant transferred
by Land Registry transfer the whole of its estate in this block to the first
defendant, Bluelake Investments Ltd. Although formal notice of assignment was
given to all the tenants on the original transfer to the second defendant, no
notice whatever of the assignment between the defendants has been given to any
of the class that the plaintiff represents. The first defendant is, so far as
the evidence before me goes, a wholly-owned subsidiary of the second defendant,
and to that extent the transfer between them is more a matter of paper title
than of substantial change in the personalities concerned.
The evidence
on behalf of the defendants contains in particular an affidavit sworn by one
Jacob Rahim Harouni on May 29 1985, which sets out at paras 3 and 4 how the
purchase came to be made. It says that the reversion to the 189 flats was
purchased by a company (in fact the second defendant, then called Volecharm
Ltd) on June 24 1983 from the freeholder, a Crocker company, which took back
leases of the 33 unsold flats. The consideration for the original purchase was
£36,000 and the income from the property is £5,670 a year in ground rents,
which, as Mr Daiches pointed out, is about 15 1/2% gross return on the purchase
price, ignoring stamp duty, costs and other matters, which of course would have
had to be borne at the time.
The premises,
it is quite evident, were in substantial disrepair at the time of the purchase.
Indeed, Mr Harouni’s own evidence was that at that time the second defendant’s
assessment of the cost of major works was in the region of £300,000. Thus it is
clear, on Mr Harouni’s own evidence, that at least by the time of the purchase
(and it would be very surprising if it was not at the time of contract) it was
well known to the defendant landlords that they were facing very substantial
works of repair. According to Mr. Daiches’ evidence there had been substantial
complaints by tenants about serious neglect of repairing obligations for some
years before that in respect of the previous landlord’s exercise of its duties.
It is not at present proved that these facts were known to the defendants at
the time of purchase, although they may well have been.
The lease, of
which I have before me a specimen, being exhibit MD1 to Mr Daiches’ evidence
sworn on May 7 1985, which it has been accepted before me is a true sample of
the leases affecting this block, contains in clause 5(2) a lessor’s covenant
that:
subject to
the payment by the lessee of the contributions hereinbefore provided to
maintain repair redecorate and renew . . . the structure and in particular the
main walls drains roofs foundations chimney stacks gutters and rainwater pipes
of the building
and then
various other parts of the reversionary premises. There is no suggestion in the
evidence that the lessees have not paid their ‘contributions hereinbefore
provided’, and thus the pre-condition in that covenant appears to be satisfied.
Thus there is a straight obligation upon the lessor to repair the main walls
etc of the building. Those parts of course, notably the roof, gutters and so
forth, remain in the occupation of the lessor, since they are not demised to
the occupying tenants of flats, as I understand the scheme of lettings, and
they remain the exclusive right and property of the lessors.
The
‘contribution hereinbefore provided’ is a covenant by the lessee in the
lessee’s covenants, clause 2(2)(a) of the lease, to pay and contribute to the
lessor a certain percentage, varying slightly, no doubt, according to the size
of the flat, of, first, the insurance (not particularly relevant), second, the
water rates (not particularly relevant) and, third:
the cost of
maintaining repairing decorating and renewing: (a) the structure of the
building including the main walls drains roofs foundations chimney stacks
gutters and rainwater pipes
Thus the scheme
of the lease is entirely clear and entirely sensible. The lessor covenants to
do the work and the lessee covenants to pay, at particular times, the costs
incurred in so doing.
It is material
to notice that in clause 2(2)(a)(viii) there is an express provision included
in the main obligation to contribute in:
such sums as
the lessor shall reasonably consider necessary from time to time to put to
reserve to meet the future liability of carrying out major works to the
building or the flat.
That covenant
by the lessee has an exegesis upon it, as I read it, which continues:
with the
object so far as possible of ensuring that the contributions shall not
fluctuate substantially in amount from time to time.
But, as I read
the clause, that is merely exegesis and is not a contractual obligation or
covenant of a separate sort in itself.
mentioned, from 2(2)(a)(i) and (iii), (iii) in particular, and there is a right
for the lessor to recover under 2(2)(a)(viii) sums reasonably necessary to put
to reserve.
The history of
the matter, as I have said, is that from the time of acquisition by the second
defendant it was known that substantial works, then assessed by the second
defendant at £300,000, were necessary on the building. There was — it may or
may not have been known to the purchaser — a history of complaints by tenants
that building works had not been done and that the exterior was deteriorating,
particularly that rainwater gutters were in bad repair, that window sills were
rotting and that brickwork and chimney stacks were deteriorating. All those
matters, one would have thought, would have been evident to any purchaser of a
large block of flats, who one would have expected would have a survey carried
out or at the very least have himself inspected with care any premises of that
sort of age which were being bought in such circumstances. There is no direct
evidence that the landlord did have a survey or make an inspection before
contract, but it would surprise me in the highest degree if no precautions
whatever were taken before contract. Such inspection or survey would have
revealed, as it seems to me inevitably on the evidence, that there were
substantial arrears of serious maintenance work.
Mr Daiches’
evidence asserts, and it is not challenged, that the sinking fund provision in
subclause (viii) was never, at least in recent years (and that means the last
five), been operated. Thus, no fund had been built up by way of reserve to meet
the future liabilities which could have been, and were in 1983, foreseen as
likely to arise.
Since the
present landlords acquired the reversion there has been a history of meetings
with the landlords’ representative, Mr Harouni, who is carrying on business in
a manner of which I am not precisely sure. He is described as a mere employee
of an agent called Selmans, but the principals of that agency are entirely
obscure and who it is that is trading under the name Selmans is not known to
the court or to the plaintiffs at present. Mr Harouni is also of course an
investor in the companies which are the lessors themselves.
A string of
meetings is recorded at which tenants make requests that surveys be undertaken,
that proper schedules of dilapidations be prepared; they object to an adviser —
an unqualified adviser as it seems — of the landlords, who was writing some
letters which certainly seem to be slightly odd in their phrasing and approach
to the estate liabilities that existed, and they make constant references to
the Housing Act and such matters. Nothing, unfortunately, seems to have been
done, until last autumn, when surveyors were commissioned by nomination by the
leaseholders whom Mr Daiches represents, and approved and appointed by the
lessors, so surveyors with the authority of both sides. They produced a survey
and a report which reveals a truly deplorable state of affairs and liabilities
for repair, now extant, of far greater extent than £300,000. These are, of
course, only surveyors’ views. One knows that surveyors may be unduly
apprehensive. None the less, figures of up to £1m are mentioned, and we start
in June 1983 with a figure of £300,000 on the lessors’ side.
The lessors
have, unfortunately, done nothing actually to start any building works. The
lessors are active enough in their presence in the property in one sense: they
collect their rents and their service charges, they provide a caretaker-hall
porter, who is by common consent an active and efficient man, they are
undoubtedly interested in the block of flats and have not simply walked away
from it and abandoned it. None the less, they have done nothing about major
repairs. There have been allegations of brickwork actually falling from the
structure, which are admitted by the lessors to have occurred, and there have
been considerable, as Mr Warwick has described them, first-aid repairs — that
is, urgent patching up of actual pieces of brickwork about to fall — so that
the landlords have been doing something around the property. But there is
nothing in the way of a concerted programme, a commissioned set of tenders for
major works, which, as it seems to me, are admitted on the lessors’ part to be
necessary.
The trouble
appears to be that the money to do such a major set of works is not there. The
evidence before me shows that the present reversioner, the first defendant,
which is the reversioner although no notice of its reversion has been given to
the tenants, has effectively no assets at all. The only evidence before me as
to its accounts shows £100 paid-up share capital, effectively no reserves and a
transfer pursuant to a charge for all moneys to a licensed deposit-taker, a
secondary banking institution. The ability of the first defendant to provide
sums of money, whether of £300,000 or nearer £1m, is plainly in the highest
degree dubious. The second defendant, which now has no interest in the property
save that it owns the shares in the first defendant, has large mortgages and all
moneys charges and appears to have had a fairly poor financial record; its last
accounts were heavily qualified by its auditors. Again, there appears to be
little prospect of its having access, certainly not from its own funds, to any
such sums of money as would be needed to put in hand such a programme as is
needed here.
In those
circumstances, say Mr Daiches, the work is urgently needed, the premises are
dangerous and deteriorating, and the enjoyment by himself and by each of those
he represents of the property (being the leasehold estate which each of them
holds) is seriously imperilled and made far less desirable than it should be.
He points to the decision of Goulding J in Hart v Emelkirk Ltd
[1983] 1 WLR 1289* and says that the essence of that decision appears at p
1291, paras F to H, where the learned judge said:
I know of no
precedent for such a relief,
being very
similar relief — a receiver — to that sought here,
but I also
know of no authority that forbids it under the provisions of the Judicature Acts,
now represented by the Supreme Court Act 1981,
of which he
reads section 37, which I have already read. The learned judge goes on:
It clearly
appears to me to be just to appoint a receiver in this case because it is done
to support the enforcement by the court of covenants affecting property: cf Riches
v Owen (1868) LR 3 Ch App 820. It is also convenient because . . . the
properties are in a condition that demands urgent action.
*Editor’s
note — Also reported at (1982) 267 EG 946, [1983] 2 EGLR 41.
Mr Warwick has
observed to me that Hart v Emelkirk is a case which he described
as a vacuum case, a case where the property was in effect abandoned by the
lessors who were not complying with their insurance covenant and were not
collecting their rents but appear simply to have walked away and left the
properties. Mr Warwick is entirely correct. That does appear to have been the
case. It seems to me, however, that Mr Daiches’ answer to that observation is
right. Although it may be easy in a vacuum case to persuade the court that
someone should step in, and although this is not a vacuum case, since in this
case the lessor is performing some of his duties and some them well, yet the
essence of the decision and the ratio decidendi is in the phrase between
G and H, ‘It [is] just to appoint a receiver . . . to support the enforcement .
. . of covenants’ and ‘It is also convenient because . . . the properties are
in a condition that demands urgent action.’
I agree that that is in truth the ratio and, on the facts I have
recited, is satisfied in this case.
As it seems to
me, it is not for me to determine fundamental questions of construction and law
upon this application. It is for me to consider whether, interlocutorily, I
should exercise the discretion vested in me under section 37. Mr Warwick
expressly conceded to me, in my view correctly, that there was jurisdiction to
exercise such a power. He merely urged me upon discretionary grounds not to do
so.
Mr Daiches
submitted to me that I should determine a question of law arising upon the
construction of the lease, which he submitted to me in this form:
Does the
lease permit the lessor to make lawful demands of all lessees for payment of
sums to the lessor before the lessor has incurred any costs in respect of such
works as may be necessary to remedy existing and substantial breaches of the
lessors’ repairing covenant?
Mr Daiches
submitted that if the answer to that question were ‘No’, then the appointment
of a receiver was almost inevitable. He also went on to submit that, even if
the answer were ‘Yes’, it would also be appropriate to appoint a receiver.
In my view, it
is neither necessary nor prima facie desirable for the court on motion,
when it is trying to exercise an interlocutory jurisdiction, to determine
fundamental questions of law if it is not essential to do so. As it seems to
me, it is probable that Mr Daiches’ contentions upon construction are correct.
The form of the lease and the form of covenants (iii) and (viii), allowing
recovery of ‘costs’ on the one hand and of ‘reasonable sums’ on the other hand,
are in contradistinction one to the other and show that subclause (viii) is
only intended to get in sums for genuinely future liabilities, not to get in
sums to meet liabilities which are presently due under the landlord’s repairing
covenant and which are future only to the extent that they have not yet been
quantified or provided for, but I do not believe I ought so to determine here.
Assuming
against Mr Daiches, without in any way deciding it, that the answer was ‘Yes,
it does so permit’, it would still not, in my view, be a sufficient answer to
the assertion that, given the difficulties of the landlord in raising the
money, given the urgency of the works, of which I am wholly satisfied, given
the inevitable problems of the procedures under Schedule 19 to the Housing Act
1980 which will have to be gone through, and given the fact (which is obvious
and deposed to) that the work cannot sensibly be done except in good weather,
the sooner this work is put in hand the better. I cannot for myself see that
there is any substantial prejudice to the landlord in so doing, because the
cost of the works done will be recoverable; it is improbable to a high degree
that the court officer, a receiver, will do works the cost of which at least is
not properly recoverable from the tenants, and the prospect of the lessor
suffering any real detriment by the appointment seems to me remote. It is quite
true that the receiver will be in a position to collect the ground rents and to
use them for the purpose of paying for the repairs. It does not seem to me that
that use of money is in any substantial way a detriment to the landlord,
because if the repairs are necessary under the landlord’s covenant in clause 5
of the lease, then indeed the rents and other moneys ought to be spent on so
doing.
As it seems to
me, the test in section 37 as expressed by Goulding J is entirely satisfied
here. The fact that the plaintiffs will, they say, finance the receiver in
beginning his works and placing the contracts for the repairs is a fact which
is of assistance to the court in considering the exercise of its discretion,
though not itself determinative. It does mean that there will be a source of
money not apparently available to the lessor, although there is nothing that
binds the plaintiffs at the present time so to provide.
Thus, as it
seems to me, I should simply, upon the question ‘Is it just and convenient?’,
consider the evidence as a whole of the works, the probability of their being
done, the need for their being done and the obligation to do them. On that I
conclude that the only convenient way is to appoint a receiver. There is a
nominated receiver who is a man of experience in this field, to whom no
objection is taken, and I shall, subject to his giving security in Chambers,
appoint him to be receiver and manager of this block of flats in the place of
the landlord and to exercise all the powers, duties and authority of the lessor
as he may be advised in managing the block, with liberty to apply in Chambers
as may be advised.
Michael Page
ARICS, a partner of Keith Cardale Groves, chartered surveyors, was appointed as
receiver and manager.
