Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Initial notice under section 42 — Notice specifying £100,000 as premium for extended lease — Valuation evidence that premium likely to exceed £200,000 — Effect of Cadogan v Morris [1999] 1 EGLR 59 — Whether initial notice specifying realistic premium — Whether section 42 initial notice valid
The claimant landlord held the freehold of premises containing the defendant tenant’s flat. The flat was held under a long lease. In May 2001, B, the then lessee, contracted to sell the lease to the defendant, and served an initial notice, under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, claiming a new extended lease. In August 2001, B assigned both the lease and the benefit of the section 42 notice to the defendant. The section 42 notice specified the premium that the tenant proposed to pay as £100,000. The claimant served a counternotice denying the validity of the section 42 notice on the ground that it failed to specify a premium, having regard to the decision of the Court of Appeal in Cadogan v Morris [1999] 1 EGLR 59. The claimant then issued proceedings seeking a declaration that the notice was invalid and the suggested premium of £100,000 was not realistic. The claimant valued the premium at £287,000, but, at the time of serving the notice, the defendant’s valuer considered the premium to be in the region of £200,000.
Held: The landlord was entitled to its declaration that the section 42 notice was invalid. The statutory provision in section 42(3)(c) of the 1993 Act requires the tenant to specify a realistic figure in the initial notice: £100,000 was not a realistic premium. A realistic premium is one that can be justified by valuation evidence.
The following cases are referred to in this report.
Cadogan v Morris [1999] 1 EGLR 59; [1999] 04 EG 155
Cresswell v Duke of Westminster [1985] 2 EGLR 151; (1985) 275 EG 461; [1985] RVR 144
Daejan Properties Ltd v Bollringer Investments Ltd unreported 18 January 2002
Willingale v Globalgrange Ltd; sub nom Willingale v Global Grange Ltd (2000) 80 P&CR 448; [2000] 2 EGLR 55; [2000] 18 EG 152
Anthony Radevsky (instructed by Speechly Bircham) appeared for the claimant; Edwin Johnson (instructed by David Conway & Co) represented the defendant.
Giving judgment, Judge Knight QC said:
[1] In these Part 8 proceedings, the freehold owner of Rossetti House seeks a declaration that a section 42 notice, served by the assignor of the defendant, who is a tenant, was invalid, as not complying with section 42(3)(c) of the Leasehold Reform, Housing and Urban Development Act 1993.
[2] Very briefly, the facts are that the proceedings were begun against a Jeffrey Barnier, who was the tenant of flat 16, Rossetti House, Hallam Street, London WI. The claimant’s freehold interest is subject to a headlease in favour of a company called Yawforge Ltd, and the flat is the subject of an underlease dated 12 May 1978, which granted a term of 80 years and 46 days from 10 May 1926.
[3] On 31 May 2002, as I have said, the underlease was vested in Jeffrey Barnier, who served a section 42 notice. That notice, at clause 7, specified the premium that he was proposing to pay for the grant of a new lease, being £100,000. The notice is not a prescribed notice, but is one in common use, being published by legal stationers.
[4] Around one week before this, on 23 May 2001, Mr Barnier contracted to sell the lease to the defendant, Mr Rosen. On 3 August 2001, the claimant, Mount Cook Land Ltd, served a counternotice challenging the validity of Mr Barnier’s notice. In the counternotice, the landlord said that it did not admit the validity of the notice because it failed to specify the premium that the tenant proposed to pay, and relied upon the decision of the Court of Appeal in Cadogan v Morris [1999] 1 EGLR 59. The landlord then commenced these Part 8 proceedings against Mr Barnier on 14 August 2001, seeking a declaration in the following terms, which I summarise: that (i) the notice served by Mr Barnier was invalid, because it failed to specify the premium that he proposed to pay in respect of the new lease, in accordance with section 42(3)(c) of the 1993 Act; and (ii) the suggested premium of £100,000 was not a realistic figure. The claimant’s value of the premium payable was £287,000.
[5] On 29 August 2001, Mr Barnier assigned the benefit of the notice to the defendant, the purchaser of the underlease, and Mr Rosen was, in due course, substituted as defendant in these proceedings. The transaction between Mr Barnier and Mr Rosen was completed on 31 August 2001.
[6] I will not dwell very long on the scheme of the Act. Chapter 2 of the 1993 Act confers upon an individual the right to a new lease — see section 39 — and the scheme of Chapter 2 corresponds very closely with the collective enfranchisement in Chapter 1 of the 1993 Act.
[7] The tenant seeking to acquire a new lease has to satisfy various conditions, and sets his claim in motion by giving a notice under section 42, which, according to subsection (3):
must specify the premium which the tenant proposes to pay in respect of the grant of a new lease under this chapter and, where any other amount will be payable by him in accordance with any provision of Schedule 13, the amount which he proposes to pay in accordance with that provision.
[8] The premium that is referred to there is elaborated upon in Part II of Schedule 13 to the Act, which defines how the premium is to be calculated, which is by reference to the aggregation of the three elements identified in para 2 of Part II of the Schedule.
[9] The claimant sought, at the outset of this hearing, to amend its claim by introducing a further ground upon which the notice served by Mr Barnier was said to be invalid. I dealt with that application during the course of argument, and rejected the application for leave to amend. What it turned upon was the failure in the notice to identify, under para 8, the other amounts that the tenant proposed to pay in accordance with Schedule 13. That concerned the compensation to the intermediate landlord, Yawforge Ltd.|page:76|
[10] This is a case, therefore, that, if the landlord is successful, will mean that the claim to a new lease begun by Mr Barnier will not be capable of being pursued, and that Mr Rosen, Mr Barnier’s assignee and now the tenant, will have to pursue any application or any claim for a new tenancy by means of a fresh notice, which he will not be able to serve until the end of August 2003, which will be the expiry of two years’ occupation since the date of the assignment of the right by Mr Barnier. It may be a consequence of any delay that followed from that that any calculation of value under Part II of Schedule 13 will result in a higher figure than the figure that would have been calculated if this were a good notice. It may also mean that Mr Rosen will have to pay a larger figure to the intermediate landlord, but I am not in a position to say whether either of those two points will eventually turn out as I have suggested. If the notice is held to be good, the matter will proceed to the leasehold valuation tribunal, where the dispute as to value will be resolved. I am told that the hearing has been fixed for November of this year, but some doubt has been cast as to whether that is feasible.
[11] The case has proceeded without oral evidence, although I have been supplied with witness statements from Mr Rosen and from Mr Kenneth Buchanan BSc, MRICS, who has provided two witness statements. In addition, the claimant has put in a witness statement of Mr Charles Morden, who is a legal manager employed by Langham Estate Management Ltd, which manages the claimant’s Langham estate, and a further expert statement by Ms Frances Joyce BSc, MRICS.
[12] Expert evidence was put in on behalf of Mr Rosen by Mr Robin Sharp, who was also, besides holding a bachelors degree in estate management, a fellow of the Royal Institution of Chartered Surveyors. Also in the bundle is a witness statement of Mr David Haynes, who was originally instructed as an expert by the claimant, but, due to illness, has not given evidence, and his role was taken over by Ms Joyce.
[13] The background to this matter I have referred to very shortly and is elaborated in Mr Rosen’s witness statement; I do not think it is necessary for me to deal with that in any greater detail.
[14] What is apparent from the evidence — this is referred to in Mr Buchanan’s two witness statements — is that Mr Rosen did request from him advice as to the realistic premium proposal to make in any new claim that was served. In his witness statement, he said that, on information Mr Rosen provided, he had advised him that a realistic premium to propose in the new notice was £100,000. In a subsequent witness statement, dated 22 August 2002, he elaborated upon that, and said that he had advised Mr Rosen that, in his view, a realistic premium to propose in a new second notice to be served by Mr Barnier would be £100,000. In para 2, he says:
This figure was derived from my rough assessment of the value of a premium for a long lease of the flat as being somewhere in the region of £200,000.
He adds that, in advising as to the suitability of that figure, he had in mind the decision of the Court of Appeal in Cadogan.
[15] That was the figure that was inserted in Mr Barnier’s second notice, and the experts who provided reports for the purpose of this hearing produced the following figures. Mr Sharp, for Mr Rosen, valued the correct premium at £229,575 as at 31 May 2001, the date of the notice, which, it is common ground, is the appropriate date for this valuation. In his report, he did dilate upon the practice of valuers in advising as to the premium to be put in a tenant’s proposals, and gives a number of examples of cases, two of which he was involved in personally. Mr Anthony Radevsky, for the claimant, says that that is not helpful information, in the sense that it does not assist me in deciding the issue in this case. But, importantly, Mr Sharp, in his report, says that, as at 31 May 2000, the figure of £100,000 offered in the notice of claim as the premium payable for an extended lease of the flat was realistic.
[16] In the preceding subparagraph, Mr Sharp says:
As at 31st May 2001, when Mr Barnier served his notice of claim to an extended lease of Flat 16 Rosetti House, the correct figure for a premium payable for an extended lease calculated in accordance with Schedule 13 was £229,575.
He then goes on, at 13.2, to set out the short subparagraph that I have just read.
[17] Ms Joyce comes up with a different figure in her valuation: £287,000, which is the figure in the Part 8 claim form. Mr Radevsky accepts, for the purposes of argument and this case, that the figure that he has to accept is £229,000.
[18] Both counsel have addressed me on the issue in this case and have provided extremely helpful skeletons. Both are agreed that the issue that is at the core of this case is summarised by Mr Edwin Johnson, who appears for Mr Rosen, in these terms:
Whether it is legitimate for the tenant’s opening shot to be a figure which is half of what he has advised is the right figure. The tenant’s case is that this was and is perfectly legitimate.
(That last sentence I have added because it is the last sentence in that paragraph.)
[19] Mr Radevsky’s submissions are that, in order for a figure to be realistic, the proposed premium must be one that can be justified by valuation evidence. That submission is derived from the Court of Appeal decision in Cadogan, which has been scrutinised very carefully for the purpose of this argument. That was a case, one should note, where the tenant in his notice inserted a figure of £100, knowing that it was a formal, nominal figure, having been professionally advised that this was an acceptable practice. The report notes that it was a deliberate decision, and bore no relation to the realistic figure that lay probably between £100,000 and £300,000.
[20] The submission made by Mr Radevsky, who appeared for the landlord in that case, was that a premium must be bona fide and genuine, and not just a nominal figure or one that bore no relation to the true value. That submission found favour with the court on the facts of that case. It was dealt with in the judgment of a three-man court given by Stuart-Smith LJ, with whom Otton and Tuckey LJJ agreed, and at p61B-E of the report is set out the crucial part of the decision. Although we have read and re-read it many times, I think I am bound to set out at least that part of the passage between B and D. Stuart-Smith LJ says at p61B:
I do not consider it necessary to read any words into section 42(3)(c). The tenant is required to specify the premium that he proposes to pay. He did not do so; he deliberately specified a figure that he did not propose to pay. I do not think the tenant is required to offer his final figure that he may be prepared to go to, but he should, in my view, offer a realistic figure. The judge was troubled by the difficulty in telling whether the offer was a realistic one. I very much doubt whether in practice this will present the difficulties that the judge envisaged. It ought to be possible both for the landlord and the judge to recognise whether the offer is a realistic one, or simply a nominal or wholly unrealistic one. The landlord would need to be on fairly firm ground if he sought to challenge a substantial offer, even if he thought it was considerably too low. The court will obviously allow a fairly wide margin. If the landlord unsuccessfully challenges the validity of the notice, he will find himself paying the costs. On the other hand, even if it is the tenant’s opening bid, it should, in my view, be a realistic one. I decline to lay down any more precise guidelines. In this I follow what Sir John Donaldson MR said in Cresswell v Duke of Westminster [1985] 2 EGLR 151 at p152:
“Where we draw the line, I do not know. I doubt whether it is in anybody’s interest that I should attempt to draw that line. Many cases will answer the question on their own facts.”
Continuing with Stuart-Smith LJ’s judgment, he says:
This seems to me to be an application of the well known elephant test. It is difficult to describe, but you know it when you see it. I think we can trust to the good sense of landlords not to make frivolous applications and county court judges to take a robust line and not get enmeshed in hearing detailed evidence. A brief inquiry, if necessary, with limited evidence from tenant and landlord, should suffice.
He then goes on to deal with the situation under section 45(3)(b), which deals with the landlord’s counter-proposals in his counternotice, and applied the same approach to that.
[21] Mr Radevsky’s submission is that, on the basis of the evidence in this case, it is clear that: first, the proposed premium of £100,000 was |page:77| put in on the basis that it was roughly one-half of the proper premium for this particular flat; and, second, it cannot be justified on valuation evidence, and that this is recognised or acknowledged by Mr Sharp, and is confirmed — if confirmation were necessary — by Ms Joyce, who carried out a number of alternative valuations, which demonstrated, to her satisfaction, that the figure of £100,000 could not be justified by valuation evidence.
[22] I would add at this stage that this is not a case where the landlord has failed to serve a counternotice, so that, if the application were to fail, the matter will proceed to the leasehold valuation tribunal. I mention that, because the argument has ranged over situations where a section 42 counternotice has not been served, and the consequences of that and how it affects the application, if at all, of Cadogan.
[23] In this connection, I was referred to another case in the Court of Appeal, Willingale v Globalgrange Ltd [2000] 2 EGLR 55. That was a case where the landlord had failed to serve a counternotice, and the court held that it had no discretion and had to make an order under section 25 of the Act in accordance with the proposals contained in the initial notice. That was a case under Chapter 1 of the Act, which are the collective enfranchisement provisions. One of the points that was touched upon in that case by May LJ, in his reasons for upholding the decision of the judge below, was that Cadogan provides a safeguard against unrealistic proposals, in the sense that a landlord who does not serve a counternotice may still fall back on the argument that the tenant’s notice was invalid, in that the proposed premium did not comply with the requirement to specify a premium.
[24] Mr Johnson urges me to reject the landlord’s argument in this case. He says that, looking at the language of section 42(3)(c), there is no requirement there for either the premium to be based upon valuation evidence, or for the tenant to have obtained valuation evidence prior to inserting his premium in the notice. He took me back to the passage in Cadogan that I think I have read, and relies in particular upon the observation of Stuart-Smith LJ that a tenant was not required to offer his final figure that he may be prepared to go to in his proposal, and that a realistic figure would suffice. The judge also went on to say:
The court will obviously allow a fairly wide margin [when looking at the premium that the tenant had specified in his proposal].
He says that the combination, therefore, of the absence of any requirement that the premium be based upon valuation evidence, and the fact that it is an offer below the tenant’s final figure, undermines Mr Radevsky’s argument that any figure that fails to be justified by valuation evidence is the test that must be applied. Mr Johnson says that, in this particular case, £100,000 is a substantial figure, and that an offer of that amount, the court ought to find, satisfies the tenant’s obligation under section 42(3)(c).
[25] He also draws my attention to a number of other matters. He raised one matter on the formal requirement under Chapter I of the Act about the need for valuation evidence in applications made under the collective enfranchisement scheme, but I think that was dealt with by Mr Radevsky and is no longer a point that is relevant. But Mr Johnson did submit that, if one followed the reasoning of Mr Radevsky, it would lead to what he termed “valuation abuse”, in that a landlord could force a tenant to divulge his valuation advice prior to the matter going to the leasehold valuation tribunal if it were not resolved, and that this would constitute a real advantage to the landlord.
[26] Mr Radevsky dealt with that by saying, in effect, that this was really an exaggerated perception of matters, and that what the landlord was doing in this particular case could not lead to valuation abuse, because all the landlord was doing was seeking an explanation as to how the £100,000 figure had been arrived at, and the tenant’s failure to provide that information could cause the landlord to be suspicious of the figure, and would lead to further exchanges that would be counter-productive and costly, so that, far from leading to valuation abuse, in this case the landlord’s request for clarification was helpful. I think that way of looking at matters is the correct way. It would follow, of course, that any valuation advice that was tendered would be qualified, and, of course, would not be binding in any subsequent hearing. So I think that any possible disadvantage to the tenant has been greatly exaggerated.
[27] The other point that Mr Johnson took was on the safeguarding point that was raised in Willingale, to which I have already referred. What he says there is that if his approach is right, there would be no loss of the safeguarding character that, it is said, Cadogan provided for the landlord, and that all that would happen is that if a premium were inserted into the tenant’s notice that was less than the proper premium value, and in a case where the landlord failed to serve a counternotice, the landlord would still receive a substantial sum for the new lease, although it would be less than what he might otherwise have received had he put in a counternotice and the matter had gone on to the tribunal. That may be the case, but I do not think it really assists me in deciding upon the application of Stuart-Smith LJ’s judgment to the facts of this case.
[28] I mention, for the sake of completeness, that I was referred to a judgment of my co-Mercantile judge in this court, Judge Hallgarten QC, in Daejan Properties Ltd v Bollringer Investments Ltd unreported 18 January 2002. That was a case where the premium was inserted at a figure of £12,000, as against an appropriate premium figure of £60,000, as the judge thought. On the basis of that discrepancy, Judge Hallgarten found no difficulty in finding that the tenant had not made a premium proposal in his notice, and he struck it out. Mr Johnson said that that was a case that turned on its rather special facts, in particular upon a concession made by counsel that he would not have made in this case. I do not think that I need to take that any further forward, because although that decision was illustrative of the application of Cadogan, I am still left with the facts of this case, which I have to deal with.
[29] In my judgment, I do not think that the proposal of a premium of £100,000 is a realistic figure in this case, and I find for the landlord on this point. I accept, of course, that there is no obligation on the tenant to offer his final figure, and that the court would be obliged to allow a fairly wide margin when considering whether the proposal is realistic or not. I do not think that it would be right for this court to engage in considerations of what might be a realistic figure in different scenarios, and I think that the reference to Sir John Donaldson’s stricture in Cresswell v Duke of Westminster [1985] 2 EGLR 151 was intended by the Court of Appeal to discourage judges from that exercise. So I do not propose to consider whether a figure of £150,000 or £175,000 might have been a realistic figure in the facts of this case.
[30] It seems to me that the statutory provision in para (c) of section 42(3) requires a tenant to put up a realistic figure, and I have difficulty in finding that a realistic figure is one that cannot be justified by valuation evidence. It does not follow from that that a tenant, when he embarks upon this procedure, has to be in receipt of expert valuation advice, although, in the majority of cases, one would expect that to be the case. If a tenant proposes a figure without the benefit of that advice, he does run the risk of the landlord challenging the basis upon which that figure is arrived at. If it could be justified by valuation evidence, the tenant will be safe. If it cannot, the tenant is at risk, and if the tenant has obtained that figure from a valuer, whether it is put forward as a proper figure or as a much discounted figure for the purpose of negotiation, and it is, therefore, not realistic, the tenant does, in my judgment, run the risk of his notice being challenged by a landlord, as is the case in point. As the figure cannot be justified, and is not sought to be justified, by way of valuation evidence, a figure that approximates to some 44% of what is said to be the appropriate figure cannot be characterised as a realistic figure, and I so find.
[31] Accordingly, I find for the landlord in this case, and, Mr Radevsky, give you the declaration you seek, unless any point is taken on the precise wording of it.
Declaration granted.
