Leasehold Reform Act 1967 — Tenants’ rights to enfranchisement — Appeals by landlords from decision (by a majority) of the Court of Appeal in favour of tenants’ claims — It was common ground that in each of the four cases the tenants fulfilled all the necessary conditions for enfranchisement subject to the resolution of one disputed issue: were the tenancies ‘at a low rent’ within the meaning of section 4(1) of the 1967 Act? — All the tenancies had been granted in 1948, so that the proviso to section 4(1) applied, with the result that it became necessary to determine whether at the commencement of the tenancies the rents exceeded two-thirds of the ‘letting value’ of the properties — If the landlords could establish that they did (and the onus was upon the landlords), the tenants’ claims to enfranchisement would fail — The relevant facts were that the four properties concerned in these proceedings had each been let at an annual rent of £200, with premiums in two cases of £1,500 and in the other two of £1,250 — Evidence accepted by the trial judge was that the rent which could have been obtained for the properties in 1948 was between £200 and £250 per annum; they could not have been let at £300 per annum — If the annual equivalent of the premium were added to the rent of £200, the resulting figure in each case exceeded £300 — Thus if ‘letting value’ meant rack rent the tenants would not be entitled to purchase their freeholds as the rent of £200 was more than two-thirds of the rack rent of £250; but if the annual value of the premium was to be added to arrive at the letting value, the tenants would be so entitled, as the letting value would exceed £300 and the rents of £200 would be less that two-thirds of this value — Both the trial judge and the majority of the Court of Appeal in the present case (Sir George Waller dissenting) held, following Manson v Duke of Westminster, that letting value should be given the broad construction which included the decapitalised value of the premium — The House of Lords came to the same conclusion — A premium was manifestly part of the value that the landlord receives for letting the premises; and ‘letting value’ should be construed as the best annual return obtainable in the open market for the grant of a long lease whether this is achieved by letting at a rack-rent or letting at a lower rent plus the payment of a premium — Present case not a suitable occasion to review Gidlow-Jackson v Middlegate Properties Ltd, but no encouragement given to challenge it in the House on some other occasion — Misgivings expressed about the agreed basis for arriving at the annual equivalent of the premium — There had been a difference between the respective valuers as to the basic rate of interest, but agreement that an additional 2% and 1% (the latter because the lease had been granted by a mesne landlord) should be added to whatever was the basic rate — The appellants had questioned the 1% in the House, but this figure had been presented to the trial judge as agreed by experts on behalf of both parties and it would be inappropriate to reopen the matter — In future, however, further consideration should be given by the experts to the basis for expressing a premium in annual terms — Per Lord Griffiths: ‘As at present advised it appears to me that it should be done on a purely actuarial basis’ — Landlords’ appeal dismissed
The following cases are referred to in this report.
Gidlow-Jackson v Middlegate Properties Ltd [1974] QB 361; [1974] 2 WLR 116; [1974] 1 All ER 830; (1973) 27 P&CR 378; [1974] EGD 217; 229 EG 781, CA
Manson v Duke of Westminster [1981] QB 323; [1981] 2 WLR 428; [1981] 2 All ER 40; (1980) 41 P&CR 159; 259 EG 153, [1981] 2 EGLR 78, CA
These were consolidated appeals by landlords, trustees of the estate of the late second Duke of Westminster, from the decision of the Court of Appeal (reported at [1985] 2 EGLR 147; (1985) 275 EG 241) in favour of tenants of houses in Burton Mews, Belgravia, London, part of the Grosvenor Estate. The Court of Appeal (Sir George Waller dissenting) upheld decisions of Judge Parker QC, at West London County Court, that the respondents, Sir Charles Collier Johnston, Margaret Voggenauer, Alec Elijah Malnick and John Williams, were entitled under Part I of the Leasehold Reform Act 1967 to acquire the freeholds of the houses of which they were the tenants.
David Neuberger (instructed by Boodle, Hatfield & Co) appeared on behalf of the appellants; Gavin Lightman QC and Kenneth Farrow (instructed by Macfarlanes for Sir Charles Collier Johnston, Margaret Voggenauer and Alec Elijah Malnick, and by Compton Carr for John Williams) represented the respondents.
In his speech, LORD GRIFFITHS said: The appellants, the trustees of the will of the second Duke of Westminster, appeal from the decision of the Court of Appeal (1986) 51 P&CR 162*, which by a majority upheld the decision of Judge Parker, sitting in the West London County Court, that the respondents were entitled to purchase the freeholds of four mews houses on the Grosvenor Estate from the appellants pursuant to the provisions of the Leasehold Reform Act 1967.
*Editor’s note: Reported also at [1985] 2 EGLR 147 and (1985) 275 EG 241.
The houses in question are 5A, 8, 8A and 9 Burton Mews, London SW1. These houses, which had suffered bomb damage during the war, were let by the second Duke of Westminster to Hedgehope Estates Ltd for a term of 37 1/4 years from September 29 1946 at a rent of £12 per annum on condition that Hedgehope carried out repairs and redecoration. After carrying out the repairs Hedgehope let each of the houses to different tenants on similar terms. The particulars are as follows: no 5A was let to Mrs Claude Truman by an underlease dated August 16 1948 for a term expiring on December 22 1983 at a rent of £200 per annum and for a premium of £1,250. No 8 was let to Viscount Allenby by an underlease dated November 3 1948 for a term expiring on December 22 1983 at a rent of £200 per annum and for a premium of £1,500. No 8A was let to Reginald Barbour by an underlease dated July 19 1948 for a term expiring on December 22|page:88| 1983 at a rent of £200 per annum and for a premium of £1,500. No 9 was let to John Williams by an underlease dated July 29 1948 for a term expiring on December 22 1983 at a rent of £200 per annum and for a premium of £1,250. Mr John Williams is still in occupation of no 9 and is the fourth respondent. The other respondents are the successors in title of the original tenants.
At the time of the grant of the underleases the rents and premiums were lawfully charged by Hedgehope. But shortly after the commencement of the underleases the tenants were able to take advantage of the terms of the Landlord and Tenant (Rent Control) Act 1949. They each applied to the rent tribunal for an assessment of the ‘reasonable rent’ of the houses. Between December 1949 and March 1950 the rent tribunal assessed the following ‘reasonable rents’: no 5A £185 per annum, no 8 and no 8A £195 per annum, no 9 £220 per annum. The rent tribunal further determined a rental equivalent of the premium for each house pursuant to the provisions of the Act which was applied in further reduction of the rent so that as a result of the rent tribunal’s orders the rent actually payable for each house was reduced to the following amounts: no 5A £149.80 per annum, no 8 £152.44 per annum, no 8A £153.04 per annum, and no 9 £178.04 per annum.
In the course of time, the head lease was surrendered to the appellants. Shortly before the underleases were due to expire the respondents applied to the West London County Court for orders that they were entitled to acquire the freeholds of the houses pursuant to the provisions of the Leasehold Reform Act 1967. The appellants resisted the applications upon the sole ground that the houses were not let at a ‘low rent’ within the meaning of the Act. It is common ground that the other conditions enabling a tenant to purchase the freehold under the Act are fulfilled.
A low rent is defined by section 4(1) of the Act:
For purposes of this Part of this Act a tenancy of any property is a tenancy at a low rent at any time when rent is not payable under the tenancy in respect of the property at a yearly rate equal to or more than two-thirds of the rateable value of the property on the appropriate day or, if later, the first day of the term:
Provided that a tenancy granted between the end of August 1939 and the beginning of April 1963 otherwise than by way of building lease (whether or not it is, by virtue of section 3(3) above, to be treated for other purposes as forming a single tenancy with a previous tenancy) shall not be regarded as a tenancy at a low rent if at the commencement of the tenancy the rent payable under the tenancy exceeded two-thirds of the letting value of the property (on same terms).
In a case to which this proviso applies, the Act placed the burden of establishing that the house was not let at a low rent upon the landlord. Section 4(5) provides:
Where on a claim by the tenant of a house to exercise any right conferred by this Part of this Act a question arises whether a tenancy granted as mentioned in the proviso to subsection (1) above is or was at any time a tenancy at a low rent, it shall be presumed until the contrary is shown that the letting value referred to in that proviso was such that the proviso does not apply.
As the lettings with which your lordships are concerned took place in 1948, this appeal turns upon whether they were let at a low rent within the meaning of the proviso. This depends upon whether the rents of £200 per annum exceeded two-thirds of the ‘letting value’ of the houses let on the same terms at the commencement of the term; and the answer to this question depends upon the meaning to be given to the phrase ‘letting value’.
The appellants contend that letting value is to be construed as the open market annual rent obtainable for the premises (let on the same terms) at the date of the grant of the tenancy. Put more shortly, that letting value means rack-rent. The respondents contend that letting value is the total consideration that a landlord can obtain in the open market for the premises (let on the same terms) and includes not only the rent but also any premium in so far as it is attributable to the granting of the tenancy rather than any collateral matters such as furniture, fittings, etc. For the purpose of the operation of the proviso the premium is to be decapitalised and expressed in annual terms and thus the letting value of the premises is the sum of the rent payable and the decapitalised annual value of the premium.
In cases unaffected by rent control one might have thought it very unlikely that the application of these two different formulae would in practice lead to a different result. However, although the Court of Appeal expressed surprise at his finding, the trial judge accepted the evidence of the appellants’ surveyor that in the case of these houses they could not have been let at a rent of £300 per annum in 1948 and he put the rent that could have been obtained between £200 and £250 per annum. On the other hand the appellants’ surveyor agreed that if the annual capitalised value of the premium was added to the rent of £200 the resulting figure in each case exceeded £300.
Thus, if the term ‘letting value’ meant rack-rent, the tenants would not be entitled to purchase their freeholds as the rent of £200 was more than two-thirds of the rack-rent of £250; but if letting value was to be calculated by adding to the rent the annual value of the premium the tenants were entitled to purchase the freeholds as on this calculation, the letting value of each house exceeded £300 and thus the rents of £200 were less than two-thirds of the letting value so calculated.
The trial judge held that he was bound by the decision of the Court of Appeal in Manson v Duke of Westminster [1981] QB 323 to hold that letting value was to be determined by adding the decapitalised value of the premium to the rent and so held that the tenants were entitled to purchase the freeholds.
In the Court of Appeal (1986) 51 P&CR 162 Ackner LJ cited extensively from the judgment of Stephenson LJ in Manson v Duke of Westminster and as I read his judgment expressed approval of the reasoning that led Stephenson LJ to the conclusion that letting value was not restricted to the rent obtainable for the premises but included any other consideration in cash which the landlord would get for letting the house. Sir Nicolas Browne-Wilkinson V-C, at pp 172-173, held that he was bound by Manson’s case to hold that letting value included the decapitalised value of the premium but that if free from authority he would have construed letting value as ‘the open market annual rent obtainable for the property at the date of the lease’.
Sir George Waller, who dissented, construed letting value as market rent and held that he was not bound by Manson’s case to hold otherwise. He, therefore, would have allowed the appeal because the judge had accepted the evidence of the surveyor called by the appellants that the market rent was less than £300.
My Lords, in my opinion the expression ‘letting value’ should be given the broad construction for which the respondents contend. There are basically two ways in which a landlord can obtain money’s worth for a house that he wishes to let on a long lease. Either he can let the premises for the highest annual rent he can obtain in the market, ie the rack-rent, or he can accept a lower rent plus the payment of an immediate capital sum — a premium. In either case the landlord is receiving value for letting his premises. I can see no reason why the meaning of letting value should be restricted to one of these two methods of realising the value of a long lease, which would be the result of construing letting value as rack-rent. If the legislature had wished the test to be against a notional market rent they could have provided that the rent should be compared with the rack-rent obtainable for the premises, which is a well-recognised term of art in the law of landlord and tenant and used in the preamble to this Act: but they did not do so, and chose a far wider term. I am not surprised. The proviso envisages that the premises will have been let at a low rent in the sense that it is substantially less than a rack-rent. In these circumstances one would expect a premium to have been charged to compensate the landlord for accepting less than the market rent. The legislature must, therefore, have appreciated that when investigating the circumstances of the letting of premises falling within the proviso a premium would in almost all cases have been paid for the lease unless prohibited by the Rent Acts. A premium is manifestly part of the value that the landlord receives for letting the premises unless it can be attributed to other benefits such as furniture and so forth and I can see no reason why it should be excluded from the letting value of the premises.
In my view, letting value should be construed as the best annual return obtainable in the open market for the grant of a long lease on the same terms whether this is achieved by letting at a rack-rent or letting at a lower rent plus the payment of a premium. It was submitted on behalf of the landlords that this construction would make it extremely difficult to ascertain the letting value because the court would have to take into account an infinite variety of combinations of rent and premium rather than seek the rack-rent from comparable lettings of similar properties at the time of the original letting. I believe the very reverse to be the case. As I have already pointed out, a premium will have been paid for almost all the houses covered by the proviso. Unless there is any reason to suppose that the bargain between landlord and tenant was not made at arm’s length, the combination of rent and premium will be very strong prima facie evidence of the open market letting value of that particular house let on those terms at that date, in which case the only|page:89| calculation that has to be made to see if the tenant is entitled to the freehold is to apply a mathematical formula based upon actuarial principles to convert the premium into an annual sum. On the other hand, if the rack-rent has to be determined for a letting that occurred many years ago, much expensive and time-consuming research will often be involved in seeking out sufficient truly comparable lettings to give a fair basis upon which to assess a rack-rent; an exercise designed to promote disagreement rather than agreement between expert witnesses, and a fruitful source for litigation.
There may be the exceptional case in which the rent and premium do not reflect the true letting value, but convincing evidence would be required to undermine the natural assumption that the landlord obtained the best price he could for the lease at the time of the original grant. In such an exceptional case it would be for the judge to determine the letting value upon expert valuation evidence and it would be permissible to have regard both to rack-rents and the combinations of rent and premiums for comparable houses in ascertaining the letting value.
In the present case the fact that the rack-rents were limited to £250 but the actual rents plus the decapitalised value of the premiums exceeded £300 demonstrates that the rack-rents did not reflect the true letting value of the houses. The judge was therefore right to disregard the rack-rent and to accept the higher return obtained by rent and premium as representing the letting value of the houses at the commencement of the term.
In the course of argument your Lordships were referred to Gidlow-Jackson v Middlegate Properties Ltd [1974] QB 361 in which it was held that the letting value could not exceed the amount lawfully exigible under the Rent Acts and the court rejected the tenant’s argument that the letting value should be assessed at the hypothetical annual rent obtainable in the absence of rent controls. In Manson v Duke of Westminster my noble and learned friend, Lord Brandon of Oakbrook, expressed doubts about the correctness of the decision in Gidlow-Jackson and said that it was desirable that it should be reviewed by the House of Lords as soon as a suitable case for such review arose. The Court of Appeal in that case was not concerned with the payment of a premium and I do not, therefore, think that it assists in the solution of the present problem. The present case is not therefore a suitable case to review that decision. However, I would not myself wish to lend any encouragement to an attempt to challenge the decision in your Lordships’ House. Leave to appeal was refused by the Appeal Committee consisting of Lord Diplock, Viscount Dilhorne and Lord Cross of Chelsea and as at present advised it appears to me to have been correctly decided. If the tenant’s argument had been accepted it would have worked most harshly against landlords, for not only would the landlord have been restricted to an artificially low rent for the term of the lease and for an indefinite period thereafter during the currency of the statutory tenancy, but would, in addition, have been faced with the prospect of having to sell his property to the tenant at an artificially low price.
The appellants also challenged the basis upon which the judge arrived at the annual value of the premium. The judge accepted the evidence of the appellants’ surveyor that the annual value should be determined by applying a basic rate of interest of 5% to which should be added 2% to provide for a sinking fund and a further 1% because the leases were granted by a mesne landlord and not by a freeholder. Although there was a difference of opinion between the surveyors as to the appropriate basic rate of interest (the respondents’ surveyor suggested it should be 8%) both surveyors agreed that the additional 2% and 1% should be added to whatever was the appropriate basic rate. The application of interest at 8% to the premiums produces an annual letting value in excess of £300 for all the houses. The appellants submit that the judge erred in adding the 1% because the lease was granted by a mesne landlord; if they succeed in this submission the two houses for which premiums of £1,250 were paid will have an annual letting value of just under £300 and thus the tenants will not be entitled to purchase their freeholds. The two houses for which premiums of £1,500 were paid will, however, be unaffected, as their annual letting value will still exceed £300.
My Lords, I am bound to say that I have considerable misgivings about the correctness of the formula adopted by the experts to express the premium in annual terms. I see the force of the appellants’ argument that when considering the conversion of the premium into an annual sum the result should be unaffected by the question whether the recipient of the premium is a mesne landlord or a freeholder. A mesne landlord may require a higher premium than a freeholder, although I do not understand at the moment why this should be so, but I cannot as at present advised see upon what basis it is suggested that the annual value of that premium can be greater or less according to the status of the recipient. But I am faced with the difficulty that this figure of 1% was presented to the judge as an agreed figure by the experts on behalf of both parties. I do not know the process of reasoning by which they arrived at the figure, nor do I know why 2% is allowed for a sinking fund. The underlying basis for adopting the formula was never investigated in the evidence.
It is apparent that the Court of Appeal also felt misgivings about the expert’s formula, for Ackner LJ said at (1986) 51 P&CR 162, 172:
On the expert evidence it is agreed, however much we may find the formula open to question, that the proper method of transferring the capital sum to an annual sum in this case is to add a total of 3% to the appropriate interest rate, which the judge found on the evidence to be 5%. Given therefore that the right process was to capitalise the premiums, then in the light of the agreed expert evidence I do not think it is open to us to interfere.
Both Sir Nicolas Browne-Wilkinson V-C and Sir George Waller agreed with this part of Ackner LJ’s judgment.
My Lords, in the light of the agreed experts’ evidence, I accept the view of the Court of Appeal that it would not be appropriate to reopen this matter in your Lordships’ House. However, in any future case it seems to me that further consideration should be given by the experts to the basis upon which a premium should be expressed in annual terms. As at present advised, it appears to me that it should be done on a purely actuarial basis. But in this case, the parties having elected to put the matter before the judge upon an agreed basis, it is not open to one of them now to seek to resile from the result of that agreement.
For these reasons, my Lords, I would dismiss this appeal.
Agreeing, LORD KEITH OF KINKEL said: Taking the view that the case turned on somewhat unsatisfactory evidence of value, with which the trial judge was entitled to deal as he did, I would concur in the dismissal of the appeals.
LORDS BRANDON OF OAKBROOK, TEMPLEMAN and GOFF OF CHIEVELEY agreed with the speech of Lord Griffiths and did not add anything.
The appeals were dismissed with costs.
