HH Judge Hazel Marshall QC
Introduction
1. This is a claim brought under Part I of the Landlord and Tenant Act 1987 (“the 1987 Act”) with regard to the “rights of first refusal” conferred on a majority of qualifying residential tenants in a block of flats where their landlord wishes to or does dispose of an interest in the reversion upon their leases
2. The claim relates to a block of flats on Kensington High Street called Melbury Court which contains 48 flats, and some shops on the ground floors. The Claimants are two of the tenants holding long leases of flats in the building. They claim in a representative capacity on behalf of the “qualifying tenants” of 28 of the flats, who together constitute the “requisite majority of the qualifying tenants” under the Act. For short, they are referred to as “the Tenants”.
3. The First and Second Defendants (“the Freeholders”) are the freeholders of the block. The Third Defendant (“Shellpoint”) is the head lessee of the whole of the building comprising the block including the roof and the air space above the roof. The Third Defendant is thus the Tenants’ immediate landlord, and the relevant landlord for the purposes of the 1987 Act.
4. It is the roof and air space which is the central subject of the matters in dispute. There is no dispute that Melbury Court is a building to which the 1987 Act applies, and there is no dispute that the 28 tenants are in principle entitled to operate the rights conferred on tenants by the 1987 Act. The matter in dispute is whether, as a result of dealings entered into between Shellpoint and the Freeholders there has been a “relevant disposal” within the meaning of Section 5 of the 1987 Act entitling the Tenants to the declaration which they now claim pursuant to Section 12A of the Act.
The facts
5. These are not in dispute. Shellpoint is headlessee of Melbury Court under a headlease (“the Existing Lease”) of the whole of Melbury Court dated 22 August 1978, granted for 83 years from 25 June 1977. The Freeholders own the reversion on that headlease. The Tenants own long residential underleases of flats in Melbury Court. Shellpoint retains the remainder of the building under the Existing Lease. Its interest in the Existing Lease makes it the “immediate landlord” of the Tenants pursuant to the 1987 Act.
6. On 29 March 2007, planning permission was granted for the construction of two flats in and on the roof of Melbury Court.
7. On 8 June 2007, the Freeholders granted to Shellpoint a lease (“the Roofspace Lease”) of the roof space at Melbury Court as shown on plans attached to that Lease. That lease was for a term from 8 June 2007 up to and including 24 June 2130. The Roofspace Lease was therefore, in principle, an overriding or reversionary lease with a reversion of 70 years upon the Existing Lease in respect of the roof space.
8. Clause 5.1 of the Roofspace Lease provided for Shellpoint to carry out the construction in the roof space of two flats. Clause 5.3 provided for Shellpoint to grant underleases of each of the two new flats at a premium equal to the open market value of the flat for a term until 21 June 2130. Clause 5.4 provided for Shellpoint to pay to the Freeholders 50% of the net proceeds of sale.
9. Clauses 5.5 and 5.6 are central. They provided as follows:
“5.5 Within one month following the grant of both of the underleases of the flats in the Roof Space and payment to the Landlord of all accounts referred to in Clause 5.4 the Tenant will surrender this Lease to the Landlord free from encumbrances (apart from the underleases) and neither party shall pay any consideration to the others in respect of such surrender but each party will release the other from further performance of the covenants set out in this Lease.
5.6 If the works to the Roof Space shall not have been materially commenced within five years the Tenant shall on written request surrender this lease to the Landlord and the Landlord shall have no further rights of action against the Tenant for damages or otherwise in relation to such works”.
10. Clause 8 is also important. It provided as follows: “8. Declaration of non merger
It is agreed and declared by and between the landlord and the Tenant that this lease will not merge with the Existing Lease”.
11. When registering the Roofspace Lease, HM Land Registry not only registered Shellpoint with a new title to the Roofspace Lease, but closed the title of the Existing Lease with regard to the roof space area itself on the basis that that title had determined. This was consistent only with there having been a merger of that part of the Existing Lease with the Roofspace lease. This was contrary to the express declaration at Clause 8 of the Roof Space lease, and was a mistake on the part of the Land Registry, which was later acknowledged and corrected, but which caused some digression in the dispute between the parties, as can be imagined.
12. On 1 August 2011, solicitors acting on behalf of the Tenants, served on all the Defendants a document containing notices under sections 12A, 12B and 12C of the 1987 Act (“the Purchase Notice”). By this, the Tenants gave, in fact, three separate and alternative notices under sections 12A, 12B and 12C of the 1987 Act requiring the implementation of their claimed rights.
13. Sections 12A, 12B and 12C contain provisions regarding different methods by which tenants’ rights under the 1987 Act may be claimed, according to different circumstances. Broadly, Section 12A deals with cases where a “relevant disposal” in relation to the landlord’s interest consists of an agreement. The tenants can then claim that the agreement should take effect as if made with them rather than the third party. Section 12B deals with cases where a relevant disposal has been effected by a transfer without a previous agreement. The tenants can then claim a transfer of the subject matter of the relevant disposal from that third party on the same terms as applied on the disposal to that third party by the landlord. Section 12C deals with the case where the “relevant disposal” is one of surrender to the superior landlord, again without a previous agreement, thereby extinguishing the immediate landlord’s interest. In such a case the tenants can claim the grant of a new lease from the superior landlord upon the same terms as the extinguished lease.
14. The Tenants in this case were clearly not sure of the legal position. Obviously at the time there was uncertainty, and therefore potential issues, arising from the mistaken closure of title by the Land Registry and the effects of this in point of law, and also perhaps as to what actually had happened, or the correct legal analysis of what had happened. The Tenants therefore gave notices, under each of Sections 12A, 12B and 12C, in that order of priority, in case either of the first two notices might not be held to be valid. In the event, by the time the matter has come to hearing, they rely only on their Notice under Section 12A, and I am not concerned with the effects of the other two notices. In particular it is common ground that there is no point to be taken arising out of the mistaken title closure.
15. The notice given under section 12A of the 1987 Act, was contained in paragraph 11 of the Purchase Notice and elected that the agreements in Clauses 5.5 and 5.6 of the Roofspace Lease should have effect as if entered into not with the Freeholders but with the Claimants, as persons nominated for the purposes of s.12A by the Tenants.
16. In response to Paragraph 11, the Defendants’ solicitors asserted that
“The ‘Surrender Agreements’ [ie Clauses 5.5 and 5.6] contained in the Roof Space Lease are not relevant disposals for the purpose of the Act. Shellpoint in its capacity as Lessee of the Roof Space is not the immediate Landlord of any of the tenants at Melbury Court.”
This statement encapsulates the issue now before the court.
17. To complete the history, owing to the recession, the construction of the flats was not commenced within the five year period from 7th June 2007. I am told, however, that the freeholders have not exercised the right to call for a surrender under Clause 5.6 of the Roofspace Lease, but have agreed to extend the period for a further three years, and construction works are now about to commence.
The proceedings
18. The claim was commenced in the West London County Court on 31 October 2011, by a Part 8 claim form with Details of Claim attached, supported by a statement from the First Claimant, Mr Baldwin. Responsive statements were filed on behalf of the three defendants, and on 1 February 2012, DJ Ryan ordered the claim to be transferred to this Court. Directions leading to this trial on 24th September 2012 were then given.
19. At the trial, Mr Stephen Jourdan QC appeared for the Claimants and Mr Anthony Radevsky for the Defendants. I should like to pay tribute to both these eminent counsel for their egregiously excellent skeleton arguments and submissions to the court.
20. The claim now made in the proceedings, as formulated by Mr Jourdan in his Skeleton Argument is for declarations that :
(a) The Purchase Notice was a valid and effective notice under section 12A of the 1987 Act.
(b) In consequence, the agreements in Clauses 5.5 and 5.6 of the Roofspace Lease have effect as if entered into not with the Freeholders but with the Claimants.
(c) If the circumstances described in Clause 5.5 of the Roofspace Lease arise, Shellpoint must transfer the Roofspace Lease to the Claimants.
(d) If the works to the Roof Space provided for in the Roofspace Lease were not materially commenced by 7 June 2012, Shellpoint must, on written request served by the Claimants, transfer the Roofspace Lease to the Claimants.
At the trial Mr Jourdan QC suggested at one point that the reference to Clause “5.5” in (c) was a mistake for “5.6”. I am not sure that that is the case, on analysis, but that does not seem to be material. The meaning in general is perfectly clear.
The Act
21. It is now necessary to look at the material provisions of the 1987 Act, although I need not set these out in full.
22. The broad purpose of the 1987 Act was to implement a policy that where the landlord of a block of flats wished to dispose of his reversionary interest in some way, the tenants, or a sufficient majority of them, should have a right of first refusal to acquire the interest which of he was willing to dispose, on the same terms as he was willing to grant. This point was to give tenants who wished to have it, a greater say in the management of their own property, but the policy of the Act is financially neutral, being neither expropriatory, nor aimed at regulating financial advantage. The Act therefore provides that a “landlord” shall not make a “relevant disposal” affecting any premises to which, at the time of the disposal, Part I of the Act applies unless (i) he has, in accordance with s.5, previously served a notice on the “qualifying tenants” of the flats contained in those premises giving them a right of first refusal, and (ii) the disposal is then made in accordance with the requirements of ss.6 to 10. The Act was heavily amended by the Housing Act 1996, after repeated judicial criticisms of the Act in its original form.
23. Under s.1(2), Part I of the Act applies to premises if they consist of the whole or part of a building, they contain two or more flats held by “qualifying tenants” and the number of flats held by such tenants exceeds 50% of the total number of flats in the premises: s.1. A person is a qualifying tenant of a flat if his tenancy meets certain qualifications, which, broadly means that it is a long residential lease. It is common ground both that Part 1 applies and that the Tenants are qualifying tenants.
24. Under s.2 (1) the “landlord” is the immediate landlord of the qualifying tenants of the flats contained in those premises. Section 2(2) extends this provision to include any superior landlord of such a “landlord” who holds under a tenancy which is for a term of less than seven years, or is terminable within the first seven years at the option of the landlord.
25. It is common ground that Shellpoint is the “landlord” of Melbury Court under s 2(1). Since the Roofspace Lease is terminable within 7 years of its inception at the option of the Freeholders (Clause 5.6) it might at first sight appear that Shellpoint would also be the “landlord” in its capacity as next superior landlord under the unmerged leasehold interest in the Roofspace Lease. However, neither counsel argued this, and that is no doubt because the extension in Clause 2(2) relates to the superior landlord of “any such premises” which, grammatically, therefore means the premises defined in Clause 2(1), which are premises containing the flats held by the qualifying tenants. The Roofspace lease is not a lease of parts of Melbury Court containing those or any such flats, so that the extension is not engaged.
26. S.4(1), defines a “relevant disposal” with regard to any premises to which Part I applies. It is defined very widely, as
“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” (emphasis added).
However, it expressly excludes the grant of any tenancy under which the demised premises consist of a single flat (s.4(1)(a)) and any of the disposals falling within s.4(2).
S. 4(2)(a) (iii) excludes the disposal of “any incorporeal hereditament”.
It would therefore exclude a disposal consisting of the grant of any easement.
27. I am not concerned with any other exclusions, except to note s. 4(2)(i) and (j), which were added by amendment to the Act.
S. 4(2)(i) excludes
“a disposal in pursuance of a contract option or right of pre-emption binding on the landlord” (with an immaterial exception).
S.4(2)(j) excludes
“a disposal consisting of the surrender of a tenancy in pursuance of any covenant, condition or agreement contained in it”.
Mr Jourdan explained, and I think Mr Radevsky agreed, that this should be read in conjunction with Section 4A, also introduced by amendment, and was intended to make clear that the policy of the Act was that the Tenants’ rights of first refusal should arise at the first opportunity, but once only. Thus, it would be the initial contractual right of option or pre-emption (subs (i)) and the initial covenant etc granting the right to require a surrender (subs (j)) which would be the “relevant disposal”. The subsequent performance of the contractual obligation would not be.
28. S.4(3) provides that “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….”.
29. S.4A(1) provides that the 1987 Act applies to a contract to create or transfer an estate or interest in land, whether conditional or unconditional and whether or not enforceable by specific performance, as they apply in relation to a disposal consisting of the creation or transfer of such an estate or interest.”
30. Thus the effect of the above provisions is that an agreement by the landlord to surrender is a relevant disposal, and so is an option under which the landlord can be required to surrender. But once such an agreement or option has been entered into, a surrender pursuant to such an agreement or option is not a relevant disposal.
31. The following sections of the Act deal with machinery and consequences. Section 5 obliges a landlord who proposes to make a relevant disposal affecting premises to which Part 1 of the Act applies to make an offer to the qualifying tenants on the same terms as he is willing to accept. Sections 5A – 5E lay down details. Section 6 provides for the tenants’ acceptance, and Section 7 for the consequences of non-acceptance. Sections 8 and 8A – 8E lay down the landlord’s obligations when its offer is accepted. Sections 9A and 9B provide for the consequences of withdrawal of by either side and Section 10 deals with situations in which the premises cease to be premises to which Part 1 applies.
32. Section 10A makes a failure to comply with Section 5 a potential criminal offence. Section 11 provides civil remedies for qualifying tenants in cases where Section 5 was not complied with (or Sections 6 -10 were contravened), and extends these to any party who acquired the “protected interest”, as it is convenient to call it, from the landlord.
33. As already indicated, Section 12A (the relevant section here) provides for qualifying tenants to serve notice on the landlord electing themselves to take the benefit of any contract which constituted a “relevant disposal” made without due compliance with Part 1, within a time limit of 6 months from gaining sufficient knowledge of the disposal. Section 16 provides for the further enforcement of rights under Section 12A, 12B or 12C against a subsequent acquirer of the protected interest.
The parties’ cases.
34. The sole issue between the parties has now been crystallised down to whether the provisions of Clauses 5.5 and 5.6 as contained in the Roofspace Lease constituted a “relevant disposal” for the purposes of the Act. This dispute was summarised, in the arguments advanced between the parties, as being whether, as the Tenants argue, the “surrender agreements” of Clauses 5.5 and 5.6 constituted a disposal by Shellpoint of or affecting its reversionary interest under the Existing Lease, or whether as the Defendants argue, they did not, because they were entered into by Shellpoint, not in its capacity as “landlord” under the 1987 Act, but as the owner of a different, superior interest, namely that of head tenant under the separate and unmerged Roofspace lease.
Tenants’ argument
35. The essential proposition of Mr Jourdan’s argument is that where the “landlord” under the 1987 Act enters into a transaction the result of which is that title to the whole or part of the immediate reversion to the qualifying tenants’ interests can pass to a third party without any further “relevant disposal”, that transaction must itself be treated as a “relevant disposal”.
36. The logical route of his argument was as follows.
(a) Where the headlessee of a block of flats grants an option to the freeholder entitling the freeholder to call for a surrender of part of the premises held under the headlease, that is a “relevant disposal”.
(b) This must also, therefore, be the case if the freeholder grants an overriding lease to the headlessee which contains such an option.
(c) The principles of relevant disposals apply just as much to disposals of parts of the relevant premises as to the whole. Thus, a disposal of a part of the building, or common parts, is caught by the Act: see Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] 2 P & CR 3.
(d) An agreement by a landlord to surrender is also a “relevant disposal”, (see dicta in Kensington Heights Commercial Co Ltd v. Campden Hill Developments Ltd [2007] 1 Ch 318, per Lawrence Collins LJ at [81-83]) and so an agreement to surrender a part of relevant premises could and would be a relevant disposal.
(e) The same principle applies to the grant of an option to call for a surrender. The fact that such an option is contained in an overriding lease made no difference in principle.
37. Thus far I do not understand Mr Radevsky to dissent. His argument (as I will mention) is that these principles are not engaged by the facts of this case. It is therefore from this point that the parties’ arguments diverge.
38. Mr Jourdan then refers to the doctrine of merger of leasehold interests. In summary, merger takes place where one person holds two estates in land, a greater and a lesser. The lesser is then “sunk or drowned, in the greater”: see Symons v Southern Railway Company (1935) 51 TLR 491 at 493 and is extinguished. At common law, this happened automatically, unless the estates were held in different capacities, but in equity, which came to prevail, merger depended on intention; the inferior interest was assumed to continue if that was the owner’s intention, and it was presumed to be the intention if its continuance would be in the owner’s interests.
39. Since all that is required to bring about merger is formation of the relevant intention in unregistered conveyancing, and provision of evidence to the Land Registrar that such an intention has been formed (to which effect will then be given on the Register) in registered conveyancing, Mr Jourdan submits that the operation of merger would “plainly” not be a “relevant disposal” for the purposes of the 1987 Act. Merger, he submits, is neither the creation of an estate or interest, nor (and unlike a surrender) the transfer of an estate and interest. Merger simply does not come within the concept of a “disposal” at all, because that requires the engagement of two different parties; a person cannot sensibly be said to make a disposal to himself.
40. Accordingly, if the Roofspace Lease had not included Clause 8, and Shellpoint had intended merger to take place at the time of the grant of the Roofspace Lease, or if Shellpoint had subsequently decided to merge the Headlease into the Roofspace Lease, merger would have taken place and the landlord’s reversionary interest in the Existing Lease would have been affected, by the removal of the roof space from the premises. This would happen without any relevant disposal taking place to trigger the Tenants’ rights under the 1987 Act. The subsequent transfer of the Roofspace Lease to the freeholder would therefore effect a change of hands of part of the reversionary interest in the Existing Lease without any relevant disposal enabling the tenants to exercise their rights, and that (he submits) could not be right.
41. Mr Jourdan submits that the inclusion of Clause 8 makes no difference to the principle, because it can be waived or varied without this (he submits) being a relevant disposal either. Shellpoint and the Freeholders can agree to abrogate Clause 8; the Freeholders can simply waive compliance with it. In either case, Shellpoint is then free to adopt an intention of merger which, if it took place, would affect the protected interest (ie the landlord’s reversion on the Existing Lease) as above. None of this would be a relevant disposal.
42. It follows, he submits, that it is only the transaction effected in Clauses 5.5 and 5.6 which fall within the parameters of a potential “relevant disposal” and the policy of the Act therefore requires that they should be treated as such. The policy of the Act is, Mr Jourdan submits, strongly to protect the tenants’ right to a first refusal in respect of the potential changing hands of the landlord’s interest. The Act should therefore be interpreted so as to further this policy effectively: see: Kay Green v Twinsectra [1996] 1 WLR 1587, per Staughton LJ at p.1603.
43. He accepts that where transactions take place with regard to a superior interest which cannot affect the inferior protected interest, then it is correct that there is no “relevant disposal”. That, he submits, is the principle of Belvedere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858, where there were parallel transactions by a landlord who held both the immediate reversion on the relevant building, and the next superior (but held unmerged) reversion in a hierarchy of leasehold interests. It was held that when the landlord disposed of both interests together, the Tenants were entitled to acquire the immediate reversion, but not the superior reversion – because the latter transfer was a separate matter and in no way affected the (protected) inferior reversion. The difference, Mr Jourdan submits, is that in that case the disposal under consideration was incapable of affecting the inferior interest. Belvedere should be seen as a logical exception to the basic principle of the Act on that ground. Here, in contrast, the transaction is so capable, and so the exception cannot be invoked. Put another way, it seems to me, he submits that the availability of the Belvedere doctrine depends on the possible consequences of the transaction and not on its nature.
44. The transactions that Shellpoint entered into (in Clauses 5.5 and 5.6 of the Roofspace Lease) do engage the policy of the Act, because they do, or could, affect the rights of the qualifying tenants against their immediate landlord.
Landlords’ argument
45. Mr Radevsky’s argument, in a nutshell, is that the “Surrender Agreements” contained in Clauses 5.5 and 5.6 of the Roofspace lease were not relevant disposals under the Act, because they were not made by the “landlord” of the qualifying tenants, but by the holder of a superior lease, namely the lessee’s interest under the Roofspace Lease, in respect of that superior interest only. The fact that that lessee also held the inferior interest separately is, he submits, irrelevant. He relies on Belvedere for support for that proposition, arguing that the situations are analogous.
46. Upon the grant of the Roofspace Lease to the Third Defendant (which, he observes, is not itself alleged to be a “relevant disposal”, and indeed could not be), Shellpoint held two interests superior to the qualifying tenants, namely the Existing Lease and the Roofspace Lease. It is only in its capacity as holder of the Existing Lease that it is the ‘landlord’ of the qualifying tenants for the purposes of the Act, and it is irrelevant that it also holds the Roofspace Lease, as is obvious from considering the position if the Roofspace Lease had been granted to a third party.
47. The simple point, he submits, is that there are two unmerged leasehold reversions, and the surrender agreements expressly provide for the surrender only of “this lease”; ie the superior overriding lease. They do not, therefore, and cannot affect the inferior reversion, which will remain in existence as before.
48. It is not good enough to suggest that in certain circumstances, at some time in the future, the position could arise whereby the qualifying tenants’ protected interest is somehow affected. There is no substitute for looking carefully at the provisions of the Act and applying them accurately to the situation which actually pertains. The execution of the Roofspace lease, even with its surrender provisions, did not and does not touch the inferior “protected interest”, and effected no disposal of it or any part of it.
Discussion
49. The issue which I have to decide is whether there has been a “relevant disposal” of the interest of the Tenants’ “landlord” within the meaning of the 1987 Act, and at first blush, Mr Jourdan’s argument that there has been has a good deal of attraction.
50. The clear object of the Roofspace Lease was to enable the exploitation, jointly with the freeholder, of an element of the landlord’s (Shellpoint’s) residual reversionary interest in Melbury Court. Intuitively, it seems that achieving that objective physically must involve utilising the rights of the landlord under the Existing Lease, such that if this had had to be formalised it must have involved a disposition by the landlord of its rights, which would therefore have triggered the Tenants’ rights, and that it is only through a kind of sleight of hand made possible by the juxtaposition in the leasehold hierarchy of the Existing Lease and the Roofspace Lease, that the development could be accomplished without having to resort to such formalisation. Somehow, therefore, it feels natural that the landlord’s rights are being deployed so as to achieve the development in a manner which must be circumventing the tenants’ rights of first refusal.
51. However, Mr Radevsky submitted that that perception is simply not correct, emphasising that there is no substitute for rigorous analysis of both the Act and the actual transactions under scrutiny. Whilst prefacing this all with the comment that none of these points had in fact been raised by the Tenants, he pointed out that, first, the carrying out of the development works did not require any disposition of Shellpoint’s rights as “landlord” of the relevant reversion. Shellpoint had rights of access to the roof space which it was entitled to exercise under the Existing Lease, but even if it had needed to grant such rights to others, these would be in the nature of easements, and would therefore be an excepted “disposal” pursuant to Section 4(2)(a)(iii) of the Act. The roof space itself, although a “common part” of the building in the sense of an undisposed of part of Melbury Court, was not a common part over which the Tenants had any rights of use. The landlord could therefore carry out works in the roof space without infringing any such right.
52. Second, whilst the grant of a lease of common parts as such would be a “relevant disposal”, once the two flats were constructed, the landlord could lease them off individually, and such a lease would be “the lease of a flat” and, again, an excepted disposal, this time under s.4(1)(a). Thus, the landlord could physically carry out the proposed development project on his own, and sell on the flats it created, without triggering the Tenants’ rights of first refusal under the Act. The only reason why the Roofspace lease had been necessary was to enable an interest in the new flats of a sufficiently mortgageable duration to be created. The crucial point, though, was that it would be wrong to approach the case under the misapprehension that the scheme could not have been implemented physically by Shellpoint, as “landlord” without triggering the tenants’ rights, so that the only point was whether the further transactions created by the Roofspace lease itself did so.
53. This explanation was not common ground. Mr Jourdan QC did not accept Mr Radevsky’s propositions, in particular he did not concede that the subsequent disposal by the landlord of leases of individual flats in the roofspace would be an exempt disposal under the Act. When asked why, though, he said only that it could hardly make any difference, in the context of the purpose of the Act, if the landlord were to grant a lease of common parts for development (admittedly a “relevant disposal”) or were to develop the common parts as flat and then lease them off (argued to be an exempt disposal).
54. Mr Radevsky submitted that it made all the material difference needed. By developing itself, the landlord was able to make an exempt disposal under the Act, and that was really all there was to it.
55. I accept Mr Radevsky’s argument on this point. Although it is not a point which I am directly called on to decide, it is important as regards the context of the issue which I do have to decide. It also reminds me of the importance of careful examination and analysis of the facts to see whether the qualifying circumstances laid down by the Act have actually occurred.
56. In approaching this exercise, I also remind myself that the policy of the Act is not expropriatory (in contrast to the other familiar Acts governing long residential leaseholds, the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993). The landlord is not obliged to make a disposition; it is simply that if he wants to do so, he must offer the same deal as he is prepared to accept to his Tenants, before proceeding with a third party. In principle, therefore, the operation of the Act is (or should be) financially neutral between landlord and tenant. Neither is intended to make a windfall.
57. Analysing the present situation, I have come to the conclusion that Mr Radevsky is correct. The Roofspace Lease with the inclusion of Clauses 5.5 ad 5.6 was not a “relevant disposal” within the meaning of the Act for the purposes of triggering the Tenants’ statutory rights of pre-emption.
58. Belvedere v Frogmore (above) is, in my judgment, authority for the proposition that a dealing with a separate superior reversion which does not touch the inferior reversion can be entered into without triggering the inferior Tenants’ rights.
59. There is an exception to this where the transaction produces the result that the relevant inferior reversion could then be brought to an end in less than seven years: s. 2(2). Since Clause 5.6 in particular is plainly capable of operating within such a period, I find it helpful to remind myself of the principles which would operate if that provision were applicable. Clause 2(2) operates to extend the scope of the tenants’ rights of pre-emption where the immediate reversion is itself short, ie actually or potentially less than seven years. Where the next superior reversion comprises the whole of the property comprised in the immediate short inferior reversion, the effect is to make the superior landlord also a “landlord” for the purpose of the Act, and thus to extend the Tenants’ rights of pre-emption to a relevant disposal of that superior reversion. Where, though, the next superior reversion comprises part only of the property comprised in the (short) inferior reversion, Section 2(2) will only apply if that part of the property is or includes the flats of the qualifying tenants. It does not apply if the superior reversion relates to a part of the building which does not comprise any such flats. That is why it cannot be invoked in this case as the short contingent reversion created by Clauses 5.5 and 5.6 of the Roofspace lease is upon common parts and not flats.
60. This underlines, in my judgment, that the crucial question is whether the Roofspace lease does, or can, effect a relevant disposal of the reversion on the Existing Lease; it is only such a disposal which triggers the Tenants’ rights under the Act. If it merely effects a contingent disposition of the next superior interest, it is irrelevant. It matters not that that next superior interest may be held by the same party, so long as it is an identifiably separate interest. Belvedere.
61. In my judgment, therefore the presence of Clause 8 in the Roofspace lease is fatal to Mr Jourdan QC’s contention. It expressly preserves the separate existence, identity and operation of the Existing Lease and the Roofspace Lease, and Clauses 5.5 and 5.6 operate and can operate only on the latter.
62. Mr Jourdan QC sought to resist this conclusion in two ways. First, he suggested that, notwithstanding the apparent express terms of the Roofspace Lease, the intention of Clause 5.6 could be seen, in practice, to be to effect a surrender of the relevant part of Existing Lease. He pointed out that Clause 5.5 provided for the surrender to be “free from encumbrances (apart from the underleases)”, (emphasis added) which meant the intended underleases of flats, and omitted to state that it was also to be subject to the Existing Lease itself. The omission, he submitted was significant and intentional, and the inference that the Existing Lease interest was not intended to remain in existence as an encumbrance on the Roofspace Lease after such a surrender was underlined by Clause 7.3 of the Roofspace lease. This provided for the freeholder to appoint Shellpoint as managing agents in respect of the new flats, a provision which he submitted was unnecessary if Shellpoint would continue to be the reversioner on those new flats through its ownership of the Existing Lease.
63. This was a new point, bowled at Mr Radevsky in the course of speeches. His response was that the omission in Clause 5.5 did not mean what Mr Jourdan QC submitted, because the Roofspace lease demise was itself expressed to be a demise of the Roofspace subject to the Existing Lease, such that a surrender of that demise was inherently a surrender subject to the Existing Lease and did not need express mention in Clause 5.5. Clause 7.3 he submitted was just sloppy or overzealous drafting. I prefer Mr Radevsky’s interpretation, and on reflection, it also seems to me that the differing lengths of the available reversions on the new flats might well make it either necessary or desirable, for conveyancing purposes, to provide for placing management of the service charges relating to them expressly in the hands of Shellpoint.
64. This meant that Mr Jourdan QC was driven back to relying on his proposition that if the Roofspace Lease could lay the ground for achieving a disposal of Shellpoint’s reversionary interest under the Existing Lease without there being another relevant disposal on which the Tenants’ rights could attach, then the mechanism which laid that ground (ie Clauses 5.5 and 5.6) must itself be a relevant disposal within the meaning of the Act, on the basis of giving it the necessary purposive construction.
65. I reject this argument. In my judgment it is too far from the mechanism (by now, with the amendments to the Act, a very elaborately crafted one) by which the Act is expressly intended to operate to be capable of being brought within its terms on the basis of a vague “purposive” construction.
66. Mr Jourdan cannot argue that the surrender agreements do affect the Existing Lease reversion, because, so long as the two reversions remain unmerged, they simply do not. His argument then has to become one that they can affect it. However, his explanation is as follows. The freeholder could waive compliance with Clause 8, Shellpoint then could decide to merge the two interests, the freeholder could then operate the surrender agreements, and if so this would effect a change of ownership of the part of the reversion of the Existing Lease, without a relevant disposal taking place, thus circumventing the tenants’ rights. This chain of circumstances thus depends not only on a chain of events at least one of which (the first) is outside Shellpoint’s control, but also the proposition, which Mr Jourdan states as if it is a given, that merger of leasehold interests is not a “relevant disposal” as a matter of law, a proposition which Mr Radevsky does not concede although he says one does not get to arguing it in this case.
67. In my judgment it is far from certain that merger, which depends, by definition, on the deliberate act (the formation of an intention) by the dual reversioner would not be a “relevant disposal” for the purposes of the Act, but the point has not been argued, and I express no firm view upon it. What does seem to me to be clear is that Mr Jourdan’s argument that the above possibility makes the dispositions contained in the surrender agreement in a currently entirely separate superior reversion a “relevant disposition” simply cannot be right. The possibility of such a chain of events occurring is just that – a course of events which, it can be envisaged, might occur. It creates no interest or potential interest in the relevant reversion, in contra-distinction to a more immediate contingency, such as the direct grant of a break clause. In my judgment, any such chain of future transactions falls to be considered, according to its properly analysed legal effects at the time, as to whether any such event does or does not entail any “relevant disposal” for the purpose of the Act.
68. Indeed, the fact that the Tenants’ argument, (which Mr Radevsky pointed out, with justification, has changed quite a lot over the course of proceedings) has now moved a long way away from the principle of what the Act envisages, seems to me to be illustrated by comparing the relief which is now claimed with the circumstances which are now argued to justify granting such relief. The tenants’ claim, in the events which have happened (with the works envisaged by the Roofspace Lease not having been materially commenced by 7th June 2012) that Shellpoint must, on written request transfer the Roofspace Lease to the Claimant. Because there has been no merger, this would leave the Qualifying Tenants’ holding a separate reversionary lease, superior to the continuing Existing Lease. Yet their argument for being entitled to require this relies on the very possibility that a merger could happen, or could have happened, even though it has not, thus quite inconsistently with the effects of the relief claimed
69. There is a further practical difficulty about Mr Jourdan’s argument in that any transfer to which the qualifying tenants might be entitled has to be on the same terms as those offered to or conferred upon the recipient of the relevant disposal. Mr Jourdan agreed that he was seeking the right to require a transfer for no consideration. Where the alleged relevant disposal is simply one element of a wide transaction identifying the true consideration which passes in respect of that element may be problematic. What does appear here, however, is that, as Mr Jourdan I think conceded, the underlying objective of the qualifying tenants is to secure, not the transfer to them of rights to enable them better to manage their own residential environment, but an interest with a value as regards the potential further development of Melbury Court, which could then be negotiated to advantage with the superior landlord(s). As previously noted, the purpose of the Act is not that of conferring financial advantage on anyone, and this also reinforces my judgment that the Tenants’ claim should be rejected.
Conclusion.
70. For the above reasons, therefore, this Claim will be dismissed.
HH Judge Hazel Marshall QC
12th October 2012
