Landlord and tenant Act 1987 — Duty of landlord on sale or other disposition of reversion — Whether leases granted by new landlord of individual flats incumbrances to be disregarded — Whether new landlord under continuing liability under section 16
On October 8
1993 the appellant, Frogmore Developments Ltd (‘Frogmore’), contracted to
purchase for £2.5m the leasehold interests of L in a block of 56 flats sublet
to the tenants holding under a variety of terms. L’s leasehold interests were a
99-year lease from June 24 1936 and a reversionary lease of the flats and other
properties for 1,992 years from March 25 1969; the two interests had not
merged. L did not serve any notice under Part I of the Landlord and Tenant Act
1987 on the tenants prior to contract, although after the contract it did
inform their association. Frogmore then served notices on the tenants under
section 18 of the Act and 47 tenants served counternotices; these
counternotices showed that a majority of the qualifying tenants wished to
exercise their rights of first refusal. Between March 8 and May 4 1994 Frogmore
granted A Ltd 150-year leases of each of the flats, of the airspace above the
flats and of the grounds, for a total consideration of £2.5m. On April 25 1994
the majority of the qualifying tenants served a purchase notice on Frogmore
under section 12 of the Act nominating the respondent, Belvedere Court
Management Ltd (‘Belvedere’), as nominee purchaser. By a letter dated May 10
1994 Frogmore denied the validity of the notice and stated that a long lease of
each flat and of the airspace had been granted to A Ltd. On an application by
Belvedere, the county court judge made a declaration that Belvedere was
entitled to acquire the interest acquired by Frogmore from L unincumbered by
the 150-year leases granted to A Ltd. Frogmore appealed.
declaration so that Belvedere was entitled to acquire the 99-year lease from
June 24 1936 acquired by Frogmore from L, subject to the leases to A Ltd. The
150-year leases were not shams and could not be disregarded. They were
reversionary leases and were not incumbrances which the court could override
under section 12(4) of the Act; the grant of such leases would trigger the
operation of section 16, although, on the facts, they were not relevant
disposals. Frogmore was obliged under the Act, but failed, to serve a notice
under section 16(1)(b)(ii). Its letter dated May 10 1994 was not such a notice.
In the absence of such a notice the condition for the application of sections
12 to 14 to A Ltd instead of Frogmore had not been fulfilled: section 16(2). It
remained Frogmore’s continuing duty to serve a notice under section
16(1)(b)(ii), and if it did not do so Belvedere could compel it to do so. When
such a notice had been served, Belvedere could take appropriate steps against A
Ltd.
The following
cases are referred to in this report.
Denetower
Ltd v Toop [1991] 1 WLR 945; [1991] 3 All ER
661; [1991] 1 EGLR 84; [1991] 20 EG 194, CA
District
Bank Ltd v Webb (Practice Note) [1958] 1 WLR
66 & 148; [1958] 1 All ER 126
Englefield
Court Tenants v Skeels [1990] 2 EGLR 230
Furniss v Dawson [1984] AC 474; [1984] 2 WLR 226; [1984] 1 All ER
530, HL
Gisborne v Burton [1989] QB 390; [1988] 3 WLR 921; [1988] 3 All ER
775; [1988] 2 EGLR 9; [1988] 38 EG 129, CA
Hilton v Plustitle Ltd [1989] 1 WLR 149; [1988] 3 All ER 1051;
[1989] 1 EGLR 119; [1989] 05 EG 94, CA
Jones v Wrotham Park Settled Estates [1980] AC 74; [1978] 3 WLR
585; [1978] 3 All ER 527; (1978) 37 P&CR 289; [1978] 1 EGLR 58; 246 EG 223,
CA
Nolan v Eagle Wharf Developments Ltd [1992] 2 EGLR 223; [1992] 46
EG 113
Ramsay
(WT) Ltd v IRC [1982] AC 300; [1981] 2 WLR
449; [1981] 1 All ER 865, HL
This was an
appeal by Frogmore Developments Ltd from a declaration made by Judge Viljoen in
Barnet County Court on an application by the respondent, Belvedere Court
Management Ltd, as to the appellant’s obligations under the Landlord and Tenant
Act 1987.
Jonathan Gaunt
QC and Anthony Radevsky (instructed by Titmuss Sainer Dechert) appeared for the
appellant; David Neuberger QC and Jonathan Ferris (instructed by Philippsohn
Crawford Berwald) represented the respondent.
Giving the
first judgment, Sir Thomas Bingham MR said: This appeal raises an important and novel
question on the rights of tenants under Part I of the Landlord and Tenant Act
1987. The purpose of this Part of the Act is to confer on tenants of flats
rights to acquire their landlord’s reversion. This appeal concerns the rights
of the tenants of flats in Belvedere Court.
Belvedere
Court is a purpose-built block of flats in Lyttleton Road, London N2. It is
part of the Hampstead Garden Suburb Estate. The block was put up shortly before
the second world war. There are 56 self-contained flats in the block. There are
the usual common parts, not included in the lettings of the 56 flats.
The freehold
of the block has been owned by different companies over the years. None of them
plays any part in this story. In 1938 an underlease of the whole block and its
grounds was granted to a mesne tenant for 99 years from June 24 1936. In
1969 the then freeholder granted a headlease of part of the estate, including
Belvedere Court, to another mesne tenant (subject to the 99-year lease)
for 1,992 years from March 25 1969. The flats have been occupied by different
subtenants on different terms. It is the current occupying tenants whose rights
are effectively in issue.
A time came
(the dates are unimportant) when Liverpool Victoria Friendly Society became the
registered leasehold proprietor of both the 1938 and the 1969 leases. It is
common ground that these two leasehold interests remained separate and did not
merge. But in due course Liverpool Victoria decided to part with its interest
in a number of properties including Belvedere Court. So, on October 8 1993,
contracts were exchanged which indirectly transferred the entirety of Liverpool
Victoria’s interest in Belvedere Court to Frogmore Developments Ltd
(‘Frogmore’), the appellant in this court and the respondent in the court
below. Frogmore is a subsidiary of Frogmore Estates plc.
After this
exchange of contracts Liverpool Victoria wrote to Belvedere Court Residents’
Association to report that this exchange had taken place. Liverpool Victoria
did not tell the association or the tenants before the exchange took place. It
would seem that this omission was quite deliberate. But it was a breach of the
society’s duty under Part I of the Landlord and Tenant Act 1987.
Section 1 of
the 1987 Act provides:
Qualifying tenants
to have rights of first refusal on disposals by landlord
1.– (1) A landlord shall not make a relevant disposal affecting any
premises to which at the time of the disposal this Part applies unless —
(a) he has in
accordance with section 5 previously served a notice under that section with
respect to the disposal on the qualifying tenants of the flats contained in
those premises (being a notice by virtue of which rights of first refusal are
conferred on those tenants); and
(b) the
disposal is made in accordance with the requirements of sections 6 to 10.
(2) Subject
to subsections (3) and (4), this Part applies to premises if —
(a) they
consist of the whole or part of a building; and
(b) they
contain two or more flats held by qualifying tenants; and
(c) the
number of flats held by such tenants exceeds 50% of the total number of flats
contained in the premises.
The premises
to which section 1 applies are further described by way of exclusion in
subsections (3) and (4) of section 1. It is clear that the section applied to
Belvedere Court.
The effect of
these subsections is dependent on a number of statutory definitions and
stipulations.
The meaning of
‘landlord’ is defined in section 2. It means the immediate landlord of the
qualifying tenants of the flats contained in the premises or (where any of
those tenants is a statutory tenant) the person who would be entitled to
possession of the flat in question apart from the statutory tenancy. Where the
immediate landlord has a superior landlord who holds for a term less than or
terminable within seven years that superior landlord may also fall within the
statutory definition of landlord, but that is not this case. There is no doubt
that Liverpool Victoria was the immediate landlord within the definition before
the transfer to Frogmore.
‘Relevant
disposal’ is defined in section 4 of the Act. The expression refers to
(1) … the
disposal by the landlord of any estate or interest (whether legal or equitable)
in any such premises, including the disposal of any such estate or interest in
any common parts of any such premises but excluding —
(a) the grant
of any tenancy under which the demised premises consist of a single flat
(whether with or without any appurtenant premises); and
(b) any of
the disposals falling within subsection (2).
One exclusion
in subsection (2) is relevant in this appeal. It is subsection (2)(l):
where the
landlord is a body corporate, a disposal to an associated company.
‘Associated
company’ is defined in section 20 of the Act. Section 4 makes it clear that the
restricted definition only applies where the phrase ‘ relevant disposal’ is
used. It is the disposal which is to trigger the right of first refusal under
section 1 which must be a ‘relevant’ disposal.
‘Qualifying
tenants’ are defined in section 3 of the Act. Protected shorthold tenancies as
defined in section 52 of the Housing Act 1980, business tenancies, service
tenancies and assured tenancies or assured agricultural occupancies within the
meaning of Part I of the Housing Act 1988 are excluded. Other tenants
(including statutory tenants) are, generally speaking, within the statutory
definition. Most of the tenants of Belvedere Court (many of whom were statutory
tenants) were qualifying tenants and fell within the statutory definition.
A landlord
(such as Liverpool Victoria) making a relevant disposal (such as a sale to
Frogmore) of any premises covered by Part I of the Act (such as Belvedere
Court) is obliged by section 1 of the Act before doing so to serve a notice
under section 5 of the Act on the qualifying tenants of flats in the premises
(as a majority of the tenants of Belvedere Court were). The effect of section 5
is encapsulated in the section heading: ‘Requirement to serve notice conferring
rights of first refusal’. Section 5 is a detailed section. The detail does not
matter for present purposes, since such a notice was not served by Liverpool
Victoria. It is enough to quote subsections (1) and (2), which convey the
legislative intention underlying the provision:
Requirement
to serve notice conferring rights of first refusal
5.– (1) Where, in the case of any premises to which this Part applies,
the landlord proposes to make a relevant disposal affecting the premises, he
shall serve a notice under this section on the qualifying tenants of the flats
contained in the premises.
(2) A notice
under this section must —
(a) contain
particulars of the principal terms of the disposal proposed by the landlord,
including in particular —
(i) the
property to which it relates and the estate or interest in that property
proposed to be disposed of, and
(ii) the
consideration required by the landlord for making the disposal;
(b) state
that the notice constitutes an offer by the landlord to dispose of the property
on those terms which may be accepted by the requisite majority of
qualifying tenants of the constituent flats;
(c) specify a
period within which that offer may be so accepted, being a period of not less
than two months which is to begin with the date of service of the notice; and
(d) specify a
further period within which a person or persons may be nominated for the
purposes of section 6, being a period of not less than two months which is to
begin with the end of the period specified under paragraph (c).
One of the
apparently strange features of this legislation is that although section 1 lays
a clear mandatory duty on a landlord (such as Liverpool Victoria) to follow the
statutory procedure, no sanction attaches to violation of this duty whether
inadvertent or (as here, it would seem) deliberate. Qualifying tenants who
caught wind of what was proposed could of course invoke civil remedies to
procure compliance by a landlord with his statutory duty, but that is a right
of little value where (as here) the qualifying tenants were presented with a fait
accompli. Unless a landlord respects his statutory duty and the rights of
his tenants, there is no reason why a tenant should learn that a landlord
contemplates making a relevant disposal.
Section 6
governs the procedure where 50% or more of qualifying tenants wish to accept
the landlord’s offer made under section 5. Where such notice of acceptance is
given, the landlord ‘shall not during the relevant period dispose of the
protected interest except to a person or persons nominated for the purposes of
this section by the requisite majority of qualifying tenants of the constituent
flats’. Since, in the present case, no section 5 notice was served on the
qualifying tenants, it of course follows that they could serve no notice of
acceptance under section 6. The detailed statutory procedure, further
elaborated in sections 7 to 10 inclusive, need not be described.
Section 11 of
the Act contemplates failure by a landlord to perform his statutory duty. It
provides:
Duty of new
landlord to furnish particulars of disposal made in contravention of Part I
11.– (1) Where —
(a) a
landlord has made a relevant disposal affecting any premises to which at the
time of the disposal this Part applied (‘the original disposal’), and
(b) either no
notice was served by the landlord under section 5 with respect to that disposal
or it was made in contravention of any provision of sections 6 to 10, and
(c) those
premises are still premises to which this Part applies,
the requisite
majority of qualifying tenants of the constituent flats may, before the end of
the period specified in subsection (2) below, serve a notice on the transferee
under the original disposal requiring him to furnish a person (whose name and
address are specified for the purpose in the notice) with particulars of the
terms on which the original disposal was made (including those relating to the
consideration payable) and the date on which it was made; and in the following
provisions of this Part the transferee under that disposal is referred to as ‘the
new landlord’.
The ‘period
specified’ in subsection (2) is two months from a stipulated starting date. The
recipient of the notice under subsection (1) must comply within one month of
service.
Section 12 of
the Act is central to this appeal. The section is headed ‘Right of qualifying
tenants to compel sale etc by new landlord’. Subsection (1) provides:
(1) Where —
(a)
paragraphs (a) and (b) of section 11(1) apply to a relevant disposal affecting
any premises to which at the time of the disposal this Part applied (other than
a disposal consisting of such a surrender as is mentioned in section 15(1)(b)),
and
(b) those
premises are still premises to which this Part applies,
the requisite
majority of qualifying tenants of the constituent flats may, before the end of
the period specified in subsection (2), serve a notice (‘a purchase notice’) on
the new landlord requiring him (except as provided by the following provisions
of this Part) to dispose of the estate or interest that was the subject-matter
of the original disposal, on the terms on which it was made (including those
relating to the consideration payable), to a person or persons nominated for
the purposes of this section by any such majority of qualifying tenants of
those flats.
Subsection (3)
provides:
A purchase
notice —
(a) shall,
where the estate or interest that was the subject-matter of the original
disposal related to any property in addition to the premises to which this Part
applied at the time of the disposal —
(i) require
the new landlord to dispose of that estate or interest only so far as relating
to those premises, and
(ii) require
him to do so on the terms referred to in subsection (1) subject to such
modifications as are necessary or expedient in the circumstances;
(b) may,
instead of specifying the estate or interest to be disposed of or any
particular terms on which the disposal is to be made by the new landlord
(whether doing so expressly or by reference to the original disposal), provide
for that estate or interest, or (as the case may be) for any such terms, to be
determined by a rent assessment committee in accordance with section 13.
Particular
attention must be paid, for purposes of this appeal, to subsections (4) and (5)
of section 12:
(4) Where the
property which the new landlord is required to dispose of in pursuance of the
purchase notice has at any time since the original disposal become subject to
any charge or other incumbrance, then, unless the court by order directs
otherwise —
(a) in the
case of a charge to secure the payment of money or the performance of any other
obligation by the new landlord or any other person, the instrument by virtue of
which the property is disposed of by the new landlord to the person or persons
nominated for the purposes of this section shall (subject to the provisions of
Part I of Schedule 1) operate to discharge the property from that charge; and
(b) in the
case of any other incumbrance, the property shall be so disposed of subject to
the incumbrance but with a reduction in the consideration payable to the new
landlord corresponding to the amount by which the existence of the incumbrance
reduces the value of the property.
(5)
Subsection (4)(a) and Part I of Schedule 1 shall apply, with any necessary
modifications, to mortgages and liens as they apply to charges; but nothing in
those provisions shall apply to a rent charge.
‘The requisite
majority of qualifying tenants’ was set by section 5(6) at 50%.
Section 13(1)
of the Act gives a rent assessment committee jurisdiction to hear and
determine:
(a) any
question arising in relation to any matters specified in a purchase notice
(whether relating to the nature of the estate or interest, or the identity of
the property, to be disposed of or relating to any other terms on which the
disposal by the new landlord is to be made); and
(b) any
question arising for determination in consequence of a provision in a purchase
notice such as is mentioned in section 12(3)(b).
When
constituted for the purpose of hearing and determining any question falling
within subsection (1), quoted above, the rent assessment committee is known as
a leasehold valuation tribunal.
It is
unnecessary for purposes of this appeal to refer to sections 14 and 15, but
attention was drawn to section 16. Section 16 addresses the case:
Where, at the
time when a notice is served under section 11(1) or 12(1) on the new landlord,
he no longer holds the estate or interest that was the subject-matter of the
original disposal.
Section 16(1)
provides that the new landlord shall take certain steps which include giving
information of the name and address of the new purchaser (that is, the
purchaser from the new landlord) and serving notices on him. Subsection (2)
provides that:
If the new
landlord serves a notice in accordance with subsection (1)(a)(ii) or (b)(ii)
above, sections 12 to 14 shall, instead of applying to the new landlord, apply
to the subsequent purchaser as if he were the transferee under the original
disposal.
Subsection (3)
makes provision for the case in which the new landlord has disposed of
different parts of the estate or interest which was the subject-matter of the
original disposal to different transferees. While the original disposal by the
original landlord must have been a ‘relevant’ disposal, the same does not apply
to a disposal by the new landlord. Section 16 applies to any disposal by
the new landlord and
(relevant) disposal by the original landlord. If the further disposal by the
new landlord is also a relevant disposal it may, in its turn, give rise to a
fresh set of section 1 rights of first refusal in respect of the new landlord’s
disposal.
Section 17(3)
provides:
Where a
period of three months beginning with the date of service of a purchase notice
on the new landlord has expired —
(a) without
any binding contract having been entered into between the new landlord and the
nominated person, and
(b) without
there having been made any application in connection with the purchase notice
to the court or to a rent assessment committee under section 13,
the new
landlord may serve on the nominated person a notice containing such a statement
as is mentioned in subsection (1)(b) above.
A notice under
subsection (1)(b) is a notice served by the new landlord on the qualifying
tenants stating that any notice served on him under section 11(1) or section
12(1), and anything done in pursuance of it, is to be treated as not having
been served or done. Where the new landlord serves such a notice Part I of the
Act ceases to have effect in relation to him in connection with the original
disposal: this is the effect of subsection (5).
Section 18 is
also relevant. Subsections (1) and (2) must be quoted:
(1) Where —
(a) any
disposal of an estate or interest in any premises consisting of the whole or
part of a building is proposed to be made by a landlord, and
(b) it
appears to the person who would be the transferee under that disposal (‘the
purchaser’) that any such disposal would, or might, be a relevant disposal
affecting premises to which this Part applies,
the purchaser
may serve notices under this subsection on the tenants of the flats contained
in the premises referred to in paragraph (a)(‘the flats affected’).
(2) Any
notice under subsection (1) shall —
(a) inform
the person on whom it is served of the general nature of the principal terms of
the proposed disposal, including in particular —
(i) the
property to which it would relate and the estate or interest in that property
proposed to be disposed of by the landlord, and
(ii) the
consideration required by him for making the disposal;
(b) invite
that person to serve a notice on the purchaser stating —
(i) whether
the landlord has served on him, or on any predecessor in title of his, a notice
under section 5 with respect to the disposal, and
(ii) if the
landlord has not so served any such notice, whether he is aware of any reason
why he is not entitled to be served with any such notice by the landlord, and
(iii) if he
is not so aware, whether he would wish to avail himself of the right of first
refusal conferred by any such notice if it were served; and
(c) inform
that person of the effect of the following provisions of this section.
Reference
should perhaps be made to section 19, which is headed ‘Enforcement’. It
provides:
(1) The court
may, on the application of any person interested, make an order requiring any
person who has made default in complying with any duty imposed on him by any
provision of this Part to make good the default within such time as is
specified in the order.
(2) An
application shall not be made under subsection (1) unless —
(a) a notice
has been previously served on the person in question requiring him to make good
the default, and
(b) more than
14 days have elapsed since the date of service of that notice without his
having done so.
(3) The
restriction imposed by section 1(1) may be enforced by an injunction granted by
the court.
It is not
clear how effective enforcement is achieved against a landlord such as
Liverpool Victoria before the horse has bolted, without an enforceable
procedure which will ensure that its intention to bolt is communicated to the
qualifying tenants before it does so.
Having
referred to the statutory background, I now return to the factual narrative. On
October 25 1993, after the exchange of contracts and after Liverpool Victoria’s
letter to the residents’ association, Frogmore served notices on each of the
tenants of Belvedere Court under section 18 of the Act. Between November 16 and
18, 47 tenants served counternotices. These showed that a majority of the
qualifying tenants wished (subject to contract) to exercise their rights of
first refusal. Frogmore completed its purchase on December 9 1993 and Liverpool
Victoria’s solicitors informed the tenants of that fact.
On December 23
1993 a majority of qualifying tenants served notices on Frogmore seeking
information under section 11 of the Act. Frogmore acknowledged receipt of the
notices on January 6 1994 and on February 4 1994 their solicitors provided the
information which had been requested — that Frogmore had bought both the
headlease and the underlease for £2.5m, giving the term of the leases, saying
that the ground rents were nominal and that the leasehold interests had not
been merged.
Then, on March
8 1994, Frogmore granted Atherton Properties Ltd (‘Atherton’) 150-year leases
from December 25 1993 of 32 of the flats in Belvedere Court. On March 31 1994
it granted Atherton a 150-year lease of part of the grounds within the
curtilage of Belvedere Court and a further lease of the airspace above the
block. On May 4 1994 Frogmore granted Atherton 150-year leases of each of the
remaining 24 flats in the block on the same terms as before. The total
consideration payable by Atherton was £2.5m. On April 25 1994, before the last
group of leases had been granted, but after all the others, a majority of
qualifying tenants served a purchase notice on Frogmore under section 12 of the
Act. Belvedere Court Management Ltd (‘Belvedere’), the respondent to this
appeal and the applicant in the court below, was the ‘person … nominated for
the purposes of [section 12]’ by a majority of the qualifying tenants as the
person who would acquire the interest of the new landlord. Frogmore’s solicitors
acknowledged receipt of this notice. In a letter of May 10 1994 they wrote in
the following terms:
On behalf of
our clients we acknowledge receipt of the notice but without any
acknowledgement as to its validity.
We write to
advise you that subsequent to our clients purchase of the property the
following leases have been granted —
1. A long
lease of each flat subject to and with the benefit of the existing occupational
interest has been granted to Atherton Properties Limited which is a wholly
owned subsidiary of Frogmore Estates Plc. We enclose a copy of the counterpart
of one of the leases the remainder of which are available for inspection at our
offices and
2. A lease of
the air space above the top floor flats and various other areas has been granted
to Atherton Properties Limited a copy of which is enclosed.
Accordingly
if the validity of your clients section 12 notice is established their purchase
will be subject to and with the benefit of the leases granted to Atherton
Properties Limited.
It would seem
that a copy of the counterpart of one of the leases of the flats was enclosed
and also a copy of the lease of the airspace. Belvedere’s solicitors (by a
letter of June 24 1994) asked for copies of all the particulars pages of all
the leases granted by Frogmore and asked to know the shareholding relationship
between Frogmore Estates and Frogmore. Frogmore’s solicitors promptly supplied
the copies requested and explained the group relationship.
Belvedere’s
solicitors remained puzzled. They wrote again on July 7 1994:
Can you please
clarify precisely how many leases have been granted by your clients. In your
letter of 10th May, you stated that a long lease had been granted in respect of
each individual flat and a further lease of air space above the top floor flat
‘and various other areas’. Please clarify whether all these other areas are
included in the lease dated 31st March or whether another lease exists.
According to our calculations, a total of 57 leases have been granted, 56 flats
and one of the air space. Please confirm this is correct.
Further,
please confirm whether any other interests have been created or disposed of by
any of your clients in the property.
Frogmore’s
solicitors replied, explaining that there had been 56 leases of the flats, a
lease of the airspace and a lease of the grounds, but that no other interests
had been created. Belvedere then instructed new solicitors who issued the
originating application in these proceedings on July 21 1994. They also wrote
to Frogmore’s solicitors,
acknowledge the validity of the section 12 notice. They asked for reasons why
the notice was invalid and expressed concern about the Atherton leases. A copy
of the originating application was enclosed and the solicitors reserved the
right to make further applications.
It seems
likely that the application which Belvedere’s solicitors had in mind was an
application to the court or a rent assessment committee as provided by section
17(3)(b), for on August 4 1994 the solicitors served on Atherton a notice
expressed to be under sections 12(1) and 16(3) of the Act. It was served on
behalf of the requisite majority of qualifying tenants. It recited:
We have reason
to believe that —
You acquired
from Frogmore Developments Limited of 8 Manchester Square London W1A 2JZ (‘the
Landlord’) various estates or interests in the Property and
Part I of the
Act applied to the Property or part of the Property at the time of the disposal
to you (‘the Disposal’) and still so applies; and
The Disposal
was a Relevant Disposal as defined in Section 4 of the Act and was made without
the Landlord having served notice under Section 5 of the Act.
The notice
went on to require Atherton to
dispose of
the estates or interests in the Property which were the subject matter of the
Disposal on the terms on which they were made, including those relating to the
consideration payable to Belvedere Court Management Limited … being the person
nominated for the purposes of [section 12] by the requisite majority of
qualifying tenants of the constituent flats in the property.
In response to
the letter of July 28 from Belvedere’s solicitors, the solicitors acting for
Frogmore (and also, it would seem, Atherton) wrote on August 12 1994. In this
letter they said that their clients would not challenge the validity of the
section 12 notice (meaning the notice of April 25 1994 served on Frogmore);
that the leases to Atherton were not a relevant disposal by virtue of section 4
of the Act, because leases had been granted of single flats to an associated
company; that the leases had been granted to ensure uniform development; that
no breach of the Act was involved; that Belvedere’s proceedings were
misconceived; and that Belvedere were at risk for costs, for which substantial
security would be sought. In its penultimate paragraph the letter said:
Our clients
have also received from your clients notices dated 4th August 1994 pursuant to
Sections 12 and 16(3) of the 1987 Act. Frogmore Developments Limited still
retains the interests acquired from Liverpool Victoria and accordingly these
notices pursuant to Section 16(3) appear inappropriate and misconceived. Our
letter of 10th May makes the situation perfectly clear. Please withdraw these
notices.
Belvedere did
not withdraw the notices. But nor did it pursue any claim against Atherton as
if it were the transferee under the original disposal as (if notice had been
served in accordance with section 16(1)(a)(ii) or section 16(1)(b)(ii)) it
would have been entitled to do by virtue of section 16(2). Belvedere seems to
have accepted the contention of Frogmore’s (and Atherton’s) solicitors that
section 16(1) did not apply. No application was made to the court against
Atherton and the three-month period specified in section 17(3) lapsed. No
reference was made to section 16 in the court below, and it was only when the
question was raised in this court that Atherton’s solicitors (on June 13 1995)
served notice on Belvedere under section 17(3) of the Act.
The
originating application issued on July 21 1994 by Belvedere in Barnet County
Court sought a declaration in these terms:
That the
Applicant, being the person nominated for the purposes of Part I of the Landlord
and Tenant Act 1987 by the requisite majority of qualifying tenants of the
constituent flats in the property known as Belvedere Court, and situate at
Lyttleton Road, London N2, is entitled to acquire from the Respondent, pursuant
to a purchase notice dated 25th April 1987, served in accordance with section
12 of the said Act of 1987, the estate or interest in the said property
acquired by the Respondent from Liverpool Victoria Trustee Limited on 9th
December 1983 unincumbered by, and otherwise free from, the 32 leases granted
by the Respondent to Atherton Properties Limited on 8th March 1994, the lease
granted by the Respondent to Atherton Properties Limited on 31st March 1994,
and the 24 leases granted by the Respondent to Atherton Properties Limited on
4th May 1994.
On the
pleadings in the county court there was one issue. Belvedere claimed that the
Atherton leases were a sham and a device to evade the provisions of Part I of
the Act and deprive the tenants of rights which Parliament plainly intended that
they should enjoy. It was accordingly contended for Belvedere, in reliance on Ramsay
(WT) Ltd v IRC [1982] AC 300 and Furniss v Dawson
[1984] AC 474, that the court should decline to give effect to the Atherton
leases and should permit it (as the tenants’ nominee) to buy the reversion to
their leases as if the Atherton leases had not been granted.
In the course
of the hearing in the court below before Judge Viljoen a new question was
raised, not up to then raised by either party. Counsel for Frogmore had
submitted that, on the basis that they were not sham, the leases granted by
Frogmore to its sister company Atherton were not ‘relevant’ disposals and would
amount to ‘incumbrances’ under section 12(4) of the Act so that the tenants
would take subject to those leases with a reduction of the consideration
payable. Counsel for Belvedere drew to the judge’s attention that the
subsection includes the qualification ‘unless the court by order directs
otherwise’. Thus the point was raised whether the court’s power by order to
direct otherwise under that subsection empowered it only to direct that the
property should be disposed of subject to such incumbrance but without a
reduction in the consideration payable (as Frogmore contended) or (as Belvedere
contended) to direct that the property should be disposed of not subject to the
incumbrance at all. In the court below, and initially in this court, the
parties were agreed that the Atherton leases, if not sham, were incumbrances
within the meaning of the subsection. Thus the argument focused on the extent
of the court’s powers under the subsection.
On the pleaded
issue, there was evidence from Frogmore, which Belvedere’s expert witness up to
a point accepted, that the grant of the Atherton leases promoted the orderly management
and commercial exploitation of the block. But despite this the judge held that
‘whatever other reasons were given or whatever additional benefits [which]
might have flowed from the Atherton leases the main, indeed the sole, aim for
their creation was to devise a scheme to avoid the consequences of the Act’
(transcript, pp11–12). He did not accept that the Atherton leases were a sham,
or that these leases could be annulled on the Ramsay/Furniss
principle. But he did accept Belvedere’s argument on the construction of
section 12(4). He said:
I have come
to the conclusion that the Atherton leases were not a sham in the well known
Diplock sense and in this regard I accept Mr Radevsky’s submissions. But they
are artificial, in the sense that they do not create a single interest in
possession but only a reversionary interest. The combined effect of all the
leases is to wholly change the nature of the estate or interest, whereas
Parliament provided that the qualifying tenants should have ‘the estate or interest
that was the subject-matter of the original disposal’. With the Atherton leases
in place, the qualifying tenants cannot in any way be said to be acquiring the
same estate or interest as that acquired by the respondent. In giving effect to
the intentions of Parliament, it is important to construe in accordance with
the spirit rather than the letter of the Act. Disposal of all the single leases
and the airspace and grounds is tantamount to disposing of the whole. What is
left is not of much use to the qualifying tenants. These leases formed a series
of transactions intended to operate as such. The result of the series as a
whole is to avoid the mandatory provision of the Act, namely to dispose on the
same terms as the original disposal, the same estate or interest. I am
satisfied that the discretion given to the court by section 12(4) is a
discretion which should be exercised in cases where it would be unjust not to
do so. I am satisfied that this is such a case and I would exercise my
discretion in favour of the applicant and order that it takes the estate or
interest free of the Atherton leases.
He accordingly
made the declaration sought by Belvedere.
On appeal to
this court Frogmore contended that the judge was
also raised a new issue, contending that whatever the correct construction of
section 12(4) it was only Frogmore’s reversion to the 99-year term which was to
be considered and not its reversion to the 1,992-year lease. Belvedere
contended that the judge was wrong on the sham issue, but right on the
construction issue. It argued that although Frogmore held the reversions to
both the 99-year term and the 1,992-year term and these terms had not merged,
it was artificial and legalistic to regard these as separate terms: once their
immediate landlord, Liverpool Victoria, had made a relevant disposal, the
tenants’ right of first refusal extended to the totality of the interest which
the landlord was disposing of.
In this court,
as a result of questions from the bench, a new question arose: whether the
Atherton leases were not covered by section 16 rather than section 12(4).
Unexpectedly confronted with this question while on his feet, leading counsel
for Belvedere at first adopted, as an alternative to his previous argument, the
contention that section 16 did govern the situation. But further thought led
him to disavow the contention, for reasons which led leading counsel for
Frogmore to rely on it.
The 1987 Act
followed, if it did not wholly adopt, a report of a committee chaired by Mr EG
Nugee QC into the management of privately-owned blocks of flats. In para 6.18
the committee reported:
Acquisition
of the reversion: under the general law the
landlord is free to dispose of his interest in the block without reference to
the wishes of the tenants; and we had evidence of cases in which the ownership
of the freehold passed through several hands in quick succession, leaving the
tenants uncertain who their landlord was and unable to take any effective
action. The majority of us do not consider that it would be right to give
tenants a right to buy the interest of a landlord who wishes to continue to own
and manage his own property, even if it could be shown that the management of
the block might be improved if it were under the control of the tenants.
However where the landlord wishes to dispose of his interest, we consider that
the presumption against expropriatory legislation no longer applies with the
same force, and that the tenants should have an opportunity to purchase the
reversion themselves.
In para 7.9.13
to 7.9.15 the committee summed up its view:
Collective right to buy the block
7.9.13 There
was also strong support in the evidence for the proposal that tenants should be
given a collective right to buy the reversion in their block. Many of those who
had written in support of a right to buy assumed that better management would
invariably follow but, whilst the surveys indicated that resident-owned blocks
generally had a lower incidence of management problems, the transfer of
ownership would not of itself solve all such problems. A collective right to
buy can take various forms. We do not favour giving tenants a collective right
to buy in all circumstances as a way of solving the problems of
management but we go on to consider a number of circumstances in which it might
arise. We first considered whether tenants should have a right of first
refusal.
Right of pre-emption
7.9.14 We
understand several blocks have been sold to the tenants following the guidance
note issued by the British Property Federation in 1982 and endorsed by the
James Working Party which recommended that a landlord who wished to dispose of
his interest in a property should give the existing tenants a collective right
of first refusal to buy the block.
7.9.15 We all
agree that tenants should have a right of first refusal where the landlord
wishes to dispose of his interest whether freehold or leasehold. The
opportunity to make an offer should be made available to all the tenants
whether leaseholders, renting tenants or a mixture of both; it should not be
restricted to a recognised tenants’ association. It would, in our view,
normally be necessary for the tenants to form their own company for the
purchase and we consider that model articles of association for example along
the lines set out in Sir Brandon Rhys Williams MP’s 1983 Co-ownership of Flats
Bill might be helpful to the tenants in setting up their company.
It seems clear
that the committee intended occupying tenants to have a right to acquire the
reversion to their leases when their landlord proposed to part with it, and
that the ultimate objective was to give the tenants in a block where the majority
wanted it, a power to manage the block themselves and so to have a greater say
in their own affairs.
The leases of
the 56 flats by Frogmore to Atherton were of the individual flats, not the
common parts, the structure or the exterior of the block. These remained with
Frogmore and remained subject to Belvedere’s purchase notice. To the extent
that Belvedere’s notice was effective, the tenants would acquire through
Belvedere the reversionary interest in the common parts and this would (as it
seems to me) necessarily override management powers which Frogmore had by
agreement with Atherton conferred on another Frogmore associate company named
Ibis (251) Ltd. It would seem plain that the object of Frogmore was not
primarily to deny the tenants a power to manage but to ensure that the profit
to be made by selling long leases of the flats in the block was earned by
Frogmore or Atherton and not the tenants. There would seem to be little room
for doubt about Frogmore’s motivation.
I share the
judge’s view that these arrangements were not a sham. There was no element of
pretence, as there was in Gisborne v Burton [1989] QB 390*. The
parties were not doing one thing and saying another. I would also accept the
judge’s view that the Atherton leases were an artificial device intended to
circumvent a result the Act would otherwise have brought about. But the finding
of such a device did not defeat the reversioners in Jones v Wrotham
Park Settled Estates [1980] AC 74† nor the lessor in Hilton v Plustitle
Ltd [1989] 1 WLR 149‡ and I am not, for my part, satisfied that in the
field of real property the principles in Ramsay and Furniss
entitle the court simply to ignore or override apparently effective
transactions which on their face confer an interest in land on the transferee.
Many transactions between group companies may be artificial. That does not
entitle the court in ordinary circumstances to treat such transactions as null.
I agree with the judge on this issue.
*Editor’s
note: Also reported at [1988] 2 EGLR 9.
†Editor’s
note: Also reported at [1978] 1 EGLR 58.
‡Editor’s
note: Also reported at [1989] 1 EGLR 119.
Our attention
was drawn to the fact that, in order to finance their attempt to acquire the
reversions to their leases, the tenants have obtained the financial backing of
a property company. Given the figures involved, this is not surprising. I
regard it as irrelevant.
The 1987 Act
does not define ‘incumbrance’. The authorities yield no conclusive answer to
the question whether a lease is an incumbrance or not. In District Bank Ltd
v Webb (Practice Note) [1958] 1 WLR 66 & 148 Danckwerts J said (at
p149):
In the first
place, I am not satisfied that a lease was an incumbrance to these parties. It
is true that in certain circumstances a lease may be regarded as an
incumbrance, but it seems to me that an incumbrance, normally, is something in
the nature of a mortgage and not something in the nature of a lease or tenancy
…
This perhaps
accords with one’s first impression. It is, however, to be noted that Megarry
& Wade on The Law of Real Property (5th ed, p611) treats
‘incumbrances’ as including all subsisting third party rights such as leases,
and the editor of Emmet on Title (19th ed, para 14.007) records it as
the usual practice to treat a lease as an incumbrance when drafting both
recitals and the grant in a conveyance. The answer is, in my view, that the
meaning to be given to the expression depends on the context, as is confirmed
by the legal dictionaries.
We were
helpfully referred to two contrasting decisions of the leasehold valuation
tribunal, in each case chaired by Lady Fox, Englefield Court Tenants v Skeels
[1990] 2 EGLR 230 and Nolan v Eagle Wharf Developments Ltd [1992]
2 EGLR 223. Besides providing apt illustrations of the kind of steps which new
landlords take with a view to escaping from the full consequences of the 1987
Act, each raised the question whether a lease granted by the new landlord was
an ‘incumbrance’ for the purposes of section 12(4), though neither included any
consideration of the inter-relation of sections 12 and 16. In Skeels,
the new landlord had granted a reversionary lease to her husband and the
tribunal held that the transfer to the tenants must be subject to the lease. In
Nolan a lease of the roofspace and car park was granted by the new
landlord to a party who did not come within section 4(2) of the Act. The
tribunal held that the tenants were entitled to take the new landlord’s title
free of this lease. They distinguished Skeels on two grounds. One was on
the point whether the section 12 notice had been served before or after the
further lease had been granted. The second ground was that in Nolan the
grant of the lease by the new landlord was a ‘relevant’ disposal, whereas in Skeels
it had not been. This ground cannot be supported in those terms. If a further
lease is a ‘relevant disposal’, that disposal may give rise to a fresh right of
first refusal as against the new landlord (and the person who has taken the
lease). It is not material to the question under section 12(4) which relates to
the rights of the tenants arising from the original landlord’s disposal; for
that purpose it is still necessary to ask whether the lease granted by the new
landlord is an ‘incumbrance’. This is the same as the question raised by the
present case.
In the present
context I regard it as critical:
(1) that Part
I of the Act is triggered when the immediate landlord of qualifying tenants
proposes to (or does) part with the reversion to the tenants’ leases;
(2) that the
object of this Part of the Act is to give qualifying tenants an overriding
right to buy the reversion on appropriate terms if they wish;
(3) that where
the reversion passes from immediate landlord A to new landlord B to purchaser C
the Act enables the tenants to pursue their claim not only against A and B but
also C;
(4) that the
situation described in (3) would appear to fall aptly within section 16.
These
considerations lead me to conclude that where a new immediate landlord grants a
lease which has the effect of transferring the reversion of tenants’ leases
from himself to another immediate landlord, the former must be regarded as no
longer holding the estate or interest that had been the subject-matter of the
original disposal. The estate or interest relevant for present purposes must be
the reversion, and the intermediate landlord (B in my example above) no longer
has it. The type of concurrent lease which Frogmore granted to Atherton is, as
explained in Halsbury’s Laws of England (4th ed) vol 27(1) para 81,
correctly characterised as a lease of the reversion (sometimes referred to as a
‘reversionary’ lease). The grant of a lease which has that effect is not, in my
view, an incumbrance within section 12(4); it is an event which triggers the
operation of section 16 (although not, on facts such as the present, a relevant
disposal).
It does not
follow from this that no lease can ever be an incumbrance within the meaning of
section 12(4). When a new landlord acquires his interest, a flat may be vacant
in the block and the landlord may let it. That in no way affects the reversion
to the leases of the other tenants. But it could affect the appropriate purchase
consideration. I would regard such a lease as an incumbrance within section
12(4).
On a natural
reading of the words used, ‘unless the court by order directs otherwise’
governs the whole of section 12(4)(a) and (b). Had the words been intended to
empower the court to direct that the consideration payable should not be
reduced, but not to empower the court to direct that the property should be
disposed of not subject to the incumbrance, the governing qualification would
logically have had to appear after ‘but’ in subsection (4)(b) and not where it
does. The circumstances in which a court could properly order that property
should be disposed of, not subject to an incumbrance, would be very rare, since
the court would never be willing to expropriate a bona fide third party
purchaser for value. But I see no reason to restrict the apparent breadth of
the language used and if (contrary to my view) the leases granted to Atherton
were to be regarded as incumbrances it would have been properly open to the
judge, on the peculiar facts of this case, to direct that the disposal should
not be subject to those incumbrances. As it is, I take the view that the
Atherton leases were not incumbrances which the court could override under
section 12(4) but a disposal governed by sections 16 and 17.
At this point
of the analysis one is bound to conclude that the judge’s declaration, on the
basis he granted it, must be set aside.
Neither party
came to this court intending to rely on section 16. But since the court was
doubtful (despite the judge’s view and the agreement of counsel on the point)
whether the Atherton leases were properly to be regarded as ‘incumbrances’
within section 12(4), and since the court regarded the construction of section
16 as relevant to this question, argument on this section was invited.
Following the conclusion of the hearing of the appeal counsel addressed further
written argument to this question, which led the court to restore the appeal
for further oral argument.
In the final
result three questions were raised. These were:
(1) Did
Frogmore, on receipt of Belvedere’s notice under section 12, serve a notice
complying with section 16(1)(b)(ii)?
(2) What is
the result in law if a new landlord (such as Frogmore) disposes of its estate
or interest after receipt of a section 12 notice?
(3) Should
Frogmore now be permitted to rely on Belvedere’s failure to make timely
application against Atherton?
Question
(1)
Frogmore
contended that its solicitors’ letter of May 10 1994 was a notice complying
with section 16(1)(b)(ii) of the Act. It informed Belvedere, through its
solicitors, of the name and address of the person (Atherton) to whom the new
landlord (Frogmore) had disposed of its estate or interest. No form of notice
is prescribed. It was not necessary to refer to section 16 if the effect of the
letter was to give clear notice. The effect of Frogmore’s letter was to give
clear notice, it argued, as evidenced by the fact that Belvedere’s solicitors
reacted by giving notice under section 16(3).
Belvedere
argued that Frogmore’s solicitors’ letter of May 10 1994 did not comply with
section 16(1)(b)(ii) of the Act for a number of reasons. The most substantial
of these was that the letter made no reference to section 16 and was not
clearly to be understood as giving notice under the section.
I prefer
Belvedere’s argument. Given the complexity of these provisions there is, in my
view, a very clear onus on a new landlord to serve a notice which will leave
the tenants or their nominee in no doubt that it is a section 16(1)(b)(ii)
notice which is intended. This is most easily done by reference to the section
itself, but I would not hold express reference to the section to be essential
if the purport of the notice is quite clear. Here, Belvedere’s solicitors
percipiently judged that a section 16(1)(b)(ii) notice might be intended (hence
their notice of August 4 1994), but this provoked Frogmore’s solicitors into
the assertion that Frogmore still retained the interest acquired from Liverpool
Victoria, an assertion wholly inconsistent with service of a section
16(1)(b)(ii) notice. It seems quite plain to me that Frogmore’s solicitors did
not intend their letter of May 10 1994 to be such a notice, and I am satisfied
that it was not such a notice as would have left an informed recipient clear as
to its effect.
I would
therefore resolve this first question in favour of Belvedere.
Question
(2)
If the answer
to question (1) is correct, this question remains relevant, since Frogmore
granted the last batch of leases after it had received Belvedere’s section 12
notice.
The opening
words of section 16(1), quoted above, are:
Where, at the
time when a notice is served under section 11(1) or 12(1) on the new landlord,
he no longer holds the estate or interest that was the subject-matter of the
original disposal, then …
There is
nothing in the section which provides for the situation in
section 11 or section 12 notice, nor is there any apparent sanction if he does
so. Belvedere suggested that in this situation a claim for damages for breach
of statutory duty would lie. But it had to recognise that the language of the
Act gave no support to the suggestion and the inclusion of an enforcement
provision in the Act (however defective) weighs against it. Frogmore suggested
that a continuing duty to perform the mandatory duties laid on a new landlord
by the Act took effect as soon as he disposed of his estate or interest after
service of a relevant notice. There is no warrant in the language of the Act
for this suggestion either. So it would seem that on any showing some
constructive judicial legislation would be called for.
I would adopt
Frogmore’s suggestion, which seems to be more apt to promote what I take to be
the object of the Act.
Question
(3)
If the answer
to question (1) is correct, this question strictly calls for no answer since
Belvedere’s right to serve notice on Atherton was never triggered. But I would,
if it were necessary, answer it in favour of Belvedere.
After receipt
of the letter from Frogmore’s solicitors dated May 10 1994 and the ensuing
correspondence, Belvedere’s solicitors served their notice of August 4 1994,
clearly intending to safeguard Belvedere’s rights in case Frogmore’s solicitors
were relying on section 16. They were then assured, in what seem to me the
clearest terms, that Frogmore was not relying on section 16. Not surprisingly,
Belvedere’s solicitors then did nothing to pursue Belvedere’s rights against
Atherton. But for the assurance they had received, and particularly if it had
been made plain that Frogmore was relying on section 16, it seems reasonable to
infer that Belvedere would have pursued a timely claim against Atherton,
perhaps in the alternative to the claim against Frogmore. In the light of
Frogmore’s solicitors’ letter of August 12 1994 Belvedere’s solicitors
reasonably concluded that reliance was not being placed on section 16. It would
not, in my judgment, be fair to allow Frogmore to do so now even if, contrary
to my view, good notice had been given under section 16(1)(b)(ii).
It is an
unusual feature of this case that Liverpool Victoria and then Frogmore held
interests in Belvedere Court under both the headlease for 1,992 years and the
underlease for 99 years. This gives rise to the question what reversionary
interest, whether under section 12(4) or under section 16, Belvedere is or
would have been entitled to acquire?
I would accept
that in terms of commonsense and practical reality it is artificial to
distinguish between the two interests. But the issue arises in a highly
technical field, closely regulated by statute. Little or no room is left for
commonsense and practical reality. Frogmore, like Liverpool Victoria, has been
at pains to ensure that the two terms did not merge. The Act is (subject to
irrelevant exceptions) concerned with tenants’ rights against their immediate
landlord. I feel bound to conclude that Belvedere can have no rights save in
relation to the 99-year lease. It was Liverpool Victoria’s disposal of this
interest which gave rise to the tenants’ right of first refusal and it is this
interest which constitutes the reversion to the tenants’ leases.
My conclusions
are, in summary, these:
(1) The leases
granted by Frogmore to Atherton were not a sham or colourable device which the
court is entitled to disregard or strike down.
(2) Those
leases were not incumbrances within section 12(4) of the Act. The judge’s
declaration was therefore wrongly granted and must be set aside. To this extent
Frogmore’s appeal succeeds.
(3) Those
leases were disposals to which section 16(1) of the Act applied. Frogmore was
obliged under the Act, but failed, to serve a notice under section
16(1)(b)(ii). In the absence of such a notice the condition for the application
of sections 12 to 14 to Atherton instead of Frogmore has not, so far, been
fulfilled: see section 16(2).
(4) It remains
Frogmore’s continuing duty to serve a notice under section 16(1)(b)(ii). If it
does not do so Belvedere can compel it to do so. When that notice is served
Belvedere may if it wishes take appropriate steps vis-à-vis Atherton.
(5)
Belvedere’s rights relate, or related, only to the 99-year lease.
(6) I would
allow the appeal to the extent of varying the language of the declaration to be
granted, as proposed by Hobhouse LJ, and only to that extent.
In Denetower
Ltd v Toop [1991] 1 WLR 945* at p952G Sir Nicolas Browne-Wilkinson
V-C, sitting in this court, described the 1987 Act as ‘ill-drafted, complicated
and confused’. The argument in this case has given new force to this
understated criticism. Some anomalies have already been mentioned. There are
others. Nothing in section 12 imposes on the new landlord a duty not to dispose
of his interest, such as is imposed on the original landlord by section 6(1).
It is unclear why not. There is nothing in section 12 which gives the tenants a
right to require a subsequent purchaser from the new landlord to dispose of his
interest to the tenants’ nominee. A limited right is given by section 16, but
it is not equivalent to the right given by section 12(1) against the new
landlord. It is again unclear why not. Counsel discounted the suggestion that
an acceptance notice under section 6(1)(b) or a purchase notice under section
12(1) might create an equitable interest in land capable of registration as a
land charge or protection by a caution, and I am not inclined to disagree. But
one could wish that the Act provided as many answers as it raised problems.
*Editor’s
note: Also reported at [1991] 1 EGLR 84.
I can readily
appreciate the complexity of the task which confronted the draftsman in seeking
to give legislative effect to this ambitious scheme. But the history of these
proceedings is a dismal commentary on a measure intended to help tenants of
mansion blocks, many of them of limited means. As it is, the legal profession
would appear to be the main beneficiaries of this obscure statute.
Rose LJ agreed
and did not add anything.
Also agreeing,
Hobhouse LJ said: I have
read the judgment of the Master of the Rolls and agree with the order he
proposes and the reasons he gives. I only wish to add reasons of my own in
relation to the ‘new’ points which arose during the course of argument and with
which he has particularly dealt in section IX of his judgment. It is however
necessary for me to put the points in context.
Part I of the
Landlord and Tenant Act 1987, as its preamble states, seeks ‘to confer on tenants
of flats rights with respect to the acquisition by them of their Landlord’s
reversion’ and the title of Part I is ‘Tenants’ Right of First Refusal’. But
the provisions of Part I do not give effect to this intent. The Act imposes
certain obligations on landlords but does not match them with adequately
expressed rights for the tenants. In some respects the drafting is extremely
detailed, in others obvious situations have not been provided for. In places
restrictive expressions are used — section 16 provides examples — but the
reasons for the restrictions are not clear and the Act does not deal with the
lacunae that result. Overall the drafting does not disclose a clear and
consistent policy and it falls between the two stools of being both excessively
and inadequately detailed.
As is
illustrated by the present case and by, for example, Englefield Court
Tenants v Skeels [1990] 2 EGLR 230 and Nolan v Eagle Wharf
[1992] 2 EGLR 223, landlords are prepared to go to considerable lengths to
escape from having to transfer the reversion to their tenants, no doubt because
significant commercial interests are involved. The legislature does not seem to
have appreciated what was involved in making the rights sought to be conferred
on tenants effective. While the drafting of fully effective provisions would
not be unduly difficult (and has been achieved in other legislation covering
similar matters), it is not the role of the court to construct such provisions
if they are not to be found expressly or implicitly in the Act as drafted. The
ease of the legislative task does not mean that the distinction between the
roles
problems posed has to be found, if at all, within the scope of the
interpretative tools open to the courts to uncover and give effect to the
statutory intention.
The scheme of
Part I of the Act is that if the tenants’ original landlord does not actively
co-operate with the tenants, the tenants do not have an effective right of
first refusal as against the original landlord. The tenants’ right has to be
exercised as against the ‘new’ landlord. But the new landlord may also
make a disposal of the reversion or some part of it to another. The only
section which seems to deal with this situation is section 16. Counsel have
been unable to suggest any rationale which explains the restrictive way
in which this section has been drafted and how, if construed literally, it
satisfactorily dovetails with section 12. The existence of section 16 does provide
an illuminating insight into the meaning to be given to the word ‘incumbrance’
in section 12(4): that term does not cover total or partial disposals of the
reversion. But neither section shows what is to be the effect or status of
disposals in defiance of the tenants’ rights. How can the court compel the new
landlord to transfer the reversion to the tenants’ nominee if the new
landlord no longer has the power to make such a transfer? How about if the new
landlord has disposed of the reversion after the service of a section 11 or
12 notice? What if the new landlord fails or refuses to serve a notice
under section 16(1)? What rights do the tenants then have against the new
landlord or against the subsequent purchaser? Does section 19 have
any impact on these situations after the reversion has been disposed of?
The facts of
the present case raise these questions. The tenants through Belvedere, their
nominee, have asked for a declaration of their rights as against Frogmore.
Judge Viljoen has made a declaration that under section 12 the plaintiffs are
entitled to acquire from the defendants, Frogmore, the interest Frogmore
acquired from Liverpool Victoria (the original landlord) ‘unincumbered
by and otherwise free from’ any of the reversionary leases which Frogmore has
granted to Atherton on March 8 or 31 and May 4 1994. There is one qualification
which must be made to take account of the decision of this court that the
interest of Frogmore, which the tenants are entitled to acquire, is not the
totality of what Frogmore purchased from Liverpool Victoria on December 9 1993,
but only the reversion to the tenants’ leases as explained in section X of the
judgment of the Master of the Rolls.
The
declaration is not concerned with whether or not Frogmore can now perform its
obligation under section 12, simply with what their statutory obligation was
and is. Under the scheme of the Act it appears to be accepted that the only way
in which Frogmore as the new landlord can divest itself of its
obligation under section 12 is by shifting the obligation to a subsequent
purchaser under section 16, ie to Atherton. This has raised the questions
whether Frogmore served the notice stipulated for in section 16(1) and whether
Frogmore could relieve itself of its section 12 obligation by disposing of the,
or an, interest in the reversion after it has been served with a section 12
notice. No declaration has been made against Atherton and it is not a party to
this action. Since Atherton is now the entity which has it within its power to
transfer the relevant reversions to Belvedere, any order to transfer can only
be addressed to Atherton. Frogmore does not have the power to transfer. The
ability of Frogmore to perform its obligations under section 12 is a separate
question from determining what those obligations were and are.
Thus, although
what the tenants seek ultimately to achieve, and indeed the only consequence
contemplated by the Part I of the Act, is the transfer of the reversion to the
tenants’ nominee, the present proceedings, and the declaration granted by Judge
Viljoen, are actually concerned with whether it would be a fulfilment of the
obligations of Frogmore under section 12 to transfer its remaining interest to
Belvedere subject to Atherton’s reversionary leases, hence the argument about
what was an ‘incumbrance’. For the reasons given by the Master of the Rolls it
was not.
The additional
submissions of Frogmore in this court are that it has been relieved of this
liability because it has done what was necessary under section 16(1) to shift
the relevant liability to Atherton. Thus Frogmore submits that the letter which
its solicitors sent to the tenants’ solicitors on May 10 1994 was a good notice
for that purpose. The arguments under section 16 have also raised the question whether
the section 16 provisions apply when the disposal concerned has taken place
after not before the section 12 notice was served.
With this
introduction, I turn to the three questions which were identified as requiring
further argument and are set out in section IX of the Master of the Rolls’
judgment.
(1) Did Frogmore, on receipt
of Belvedere’s notice under section 12, serve a notice complying with section
16(1)(b)(ii)?
The character
of this notice is that it forms part of the machinery of section 16. It is part
of the process by which the new landlord invokes section 16 in order,
from his point of view, to shift his obligation to transfer to the subsequent
purchaser. From the tenants’ point of view it is, if the section is to be
construed literally, a notice which the tenants are entitled to have to make
section 16 applicable and to enable the tenants to invoke that section against
the subsequent purchaser. Thus it must be a notice that is patently
served under that section and which tells the tenants that the notice is being
so served. The letter of May 10 1994 was not and did not purport to be such a
notice. It overtly had a different purpose — to tell the tenants that Frogmore
would, under section 12(4), be transferring the reversion incumbered by the reversionary
leases they had granted to Atherton. It was only incidentally and by reference
to an enclosed document that the full information required by section
16(1)(b)(ii) was imparted. This stance was further confirmed by the solicitors
(who were acting for both Frogmore and Atherton) in the correspondence which
followed. It is beside the point that the tenants, on learning of the further
disposal and of the existence of Atherton, themselves appreciated that section
16 was relevant and that they (unlike Frogmore) might wish to invoke it. The
letter was not a section 16(1) notice.
I therefore
agree with the Master of the Rolls that the letter of May 10 1994 did not
comply with section 16(1)(b)(ii).
(2) What is the result in law
if a new landlord disposes of its estate or interest after receipt of a section
12 notice?
Neither
counsel before us submitted that the effect of section 12 was that the court
could order the specific performance by the new landlord of his
obligation to transfer when he no longer was the owner of what he was to be
ordered to transfer. This Act does not give the tenants rights which are
registrable and therefore enforceable as such against the subsequent
purchaser. They have no rights against any person save for the personal
rights stated in the statute. It follows that, although it was the obligation
of the new landlord, once the purchase notice had been served, to comply
with it in accordance with the terms of the statute, and ultimately transfer
the reversion to the tenants’ nominee, there is no way in which the performance
of the obligation to transfer can be enforced under section 12 once the new
landlord has disposed of the reversion. In such circumstances the tenants
can only enforce the actual obligation to transfer if they can do so against
the subsequent purchaser under section 16. This is no doubt the main
reason why the statute imposes the obligation on the new landlord to
serve the notices required by section 16. The same problem arises and the same
logic applies whether the new landlord disposed of the reversion before
or after the purchase notice was served under section 12.
Section 16 is
qualified by its opening words: ‘Where, at the time when a notice is served
under section 11(1) or 12(1) on the new landlord, he no longer holds the
estate or interest that was the subject-matter of the original disposal …’. It
is possible to argue back from the wording of section 16 that section 12 should
be construed so as to enable the tenants still to enforce their section 12
purchase notice against the new landlord if the disposal by the new
landlord is only made after the service of that notice, but the argument
inevitably founders on the inability of the new landlord to transfer what
he no longer has. The question therefore becomes one of construing section 16
and deciding whether the opening words of section 16(1) are
the relevant notice has been served.
Is it an
essential part of the scheme that the new landlord must have already
disposed of the reversion before the section 12 notice is served? Obviously the
draftsman has not anticipated that the new landlord will act in defiance
of a section 12 notice and this has led him to draft section 16(1) as he has.
But is one to construe the subsection as if it can only apply where the further
disposal has preceded the section 12 notice? No reason has been suggested why
this should be the intent of the statute. It would merely create a lacuna in
the scheme of the statute. If a subsequent purchaser has bought a
reversion in respect of which the tenants have already served a purchase
notice, why should he be any the less under an obligation to transfer it to the
tenants than if he had purchased the reversion before they had done so? The
mechanisms of section 16 can still work in this additional situation. The new
landlord can serve the section 16(1) notices. The tenants can then acquire
the statutory right against the subsequent purchaser. There is no reason
why the substantive provisions in section 16(2) and (3) should not take effect.
This
conclusion is supported by the references to both section 11 and section 12.
What is being referred to is not some critical date which may have been passed,
but an identification of the stage that has been reached so that what needs to
be done about notices can be provided for. Similarly, if the date of the
disposal was critical to the applicability of section 16 and the substantive
right it creates, one would expect the Act to have provided some definition of
when the disposal is to be taken to have occurred. Is it at the stage that some
contractual obligation has been undertaken by the new landlord? Or is it
when some equitable interest has been created? Or is it when the legal transfer
actually occurs? These various stages could very easily straddle the service of
one or more of the statutory notices by the tenants.
It follows
that I answer this question by saying that the new landlord cannot by
disposing of the reversion after service of a section 12 notice upon him avoid
his legal obligation under section 12 (though he may have put it out of his
power to perform it himself) nor does it relieve him from the obligation under
section 16 to serve the requisite notices. The tenants therefore remain
entitled to require the new landlord to perform the obligations set out
in section 16(1) and to insist on the statutory machinery being followed by the
new landlord.
(3) Should Frogmore now be
permitted to rely on the tenants’ failure to make timely application against
Atherton?
As explained
above and in the Master of the Rolls’ judgment, this question has only arisen
as a result of the further analysis of the positions of the respective parties
under the Act that has taken place in this court. It was the starting point of
this part of the argument of Frogmore that Frogmore had served a section 16
notice on the tenants. This court has held that the letter relied on, that of
May 10 1994, did not amount to such a notice. Accordingly, the question does
not arise as posed.
There was
however a subsidiary argument of Frogmore that the tenants should be treated as
having waived their right to continue to assert their section 12 rights against
Frogmore. The facts of this case do not justify such a conclusion. As between
Frogmore and Belvedere, Frogmore insisted that Belvedere pursue its claim
against Frogmore under section 12 and Belvedere acquiesced — hence the present
litigation, which is between Belvedere and Frogmore alone.
Conclusions
In my
judgment, this appeal should, for the reasons I have given, be allowed to the
limited extent, but no further, of amending the wording of the declaration so
as to substitute for the words:
… the estate
or interest in the said property acquired by the respondent from Liverpool
Victoria Trustee Limited …
the words:
… the estate
or interest in the under-lease of the said property for a term of 99
years from 24th June 1936 acquired by the respondent from Liverpool Victoria
Trustee Limited …
The
declaration varied as I have stated should stand. This declaration is made as
to the present position, Frogmore not having done what is necessary to shift
its liability to Atherton. It is a declaration of the statutory right of the
tenants against Frogmore under section 12; it is made even though Frogmore may
have put it out of its power to perform its obligation.
By way of
final comment I would add that I am strongly attracted to the view that
legislation of the present kind should be evaluated and construed on an
analytical basis. It should be considered which of the provisions are
substantive and which are secondary, that is, simply part of the machinery of
the legislation. Further, the provisions which fall into the latter category
should be examined to assess whether they are essential parts of the mechanics
or are merely supportive of the other provisions so that they need not be
insisted on regardless of the circumstances. In other words, as in the
construction of contractual and similar documents, the status and effect of a
provision has to be assessed having regard to the scheme of the legislation as
a whole and the role of that provision in that scheme — for example, whether
some provision confers an option properly so called, whether some provision is
equivalent to a condition precedent, whether some requirement can be fulfilled
in some other way or waived. Such an approach when applied to legislation such
as the present would assist to enable the substantive rights to be given effect
to and would help to avoid absurdities or unjustified lacunae. I have not
embarked upon such an analysis of this legislation since it was not contended
for by either party before us and no argument was addressed to us which sought
to evaluate and categorise the provisions in this way nor to consider what was
truly essential to the scheme of the Act and whether it would break down if
such an approach was adopted.
Giving the
conclusions of the court, Sir
Thomas Bingham MR said: We have already indicated that we would
have been minded, had application been made by either party, to grant leave to
appeal to the House of Lords. We understand that, as matters stand, no such
application is made, but it is open to either party on reconsidering the matter
to make application.
So far as
costs are concerned, Mr Jonathon Gaunt QC, on behalf of Frogmore, asks that
there should be no order for costs in the court below and that Belvedere should
pay 50% of Frogmore’s costs in this court. Mr David Neuberger QC, by contrast,
asks that Belvedere should have costs in the court below and three-quarters of
the costs in the Court of Appeal. Mr Gaunt’s submission is, first of all, based
on the broad picture. He submits that Belvedere sought a declaration concerning
the long lease which Frogmore acquired from Liverpool Victoria. He points out,
quite rightly, that the declaration that Belvedere have obtained relates to
something different. Looking at the matter more analytically, he points out
that in the court below much time was devoted to the issue of sham or no sham
on which Frogmore have ultimately succeeded, but a good deal of time was
directed to section 12(4) on which Frogmore have succeeded, that Frogmore,
although unsuccessful on the section 16 point and the estoppel point have, none
the less, succeeded in this court on the interest to be acquired. He says that
entitles Frogmore to a favourable order to costs in this court.
Mr Neuberger
bases his application on the fact that, although Belvedere have encountered
considerable difficulty in identifying the target on which they should
concentrate their fire, none the less their aim has been clear throughout.
Despite the difficulty of pursuing it, they have been sufficiently vindicated,
even if not in the manner which they originally contemplated.
It appears to
us right to take an overall view of the matter. We bear in mind that Belvedere
have from the outset been seeking to establish the rights which the Act
purported to confer on them. They have, as is
precisely how under the Act they should pursue this aim. That is not surprising
given the extreme complexity of this statute.
Overall, it
seems to us right to take a broad and general view of the picture. We bear in
mind that, although Belvedere have lost on a number of points and devoted time
to points that have proved to be either peripheral or irrelevant, none the
less, they have substantially advanced towards the object which they have from
the outset been seeking to achieve despite the efforts of Frogmore to frustrate
them.
Overall, we
consider that the right order is that Belvedere should have half its costs in
the court below and the same proportion of its costs in this court against
Frogmore.
