Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Initial notice — Claim for new long lease — Nominal premium of £100 specified by tenant — Whether initial notice invalid — Whether obligation to specify realistic premium figure in initial and counternotices applies to tenants and landlords respectively
In September 1994 the respondent tenant served a
notice pursuant to section 42 of the Leasehold Reform, Housing and Urban
Development Act 1993 claiming a new long lease in respect of a flat. The
contractual term was due to expire in December 1994. The notice specified £100
as the suggested premium; the tenant knew that this figure was a formal nominal
figure but was professionally advised that this was acceptable. A realistic
figure lay between £100,000 and £300,000. In the county court the recorder
decided that the insertion of a purely nominal premium in the tenant’s initial
notice did not invalidate the notice. The landlord appealed.
allowed. The tenant’s initial notice was invalid. Under section 42(3)(c) of the
1993 Act the tenant was required to specify the premium that he proposed to
pay. The tenant did not do so; he deliberately specified a figure that he did
not propose to pay. In stating the premium, a tenant should specify a realistic
one. The insertion of an unrealistic premium in the tenant’s initial notice was
not an inaccuracy that could be corrected under para 9(1) of Schedule 12 to the
Act. When a landlord made counter-proposals for a premium in his counternotice
under section 45(3)(b), this too should be a realistic figure and not an
absurdly high one that might have the effect of intimidating the tenant. If the
landlord did not give a valid counternotice in the time allowed, the
consequences in section 49(1) would result. However, it was unnecessary to
resolve the question as to whether the court had a discretion under section
49(1) to order the grant of a new lease where the landlord failed to serve a
counternotice within the time-limit.
The following case is
referred to in this report.
Cresswell v Duke
of Westminster [1985] 2 EGLR 151
This was an appeal by the
Rt Hon Charles Gerald John, Earl Cadogan, and Cadogan Estates Ltd from a
decision of Recorder Kallipetis QC, sitting in West London County Court, in
proceedings by the appellants against the respondent, Hugh Francis Morris.
Anthony Radevsky (instructed by Lee &
Pembertons) appeared for the appellants; Gary Cowen (instructed by Wood
Winfield) represented the respondent.
Giving the judgment of
the court, STUART-SMITH LJ said:
Introduction
This is an appeal from an order of Mr Recorder
Kallipetis QC, made on 21 January 1998 in West London County Court, whereby he
upheld the validity of the tenant’s notice served under the provisions of the
Leasehold Reform, Housing and Urban Development Act 1993 (the Act). At the
hearing below, the respondent, to whom I shall refer as the tenant, challenged
the jurisdiction of the court to determine the validity of the notice. The
recorder held that he had jurisdiction and there is no cross-appeal.
The facts were not in dispute. In June 1990 the
tenant took an assignment of the residue of a 30-year lease of flat 32, 5
Sloane Court East, London SW3 (the flat). The contractual term was due to
expire on 22 December 1994. The tenant served the notice pursuant to section 42
of the Act on 6 September 1994. The notice specified that the premium that the
tenant proposed to pay for the grant of a new lease was £100. The appellants,
to whom I shall refer as the landlord, while not accepting the validity of the
tenant’s notice, served a counternotice.
The tenant inserted the figure of £100, knowing
that it was a ‘formal nominal figure’ having been professionally advised that
this was acceptable. It was a deliberate decision. The figure bore no relation
to the realistic figure, which lay probably between £100,000 and £300,000. The
claim is for a 90-year lease from 23 December 1994 at a peppercorn rent
(section 56 of and Schedule 13 to the Act). It is obvious therefore that any
premium will be very substantial.
Statutory provisions
The Act gives qualifying tenants, essentially
those holding a long lease at a low rent, two important rights. Chapter I of
Part 1 introduced the right to collective enfranchisement, namely the right of
a sufficient majority of tenants to acquire the freehold. Chapter II of Part 1
granted a qualifying tenant an individual right to a new lease: section 39(1).
The new lease is in substitution for the old lease. The value of the new lease
will vary depending to a considerable extent on how much of the old lease
remains unexpired. If the existing lease has a long time to run, then the
premium payable may be quite small. But if, as in this case, the old lease has
nearly expired, what is being purchased is 90 years at a peppercorn rent:
something that is clearly very valuable.
A claim to a new lease is made by notice under
section 42(1). There is no prescribed form. But the notice must contain
specified information. Section 42(3) provides:
(3) The tenant’s notice must —
(a) state the full name of the tenant and the
address of the flat in respect of which he claims a new lease under this
Chapter;
(b) contain the following particulars, namely —
(i) sufficient particulars of that flat to
identify the property to which the claim extends,
(ii) such particulars of the tenant’s lease as
are sufficient to identify it, including the date on which the lease was
entered into, the term for which it was granted and the date of the
commencement of the term,
(iii) such further particulars as are necessary
to show that the tenant’s lease is, in accordance with section 8 (as that
section applies in accordance with section 39(3)), a lease at a low rent [or,
in accordance with section 8A (as that section so applies), a lease for a
particularly long term], and
(iv) particulars of the period or periods falling
within the preceding ten years for which the tenant has occupied the whole or
part of the flat as his only or principal home;
(c) specify the premium which the tenant proposes
to pay in respect of the grant of a new lease under this Chapter and, where any
other amount will be payable by him in accordance with any provision of
Schedule 13, the amount which he proposes to pay in accordance with that
provision;
(d) specify the terms which the tenant proposes
should be contained in any such lease;
(e) state the name of the person (if any)
appointed by the tenant to act for him in connection with his claim, and an address
in England and Wales at which notices may be given to any such person under
this Chapter; and
(f) specify the date by which the landlord must
respond to the notice by giving a counter-notice under section 45.
The date specified for the landlord’s response
must be not less than two months: subsection (5). The particulars required in
section 42(3)(b) are designed to show whether the tenant qualifies for a claim.
Section 45 provides that the landlord can serve a
counternotice, provided he does so within the time specified in the tenant’s
notice. The counternotice must state whether the landlord admits that the
tenant qualifies for the right to acquire a new lease or does not admit that
right, or that the landlord proposes to redevelop. If he admits the tenant’s
right, his counternotice must specify which of the tenant’s proposals are
accepted and, in relation to any proposal not accepted, specify the landlord’s
counter-proposals: section 45(2) and (3).
Section 49(1) provides that where a counternotice
has not been served in accordance with section 45(1), the court may, on
application by the tenant, make an order determining, in accordance with the
proposals contained in the tenant’s notice, the terms of the acquisition. We
are told by counsel that there has been a difference of view among county court
judges as to whether the court is bound to grant a new lease on the terms of
the tenant’s proposals, if the landlord fails to serve a counternotice in time;
or whether it has a discretion. Mr Gary Cowen, counsel for the tenant,
submitted that the court was obliged to do so and had no discretion. It is
unnecessary for this court to resolve that question. Suffice it to say that, if
Mr Cowen is right, should the landlord for whatever reason fail to serve a
counternotice in time, he will find himself granting a 90-year lease at a
peppercorn rent for £100 — if Mr Cowen’s main contention in this appeal is
correct.
The Leasehold Reform (Collective Enfranchisement
and Lease Renewal) Regulations 1993 S1 No 2407 (the regulations) were made
pursuant to section 98 of the Act. Schedule 2 is concerned with lease renewals.
Para 2(1) provides that the landlord may give the tenant notice requiring
payment of a deposit at any time when the tenant’s notice continues in force.
By para 2(2) the amount of the deposit is £250 or 10% of the amount proposed in
the tenant’s notice payable on the grant of the lease in accordance with
Schedule 13 — whichever is the greater. By para 3(3), if the deposit has to be
returned to the tenant, the landlord is entitled to deduct his costs as
prescribed under section 60 of the Act. These costs can be substantial,
including the cost of obtaining a valuation of the tenant’s flat for the
purpose of fixing the premium. This is a valuable right to the landlord because
we are told by counsel that, not infrequently, the tenant, for one reason or
another, does not continue with the claim.
One further statutory provision should be referred
to at this stage. Schedule 12, para 9(1) provides:
The tenant’s notice shall not be invalidated by
any inaccuracy in any of the particulars required by section 42(3) or by any
misdescription of any of the property to which the claim extends.
It was submitted to the recorder by Mr Cowen, and
also to this court as an alternative to his principal argument on construction,
to which I shall come shortly, that if the £100 proposal did not satisfy
section 42(3)(c), it was an inaccuracy in the particulars and was therefore
cured under this paragraph. It is not entirely clear whether the recorder
accepted this submission. There is considerable discussion in his judgment as
to whether it amounted to an inaccuracy or an omission. In my judgment, para
9(1) has no application to section 42(3)(c) or indeed any of the other
requirements of section 42(3) other than those that are specifically called
particulars, that is to say those in section 42(3)(b). This is so as a matter
of ordinary construction, quite apart from the fact that, in my view, the
expression ‘inaccuracy’ is hardly appropriate to be used in relation to what
must be specified or stated in subparas (c) to (f) of section 42(3).
Mr Anthony Radevsky, on behalf of the landlord,
submits, that the proposal as to premium must be a bona fide and genuine one,
not just a nominal figure or one that bears no relation to the true value. He
submits there are good reasons for this.
The notice is the start of the procedure, which
ideally will lead to the parties agreeing the terms of the new lease. The Act
is designed to encourage parties to reach an agreement and, if they do so, time
and money is saved. Only in default of agreement does the matter have to be
determined by the leasehold valuation tribunal. If a realistic offer is made at
the outset, the landlord can accept it, without spending time and expense on
valuations or negotiations. And the fact that he may recover most of these
costs from the tenant under section 60 does not alter the policy of the Act. We
are told by Mr Radevsky that, not infrequently, when tenants realise what they
are going to have to pay for the new lease, they no longer wish to continue. It
is better from everyone’s point of view that this should be realised at the
outset, with consequent saving of costs.
The process is one of compulsory purchase if the
tenant is able and willing to do so. Effectively the landlord is compelled to
offer the new lease for sale to the tenant, if he qualifies. In the same way as
in any other transaction of purchase and sale, the purchaser should make a
realistic offer, though not necessarily his final offer.
The sum proposed by the tenant by way of premium
determines the amount of the deposit. While it is not permissible to construe
primary legislation in the light of subordinate legislation, it seems to me
that the provision in the regulations relating to deposits would be effectively
negated if Mr Cowen is right. No one will ever pay a deposit of more than £250.
This is a valuable right to the landlord. Although of course he may have other
remedies for recovering his section 60 costs, it can be very difficult in the
case of a tenant who has gone out of possession; it may not be worth the
trouble and expense of pursuing him for a few thousand pounds.
It is at least arguable that section 49(1) has the
effect that the court must grant a new lease in accordance with the tenant’s
proposals set out in the notice. It would be a very harsh result if for
whatever reason the landlord failed to serve a counternotice in what is a very
short time-span, to find that he had to grant a 90-year lease for virtually
nothing.
Mr Cowen submits that there is no warrant for
introducing some such words as bona fide and genuine into section 43(3)(c). The
purpose of the provisions is merely to initiate a process of negotiation, and
for this purpose it matters not whether a nominal or realistic figure is
proposed. He also submitted that if the appellant’s contention was correct, the
county court would be beset with the difficult question of assessing whether
the proposal was genuine and realistic or not. Suppose for example the tenant
in this case put forward £50,000, knowing that at the end of the day he might
well have to go to something like £200,000; would that be sufficient? This was
an argument that weighed heavily with the recorder, indeed, as I understand it,
it was the decisive consideration. Mr Cowen also contended that valuation was
the province of the leasehold valuation tribunal, and if the court had to
determine whether or not the offer was realistic, it would in some way encroach
on the tribunal’s jurisdiction or the court might have to refer the case to the
tribunal for a preliminary opinion.
Finally, Mr Cowen contrasted the provisions of
section 42 with the corresponding provisions of section 13, which deal with the
question of collective enfranchisement and notice to be given by those
proposing to purchase. As originally drafted, section 13 contained a subsection
that required that a notice should not be given unless the qualifying tenants
had obtained a valuation prepared by a qualified surveyor of the relevant
interests, and the notice had to specify that this was done and the name of the
surveyor: section 13(6). Mr Cowen contended that this indicated, by contrast
with section 42, that the proposed purchase price
one. Quite apart from the fact that subsection (6) of section 13 was
subsequently repealed in the Housing Act 1996, the conclusion does not, in my
view, follow from the premise. Parliament may have thought there were good reasons
for requiring a valuation to be obtained in the case of collective
enfranchisement, not least because the valuation is likely to be very
substantial, whereas in the case of a lease renewal, for reasons I have already
explained, it may not always be so. But if section 13(3)(d) requires a bona
fide and genuine proposal as to a purchase price, as Mr Cowen concedes, I
cannot see why the same should not apply to section 42(3)(c).
I do not consider it is necessary to read any
words into section 42(3)(c). The tenant is required to specify the premium that
he proposes to pay. He did not do so; he deliberately specified a figure that
he did not propose to pay. I do not think the tenant is required to offer his
final figure that he may be prepared to go to, but he should, in my view, offer
a realistic figure. The judge was troubled by the difficulty in telling whether
the offer was a realistic one. I very much doubt whether in practice this will
present the difficulties that the judge envisaged. It ought to be possible both
for the landlord and the judge to recognise whether the offer is a realistic
one or simply a nominal or wholly unrealistic one. The landlord would need to
be on fairly firm ground if he sought to challenge a substantial offer, even if
he thought it was considerably too low. The court will obviously allow a fairly
wide margin. If the landlord unsuccessfully challenges the validity of the
notice, he will find himself paying the costs. On the other hand, even if it is
the tenant’s opening bid, it should, in my view, be a realistic one. I decline
to lay down any more precise guidelines. In this I follow what Sir John
Donaldson MR said in Cresswell v Duke of Westminster [1985] 2
EGLR 151 at p152:
Where we draw the line I do not know, I doubt
whether it is in anybody’s interest that I should attempt to draw that line.
Many cases will answer the question on their own facts.
This seems to me to be an application of the well
known elephant test. It is difficult to describe, but you know it when you see
it. I think we can trust to the good sense of landlords not to make frivolous
applications and county court judges to take a robust line and not get enmeshed
in hearing detailed evidence. A brief inquiry, if necessary with limited
evidence from tenant and landlord, should suffice.
I also consider that when the landlord makes
counter-proposals in his counternotice (see section 45(3)(b)), this too should
be a realistic figure and not an absurdly high one, which might have the effect
of intimidating the tenant. If the landlord does not give a valid counternotice
in the time allowed, the consequences in section 49(1) will result. But here
again there is no reason why the landlord should not specify the highest figure
that he realistically hopes to get.
For these reasons I would allow the appeal and
hold that the tenant’s notice was invalid.
OTTON and TUCKEY LJJ agreed and did not add anything.
Appeal allowed.
