Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Vesting order — Service charge dispute — Determination of enfranchisement price — Unresolved dispute as to amount of unpaid service charges — Section 24(3) application for vesting order — Aggregation of unpaid service charges with purchase price — Schedule 5 — Whether landlord entitled to immediate vesting order — Whether landlord entitled to vendor’s lien to protect recovery of unpaid service charges
In 2000, the qualifying tenants of a block of flats served notice of enfranchisement, under the Leasehold Reform, Housing and Urban Development Act 1993, on the first and second defendant freeholders and on the third defendant headlessee. The defendants admitted the right of the tenants to acquire the freehold. On 17 October 2000, the claimant nominee purchaser and the defendants agreed, and the leasehold valuation tribunal approved, the price and the terms of the acquisition. Meanwhile, on 16 October 2000, the tenants applied to the LVT for determination of a dispute with the third defendant as to service charges. No binding contract for the acquisition of the freehold was entered into.
On 15 February 2001, the claimant applied for a vesting order under section 24(3) of the Act. In August 2001, the LVT determined the service charge dispute, although the arrears of service charges due from the individual tenants remained unresolved. On the hearing of the application under section 24(3), the district judge decided that the order should be deferred, to take effect either when the parties had agreed, or when the LVT had determined, the amount of the service charges to be paid in addition to the purchase price. The third defendant applied for permission to appeal, and, if granted, to appeal against that decision.
Held: Permission to appeal was granted and the appeal was allowed. Schedule 5 to the 1993 Act does not require that all sums due to the transferor are to be aggregated with the purchase price. The schedule requires that where any amounts or estimated amounts have been determined by the LVT, they are to be aggregated with the price. However, if they have not been so determined, they are not to be aggregated. Accordingly, a vesting order under section 24(4)(a) could be made immediately. The third defendant was entitled to a vendor’s lien, under section 32(2)(a) of the 1993 Act, to protect its entitlement to the unpaid service charges.
No cases are referred to in this report.
Charles Harpum (instructed by Freemans) appeared for the appellant; Stan Gallagher (instructed by Thackray Wood, of Beckenham) represented the respondent.
Giving judgment, Judge Hallon said:
This is an application by the third defendant (to whom I shall refer as D3) for permission to appeal and, if granted, to appeal against the decision of District Judge Wilkinson, of 29 November 2002, to make a vesting order under the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act), but with that order not to be effective until there was agreement between the parties or a decision of the leasehold valuation tribunal as to the exact amount of service charges due from the leaseholders seeking enfranchisement to D3.
I directed that the matter should be listed as the application, and, if granted, the appeal, because it seemed likely from a consideration of the papers that, because of the complexity of the case, it would be necessary to hear a considerable amount of argument relevant to the appeal before being able to decide whether permission to appeal should be granted. If it were granted, but the appeal was heard separately, there would be substantial duplication. Having heard argument, it is clear that the interpretation of the statute, which is the point at issue, is difficult and without judicial authority. Thus, there is a realistic prospect that the appeal would succeed and so permission to appeal should be granted. In addition, the form of the order that was put before District Judge Wilkinson at the hearing, but which D3’s solicitor and counsel had not seen prior to the day of the hearing, needs substantial amendment, which cannot be done (as was suggested in correspondence) under the slip rule. A further matter that is relevant to the issue of permission to appeal is that District Judge Wilkinson was told, correctly, that the application for a vesting order had been made by the claimant, but he was given to understand, incorrectly, that the hearing before him had also been at the instigation of the claimant. In fact, it was D3’s solicitor that had asked the court to arrange a hearing because of the time that had passed since the original application had been made.
The factual situation that gives rise to this dispute is, briefly, as follows. The qualifying tenants of a block of flats at Edgewood Drive, Orpington, wished to exercise their right of enfranchisement, the proposed nominee purchaser being the claimant company. In 2000, they served notice on the freeholders (the first and second defendants) and the headlessee, D3. The defendants served a counternotice admitting the tenants’ right, and, on 17 October 2000, agreement was reached as to the terms of acquisition. On 16 October 2000, the tenants of the block and two other blocks made an application, not under the 1993 Act, to the leasehold valuation tribunal (the LVT) to determine a dispute with D3 as to service charges. On 21 November 2000, the LVT endorsed the agreement of 17 October 2000, but the process of enfranchisement then stalled because the parties could not agree whether completion should be 28 days after exchange of contracts (as proposed by D3) or 28 days after the service charges had been agreed or determined by the LVT. No binding contract was entered into, and, in order to protect its position in relation to time limits provided by the 1993 Act, the claimant began the present application under section 24(3) on 15 February 2001. On 23 August 2001, the LVT determined the dispute as to service charges that were due from the tenants of the three blocks who had applied to the LVT, but that did not resolve the issue as to what was due from the individual tenants of the block who were seeking enfranchisement. D3 sought to appeal the determination, but permission was refused on 4 February 2002. In May 2002, D3 asked this court to fix a directions appointment in relation to the claimant’s outstanding application under section 24(3). After being adjourned in October 2002, that was the matter that came before District Judge Wilkinson on 29 November 2002, and that was treated as the hearing of the application under section 24(3).
That summary of events shows that a considerable period of time has elapsed since agreement was reached as to the terms of acquisition. It also demonstrates that the first two defendants are not involved in the dispute that is preventing finalisation. The claimant and D3 each blame the other for delay. I made it clear in the course of the hearing that, although there could be no doubt that time has passed, I was not in a position to be able to apportion blame.
When dealing with an application under section 24(3), where the procedure for enfranchisement has been correctly followed and the terms of acquisition agreed but no binding contract has been entered into, the court may, under section 24(4), make one of three orders. It may make an order:
(a) providing for the interests to be acquired by the nominee purchaser to be vested in him on the terms referred to in subsection (3);
(b) providing for those interests to be vested in him on those terms, but subject to such modifications as —
(i) may have been determined by a leasehold valuation tribunal, on the application of either the nominee purchaser or the reversioner, to be required by |page:55| reason of any change in circumstances since the time when the terms were agreed or determined as mentioned in that subsection; and
(ii) are specified in the order; or
(c) providing for the initial notice to be deemed to have been withdrawn at the end of the appropriate period specified in subsection (6);
and Schedule 5 shall have effect in relation to any such order as is mentioned in paragraphs (a) or (b) above.
Paragraph 2 of Schedule 5 provides for the conveyance of any interest that is the subject of a vesting order on payment into court of “the appropriate sum”, and para 3 defines that as the aggregate of:
(a) such amount as is fixed by the relevant terms of acquisition as the price which is payable in accordance with Schedule 6…; and (b) any amounts or estimated amounts determined by a leasehold valuation tribunal as being, at the time of execution of the conveyance, due to the transferor from any tenants of his of premises comprised in the premises in which that interest subsists…
Paragraph 4 then goes on to provide that the payment into court of the appropriate sum shall be taken to have satisfied any claims in respect of the price payable under “this Chapter”.
Before District Judge Wilkinson, D3 was contending for either an immediate vesting order under (a), but with a lien for the as yet unquantified service charges, or for the initial notice to be deemed to have been withdrawn under (c). The claimant said that it was contending for an order under (b), but the draft order produced actually provided for a form of deferred vesting order, that is, a vesting order to take effect either when the parties had agreed, or the LVT had determined, the amount of the service charges to be paid in addition to the price that had already been agreed and confirmed by the LVT.
District Judge Wilkinson concluded that a vesting order could not be made until any sums due by way of outstanding service charges had been paid into court, and that, as the court itself had no power to determine what those charges should be, the vesting order could not be made until the LVT had determined them — thus he accepted that the draft order proposed by the claimant was the proper one to make.
On the appeal, D3 challenges the district judge’s conclusion on the basis that, although Schedule 5 says that if the LVT has determined the amount of the service charges, they must be paid into court, it does not say that where sums by way of service charges are due they must be determined and paid into court before a vesting order can be made: the schedule does not say that all amounts due must be paid into court. D3 says that that interpretation is consistent with the fact that para 4 refers to the fact that payment in of the appropriate sum satisfies the price payable, and the “price… payable in accordance with Schedule 6” (that reference being in para 3(1)(b)) does not include service charges. The claimant disagrees and argues that Schedule 5 contemplates a sequence of events that must be followed in order to enable the conveyance pursuant to the vesting order to take place, and it is the conveyance, not the vesting order, that vests the interest in the purchaser.
Although I understand and respect the argument advanced by the claimant on this point, I have come to the conclusion that I cannot agree with it. It seems to me that if Schedule 5 was intended to mean that all service charges due were to be paid as part of the “appropriate sum”, then it would have said all sums due to the transferor are to be aggregated with the price. The reference to “any amounts or estimated amounts determined by a LVT as being… due to the transferor” seems to me to mean exactly what it says, namely that if the amounts have been determined, they are to be aggregated with the price, but (and this in the corollary) if they have not been so determined, they are not to be aggregated. That means that I do not agree with District Judge Wilkinson when he concluded that, since there were outstanding service charges to be quantified, a vesting order could not be made to take effect until quantification had taken place. A vesting order under section 24(4)(a) can be made now.
That, however, leaves outstanding the question of how D3 is to be protected in relation to the payment of the outstanding service charges. It is clear that only the LVT can determine the amount of them, and it is said by the claimant that the only way the LVT can do that under the 1993 Act is pursuant to section 24(4)(b)(i) and Schedule 5. That overlooks the fact that the previous reference of the service charge issue between the tenants and D3 was not made under the 1993 Act, and that the present dispute arises out of the tenants’ and D3’s inability to calculate the individual tenants’ liabilities pursuant to the LVT determination of the liability as a whole of these tenants and the tenants of the other blocks. That resulting dispute should be referred back under the original application for further determination. That provides a method for resolving the dispute as to the precise amounts due, but does not ensure payment of those amounts to D3. D3 could, when the amounts are known, then sue each individual tenant (if they did not pay voluntarily) since, on my interpretation, D3 would not fall foul of para 4 of Schedule 5 because the “price” includes service charges only if they have been included in the “appropriate sum” and paid into court. However, suing individual tenants is an unsatisfactory way of dealing with the situation if there is a simpler method available. That is why D3 contends for a lien pursuant to section 32(2)(a) of the 1993 Act.
Section 32(2) provides that the lien of the owner as vendor for the price payable shall extend to any amounts that are due to him from any tenants of his of the premises being conveyed.
The claimant says, quite simply, that a vendor’s lien arises when a contract of sale is entered into. As there is no contract of sale when a vesting order is made, a lien cannot arise; and section 32(2) does not help, since it refers to the lien of the owner being extended, and something can be extended only if it exists in the first place. D3 counters that by pointing out that para 5 of Schedule 5 provides that, in all the sections listed in that paragraph, references to a binding contract being entered into are to be read as including references to the making of a vesting order. Therefore, it is said, the 1993 Act itself provides the way in which a lien can be used to safeguard D3’s position: a vesting order is, in the Act, equated with a binding contract, and, therefore, although section 32(2) does not specifically refer to a vesting order, it would fly in the face of the provisions of para 5 of Schedule 5 to say that section 32(2) can apply only when there is a binding contract.
I have been considerably exercised by these two utterly opposing, but, in their separate ways, attractive, arguments. However, I have concluded, with some hesitation, that I prefer the argument of D3. This is because it can be said to be illogical, even perverse, to equate a vesting order with a binding contract in so many important parts of the Act but to say that that should not apply in respect of a lien that is specifically provided for within the Act as a way of safeguarding the position of the vendor.
The result, therefore, is that D3’s appeal must succeed, and it will be necessary for counsel to draft an appropriate form of order to reflect the decision that I have made.
Appeal allowed.
