First-reported decision under Landlord and Tenant Act 1987, s13 — Rights of first refusal for tenants of privately owned flats on disposal by landlords — In present case landlords of five self-contained flats in terrace house at Belsize Park, London NW3, failed to give tenants first refusal in breach of statutory duty under 1987 Act — Premises sold at public auction in February 1988 for £140,750 — Purchase notices served on new landlords under s12 by majority of qualifying tenants (three tenants with regulated tenancies) — Misdescriptions of two of the flats in the auction particulars admitted on behalf of new landlords — Tribunal requested by ‘nominated person’ to settle price payable by tenants and also terms of conveyance — Price nominated person considered payable was £79,000 — In September 1988 premises again offered at auction with reserve of £141,000 but withdrawn at £135,500
Part I of Act found by tribunal to be ‘not only complex but extremely difficult
to construe’ — These provisions, particularly s13 dealing with a tribunal’s
jurisdiction, reviewed in detail in relation to circumstances of present case —
Following this review, the tribunal concluded that they did not have any power
to determine de novo a value for the premises as at the date of the original
auction — If they did, the result, they considered, could be remarkable, for a
landlord who was selling his interest after a genuine arm’s-length negotiation
in the open market might find himself out of pocket because a tribunal took a
different view on the value of his property — This, suggested the tribunal,
would bring a penal element into the 1987 Act which, so far as Part I was
concerned, it did not appear to have — The original sale figure should be the
starting point from which the tribunal had to work — They had no difficulty in
accepting that where the estate or interest to be disposed of was different from
that which was disposed of under the original disposal and that difference had
an effect on the price, they had jurisdiction to adjudicate on that matter, but
only as to the amount of the abatement — In the event, however, the parties
reached agreement in the course of the hearing that, by reason of the
misdescriptions in the auction particulars, the price obtained at auction
should be abated by £18,250
the agreement it was not necessary for the tribunal to consider whether they
had power to inquire into the genuineness or otherwise of the auction figure of
£140,750, but they were not convinced that they had power to investigate the
circumstances surrounding a sale, whether by auction or otherwise —
Determination that the estate or interest to be disposed of to the nominated
person was that described in the auction particulars of February 1988, save
that two of the flats should be differently described, and that by reason of
these misdescriptions the price payable under the purchase notices was £122,500
No cases are
referred to in this report.
C Tidmarsh
(instructed by Horrocks & Co) appeared for the applicant, Mr B Cousins, the
nominated person; Kirk Reynolds (instructed by Barnett Alexander Chart)
represented the respondent landlords.
Giving their
decision, THE TRIBUNAL said: This is an application to a leasehold valuation
tribunal (‘the tribunal’) under section 13 of the Landlord and Tenant Act 1987
(‘the Act’). As we believe it is the first case to be heard under the Act, it
will be convenient to set out its main provisions in so far as they affect this
application.
The Act in
Part I confers on tenants of flats rights with respect to the acquisition by
them of their landlord’s reversion, if he wishes to sell, by giving them the
right of first refusal. Under section 1 a landlord shall not make ‘a relevant
disposal’ affecting any premises as defined in the Act unless he first notifies
the ‘qualifying tenants’ of his intention to do so and the disposal is made in
accordance with the requirements laid down in the Act. Sections 3 and 4 of the
Act define who are qualifying tenants and what are relevant disposals. By
section 5 the notice served on the qualifying tenants by a landlord wishing to
dispose of his reversion constitutes an offer to the tenants to purchase. They
may accept the offer within a specified period subject to various procedural
matters. They may also reject the landlord’s offer and make a counteroffer, and
provisions are made in the Act for further offers by the landlord and for negotiations
between the parties. The tenants have to act through a person nominated by
them, known as ‘the nominated person’.
Where a
landlord disposes of his reversion in contravention of the Act, that is, he
fails to give the tenants first refusal, as happened in this case, the
qualifying tenants have rights to compel the sale to them of the premises by
the new landlord. They may under section 11(1) ‘serve a notice on the
transferee under the original disposal requiring him to furnish a [specified]
person . . . 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 . . .’. The rights of qualifying tenants to compel a sale are
set out in section 12, the relevant parts of which state:
12.–(1) Where —
(a) paragraphs (a) and (b) of
section 11(1)
— these paragraphs refer to a disposal by
a landlord without first notifying the qualifying tenants —
apply to a relevant disposal affecting
any premises to which at the time of the disposal this Part applied . . . 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 (2)
deals with the period of notice, which is not relevant in this case. Subsection
(3) states:
(3)
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.
The remaining
subsections, although the subject of discussion during the hearing and referred
to in passing later herein, are not relevant to our decision in this case.
The
jurisdiction of a tribunal is to be found in section 13:
13.–(1)
A rent assessment committee shall have 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).
(2) An application to a rent assessment committee
under this section must be in such form, and contain such particulars, as the
Secretary of State may by regulations prescribe.
(3) On any application under this section the
interests of the persons by whom a purchase notice has been served shall be
represented by the nominated person, and accordingly the parties to any such
application shall not include those persons.
(4) Any costs incurred by a party to an
application under this section in connection with the application shall be
borne by that party.
(5) A rent assessment committee shall, when
constituted for the purpose of hearing and determining any question falling
within subsection (1) above, be known as a leasehold valuation tribunal . . .
(6) In this section and sections 14, 16 and 17
‘the nominated person’ means (subject to section 15(5)) the person or persons
for the time being nominated for the purposes of section 12 by the requisite
majority of qualifying tenants of the constituent flats.
The facts
Since, for
reasons which will appear, no evidence was given at the hearing, we take the
facts from the correspondence and other documents supplied to the tribunal.
No 11 Belsize
Crescent (‘the premises’) is a 19th-century inner-terrace house on basement,
ground and three upper floors all of which have been converted into self-contained
flats. The basement, ground and third floors are let under regulated tenancies,
and the first and second floors have been leased for terms of 99 years from
September 30 1985.
The premises
are freehold and registered at HM Land Registry under title number LN 112535
with Title Absolute.
In 1986 a
repair notice was served by the London Borough of Camden pursuant to section
9(1A) of the Housing Act 1957 (now section 190 of the Housing Act 1985).
On February 16
1988 the premises were sold at public auction by Barnard Marcus for £140,750.
The vendor was Brightwest Ltd and the purchaser was Metropolitan Guarantee Ltd
(‘Metropolitan’). The special conditions under which the premises were sold
disclosed the service of the repair notice and referred to the fact that the
vendor had not served any notice on the tenants of the premises pursuant to the
Act of 1987. Thus, the premises were sold in breach of the landlord’s statutory
duty to give the tenants first refusal.
A description
of each of the five flats was included in the auction contract. The basement
flat was described as having two rooms, kitchen, bathroom/wc and the
third-floor flat as having two rooms, kitchen, bathroom/wc. It subsequently
transpired that the basement flat did not have a bathroom, only a bath in the
kitchen, and the third-floor flat comprised only one room, kitchen and
bathroom/wc.
On March 30
1988 Metropolitan’s solicitors, Barnett Alexander Chart (‘Barnett’) advised the
tenants (presumably all of them, although only the letter to Mrs L Lee, the
tenant of the third-floor flat, has been exhibited in the correspondence) of
the sale, the sale price and the name of the new landlords. In a letter of July
4 1988 to Metropolitan, Mr B Cousins, as nominated person, said that he had
earlier that day served a default notice on Barnett for failure to furnish
information requested under section 11 of the Act.
On the same
day the tenants of the basement, ground and third-floor flats sent to
Metropolitan notices in identical terms as follows:
PURCHASE NOTICE OF 11 BELSIZE CRESCENT,
NW3, UNDER SECTION 12 OF PART I OF LANDLORD AND TENANT ACT 1987
I . . . the tenant of . . . of the above
premises, require you, in the absence of the information requested to be
furnished under section 11 of the said Act, to dispose of to Mr B Cousins, 12
Park End NW3, the estate or interest that was the subject matter of the
disposal referred to in the letter of 6 April 1988 from your Solicitors,
Barnett Alexander Chart, and that the estate or interest and any particular
terms on which the disposal is to be made is to be determined by a Rent
Assessment Committee in accordance with the section 13 of the said Act.
Each notice was signed by the individual
tenant.
Following
subsequent correspondence between the nominated person and Barnett, the
validity of the purchase notices was admitted by Barnett. It was also
subsequently admitted by Moss Kaye & Roy Frank, agents acting on behalf of
Metropolitan, in a letter of November 22 1988 to the tribunal, that the
third-floor flat had been misdescribed and that such misdescription ‘could
render the price at which the tenants can purchase to be different from the
auction price’. The misdescription of the basement flat, which we understand is
also conceded, was referred to by the nominated person in a document before the
tribunal. An application under section 13 of the Act by the nominated person
dated October 3 1988 was made to the tribunal on the appropriate statutory form
in which the tribunal were requested to settle the price payable under section
12 and to settle the terms of the conveyance in addition to the price, the
terms and estate or interest to be disposed of to be in accordance with section
12(3)(b) of the Act. The price which the nominated person considered
payable under section 12 was £79,000.
To complete
the history of the matter: we were informed in documents prepared by the
nominated person that in September 1988 the premises were again put up for
public auction but were withdrawn when the bidding reached £135,500, which was
below the reserve of £141,000.
The hearing
At the
commencement of the hearing we formulated four questions on which we considered
counsel could assist in their submissions to us:
1. Can the tribunal determine a value for the
premises de novo as at February 16 1988?
2. Has the tribunal power to inquire into the
genuineness or otherwise of the auction figure of £140,750 paid on February 16
1988?
3. Is the jurisdiction of the tribunal limited
solely to determining any question arising out of the purchase notices of July
4 1988, excluding the amount of consideration paid?
4. If the answer to 3 is ‘yes’, has the
tribunal power to amend the figure of £140,750 to take account of the admitted
misdescription of the basement and top-floor flats?
Mr Tidmarsh,
counsel for Mr Cousins, submitted that the starting point for construing the
relevant provision of the Act was section 12(1). He accepted that the premises
were premises to which the Act applies and that the former landlord, Brightwest
Ltd, had made a relevant disposal.
The reference
in section 12(1) to ‘the terms on which [the disposal] was made (including
those relating to the consideration payable)’ showed that the tribunal had
jurisdiction to deal with the consideration. Either the use of the words ‘for
any such terms’ in subsection (3)(b) referred back to subsection (1) or
subsection (3)(b) contained an obvious omission. For example, how could
a tribunal in determining a question arising under the subsection deal with the
case where consideration for the sale of the reversion was by the transfer of
shares in an unquoted company unless they had power to carry out their own
valuation? Section 13 did not tell the
tribunal how to determine the terms, but what must be read into the statute was
that the figure the tribunal had to determine was the open market value.
Mr Tidmarsh
also prayed in aid subsections (4)(b) and (6) of section 12. The former
was concerned with the situation where since the original disposal the property
had been subject to an incumbrance which could reduce the consideration payable
to the new landlord, and the latter provided that where there had been an
increase in the value of the reversion owing to any change in
taken into account in the amount of consideration payable to the new landlord
in pursuance of a purchase notice. Mr Tidmarsh submitted it would be absurd if
the tribunal could not carry out a valuation exercise in the circumstances that
might arise under these two subsections.
Mr Tidmarsh’s
answer to questions 1 and 2 was ‘yes’. If this was right, questions 3 and 4 did
not need to be considered.
Mr Reynolds, counsel
for Metropolitan, answered question 1 in the negative but conceded that, under
question 2, a tribunal did have power to embark upon such inquiries. Under
question 3 the tribunal had only limited jurisdiction, not including a general
power of revaluation. He conceded that under question 4, the tribunal would
have power to amend the figure, for example in the circumstances which might
arise under section 12(4)(b) and (6).
Mr Reynolds
outlined the general policy of Part I of the Act. The mischief at which it is
aimed is landlords selling over the heads of their tenants without the tenants’
knowledge. It is contrary to that policy that the tribunal should be given a
roving discretion to require the new landlord who had paid a genuine price to
sell on at less than that figure. If the Act is to have such a confiscatory
effect, one would expect clear words, which are absent.
Section 12(3)(b)
merely gives the tenants an option not to specify any particular terms but to
provide for those terms to be determined by a tribunal. These terms do not
include the question of consideration. Although no guidance is given under
section 13(1) to a tribunal as to how they should carry out their task, if the
tribunal are to have a power of valuation there would have been a clear
valuation formula. With regard to Mr Tidmarsh’s submissions by analogy with
section 12(4)(b) and (6), Mr Reynolds suggested that it was dangerous to
rely on possible anomalies in construing a new and untried Act.
After a short
adjournment to consider counsel’s answers to our questions we gave it as our
opinion that a tribunal did not have any power to determine de novo a
value for the premises. This was subject to further consideration on our
jurisdiction in relation to the other three questions on which, no doubt, the
parties would wish to call evidence.
In the event,
and following a further adjournment, counsel informed us that the parties had
reached agreement that by reason of the misdescriptions in the auction
particulars the purchase price paid at the auction should be abated by £18,250
and counsel asked us to make certain orders as to our jurisdiction (this
concession was made by Mr Reynolds on commercial, not legal, considerations).
We explained that we had not yet arrived at a firm conclusion on the matters
argued other than that on which we had already given a decision, but that we
would issue a full decision with a statement of our reasons incorporating the
agreement reached between the parties.
Decision
We find the
provisions of the Act not only complex but extremely difficult to construe.
However, the purpose of Part I of the Act is clear, which is to give tenants
the right of first refusal when a landlord wishes to dispose of his interest.
The landlord can name his price and the tenants are free to accept or
negotiate. If the negotiations fail, there is nothing in the Act to prevent the
landlord selling to another purchaser, although the price must not be less than
that at which it was offered to the tenants. If he fails to offer the tenants first
refusal, a landlord incurs no penalty and the tenants’ only redress is to serve
on the new landlord a purchase notice requiring him (except as otherwise
provided in Part I of the Act) ‘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)’ (section 12(1)). There
is no provision enabling the tenants to challenge the sale figure or to
negotiate with the new landlord on the price. If the matter rested there, those
words in section 12(1) can only mean what they say, that the requirement is for
the new landlord to sell on to the tenants the interest he purchased from the
previous landlord on the same terms and at the same figure.
Section 12(3)
sets out what the purchase notice may contain. Para (a) covers the
possibility that the property in which the tenants have their interest had been
sold to the new landlord together with other property, a circumstance that does
not arise in this case. However, it is not without significance to note that
the paragraph makes it clear that the new landlord is required to dispose of
his interest ‘on the terms referred to in subsection (1) subject to such
modifications as are necessary or expedient in the circumstances’. This
reference back to subsection (1) seems to make the starting point for
determining the terms of the disposal the terms of the original disposal,
including the consideration then paid.
It is, of
course, possible that when a landlord sells on without giving the tenants first
refusal, the tenants will know no more than that they have a new landlord. They
may know nothing of the sale or the price paid and be quite in the dark as to
what estate or interest has passed under the sale. It seems to us that section
12(3)(b) is intended to deal with such a situation by giving the tenants
an option. They need not specify in the purchase notice what is the estate or
interest the landlord has to dispose of to them, but instead they can merely
ask for the terms of the disposal to be settled by a tribunal. This is
precisely what the purchase notices in this case did. But neither para (a)
nor para (b) qualifies in any way what it is the new landlord has to
dispose of under section 12(1), that is the estate or interest that had been
sold to him on the terms on which it was sold including the consideration
payable. If the consideration is not known or readily ascertainable, as in the
situation premised by Mr Tidmarsh of the sale of the landlord’s interest by way
of the transfer of shares in an unquoted company where their value is in
dispute, it may be the tribunal would have jurisdiction to determine the price,
but that is not this case and we offer no opinion on that question.
Section 13,
which gives the tribunal jurisdiction, has two parts. Subsection (1)(a)
refers to ‘any question arising in relation to any matters specified in the
purchase notice . . .’ and subsection (1)(b) refers to ‘any question
arising for determination in consequence of a provision in a purchase notice
such as is mentioned in section 12(3)(b)’. Thus, in each case one is
driven back to the purchase notice, and the tribunal have no jurisdiction to
determine any matter beyond the scope of such a notice. Sections 12(3) and
13(1) when referring to the original disposal speak of the ‘estate’ or
‘interest’ or ‘the nature of the estate or interest’ or the ‘identity of the
property’ which is to be disposed of by the new landlord. The words ‘any other
term’ in section 13(1)(a) do not seem to us on their own to be capable
of meaning that a tribunal have jurisdiction to value the premises where the
estate or interest to be disposed of is the same as the subject-matter of the
original sale. They can, however, be read so as to include the consideration
payable where the estate or interest has become affected by any incumbrance
under section 12(4)(b) or has increased in value because of change of
circumstances under section 12(6), and we think this is the better
interpretation that is consistent with the intention of the statute.
In every
instance in Part I of the Act, except in sections 12(3) and 13(1) (see sections
5(2), 5(5), 6(3), 7(3), 8(1), 9(2), 11(1) and 12(1)), either references to ‘the
terms’ or ‘other terms’ are qualified to include the consideration payable or
the relevant section makes it clear that they include the consideration
payable. This, of course, is not conclusive that the use of those words without
qualification in sections 12(3) and 13(1) cannot include the consideration, but
we would have thought the draftsman of the Act must be assumed to be consistent
in his drafting. If it were intended to give the tribunal power under section
13 to embark on a valuation exercise de novo, this surely would be made
clear. (Compare the position under Part III of the Act, where the court has
made an acquisition order providing for the nominated person to acquire the
landlord’s interest; there the tribunal clearly do have power to make their own
valuation, because under section 31(2) an application may be made for the
tribunal to determine the consideration payable which they ‘shall do by
determining . . . the amount which . . . that interest might be expected to
realise if sold on the open market . . .’.)
It would be
startling, to say the least in the context of Part I of the Act and the
thinking behind it, if a tribunal were able to embark on such an exercise. If
they did, the result could be remarkable, for a landlord selling his interest
after a genuine arm’s-length negotiation in the open market might find himself
out of pocket because a tribunal took a different view on the value of his
property. This would being a penal element into the statute which, at least so
far as Part I is concerned, it does not appear to have. Clear words would be required
to give it this effect.
However, the
circumstances have arisen in this case where it is conceded that had the
basement and second-floor flats been correctly described the premises would not
have fetched the price they did at the auction. Thus, the estate or interest of
the property to be disposed of is not precisely the same as the estate or
interest which was offered for sale under the original disposal. If that
difference affects the price
that the price should be adjusted. This is certainly implicit in section 12(3)(a)
where the disposal to the new landlord includes an additional property, for it
would be absurd for a tribunal to determine the estate or interest only so far as
it related to the premises occupied by the qualifying tenants without at the
same time being able to apportion the price. But that does not mean that the
tribunal could reassess the original sale figure. That figure, in our view,
should be the starting point from which the tribunal have to work. Thus, we
have no difficulty in accepting that where the estate or interest to be
disposed of is different from that which was disposed of under the original
disposal and that difference has an effect on the price, we have jurisdiction
to adjudicate on that matter, but only as to the amount of the abatement, not
on a fresh valuation.
In view of the
agreement between the parties it is not necessary for us to consider question
2. Nevertheless, it may be helpful to say that we are not convinced that a
tribunal have power to investigate the circumstances surrounding a sale,
whether by auction or otherwise. This seems to us to go well beyond our
jurisdiction under section 13, bearing in mind that the county court has wide
powers under section 52 to determine any question arising under the Act (other
than one given to a tribunal).
We determine
under section 13 of the Act that the estate or interest in 11 Belsize Crescent
to be disposed of by Metropolitan to the nominated person is that estate or
interest as described in the auction particulars under which the sale on
February 16 1988 took place, save that the basement flat should be described as
two rooms, kitchen with bath, wc and the third-floor flat described as one room,
kitchen, bathroom/wc. We further determine that, by reason of those
misdescriptions, the price payable pursuant to the purchase notices of July 4
1988 is £122,500.
We wish to
express our thanks to both counsel for their assistance in this difficult matter.
