Landlord and tenant — Secure tenancy — Housing Act 1985 — Rent review — Whether effect of statutory right to buy to be disregarded — Whether extensive works carried out by tenant improvements to be disregarded under rent review and right to buy provisions
By an agreement for a lease dated
December 21 1984, the appellant held a secure tenancy of a dwelling-house for a
20-year term from August 1 1984 at an initial rent of £3,150, with five-year
rent reviews to a fair and reasonable rent. There was an outstanding rent
review with effect from August 1 1989. The appellant had exercised his right to
buy the property under the Housing Act 1985. Under the agreement the appellant
was liable for a full repairing obligation, the property being in a poor state
of repair when demised to the appellant. With the consent of the respondent
council, the appellant carried out a number of alterations and improvements to
the property, and put it into a proper state of repair. The appellant appealed
the orders made by the judge in the court below on his application for
declarations that, inter alia, the effect of the statutory right to buy
and the extensive works should be disregarded in determining the rent at the
rent review, and that the works were improvements under the right to buy
provisions.
declarations made in the court below varied. The rent must be determined
without regard to the effect of the statutory right to buy. Improvements under
the Housing Act 1985 were given a specific meaning under section 187, and, save
for the items agreed to be improvements, the extensive works carried out by the
tenant were not improvements which should be disregarded in determining the
purchase price or the rent at the rent review.
The following cases are referred to in
this report.
Bates (Thomas) & Son Ltd v Wyndham’s (Lingerie) Ltd
[1981] 1 WLR 505; [1981] 1 All ER 1077; (1980) 41 P&CR 345; [1981] 1 EGLR
91; [1981] EGD 65; 257 EG 381, CA
Brew Bros Ltd v Snax (Ross) Ltd
[1970] 1 QB 612; [1969] 3 WLR 657; [1970] 1 All ER 587; (1969) 20 P&CR 829;
[1969] EGD 1012; 212 EG 281, CA
Ponsford v HMS Aerosols Ltd [1979] AC 63;
[1978] 3 WLR 241; [1978] 2 All ER 837; (1978) 38 P&CR 270; [1978] 2 EGLR
81; [1978] EGD 137; 247 EG 1171, HL
This was an appeal by the plaintiff,
Edward Hicks Dickinson, from orders made by Judge Green in Edmonton County
Court, on the plaintiff’s application for declaratory orders against the
defendants, Enfield Borough Council.
Derek Wood QC and Daphne Romney
(instructed by Malkins) appeared for the appellant; Wayne Clark (instructed by
the solicitor to Enfield London Borough Council) represented the respondents.
Giving the first judgment at the
invitation of Staughton LJ, Millett
LJ said: This appeal raises two questions of law concerning the
rights of the appellant under the Housing Act 1985 as a secure tenant of a
dwelling-house known as ‘The Hollies’, Botany Bay, in the London Borough of
Enfield. The respondents are the local housing authority and are the landlords.
The facts are fully and carefully set out
in the judgment of Judge Green, from whom the appeal is brought, and can be
shortly summarised. The appellant’s tenancy arises under an agreement for lease
dated December 21 1984. The lease was for a term of 20 years from August 1 1984
at an initial rent of £3,150 pa payable by equal quarterly payments in advance
with provision for rent review every five years. No machinery was provided for
the rent review, but it is common ground that the rent should be fixed by the
court at a figure which is fair and reasonable between the parties. There is an
outstanding review of the rent with effect from August 1 1989. The appellant
has exercised his right to buy the property pursuant to the provisions of the
1985 Act. The valuation date for ascertaining the purchase price is February 3
1988.
By the terms of the agreement for lease
the appellant was under a full repairing obligation. He expressly undertook ‘to
put and keep the property and the grounds in tenantable repair to the
satisfaction of the local authority’. The appellant sought and obtained the
consent of the respondents to carry out other works of alteration and
improvement and these, together with the works of repair which were necessary
in order to put the property into repair, were set out in a schedule to the
agreement for lease. As the judge observed, the appellant was contractually
bound to carry out those works in the schedule which were properly categorised
as works of repair. So far as the other works listed in the schedule were concerned,
he had the landlords’ consent to carry them out, but was not obliged to do so.
The appellant carried out all the works
in question. There is an agreed schedule of works which he has undertaken to
the property. They have been variously described as ‘repair’, ‘chiefly repair’,
‘improvement’ and ‘chiefly improvement’. The classification is agreed by the
parties.
The first question concerns the purchase
price to be paid for the freehold reversion. The second concerns the amount of
the rent payable since August 1989 and pending completion of the purchase. The
appellant also appeals against the orders for costs below.
Purchase price
Part V of the Housing Act 1985 (‘the
Act’) confers on secure tenants of dwelling-houses the right to buy the
freehold of their house. The price payable is the amount which under section
127 of the Act is to be taken as the value of the dwelling-house at the
relevant time less a discount to which the purchaser is entitled under the Act.
So far as material section 127(1) provides:
(1) The value of the dwelling house at
the relevant time shall be taken to be the price which at that time it would
realise if sold on the open market by a willing vendor …
(b) disregarding any improvements made by
any of the persons specified in subsection (4) and any failure by any of those
persons to keep the dwelling house in good internal repair.
The persons specified in subsection (4)
include the tenant.
In valuing the dwelling-house, therefore,
the valuer is required to disregard two matters. The first is the existence of
any improvements which the tenant has carried out to the property. This
protects the tenant from having to pay twice over for the improvements, once when
he made them and once by paying an increased price for the freehold. The other
is the tenant’s failure to carry out internal repairs. This protects the
landlord, who is entitled to receive the full value of the property in a state
of good internal repair whether or not the tenant has in fact kept it in that
condition.
Section 127(1)(b) does not distinguish
between improvements which the tenant has carried out voluntarily and those
which he has carried out pursuant to an obligation in that behalf in the tenancy
agreement. It also appears to assume that the tenant is liable for internal,
but not external repairs. No doubt this is because tenants of secure tenancies
are seldom if ever subject to a contractual obligation to effect improvements
and are not normally required to keep the exterior in good repair.
The expression ‘improvements’ is defined
for the purposes of Part V of the Act by section 187. This reads as follows:
‘improvement’ means, in relation to a
dwelling-house, any alteration in, or addition to, the dwelling-house and
includes —
(a) any addition to, or alteration in,
landlord’s fixtures and fittings and any addition or alteration connected with
the provision of services to the dwelling house,
(b) the erection of a wireless or
television aerial, and
(c) the carrying out of external
decoration
The appellant contends that the whole of
the works in the schedule are improvements for the purposes of Part V of the
Act and must be disregarded in arriving at the value of the property. He
advances two separate arguments:
(i) that the word ‘improvements’ in Part
V comprises all works undertaken by the tenant, including mere repairs, which
increase the value of the property;
(ii) the works in the present case were
so extensive that, taken together, they constituted ‘improvements.’
First argument
The appellant submits that, given the
manifest purpose of Part V, any works carried out by the tenant at his expense
which have the effect of increasing the value of the property above that which
it would have had if the property had remained in the condition in which it was
originally let to him must be treated is an ‘improvement’. This construction,
it is submitted, conforms to the ordinary and natural meaning of the word. By
carrying out the works, the tenant ‘improved’ the property; ergo the
works were ‘improvements’. When the property was let to the appellant, it was
in a seriously run down condition and a great deal of work was required to make
it fit, habitable and saleable. Why, he asks rhetorically, should the
respondents reap the benefit of the increase in the value of the property which
has been brought about by the expenditure of his money? Why, in this context,
should it matter whether or not the works would fall within the scope of a
covenant to repair?
In my judgment, this submission ignores
three relevant considerations. First, the statutory disregard is limited to
those works which the tenant has carried out which constitute ‘improvements’.
If the works in question are not ‘improvements’ it is nothing to the point that
they have increased the value of the property. Second, the meaning of the word
‘improvements’ in Part V of the Act is not used in a wide, general or popular
meaning but has the specific meaning given to it by section 187. Third, the
expressions ‘repairs’ and ‘improvements’ have meanings which are well
understood in the context of the law of landlord and tenant where they are
treated as mutually exclusive.
Section 187 contains an exhaustive
definition of the word ‘improvements’ for the purposes of Part V. Except for
the cases specified in paras (a) to (c), which extend the meaning of the word
to cases (such as the carrying out of exterior decoration) which it would not
otherwise include, the word ‘improvements’ means (not ‘includes’)
‘additions or alterations’. Unless the work falls within one of the paragraphs
which extend the meaning of the word, nothing is an ‘improvement’ for the
purposes of Part V unless it is an ‘addition’ or ‘alteration’.
This conforms to the ordinary usage in
the law of landlord and tenant, which draws a distinction between additions and
alterations, on the one hand, and works of repair renewal and decoration, on
the other. The former are ‘improvements’; the latter are not. There is a
substantial body of case law which distinguishes between works of improvement
and works of repair, and which contrasts the one with the other. In my view,
the same dichotomy has been adopted by parliament in Part V of the Act. The
fact that the context is different is neither here nor there. The word
‘improvement’ is not to be given a wide or popular meaning but the meaning
given to it by section 187, the construction of which is to be informed by a
knowledge of the law of landlord and tenant.
Accordingly, I reject the appellant’s
first argument.
Second argument
The appellant argues in the alternative
that as a matter of fact and degree the works which he undertook were so
extensive that they went beyond mere repair and renewal and, viewed as a whole,
constituted an improvement: see Brew Bros Ltd v Snax (Ross) Ltd
[1970] 1 QB 612 at p645, where Phillimore LJ said that it was necessary to have
regard to the work as a whole and not to analyse it item by item.
This is appropriate where the work which
is being considered is made necessary by a particular defect and is undertaken
in order to remedy the defect. In the present case, however, the work consisted
of a large number of unconnected items undertaken in respect of the same
property. There was no single defect which they were intended to remedy; there
were numerous defects which needed to be put right. The works could have been
carried out at different times and over a long and discontinuous period. I do
not accept that the judge should have asked himself whether the effect of the
entirety of the works was substantially to rebuild the property. In my
judgment, he was obliged to examine the constituent items singly in order to
determine their character and his decision that some of them constituted
improvements and some repairs is unassailable.
I have had the advantage of seeing
photographs of the property before and after the works were carried out. It is
right to acknowledge that they have transformed the property. What was formerly
a near ruin is now an attractive and desirable residence. If that were the
decisive test it would be easily satisfied. But with the exception of the items
which are agreed to be improvements there are no alterations or additions. I
would reject the second argument also.
Rent review
Two questions arise in relation to the
operation of the rent review: (i) whether (as the appellant contends) the
valuer should disregard all the works in the agreed schedule in determining the
new rent or only those properly described as improvements; and (ii) whether (as
the respondents contend) the valuer should have regard to the fact that at the
valuation date the appellant was entitled to exercise the right to buy the
reversion.
Improvements
Whether improvements effected by the
tenant are to be disregarded on a rent review is a matter of construction of
the rent review clause. The relevant clause in the present case is exiguous in
the extreme. It was conceded by the landlords at the trial that those items
classified as ‘improvements’ in the agreed schedule are to be disregarded in
reviewing the rent and this remains the position before us.
The appellant’s contention that all the
works specified in the schedule, including items of repair only, fall to be
disregarded on a rent review invokes the provisions of section 101 of the Act
but otherwise raises the same questions as those considered above.
Section 101 provides:
Rent not to be increased on account of
tenant’s improvements.
101.– (1) This section applies where a person
(‘the improving tenant’) who is or was the secure tenant of a dwelling-house
has lawfully made an improvement and has borne the whole or part of its cost …
(2) In determining, at any time whilst
the improving tenant or his qualified successor is a secure tenant of the
dwelling-house, whether or to what extent to increase the rent, the landlord
shall treat the improvement as justifying only such part of an increase which
would otherwise be attributable to the improvement as corresponds to the part
of the cost which was not borne by the tenant (and accordingly as not
justifying an increase if he bore the whole cost).
The judge held that the section does not
apply to a contractual provision for a review of the rent as distinct from a
unilateral variation of the rent chargeable for a periodic tenancy. He reached
this conclusion by a consideration of the provisions of sections 102 and 103 of
the Act. Section 102 provides
(1) The terms of a secure tenancy may be
varied in the following ways, and not otherwise —
(a) by agreement between the landlord and
the tenant;
(b) to the extent that the variation
relates to rent … by the landlord or the tenant in accordance with a provision
in the lease or agreement creating the tenancy, or in an agreement varying it;
(c) in accordance with section 103
(notice of variation of periodic tenancy).
Section 103 allows the terms of a
periodic tenancy to be varied by the landlord by the service of a notice of
variation served on the tenant.
Section 103 applies only to periodic
tenancies. Section 102 applies generally, but makes it clear that except in the
case of a periodic tenancy the only way in which a variation of rent can be
effected is by a specific provision in the tenancy. Strictly speaking, of
course, this is not a variation in the terms of the tenancy; what is
contemplated is an increase in the rent by the operation of the existing terms
of the tenancy without variation.
The question, which is not altogether an
easy one, is whether such an increase comes within section 101. The section
refers to a determination by the landlord whether or to what extent to increase
the rent. This is an appropriate description of the unilateral decision of the
landlord to demand an increase in the rent under a periodic tenancy, but it is
less appropriate to describe the operation of a contractual term allowing for
an increase in the rent. In such a case, the respondents submitted, the
landlords do not make any determination whether or to what extent to increase
the rent. The increase is determined by reference to a pre-set formula in the
tenancy agreement.
I have found this argument attractive,
but in the end I have come to the conclusion that it should be rejected.
Sections 102 and 103 appear under the heading ‘Variation in the terms of secure
tenancy’. Section 101 is placed in a different group of sections under the
heading ‘Repairs and improvements’. They are dealing with different
subject-matters. Sections 102 and 103 deal with the means by which the landlord
can obtain, inter alia, an increase in the rent, and these include the
operation of a contractual provision entitling them to do so. Section 101 deals
with effect which the existence of improvements is to have on the determination
of the rent. In this context, section 101 must be applied generally to the
determination of the amount of the rent by whatever means this is achieved.
This involves reading the words ‘in determining … whether or to what extent to
increase the rent’ as meaning ‘in determining … whether or to what extent to
seek
effect to the procedure involved in the operation of any contractual provision
for rent review. This makes independent valuation necessary only if and so far
as the parties are unable to reach agreement and any such valuation must be
made in accordance with any principles on which they are agreed.
Accordingly, I am of opinion that the
judge was wrong to conclude that section 101 is inapplicable. Its only effect,
however, is to require the improvements carried out by the tenant to be
disregarded in the operation of the rent review provisions; and this has never
been disputed by the respondents. The word ‘improvements’ is defined by section
97(2) and means the same as in section 127(1)(b). The appellant’s contention
that it covers all the works in the agreed schedule fails for the reasons
already given.
Effect of the right to buy
The question here is whether, in fixing
the reviewed rent, the court should take account of the fact that the
appellant, being a secure tenant, has exercised or may in the future exercise a
right to buy the freehold at a discount to the market value.
In Thomas Bates & Son Ltd v Wyndham’s
(Lingerie) Ltd [1981] 1 WLR 505* Buckley LJ said at p517:
*Editor’s note: Also reported at [1981] 1
EGLR 91
… the rent should be such as it would
have been reasonable for these landlords and these tenants to have agreed under
the lease. It would consequently be proper for the arbitrator to take into
account all considerations which would affect the mind of either party in
connection with the negotiation of such a rent, as, for example, past
expenditure by the tenant on improvements …
The judge was inclined to exclude the
existence of the statutory right to buy from consideration in determining the
rent for three reasons. (1) He thought that if the officious bystander had
asked the parties in 1984 whether the existence of the right to buy should
affect the amount of the rent they would have replied: ‘Of course not’. (2) He
suggested that if a lease containing a rent review clause also contained an
option to buy the reversion the existence of the right to buy should not affect
the rent payable on review because the tenant would have given full
consideration for the option when he paid the option price. (3) He considered
that it would have been contrary to the intention of parliament that a tenant
should receive a discount with one hand when exercising his right to buy and
have to pay it back with the other when having his rent determined. But in the
end the judge was persuaded that if the existence of the right to buy was
relevant to the determination of the rent, which he thought doubtful, it could
not be excluded.
The existence of a right to buy the
reversion at a discount to the market price must make the tenancy more
attractive to a prospective tenant and less attractive to the landlord, thus
inducing the tenant to offer and the landlord to demand more by way of rent,
the one in order to obtain the right and the other in order to compensate for
the loss it would suffer on the exercise of the right. It must therefore be a
relevant consideration in determining the market rent. But the rent
review clause in the present case does not require the market rent to be
determined, but the rent which it is reasonable for the tenant to pay
and the landlord to receive in all the circumstances.
The distinction between the two tests
appears clearly in the judgment of Buckley LJ in Thomas Bates & Son Ltd
v Wyndham’s (Lingerie) Ltd and from a comparison of the speeches of the
majority and the minority of the House of Lords in Ponsford v HMS
Aerosols Ltd [1979] AC 63*. Both cases were concerned with improvements
which the tenant had carried out. They decide: (i) that, whether the rent is to
be fixed by reference to the market rent or by reference to what would be
reasonable as between the parties, prima facie the existence of any
improvements must be taken into account; (ii) the fact that they have been
effected by the tenant and at his expense must be taken into account in the
latter case but not in the former; and (iii) the effect of taking this last
factor into account is that they must be disregarded in determining the rent:
see [1979] AC at pp74B–D, 80G–H.
*Editor’s note: Also reported at [1978] 2
EGLR 81
By a parity of reasoning, in my opinion,
the court must take into account not merely the existence of the right to buy
at a discount but the fact that the right has been conferred on secure tenants
by parliament with the deliberate purpose of inducing them to buy their homes
and take them out of the public sector. Whether parliament can have intended
the landlord to recoup the discount by obtaining an increased rent by reference
to its existence is not strictly material, since whether it is entitled to do
so depends on the true construction of the tenancy agreement and not of Part V
of the Act. But in considering what it is reasonable for the landlord to demand
and for the tenant to pay the nature and purpose of the right to buy are highly
material. Given the purpose of the statute, it would not be reasonable (a) for
the landlord to take advantage of parliament’s generosity to the tenant in
order to obtain an increased rent for itself or (b) for the tenant to be
required to pay an increased rent while he continued to occupy public sector
housing because he had been offered a monetary inducement to leave it.
I do not consider that the existence of
the right to acquire the freehold can be separated from the right to acquire it
at a discount. Accordingly, differing from the judge in this respect, I
conclude that the rent should be determined without regard to the statutory
right to buy.
Order for costs below
There were three applications before the
judge: (1) an application by the appellant for declarations in connection with
the appellant’s right to buy; (2) an application by the respondents for
declarations in connection with the rent review; (3) an application by the
appellant to acquire additional land not included in the tenancy agreement.
The principal issue in relation to the
appellant’s right to buy was concerned with the extent of the improvements to
be disregarded. The respondents won on this point and has held the decision in
this court. The respondents won every issue below in relation to the rent
review, though they have failed to maintain their position in relation to the
effect on the rent of the right to buy in this court. It was agreed that the
assessment of the rent should be adjourned to be determined by the court at a
later date. The appellant’s application to acquire additional land was
dismissed.
The judge ordered the appellant to pay
the respondents’ costs of all three applications. The appellant succeeded in
extracting some concessions (as did the respondents) at an early stage of the
hearing but, these apart, he failed in every case. In the circumstances I am
unable to discern any error in principle which would entitle this court to
intervene. It is submitted that the judge overlooked the fact that the
proceedings were interlocutory in nature and were designed to obtain
declarations which would guide the court in fixing the purchase price and the
reviewed rent. It is said that there is as yet no ‘event’ by reference to which
the order for costs can be made, and that the judge should not have made any
order for costs until the final determination of the figures.
I do not accept this. The object of the
applications was to obtain rulings which would assist in the determination of
the rent, but the applications were discrete applications made necessary by the
parties’ inability to agree on particular issues. The resolution of each issue
was a discrete event on which an order for costs could properly be made.
Conclusion
I would vary the judge’s order by
substituting a declaration that the appellant’s statutory right to buy the
freehold should not be taken into account in the determination of the reviewed
rent. Subject thereto I would dismiss the appeal.
Agreeing, Hobhouse LJ said: I agree with the order proposed by
Millett LJ and the reasons which he has given in his judgment.
I agree with Millett LJ that the
statutory right to buy (at a discount) is irrelevant to the fixing of a reasonable
rent. I do not agree that, even theoretically, it is open to a valuer when
assessing the reasonable rent to take into account that the tenant has a
statutory right to buy. It
the judge’s order so as to add a declaration that the appellant’s statutory
right should not be taken into account in the determination of the reviewed
rent.
Also agreeing, Staughton LJ said: I agree with the judgment of Millett
LJ on the questions of (1) the purchase price, and (3) costs in the court
below. I differ from his reasoning on (2) the rent review, but I doubt whether
this has any material effect on the result.
Millett LJ has explained the argument
that section 101 does not apply to a contractual provision for rent review, but
only to the power of the landlord to vary the rent under a periodic tenancy
unilaterally, by virtue of section 103. I not only find the argument
attractive; I agree with it. In my judgment, the words in section 101
in determining … whether or not to
increase the rent
refer to a unilateral decision of the
landlord, and not to a situation where an increase can only be achieved by
agreement. The different headings — repairs and improvements for sections 96 to
101 and variation of terms of tenancy for sections 102 to 103 –do not deflect
me from that view. Section 101 is concerned with improvements; but it is
also concerned with variation of the terms of a tenancy.
It is still accepted that those items
classified as improvements in the agreed schedule must be disregarded in the
rent review, even if (as I hold) section 101 is not applicable.
As to the effect of the right to buy on
ascertaining the new rent, it seems to me that theoretically it should be taken
into account, but in practice it is unlikely to have any significant effect. We
are not concerned with a new tenancy, or with whether a higher rent would be
appropriate because the right to buy may become available at some time in the
future. The rent review date in this case is August 1 1989, but the valuation
date for the right to buy is February 3 1988. The right had already been
invoked when the rent review date arrived. It was then very likely, as both
parties knew, that the tenancy would come to an end before long, although they
could not tell how long. I can see no reason why any different rent should be
reasonable for the landlord to receive or the tenant to pay on that account. To
claw back the discount which parliament had allowed, if it could be achieved
when the remainder of the term was uncertain but likely to be short, seems to
me unreasonable.
I agree with the decision of Millett LJ
as to the result; but in point of form I would simply dismiss this appeal.
Appeal dismissed.