Price payable for landlord’s leasehold interest in three-storey, semi-detached Huddersfield house converted into two self-contained flats — Each flat held on a regulated tenancy — Original disposal a sale at £45,000 by vendors who had purchased at auction some 18 months earlier for £39,500 — New landlord bought under misapprehension that he could obtain vacant possession — Valid purchase notice served by tenants under s 12(3)(b) — Tenants contended for price of £25,000 — Decision in Cousins v Metropolitan Guarantee adopted
sought to distinguish Cousins, submitting that the tribunal had jurisdiction to
investigate the surrounding circumstances of the original disposal in an
appropriate case and that the present case was an appropriate one — Unlike
Cousins the price had not been set at auction and tenants’ expert advice was
that property worth only £25,000 with protected tenants in possession —
Landlord relied strongly on Cousins for general principle that there was no
power to investigate the circumstances surrounding the sale, whether at auction
or otherwise
occasions, tribunal comment, the legislation proved difficult to interpret —
Crux of the matter was the extent, if at all, to which the tribunal have the
power to determine the price payable when the purchase notice served pursuant
to s 12(3)(b) provides for the ‘terms’ on which disposal is to be made to be
determined by tribunal — There were two possible constructions of s 12
provisions: (1) s 12(3)(b) read in isolation or in conjunction with s 13(1)(b)
would not imply any limitation on a tribunal’s power to substitute their own de
novo valuation as decided in Cousins; (2) s 12(1) provides for the tenants’ rights
to buy and lays down the limits within which this right can be exercised
whether the purchase notice is served under s 12(1) itself or under s 12(3)(b)
— On balance, tribunal decided to adopt latter construction, ie the Cousins
view — Tribunal consider present case by no means the typical case envisaged by
those enacting the legislation
different situations which had arisen for argument or decision identified by
tribunal as possible instances where they might be called upon to investigate
the surrounding circumstances — Four of these not applicable here — Even if the
tribunal were convinced that the fifth situation, the present case, provided
such an instance (which they were not), the evidence as to market value did not
lead them to conclude that the price of £45,000 should be disturbed
experts gave valuations on an investment basis of around £25,000-£30,000 — But
tribunal adopted wording of tribunal in 30 Upperton Gardens Management case:
‘Whatever might be said, the best evidence of the value of anything is what it
will fetch in the open market’ — As in that case, there was evidence in present
case of an auction price and to view expert evidence without taking that into
account was not appropriate — It was clear in auction conditions that the sale
was subject to existing protected tenancies — ‘The market’ in the particular
area could reasonably be viewed as paying more than traditional investment
value for properties such as subject property — Even if tribunal entitled to
look at surrounding circumstances because of landlord’s mistake, the price of
£45,000 was not out of line with open market value
of a disposal under a purchase notice pursuant to s 12(3)(b) to do other
than ascertain the consideration payable under the original disposal and
determine that to be the price payable — Determination, accordingly, of £45,000
The following
cases are referred to in this report.
Cousins v Metropolitan Guarantee Ltd [1989] 2 EGLR 223; [1989] 31 EG
56, [1989] 2 EGLR 116, LVT
30
Upperton Gardens Management Ltd v Akano [1990]
2 EGLR 232; [1990] 45 EG 121 & [1990] 46 EG 131
Wilkins v Horrowitz [1990] 2 EGLR 217; [1990] 29 EG 57
Andrew Beck
(of Walker Morris Scott Turnbull, of Leeds) appeared for the applicants; James
Behrens (instructed by Fowler & Crossley, of Huddersfield) appeared for the
respondent.
Giving their
decision, THE TRIBUNAL said: This is a decision upon an application to a
leasehold valuation tribunal (‘the tribunal’) under section 13 of the Landlord
and Tenant Act 1987 (‘the Act’) by the applicants, being the nominated persons
within the meaning of section 13, for the determination of the price to be paid
for, and the other terms of the conveyance of, the estate or interest of the
respondent landlord [Mahommed Saddiq] in the land and premises known as 83 New
North Road, Huddersfield (the ‘subject premises’), consequent upon the service
upon the respondent of a purchase notice under section 12 of the Act.
The
background
The subject
premises consist of a three-storey Victorian semi-detached house with basement,
the whole being converted into two self-contained flats. The tenants of these
flats are respectively Mr M Gregory and Mr F Rahimi, each of them holding under
a regulated tenancy. The landlord’s title is leasehold, deriving from a
999-year lease taking effect from March 25 1919 at a ground rent of £8 pa, and
a good leasehold title was first registered at HM Land Registry, title no
WYK430305, on December 2 1988, consequent upon the purchase at auction of the
premises on October 18 1988 by Mrs Jasbir Kaur for £39,500. On November 27 1989
the respondent entered into a written contract to purchase the premises for
£45,000, and the transfer to him was executed by Mrs Kaur on March 30 1990, the
respondent being registered as proprietor on May 11 1990.
On March 21
1990 Messrs Gregory and Rahimi served a notice upon the respondent’s then
solicitors under section 11 of the Act requiring information about this
transaction. By letters dated April 5 and 25 1990, they were informed that the
property was held under a 999-year lease from March 25 1919, that formal
completion took place on March 30 1990 and that the price was £45,000.
On or about
June 11 1990 Messrs Gregory and Rahimi served a
interest and the terms of the disposal be determined by a rent assessment
committee under section 13 of the Act (that is, constituted as a leasehold
valuation tribunal) and nominating themselves as the persons to whom disposal
should be made. The application was made to the tribunal on July 13 1990. The
sum stated to be paid by the landlord was £45,000. To the question: ‘What price
do you consider payable under the Act?’
the applicants answered: ‘£25,000.’
At the hearing
the following points were agreed by the parties:
(i) the subject premises were premises to which
Part I of the Act applied;
(ii) the tenants of the subject premises were
qualifying tenants under section 3 of the Act, and for all purposes formed the
‘requisite majority’ of such tenants, and they properly nominated themselves as
the nominated person(s) under sections 12 and 13;
(iii) the transfer of the leasehold interest on
March 30 1990 to the respondent was a relevant disposal under section 4 by a
landlord as defined by section 2;
(iv) that disposal was made in breach of section
1, in that no prior notice complying with the terms of section 5 was given to
the qualifying tenants (although certain informal negotiations took place, as
outlined below);
(v) the applicants served a valid purchase notice
under section 12 in good time and in due form upon the respondent.
The tribunal
conducted an inspection of the exterior and interior of the premises prior to
the hearing. At the hearing the applicants were represented by their solicitor
Mr Beck and the respondent by Mr Behrens of counsel.
The
hearing
Mr Beck
indicated that the crucial issue was the basis upon which the tribunal could
deal with the question of the price payable. He put forward three principal
contentions:
First, the
tribunal had jurisdiction to look at the circumstances of the original disposal
in an appropriate case. Second, the tribunal had jurisdiction to consider the
genuineness of the transaction which formed the original disposal. Third, the
tribunal had jurisdiction under section 12(4)(b) to look at the effect
of an incumbrance upon the price payable, and that should be done here.
He recognised
that the decision of another such tribunal in London in Cousins v Metropolitan
Guarantee Ltd [1989] 2 EGLR 223* did not assist him on the first two
points, but he sought to distinguish the present case. In Cousins four
questions were put to counsel, but consequent upon the ruling of the tribunal
upon the first of them, that it had no power to determine a value for the
premises de novo, the parties reached agreement and further argument was
not heard.
*Editor’s
note: Also reported at [1989] 31 EG 56, [1989] 2 EGLR 116.
His argument
that this was an appropriate case to look at the circumstances was this: he
could accept that the policy of the legislation, as reflected in Cousins,
was that the tribunal should not have discretion to substitute its own
valuation and compel the new landlord who had paid a genuine price to sell for
less. This, he contended, was because the practical effect of the whole scheme
of the legislation was that a landlord wishing to sell would normally receive
the open market investment value of the property, either from the tenants or
from a purchaser, provided that sections 5 to 10 had been complied with. But
the tenants had more than simply a ‘right of first refusal’: they had the right
to compel a sale when their right of first refusal had been infringed. In this
latter situation they should not be in any worse situation than if the proper
procedure had been followed, involving offer, rejection, counter offer etc;
such a procedure would normally result in a sale at the true open market value.
Where the tenants had not had such an opportunity, they should not simply be
presented with a fait accompli where the new landlord had made a bad
bargain, paying twice as much as the property was worth; the burden of that bad
bargain should fall rather upon him — he was more likely to have other avenues
to recoup his loss. He would distinguish Cousins, where the price had
been set at auction; here the tenants had not had the protection of an auction
and their expert advice was that the property was worth only £25,000 with
tenants in possession. He also pointed to the form of the purchase notice and
application, which clearly envisaged the question of price being open to
argument, and questioned the need for the tribunal to be set up to include an
expert in valuation if no such function existed.
With regard to
genuineness, he submitted that this was within the tribunal’s power to
investigate, as counsel had suggested in Cousins. Here the tenants were
in difficulty: the only evidence as to price which they had seen was an open
contract in the following terms:
I Mahommed
Saddiq of 176 Trinity Street, Huddersfield agree to buy 83 New North Road,
Huddersfield from Mr Kuldip Singh for the sum of £45,000. I agree to pay a
£5,000 non-returnable deposit in case I fail to complete the deal within 3
months the deposit is non-refundable. The deal is subject to me receiving a
satisfactory mortgage at current martgage (sic) rates on 176 Trinity
Street, Huddersfield. The house is sold with sitting tenants and in its present
condition of which I am fully aware.
I Kulbir
Singh of 23 Greyfriars Avenue, Deighton agree to sell 83 New North Road to Mr
Mohammed Saddiq for the sum of £45,000 and agree to accept a £5,000 deposit and
agree that if I fail to complete the deal then I shall return the deposit in
full as well as pay the purchaser £5,000 compensation. A period of 3 months is
to be allowed for the completion.
This contract
was dated November 27 1989 and was signed by Mr Singh and Mr Saddiq with K S
Uppal of 122 Lockwood Road, Huddersfield, named as witness. The registered
proprietor at that time was Mrs Kaur. The respondent had not produced a copy of
the transfer to him or any other evidence.
With regard to
section 12(4)(b), he produced a repair notice, served under section 190
of the Housing Act 1985 upon Mrs Kaur in June 1990, requiring certain repair
works listed in the schedule to be carried out by a specified date. He
submitted that this was an incumbrance within the meaning of the section and
that the burden of the repairs would run with the land and fall upon the
tenants upon purchase, so that this should be taken into account in determining
a price.
Mr Behrens
responded to Mr Beck’s first argument by rejecting the general proposition that
the purpose and effect of the Act was to allow the tenants to purchase at
market value. The Act gave no more than a right of first refusal and the whole
core was to be found in section 6(3), which allowed the landlord, where the
tenants were not prepared to agree to his price, to dispose to such person as
he thought fit provided that the consideration required was not less than that
specified in the offer notice. This principle should be borne in mind even
where there was a breach, since the Act was not intended to have penal
consequences: the burden of the bad bargain did not fall upon the tenants, as
they were not forced to purchase at all, whereas it would be unfair on the new
landlord to make him suffer a loss. The limit of the tenants’ rights was quite
clear in section 12(1): they could require the new landlord ‘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)’. Clearly there were circumstances where adjustments could be made, eg
under section 12(3)(a), and this accounted for the wording on the form
and the use of valuation expertise on the tribunal. In any case, the wording on
the form should not be used as an aid to the construction of the words of the
statute itself. He relied strongly upon Cousins, which he cited at
length, for the general principle that there was no power to investigate the
circumstances surrounding the sale, whether at auction or otherwise. In any
case, he pointed out that the subject premises had been sold at auction as
recently as October 1988 for £39,500.
On the
question of genuineness, he produced copy correspondence passing between
solicitors acting for Mrs Kaur and the respondent, in support of the contention
that the respondent had indeed paid £45,000 for the property. After a short
adjournment to allow Mr Beck to consider the effect of these letters, Mr Beck
agreed that he was in no position to contradict the inference that the
transaction had been a genuine arm’s-length sale for £45,000. (It should be
mentioned here that although the name of Mr Singh appeared at various points in
the correspondence and he was clearly involved with Mrs Kaur in both the
purchase and sale of the property, only Mrs Kaur was registered as proprietor
and she alone has been treated in these proceedings as the landlord making the
original disposal.)
On section
12(4)(b), Mr Behrens pointed out that the repair notice produced was
dated before the disposal, whereas section 12(4) referred to the property
becoming subject to an incumbrance ‘at any time since the original disposal’.
Mr Beck responded that the local authority had subsequently served notice on
the respondent seeking details of ownership of the land, under section 16 of
the Local Government (Miscellaneous Provisions) Act 1976, but he conceded that
no new repair notice had been served since the disposal.
The tribunal
at this point drew attention to another reported decision upon the Act, 30
Upperton Gardens Management Ltd v
again emphasised the different approach to be adopted where the disposal had
been by auction, but adopted it as authority for the view that such
circumstances could be investigated. Mr Behrens did not accept such a
distinction in the present case, where there was ample evidence of what the
market would pay.
*Editor’s
note: Also reported at [1990] 2 EGLR 232.
In view of the
complexity of the legislation, the tribunal wished to give further
consideration to the question of the extent of its powers to investigate the
circumstances of the disposal in determining the price to be paid. However, it
was agreed by the parties that it would be preferable to take evidence as to
valuation at this stage, de bene esse, rather than adjourning and
reconvening at a later date.
For the
applicants, Mr M J Sellers FSVA, with 20 years’ experience in selling
properties in the area, produced his written report and gave oral evidence as
to his knowledge of the property. He had first visited it in June 1988 to carry
out a building society valuation. Although the property had been in a slightly
better condition then, it was sadly neglected in a number of major areas which
he outlined. He had advised then that any mortgage offer should be conditional
upon a structural engineer’s report, plus investigation and treatment of the
woodworm, dry rot and wet rot, and his valuation was then £22,000. His only
explanation for the figure of £39,500 reached at auction shortly afterwards was
on the basis that the purchaser thought that vacant possession was available.
When he revisited for the present valuation in July 1990 he found few, if any,
repairs had been carried out, and his valuation, taking into account the need
for those major repairs, the fact that it was a listed building in a
conservation area, and that it was occupied by two protected tenants on
registered rents, was £25,000. That the respondent had paid £45,000 was beyond
his comprehension, in terms of return on capital investment and the amount of
repairs needed. In his view, the presence of the sitting tenants was the major
factor in keeping the valuation down, in this case, to about 50% of the vacant
possession value. The price paid by the respondent would be a fair market price
with vacant possession, and the market had not really moved significantly since
November 1989. He disagreed with Mr Newton, the respondent’s expert, who valued
it with vacant possession at £60,000, in view of the scale of repairs required
on a listed building; however, he would not disagree with Mr Newton’s
investment valuation of £27,150.
Cross-examined,
he said that, as an investment, one would take the rent (plus some element to
allow for imminent re-registration) less repairs, insurance and management —
say £3,000 pa — and a multiplier of somewhere between five and eight years’
purchase: recent sales of investment property at auction had showed such a
variation. He agreed that the presence of sitting tenants had a variable
effect, depending upon age and circumstances, but here there were two fairly
young tenants who had not indicated any intention to move. He agreed that it
was possible that an auction price of £39,500 implied the existence of another
underbidder prepared to go quite high (or a reserve set at that level). He
accepted that Bramleys, an established and qualified local firm, might, as
alleged, have valued the property at £50,000 in May 1989, but he questioned the
basis upon which the valuation was requested. He also suggested that the
tenants, if they offered £44,000 to Mrs Kaur, might have been using the vacant
possession approach. Questioned by the tribunal, he rejected the possibility
that the price obtained reflected a possibility of conversion to offices,
because in his view there was not the car-parking space required by the
planners for use as either office or bed-sit accommodation.
At this point
the tribunal raised the question of the appropriate valuation date: it was
agreed that the relevant time should be that of the original disposal, not the
hearing date, in accordance with the general wording of section 12, but what
was the disposal date? Was it the date
of the contract, the execution of the transfer or the registration of the new
proprietor? It was agreed, in view of
the earlier decision, upon the status of a contract in Wilkins v Horrowitz
[1990] 29 EG 57† , and the general law as to the position between
completion and registration, that the appropriate date to take, if valuation
were to be permissible, was the date of execution of the transfer, ie March 30
1990.
† Editor’s
note: Also reported at [1990] 2 EGLR 217.
Mr Gregory,
the tenant of the first-floor flat, then gave evidence as to the circumstances
in which the tenants had made offers to purchase. He agreed that in May 1989
they had offered £44,000 as a result of a meeting with Mr Uppal, the estate
agent who was seeking to achieve a resolution of the disputes which had arisen
between them and Mrs Kaur and Mr Singh. That offer was made without
professional advice or a mortgage application, and was made because they were
prepared to buy at whatever price to end the harassment they were suffering. He
agreed also that on June 5 1989 an offer of £40,000 was made by their solicitors,
again without professional valuation advice, which offer was rejected in a
letter from Mrs Kaur and Mr Singh’s solicitors on June 8 stating that their
clients ‘will not accept less than £50,000’. He had also been told in May 1989
that Bramleys had valued it at £50,000, but that must have been without
internal inspection, since only he and Mr Rahimi had the keys to allow access.
He denied receiving any letter from Mr Uppal in September 1989 stating that the
asking price was £50,000 and inviting their highest offer, and said that at no
stage was he aware that the property was actually being marketed.
The valuation
evidence for the respondent consisted of the written report and accompanying
letter of Mr Robert Newton FRICS FAAV, written in October 1990, and the oral
evidence below. On Friday January 11 1991 the respondent had sought a
postponement of the hearing because Mr Newton was unable to attend on the 15th;
this was opposed by the applicants. The tribunal did not accede to this
request, having regard to the grounds laid down in regulation 8(1) of the Rent
Assessment Committee (England and Wales) (Leasehold Valuation Tribunal)
Regulations 1981. However, Mr Beck agreed that Mr Newton’s report and letter
should form part of the valuation evidence, albeit untested by
cross-examination. Mr Newton’s conclusions were that as an investment property
its value was in the region of £27,150 (based upon an annual return of £2,715),
that the vacant possession value in its present condition was about £60,000,
and that a negotiated figure for a purchase by sitting tenants would have been
somewhere midway beween these figures, say £43,575.
Mr Uppal,
owner of the Parade Estate Agency with offices in Huddersfield and Leeds, gave
evidence that he had been involved when Mr Singh and Mrs Kaur were having
difficulty with the tenants and had arranged a meeting in May 1989. Mr Gregory
seemed willing to make an offer at that stage but for substantially less than
£50,000 and it was not acceptable. He then received instructions to market the
property in September 1989, and he produced the particulars. The property was
described as containing two flats ‘let on an unfurnished registered basis’,
details being given of the rents and registration dates. The price sought was
offers around £50,000 ‘Subject to tenancy’. He had thought that this was the
best price obtainable. Although he understood the logic of the investment
calculation, people were in fact willing to pay somewhat more for the
possibility that the tenants might vacate. At least two other parties had been
interested at that price but had not been able to proceed because the tenants
would not allow access for inspection. He himself had got in only by pretending
to take a builder round. The respondent had first indicated an interest about
November 15 and the contract was signed for sale at £45,000 on November 27. If
the property were offered with vacant possession he would look for at least
£60,000. The adjoining property had been offered recently at £130,000, and even
though that was in a good state of repair and had been converted to bed-sits on
assured lettings the gap between the two could not be so enormous. He insisted
that he had contacted the tenants in September about buying the property, as
that would always be the easiest way to achieve a sale.
In
cross-examination, he said that he had five years’ experience of the
Huddersfield market and that he had sold commercial property all over
Yorkshire. If he had simply marketed it at the investment valuation of £25,000
there would have been a stampede in his office. He agreed that he had no
evidence that the tenants might move out, but over the last five years he had
sold about half a dozen properties subject to tenancies and there had always
been the ‘hope element’ over and above the investment formula.
The
respondent, whose command of English is somewhat limited, then gave evidence
that he had been looking for a house to move into with his wife and two
children, as he was living in rented property. He went to various estate
agencies including Mr Uppal’s, and went to look round this property with Mr
Uppal. The tenants showed him round the inside of both flats, Mr Uppal having
introduced him as a builder. He and his wife decided to offer £45,000. They
felt there was no need to seek valuation advice, as it was in quite a good
state inside and was quite big; they were surprised the price was not higher.
He was aware that the tenants were there, but he thought that he would
be able to take them to court through solicitors and get them out. He first saw
a solicitor after he had signed the contract at Mr Uppal’s office, and the
solicitor told him that he could not remove the tenants. However, he went ahead
with the purchase because under the contract he would have lost his £5,000
non-refundable deposit. He stated that the solicitor did not tell him that the
tenants had a right to buy from him.
Mr Behrens’
submissions as to the valuation basis were these: first, one must take into
account what actually happened. He accepted that two professionals said that
valuation should be upon an investment basis, say £25,000 to £30,000. But it
was known here that it was sold at auction in October 1988 for £39,500, which
was good evidence of market value. It was possible that Mrs Kaur and Mr Singh
had not realised about the sitting tenants, but there was no evidence about
that and the contract on that occasion, which he produced, clearly stated that
the property was sold subject to the tenancies. Bramleys had valued it at
£50,000, and there was no evidence that that was on the wrong basis. There was
interest expressed by others besides the respondent, and the tenants themselves
had offered more. Finally, it actually sold for £45,000. All this surely
amounted to good evidence as to the actual market value, and, therefore, he
contended that the appropriate market value was what was actually paid.
Second, there
was nothing in the Act to say that, if the tribunal embarked upon the
determination of the price to be paid, this must be at the market value. In
view of the fact that the tenants were themselves prepared to pay £40,000 to
£44,000, it would be fair to both sides, taking all the circumstances into
account, to insert such a figure so as to ensure that they did not receive a
windfall profit at the expense of the landlord.
Mr Beck argued
that the tribunal should proceed upon the basis of the market value and the
best evidence of that was the valuation evidence of the professional valuers,
Mr Sellers and Mr Newton, in preference to Mr Uppal’s views. The only person as
to whom there was clear evidence of being interested in the property was the
respondent, who had bought under a misapprehension about the status of the
tenants, and the fact that he was willing to pay £45,000 was, therefore,
irrelevant as to value.
The tribunal
then considered how to deal with the question of the other terms of the
conveyance which it had been requested to settle. Mr Beck said that, although
one would normally expect the terms to be the same as those of the original
disposal, he had not been in a position to propose that in the purchase notice,
since he had not had sight of anything other than the very brief and unhelpful
open contract and the office copy of the entry on the register. During the
course of the hearing, various documents had been produced, including the
transfer, the original lease, and the formal contract entered into pursuant to
the auction sale in October 1988. He did not feel in a position to agree the
terms immediately, but he was hopeful that, if the tribunal gave its
determination as to price, the parties would be able to agree the other terms
without the need to return to the tribunal.
The tribunal
agreed to this general course of action and ruled that it would give its
interim determination as to price in due course to the parties, which
determination could be the subject of an appeal to the Lands Tribunal; if the
parties were not able to agree the other terms within a period of 14 days after
the expiry of the time allowed for lodging notice of appeal, no such notice
having been lodged, either party could apply for the tribunal to reconvene to
make its determination thereon. If an appeal upon the interim determination was
made, the tribunal would, subject to any directions to the parties by the Lands
Tribunal, reconvene on the application of either party if terms could not be
agreed after disposal of the appeal.
The
decision
This tribunal
has considered very carefully the effect of the legislation with reference to
the price to be paid by the applicants in purchasing the subject premises, such
right to purchase clearly being exercisable in this case. As on other
occasions, the legislation has proved difficult to interpret and we are
grateful for the assistance of those who appeared for the parties.
The crux of
the matter is the extent, if at all, to which the tribunal has the power to
determine the price payable when the purchase notice served pursuant to section
12(3)(b) of the Act provides for the ‘terms’ upon which the disposal by the new
landlord is to be made to be determined by the tribunal. Mr Beck’s first and
principal submission, strongly opposed by Mr Behrens, was that the tribunal has
wide power in this regard. He also made two more limited submissions which can
here be disposed of at the outset quite briefly:
First, the
question of the genuineness of the price paid upon the original disposal: in
view of the evidence produced at the hearing, Mr Beck did not feel in a
position to pursue this point. Nor do we, save to comment that, had a live
issue emerged, we would have considered very carefully whether this was
something into which we should inquire, involving as it might have done
allegations of bad faith, or whether the proper course was for the matter to be
adjourned for determination of this question under the more formal process of
the county court. There being no such issue here, we are satisfied that £45,000
was the price actually paid upon the original disposal.
Second, the
effect of the repair notice under section 12(4)(b): we would certainly be of
the opinion that such a notice which has been served and become operative under
section 190 of the Housing Act 1985 could constitute an incumbrance,
particularly in view of the effect of section 190(5), added under section 130
of the Housing Act 1988, which provides for it to be a local land charge.
However, the only repair notice here was served and became operative before the
original disposal and therefore section 12(4) is not applicable thereto.
Returning to
the principal argument, Mr Beck’s contention was not that in all cases the
tribunal has power to put its own valuation upon the property and order
disposal at that price, but that in what for present purposes we might label an
appropriate case the tribunal should go into the circumstances surrounding a disposal
when the price paid was completely out of line with what an expert valuation of
the open market price would indicate and substitute that expert valuation.
However, we have given some consideration to the broader approach, because we
have felt it right to form our own view as to the correct basis for the
exercise of our jurisdiction and because arguments about this and the narrower
approach are inextricably linked.
Much argument
centred on Cousins and its status in relation to the present case.
Before considering the substantive arguments it might be helpful to say this:
although the decision of another leasehold valuation tribunal is not as such
binding upon us (and therefore it is not perhaps of such crucial importance to
identify what could strictly be regarded as the ratio decidendi and obiter
dicta), where we have a decision reached after careful argument and
discussion, and not dissented from, so far as we are aware, by any tribunal
before whom this question has arisen, we would not readily adopt a different
approach. Cousins clearly decided that the tribunal does not have the
power to substitute its own valuation but must proceed upon the basis of the
price actually paid (with possible exceptions to be dealt with further below).
This conclusion was arrived at partly on a close reading of the various
statutory provisions and partly on the perceived policy of the Act. We would
make the following observations.
A reading of
section 12(3)(b) in isolation, or indeed in conjunction with section 13(1)(b),
would not imply that there is any such limitation upon the tribunal’s powers in
determining the terms of the disposal. However, the alternative reasoning is
that section 12(1) does not simply lay down one possible form of purchase
notice (ie where the terms are known, with section 12(3)(b) providing for the
other form as used here) but is the fundamental provision which provides for
the tenants’ right to buy and lays down the limits within which this right can
be exercised, whether the purchase notice invoking the tribunal’s assistance is
one served under section 12(1) itself or under section 12(3)(b). If this view
(the Cousins view) be accepted, then clearly the price is to be ‘the
consideration payable’ under the original disposal, and the tribunal has no general
jurisdiction to modify that particular term by substituting its own de novo valuation.
The provisions are by no means easy to construe, but on balance we had decided
to adopt the latter construction.
Consideration
of the policy of the legislation does not yield clear guidance in the present
case. We accept that the Act should not readily be construed to have a penal
effect upon a landlord who has sold after genuine negotiation in the open
market by making him sell at a lower valuation. (It may be of interest in this
regard to note that section 12(6) prevents the tenants from taking a ‘windfall’
profit where the property has increased in monetary value owing to a change in
circumstances, but there is no corresponding provision for reduction, other than
for an actual charge or incumbrance under subsection (4).)
On the other
hand, where the property has been sold in clear contravention of section 1 of
the Act and at a price which is higher
the tenants be presented with a ‘take it or leave it’ choice? We recognise, however, in that instance that
had the landlord followed the correct statutory procedures and the tenants not
proceeded upon his final offer he would be able to sell within 12 months, under
section 8(3), at a higher price (but not lower) if he could find a willing
purchaser.
We might
comment here that although we have not regarded it as a consideration which
should properly influence our conclusions, we think the present case is by no
means the typical case envisaged by those enacting this legislation. Here we
have a property containing solely these two tenanted flats. If we are to accept
the experts’ view, the price which a seller could expect to receive on the open
market would be governed by the existence of the protected tenants, and
therefore the ‘investment value’ would dictate the price around which those
tenants can negotiate with the selling landlord if he serves a notice under
section 5; that is different from the ‘sitting tenant value’, which normally
results in a higher price. The investment value does not reflect the
possibility that, with only two tenants involved, they may well be able to resell
shortly afterwards with vacant possession. Nevertheless, these tenants clearly
have the right to avail themselves of the provisions of the Act, and we have
attempted to construe that wording in the light of what we infer to be the
general policy of the Act and carefully considering the arguments put forward
by the representatives of both parties.
In the end, we
have concluded that we should proceed upon the basis that the Act does not give
a tribunal, wherever there is a purchase notice served under section 12(3)(b),
the power to embark upon a de novo valuation exercise to determine the
price which is to be paid.
We have gone
on to consider the occasions where the tribunal may, or must, be involved in
the determination of a question relating to the price payable, to see whether
there is scope for such an exercise of our jurisdiction in the present case. Mr
Beck put this in terms of the ‘investigation of the surrounding circumstances’.
We have made a tentative attempt to clarify that rather vague phrase by identifying
different situations which have already arisen for argument or decision.
1. It may be
that where the consideration payable on the original disposal was not actually
expressed in monetary terms, the tribunal might be called upon to determine a
dispute as to the monetary price now payable, for instance where the original
disposal involved a land exchange deal or transfer of shares in an unquoted
company. That point does not arise for decision here.
2. Where the
question arises as to whether there was a genuine arm’s-length transaction
involving a real bargain at the price alleged, this must clearly be a matter
which requires investigation if the Act is not to be circumvented by fraud.
However, the question whether this is properly a matter for the tribunal or for
the county court did not arise in this case.
3. There are
the circumstances expressly laid down in the Act where the consideration
payable is modified: section 12(3)(a), where the original disposal included
property additional to the subject premises; section 12(4)(b), where the
property has subsequently become subject to an incumbrance reducing its value;
section 12(6), where the property has increased in value owing to a change in
circumstances (‘other than a change in the value of money’). In these
circumstances, it seems to be implicit, and has so been accepted by tribunals,
that it is for the tribunal to determine the adjustment of price, in accordance
with the varying formulae laid down by the respective subsections. These are
themselves by no means easy to interpret, but none of them has been found to be
applicable here.
4. There are
occasions where it may be found that the property was the subject of
misdescription on the original disposal, so that the estate or interest now to
be disposed of is not precisely the same as that which was then offered for
sale. This was the situation which arose in Cousins; in the event the
parties reached agreement as to the abatement of price, but the tribunal was of
the opinion that its jurisdiction would have extended as far as determining the
appropriate abatement in relation to the actual price paid. Such a view was
based in part upon an analogy with section 12(3)(a). This situation has not, so
far as we are aware, arisen in the present case. We add that qualification
because it will be recalled that the application to this tribunal provided for
the estate and interest to be disposed of and the terms of the disposal to be
determined by the tribunal, as the applicants were not in a position at that
stage to ascertain the full details of the original disposal. The applicants
have now been provided with the appropriate details, and have indicated that
such determination will in all probability not be necessary. Indeed it is very
difficult to envisage circumstances in a situation such as this, involving a
registered transfer preceded by the terms of such sparse contractual
documentation, whereby the purchaser would be able to seek reduction of price
on the basis of misdescription. However, we would indicate at this point that
the price which we have proceeded to determine is founded upon the premise that
there has been no misdescription which would have entitled a purchaser to
abatement. If a later hearing upon the other matters becomes necessary, and the
highly unlikely fact of a misdescription is proved, then an adjustment of price
to reflect the difference in estate or interest to be disposed of might need to
be further considered.
5. We have
considered whether this case may present another instance where the tribunal
may modify the price payable, in accordance with Mr Beck’s argument. We have
phrased this exception in the narrowest terms possible, and have felt justified
in regarding it as within our jurisdiction at least to consider its
applicability. This instance would be where two requirements were satisfied:
first, the price paid was totally at variance with the open market value and,
second, it was paid by a purchaser who was suffering under a misapprehension
(as in this case where the purchaser thought he could obtain vacant possession
while in fact there were protected tenants). We stress that we are not dealing
with a case of misdescription as under 4 above; nor was there any evidence
before us of a misrepresentation of the position by Mrs Kaur or her agents or
of an acquiescence by her or her agents in the purchaser’s unilateral mistake
(whether it be labelled a mistake of fact or law) such as to have entitled him
to relief against her.
This would
clearly go further than the previous instances. In the ‘misdescription’ case,
it could be argued that from the outset the ‘consideration payable’, under
section 12(1), was actually the price paid less the amount of the abatement to
which the purchaser was legally entitled. In the present case it is difficult to
see how, legally, the purchaser would have been able to look to the vendor for
a reduction in price. On the other hand, is it right to adopt such a rigorous
interpretation of section 12(1) that the tenants who have already been denied
their right to be offered the property initially are then told that they may
exercise their right only on the terms which a mistaken purchaser accepted
after failing to seek professional valuation or legal advice?
In the event,
we do not find it necessary to decide that point in isolation, since in this
case the other requirement comes into play. Mr Beck was not suggesting, and we
certainly would not accept, that the mistake alone was sufficient. He contended
that the other relevant ‘surrounding circumstance’ was the fact that the price
was completely out of line with the open market valuation made by experts. We
recognise that for the tribunal to inquire into this aspect might perhaps be
regarded as simply another attempt to import a de novo valuation by the
back door. We do not necessarily accept this view. The purpose on this occasion
would simply be part of the background investigation to establish that this was
one of the very limited number of cases where consideration of surrounding
circumstances was appropriate.
If such an
investigation is permissible, we would put the question to be asked by the
tribunal in these terms: ‘Was the price paid in this case totally out of line
with the open market value of the property, sold as an investment property with
existing protected tenants?’ This would
accord with the approach laid down in the provision which is perhaps the most
closely analogous, section 12(6): ‘the amount that might reasonably have been
obtained on a corresponding disposal made on the open market at the time of the
original disposal’. The professional experts gave a theoretical investment
valuation, in the region of £25,000 to £30,000, based upon the income/years of
purchase approach. That would obviously carry much weight against the
unsupported opinion of a local estate agent and would accord with the valuation
experience of the tribunal. However, we adopt the wording of the tribunal in 30
Upperton Gardens Management Ltd v Akano, ‘Whatever might be said,
the best evidence of the value of anything is what it will fetch in the open
market’. Here, as in that case, there is evidence of what the property did
fetch, at auction, in October 1988, ie £39,500, and to view the expert evidence
without taking that into account would not be appropriate. The conditions of
sale at the auction made it clear that the sale was subject to the existing
protected tenancies. There is no evidence that the market in
disposal for £45,000. Even without taking into account other evidence as to
persons offering prices around that region, we are led to the view that ‘the
market’ in this particular area can reasonably be viewed as paying more than
the traditional investment property valuation for properties such as the subject
property, and it is not particularly helpful to speculate further as to the
reasons for this.
Therefore,
even if we accept Mr Beck’s argument, that this would be one of the instances
where we are entitled to look at the surrounding circumstances because of the
mistake of the respondent and the level of price, we are of the opinion that he
has not succeeded in showing that the price paid, £45,000, was out of line with
the open market value.
As we stated
at the outset, we have not found the matter easy to determine, and look forward
to a time when authoritative guidance will have been provided on various points
by Lands Tribunal decisions. However, the conclusion that we have arrived at is
that normally the tribunal has no jurisdiction, in determining the terms of a
disposal under a purchase notice served pursuant to section 12(3)(b), to do
other than ascertain the consideration payable under the original disposal and
determine that to be the price payable. We have suggested some possible
instances (nos 1 to 4) where the tribunal may be called upon to do more than
that, but none of those is applicable here. We are not convinced that instance
no 5 provides another such occasion, but even if we were, the evidence here as
to market value would not lead us to the conclusion that we should disturb the
price of £45,000.
We have
therefore determined that the price payable by the applicants for the disposal
by the respondent of his interest in the subject premises is £45,000.
