Leasehold Reform Act 1967 — Application to acquire freehold — Appeal from decision of county court judge rejecting tenant’s application — Whether rent paid by tenant was a ‘low rent’ within the meaning of section 4 — Issue was as to the operation of the proviso to section 4(1) — Was the rent not to be regarded as a low rent because at the commencement of the tenancy it exceeded two-thirds of the ‘letting value’ of the property? — Onus on landlords to show that the proviso applied — Effect of premium — Meaning of ‘letting value’, as explained by the House of Lords in Johnston v Duke of Westminster — ‘The best annual return obtainable in the open market for the grant of a long lease on the same terms whether this is achieved by letting at a rack-rent or letting at a lower rent plus the payment of a premium’ — Rent in the present case was £240 per annum — Accordingly landlords had to establish that at the commencement of the tenancy the letting value of the property was less than £360 per annum, because, if it was not, the rent of £240 per annum would exceed two-thirds of the letting value — It was necessary to decapitalise the premium for this purpose in order to ascertain the annual equivalent — Landlords had thus to show that on a new letting at £240 per annum they could not have obtained a premium of £1,440 (12 times £120) or more — There was evidence that soon after the commencement of the tenancy it was assigned for a premium of £6,850 — This appeared clearly to support the tenant’s case, but the county court judge reached a decision in favour of the landlords — He accepted evidence and submissions that the premium of £6,850 had been a ‘freak’ or ‘one-off’ transaction from which no justifiable inference could be drawn — Held, on appeal, that the judge’s decision was open to criticism — He appeared not to have given proper consideration to the significance of the premium; he did not give effect to the position of the onus of proof; and he gave too
The following
case is referred to in this report.
Johnston
v Duke of Westminster [1986] AC 839; [1986]
3 WLR 18; [1986] 2 All ER 613; [1986] 2 EGLR 87; (1986) 279 EG 501, HL
This was an
appeal by the tenant, Mrs Dorothy Hembry, who died before the hearing of the
appeal, from the decision of Judge Parker QC, at the West London County Court,
dismissing her application under the Leasehold Reform Act 1967 to acquire the
freehold of 40 Ovington Square, London SW3. (Mrs Hembry’s personal
representatives were substituted for her in the appeal proceedings.) The respondents below and in the Court of
Appeal were the owners of the freehold, the Trustees of Henry Smith’s Charity.
Nigel Hague QC
and K Farrow (instructed by Compton Carr) appeared on behalf of the appellants;
David Neuberger QC (instructed by Denton Hall Burgin & Warrens) represented
the respondents.
Giving
judgment, MAY LJ said: This is an appeal from a decision of His Honour Judge
Parker QC in the West London County Court of November 11 1985. The learned
judge then had before him an opposed application by a tenant under the
Leasehold Reform Act 1967 to acquire the freehold of the premises known as 40
Ovington Square, London SW3. The learned judge dismissed that application. The
tenant now appeals, seeking to have that decision reversed and her application
allowed.
The principal
enfranchisement provision in the 1967 Act is contained in section 1(1). For
present purposes I need not set this out in full. It is not disputed that at
the date of her application the tenant held a long tenancy of the relevant
premises; that their rateable value on the appropriate day was not more than
the stated limit; and that at the relevant date, namely when she gave notice in
accordance with the Act of her desire to have the freehold, she had been the
tenant of the premises under a long tenancy and occupying them as her residence
at least for the stipulated period. The only issue in this case is whether the
rent payable by the tenant under her tenancy of the premises was a ‘low rent’
within the relevant statutory provisions.
As to this
point, the rent payable under the tenancy was less than two-thirds of the
rateable value of the property on the appropriate day and was thus prima
facie a ‘low rent’. However, the tenancy was one to which the proviso to
section 4(1) of the 1967 Act applied and it is upon the operation of this in
the circumstances of this case that the determination of the tenant’s
application for enfranchisement depends. The proviso is in these terms:
provided that
a tenancy granted between the end of August 1939 and the beginning of April
1963
with
immaterial exceptions
shall not be
regarded as a tenancy at a low rent if at the commencement of the tenancy the
rent payable under the tenancy exceeds two thirds of the letting value of the
property
on the same
terms.
By virtue of
section 4(5), where a question arises whether a tenancy within this proviso is
or was at any time a tenancy at a low rent, it is to be so presumed until the
contrary is shown. In other words, on a tenant’s application the onus of
demonstrating that the tenancy is within the proviso to section 4(1) and thus
not to be regarded as one at a low rent is on the landlord.
In his
judgment the learned judge described the relevant premises as a terraced house
dating from the middle of the 19th century, consisting of a basement, ground
floor and three floors above. The house has no garden, but it is within easy
walking distance of Harrods. The house is one of many owned by the respondent
landlords in Ovington Square, forming part of what is described as Smith’s
Kensington Estate and encompassing not only Ovington Square but the whole or
parts of neighbouring residential streets. Until the last war, most of these
houses had been in single-family occupation, many of them were requisitioned
during the war, and all of them by the war’s end were in a poor state of
repair.
In 1946 the
premises were let on a full repairing and insuring lease to one Captain Cooper
for a term of 19 3/4 years from September 29 1946 at a rent of £220 per annum
exclusive. It was a condition of that grant that Captain Cooper was to put the
premises into repair and on completion of the work not only was he to receive
compensation for damage done by the requisitioning authority but also £200 from
the landlords. In June 1954 Captain Cooper assigned his lease to a Mrs
Bingham-Powell, she paying a premium of £1,050 of which the landlords were
aware.
At about this
time the landlords made an important policy decision in relation to the management
of their Kensington Estate. The properties on the estate were generally in poor
condition and unmodernised. Their lessees were not prepared to spend money on
repairs and improvements with only a limited number of years of their leases
remaining. The landlords therefore decided to offer existing lessees new leases
with terms extending 21 years beyond their then expiry dates, containing
stringent repairing covenants but at rents increased, if at all, by amounts
which would today be called minimal. As the learned judge pointed out, however,
the rate of inflation then was nil or nearly so. The expectation was that if
lessees were granted longer leases at more or less the existing rents they
would renovate and modernise their properties. This expectation has for the
most part been borne out by events.
Pursuant to
this policy an offer by the landlords to grant Mrs Bingham-Powell a new lease
for a term of 30 years from June 24 1952 at an annual rent of £240 was accepted
by her in July 1957. This required the consent of the Charity Commissioners. On
July 16 1957 a Mr Kenneth Marr-Johnson, the then senior partner in Cluttons,
the well-known firm of surveyors, who managed and still manage the Kensington
Estate of the landlords, wrote to the commissioners advising them to consent to
the grant of the new lease. The letter concluded:
The net
annual value of the property in possession today I estimate to be £240. I am of
the opinion that the proposed new rent and other conditions are the best that
can be reasonably obtained and I therefore advise that the Charity
Commissioners consent thereto.
Mr Marr-Johnson
gave evidence before the learned judge below to the effect that this
represented his then opinion and that he was still of the same view. The carbon
copy of the letter bears the initials of a Mr Crane. He was then a junior
member of Cluttons’ staff concerned with running the estate under Mr
Marr-Johnson. Mr Crane is now a senior partner of Cluttons; he has continued to
be involved with the affairs of the estate; he, too, gave evidence before the
learned judge to the like effect.
The Charity
Commissioners duly gave their consent and on January 21 1958 Mrs Bingham-Powell
surrendered her existing lease and was granted the new one. By then it was
known that she was intending to assign the new lease once granted to a Mr
Hembry, a member of the National Coal Board. She had originally proposed to
assign her new lease to the board itself, but the landlords were not prepared
to consent. They were, however, prepared to agree to an assignment to a member
of the board, subject to the usual references. On January 28 1958 Mrs
Bingham-Powell assigned the lease, executed seven days earlier, to Mr Hembry
for £6,850. This premium was in fact provided by the board for whom Mr Hembry
acknowledged that he held the property as trustee by a deed of February 7 1958.
Mr Hembry died on February 1 1961. His wife assented to the property vesting in
herself on May 4 1961 and three weeks later she bought the board’s interest for
the original purchase price of £6,850. Thereafter she remained in occupation
until her death, which sadly has occurred since the decision of the learned
judge below. At the opening of this appeal, on being told of Mrs Hembry’s
death, we gave leave to her personal representatives to be substituted for her
in these proceedings.
Both before us
and in the court below there was no dispute either about the relevant law or
the fundamental question which the judge had to decide. In Johnston v Duke
of Westminster [1986] AC 839* the House of Lords held that the expression
‘letting value’ in section 4(1) of the 1967 Act was to be ‘construed as the
best annual return obtainable in the open market for the grant of a long lease
on the same terms whether this is achieved by letting at a rack rent or letting
at a lower rent plus the payment of a premium’. If a landlord charges a
premium, this has to be ‘decapitalised’, that is to say it has to be reduced to
its annual equivalent. It was accepted that in the circumstances of the instant
case if the landlord could have obtained a premium in the open market when
granting the new lease in 1958 this would have to be divided by 12 and added to
the rent reserved of
Bingham-Powell within the proviso to section 4(1) of the Act, the landlords had
to show that the letting value of the premises in 1957-58 was less than £360
per annum — for if it was not, then the rent payable under the tenancy (£240
pa) would exceed two-thirds of the letting value. Thus in the instant case,
where the rent payable was £240 per annum and the contention was that in the
open market the landlords could have obtained a premium, as did Mrs Bingham-Powell
on her assignment to Mr Hembry, the landlords had to satisfy the judge that on
a new letting at £240 per annum they could not have obtained a premium of
£1,440 (namely 12 times £120) or more.
*Editor’s
note: Reported also at [1986] 2 EGLR 87 and (1986) 279 EG 501.
The
appellant’s case both before the court below and before us was that the fact
that Mrs Bingham-Powell had been able to get the premium of £6,850 on her
assignment to Mr Hembry clearly gave rise to the inference, which the landlords
had not negatived, that they, too, could have obtained a premium of at least
£1,440 in the open market for a lease in the terms of that which they granted
to their sitting tenant, Mrs Bingham-Powell.
The opposing
contentions, supported by the expert evidence of Mr Marr-Johnson and Mr Crane,
were that the premium obtained by Mrs Bingham-Powell had been a ‘freak’ or
‘one-off’ transaction from which no justifiable inference could be drawn. The
landlords wished to maximise their income at the material time and thus did not
take premiums. The rent of £240 per annum had been the best that they could
obtain from the premises in 1957-58. These contentions were accepted by the
learned judge, who held that the landlords had discharged the onus upon them.
I fully
appreciate that this court should be slow to disturb a finding by a judge at
first instance where there was evidence which he accepted to support it.
However, I confess that in the light of the landlords’ policy towards their
sitting tenants at the material time, of the premium paid by Mrs
Bingham-Powell, of the premium which she was able to obtain from Mr Hembry
within days of the grant of the new lease to her, and of the fact that the
burden of showing that this case fell within the proviso to section 4(1) of the
1967 Act was on the landlords, the decision in the court below surprised me on
first reading. The strength of the case which the landlords had to overcome was
such that for my part I think that the decision in their favour must be
carefully considered.
I note first
that the expert evidence of Mr Marr-Johnson and Mr Crane was directed largely,
if not wholly, to the question of rents. These two witnesses did not in fact
say anywhere that I can discover in their evidence that they could not have
obtained a premium on the open market had they tried to do so.
Further, in my
respectful opinion the reasoning of the learned judge in the last three pages
of the transcript of his judgment before us can validly be challenged at a
number of points. At the end of his consideration of the first of the three
questions to which he thought that the fundamental issue in the case gave rise,
he said: ‘Unless the landlord knows that a particular sum can be obtained by
way of premium the fact that a person is prepared to pay that premium to enter
into possession cannot determine the letting value of that property’. If this
is a correct record of what the learned judge said at this point, it was
clearly wrong. Counsel for the landlords contended that the learned judge
cannot have meant what the ordinary understanding of this sentence would lead
one to think and proffered an explanation of the judge’s real intention. I
confess that I was not persuaded by counsel’s argument. Putting it at its
lowest, I am not satisfied that the learned judge gave proper consideration to
the fact that Mr Hembry did pay the premium that he did.
Second, a
little later in his judgment, when still considering how important a piece of
evidence was the fact that Mr Hembry had paid his premium, the judge recorded
that the experts on both sides agreed that on the face of it £6,850 was out of
line with other premiums which had been obtained for some other properties on
the landlords’ estate. Similar considerations applied to them as to the
premises with which this appeal is concerned. The judge, however, then rejected
a submission by counsel for the tenant that if an explanation were needed for
the difference it was for the landlords to provide it and they had not done so.
In this also I think that the judge was wrong. The premium paid by Mr Hembry
may have included an element attributable to the particular purchaser involved,
but the fact is that it was paid. Prima facie, therefore, a lease on the
new terms granted to Mrs Bingham-Powell was capable of attracting a premium and
it was for the landlords to prove that at least £5,400 of it was attributable
either to Mr Hembry’s particular circumstances or to something else which
showed that it was no reliable indication of what the market at that time would
stand.
Third, I think
that the judge was wrong to accept the submission made to him on behalf of the
landlords that if the obtaining of the premium was not a ‘freak’ or ‘one-off’
transaction, the conclusion had to be that Mr Marr-Johnson, a partner of his
and Mr Crane had been negligent not only in respect of the transaction with Mrs
Bingham-Powell but also in respect of at least 100 other similar transactions
carried out at much the same time. I do not think that the conclusion was
justified. It is clear that Mr Marr-Johnson and his colleagues were not
interested in premiums. They were dealing with sitting tenants. They were
agreeing rents with the latter for longer leases, which rents were not very
different from those already being paid. The object of the estate’s then policy
was to encourage their sitting tenants to spend money on improving their
properties. It was not surprising, therefore, that they were not asked for
premiums and that the rents proposed and agreed were generous to the tenants.
By his acceptance of counsel’s comment I think that the judge may well have
been led to accord this expert evidence more weight than it merited.
The judge then
commented: ‘If the premium has significance it means that the landlords were
letting at a rent of £240 a year a property whose true rental value was £811
per annum. This I cannot accept.’ In my
opinion, this does not follow. Although one has to attribute an annual value to
a capital premium paid for a lease, it does not follow that the market for a
lease at a high running rent is the same as one for a lease at a lower periodic
rent but with a capital price at the start. In any event, although a
substantial part of the premium paid by Mr Hembry may have been attributable to
his special circumstances, it does not follow that it all was. Showing
generosity to their sitting tenants, the landlords may have been letting at a
rent of £240 per year a property whose true rental value was, say, £400 per
year. In any event it was for the landlords to prove that they were not.
Finally,
although the judge mentioned it as part of the history, in his reasoning in the
last three pages of his judgment he does not seem to have taken any account of
the fact that Mrs Bingham-Powell herself paid a premium on the assignment of
the lease to her by Captain Cooper in June 1954. In my opinion, this at least
made it substantially more difficult to dismiss the premium which Mrs
Bingham-Powell subsequently received as a ‘freak’ or ‘one-off’ transaction.
In the light
of these criticisms which, in my opinion, can validly be made of the learned
judge’s judgment, and even accepting Mr Marr-Johnson and Mr Crane’s expert
evidence so far as it went, I respectfully think that the judge’s finding that
the landlords had discharged the onus upon them was plainly wrong. Operation of
the landlords’ policy with regard to their sitting tenants at the material time
almost inevitably meant that there would be a difference between the rent which
the tenants were asked to pay and the rental value of their leases in the open
market. When, against that background, one finds Mrs Bingham-Powell both paying
and later receiving a premium, it is I think difficult to accept that no part
of the latter represented the almost inevitable rent differential to which I
have just referred. The burden was on the landlords to show that it did not, at
best to no more than £120 per year. For my part, I do not think that they
discharged this burden and I would therefore allow this appeal.
GLIDEWELL LJ
and SIR ROUALEYN CUMMING-BRUCE agreed and did not add anything.
The appeal
was allowed with costs. An application for leave to appeal to the House of
Lords was refused.
