Landlord and tenant — Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Section 42 notice claiming new lease — Notice unregistered — Collective acquisition of freehold — Whether new freeholder bound by section 42 notice
On 1 June 1995 a notice of collective
enfranchisement under section 13 of the Leasehold Reform, Housing and Urban
Development Act 1993 was served in respect of the freehold of a building
containing flats on the then trustee landlords. Pursuant to the provisions of
chapter 1 of the Act the applicant landlord, as nominee purchaser, acquired the
freehold on behalf of the participating tenants on 20 July 1998. By a notice
dated 13 June 1995, served in accordance with section 42 of the Act on the
original trustee landlords, the respondent tenant sought to acquire a new
lease. The respondent was not one of the participating tenants. The present
landlord contended that, as the tenant’s section 42 notice had been served on
the original landlords, the notice was not binding on the present landlord for
want of registration as a notice or caution on the original landlords’ register
of title; it was irrelevant that the present landlord had actual knowledge of
the notice.
applicant landlord. The leasehold valuation tribunal did not find a lower price
for the acquisition of the freehold because of the existence of the section 42
notice. Even if it had, the difference was hardly discernable. Although the
terms of the agreement between the original landlords and the applicant
landlord referred to the section 42 notice, that reference did no more than set
out what the parties expected might happen, and no words of assurance or
special promise could be discerned. The tenant did not have an overriding
interest under section 70(1)(g) of the Land Registration Act 1925. The
applicant landlord was not acting unconscionably. One could not infer a
constructive trust to protect the interest of the tenant from such slender
material. There was no necessary conflict between section 54, which defines the
landlord as the freeholder for the time being, and section 97, which provides
that a section 42 notice is registrable. There was no waiver of the right to
rely on the invalidity of the notice.
The following cases are referred to in this
report.
Ashburn Anstalt v
Arnold [1989] Ch 1; [1987] 2 EGLR 71; (1987) 284 EG 1375, CA
Binions v Evans
[1972] Ch 359; [1972] 2 WLR 729; [1972] 2 All ER 70; (1972) 23 P&CR 192;
[1972] EGD 518; (1972) 222 EG 2147
Lyus v Prowsa
Developments Ltd [1982] 1 WLR 1044; [1982] 2 All ER 953; (1981) 44 P&CR
213
Peffer v Rigg
[1977] WLR 285; [1977] 1 EGLR 97; (1976) 242 EG 123
Williams & Glyn’s Bank Ltd v Boland [1981] AC 487; [1980] 3 WLR 138; [1980] 2 All ER
408; (1980) 40 P&CR 451, HL
This was an application by Melbury Road Properties
1995 Ltd to determine the validity of a notice under the Leasehold Reform,
Housing and Urban Development Act 1993 given by the respondent, Rafic Kreidi.
Anthony Radevsky (instructed by Masons) appeared
for the applicant; Andrew Walker (instructed by Boodle Hatfield) represented
the respondent.
Giving judgment, JUDGE COWELL said:
An appropriate number of tenants (known as the participating tenants) gave
notice under section
1995 to acquire the freehold under chapter 1 (that is, sections 1 to 38) of the
Act from the trustees of the Ilchester Estate. So far as appears, all went as
planned and the freehold was transferred by the trustees on 20 July 1998 to the
nominee company, Melbury Road Properties 1995 Ltd, which is the applicant in
this case.
The respondent, Mr Kreidi, was not one of the
participating tenants, but he served a notice under section 42, which is part
of chapter 2 of the Act, on 13 June 1995, seeking a new lease of his flat held
on a long lease from the Ilchester Estate trustees. His flat comprised the
ground and first floor of the building of which the freehold was acquired by Melbury,
the applicant.
The effect of section 54 was to suspend the
operation of the respondent’s notice while the section 13 notice remained
unresolved. There are many reasons for that that I do not think I can go into,
but it is, in any event, important to know who is the landlord or freeholder
from time to time, if only so that negotiations can proceed with the
appropriate party. So that was the effect of suspension brought about by
section 54(1) of the Act.
The section 13 matter was unresolved for some
considerable time, because the leasehold valuation tribunal heard the question
of valuation in September 1996 and did not give its decision until 7 April
1997. In fact, they determined that the price for the freehold should be
£762,500. Thereafter, the terms of the transfer had to be negotiated and a year
later, on 17 June 1998, contracts were exchanged, and then there was a transfer
of freehold on 20 July 1998.
It is unnecessary to describe the legal effect in terms
of property law of the service of a section 42 notice beyond noticing that,
like an estate contract, it is treated as a registrable interest. It is avoided
as against a purchaser, that is, a transferee, purchasing from the recipient of
the notice (whom I shall refer to as the transferor) if it is not registered,
whether or not the transferee knows of, or has notice of, the giving of the
section 42 notice, and that is what I shall refer to as the registration
principle.
That appears from two sections. One is section 97
of the Leasehold Reform, Housing and Urban Development Act 1993, of which the
crucial part begins:
any right of a tenant arising from a notice given
under section 13 or 42 shall not be an overriding interest within the meaning
of the Land Registration Act 1925; but a notice given under section 13 or 42
shall be registrable under the Land Charges Act 1972, or may be the subject of
a notice or caution under the Land Registration Act 1925, as if it were an
estate contract.
The other section that is relevant to this is
section 59(6) of the Land Registration Act 1925 which provides:
Subject to the provisions of this Act relating to
fraud and to the title of a trustee in bankruptcy, a purchaser acquiring title
under a registered disposition shall not be concerned with any pending action,
writ, order, deed of arrangement, or other document, matter or claim (not being
an overriding interest)… which is not protected by a caution or other entry on
the register, whether he has or has not notice thereof express, implied or
constructive.
It is well known that some registrable interests
may be not merely minor interests but also, by reason of the occupation of the
person entitled to the interest, overriding interests within section 70(1)(g),
I think it is, of the Land Registration Act 1925, so as to bind a purchaser on
that account despite the absence of registration. That was decided in the
important decision of Williams & Glyn’s Bank Ltd v Boland
[1981] AC 487. But section 97(1) of the 1993 Act ensures that that will not be
the case with a section 42 notice: it expressly provides for no overriding
interest despite the almost inevitable occupation to be expected of the person
giving the notice.
The applicant’s case is simple, and it comes as no
surprise to a real property lawyer. The respondent Mr Kreidi’s notice was
served on the Ilchester trustees, the transferors. It was not registered by
notice or caution, the land being registered land, and it was not registered by
notice or caution on the transferors’ register of title. The notice had no
overriding effect. It was avoided as against the transferee for want of
registration. It is immaterial that the transferee knew of the notice, as it
did, because it was mentioned in correspondence before the transfer, in the
contract and in the transfer itself.
So that is the simple and straightforward case of
the applicant. All the textbooks are to that simple and straightforward effect:
Ruoff & Roper para 2.18; Barnsleys Conveyancing 4th ed at
p230; Emmet on Title 19th ed para 28.019; and Hague on Leasehold
Enfranchisement 3rd ed paras 25/15 and 30/08.
I adopt the analysis in Ruoff & Roper para
2.18 of the decision in Peffer v Rigg [1977] WLR 285*, where it
is said that an alternative ground for this decision was that, because of her
knowledge (and that is a reference to the transferee), she held the property on
a constructive trust which was quite distinct from the express trust. By reason
of the cases mentioned in footnotes 7 and 8, it does seem to me that that was the
real ground of the decision, at any rate in the light of the more recent
authorities.
*Editor’s note: Also reported at [1977] 1 EGLR 97
I think I can point out at this stage that a new
section 42 notice can be, and in this case was, served on the transferee,
which, according to Emmet on Title at 28/019, means that the consequences of
there being no protection by registration appear not very serious, although
having to start again may make a difference in individual cases.
So is there any answer to the applicant’s simple
and unsurprising case? It was first formulated in detail in Mr Andrew Walker’s
written argument of the day preceding the hearing. He relies, first of all,
upon establishing the existence of a constructive trust. It seems to me (and I
will put it in my own words) that, in any particular case, circumstances may
exist and they may helpfully be called special, but they must be such that it
is unconscionable on the part of the transferee to assert that he holds the
property free of the interest of another in order that a constructive trust
should arise.
The test is not always put in precisely the same
words, but it is very authoritatively put in the leading case of Ashburn
Anstalt v Arnold [1989] Ch 1† at p22E:
The test, for the present purposes, is whether
the owner of the property has so conducted himself that it would be inequitable
to allow him to deny the claimant an interest in the property…
†Editor’s note: Also reported at [1987] 2 EGLR 71
It is also put at p25H:
The court will not impose a constructive trust
unless it is satisfied that the conscience of the estate owner is affected. The
mere fact that that land is expressed to be conveyed ‘subject to’ contract does
not necessarily imply that the grantee is to be under an obligation, not
otherwise existing, to give effect to the provisions of the contract.
There is also a passage at p23C where it is said:
It is, we think, in every case a question of what
is the reasonable inference from the known facts.
I refer to, but I will not take time by reading
out, the Court of Appeal’s interpretation of the case of Lyus v Prowsa
Developments Ltd [1982] 1 WLR 1044, which appears particularly at the
bottom of p24 and the top of p25 of Ashburn Anstalt v Arnold, and
also to the Court of Appeal’s observations on the case of Binions v Evans
[1972] Ch 359, which appear at p25E-H. There is one paragraph that reads as
follows at p26D:
In matters relating to the title to land,
certainty is of prime importance. We do not think it desirable that
constructive trusts of land should be imposed in reliance on inferences from
slender materials.
So, again in my own words, the mere knowledge or
notice of the other person of that other interest is not sufficient, for that
would be inconsistent with the registration principle itself. As I just
indicated, one should not infer a constructive trust from slender materials. I
think I only need add, on the law, that Binions v Evans was a
clear case where there was a reduction in price paid by the transferee, which
was reduced
right to live on the land for life. In Lyus v Prowsa it was first
of all unnecessary, in a contract of sale of land by a mortgagee, for a
contract entered into by a mortgagor, which would normally be overridden, to be
referred to; it would ordinarily be ignored altogether, but it was not. There
was also a letter of assurance, written on behalf of the transferee, that the
transferee would give effect to it. In the case of Peffer v Rigg
a constructive trust was imposed on the transferee, who knew of considerable
expenditure of money by the party whose interest she alleged she had defeated.
Maybe it is only a matter of different words, but
a statute is not to be used as an engine or instrument of fraud, as Dillon J
said at p1054H of the Lyus case.
In this case, Mr Walker, on behalf of the
respondent, relies upon a number of factors, and the first, he says, is that
when making its valuation, the leasehold valuation tribunal’s decision was
based upon the existence of the respondent’s section 42 notice and claim. My
conclusions about that are as follows. The decision shows that the tribunal was
certainly aware of the section 42 notice. If it ever thought about the matter
of registration, it would not have assumed (and indeed could not have assumed,
because registration can be effected at any time virtually up to the date of
the transfer) that it would not bind the transferee. So, it is clear that the
tribunal’s assumption would, if anything, be that the section 42 notice would
be valid.
When one comes to look at the reasoning of the
tribunal, first of all they pointed out or recognised that the section 42
notice might not be proceeded with. They make that point perhaps only when, in
para 62, they were rejecting an argument that had assumed a high value for the
premium that would be paid under it. But at any rate they recognised the
possibility that the notice might not be proceeded with.
The fact of the section 42 notice did not lead the
tribunal to treat Mr Kreidi’s flat as being different from the other flats for
valuation purposes. Third, the value of the three flats was taken, and there
was a deduction of 25%. It was not expressly stated that the 25% applied to
each flat, but then nor was it stated that the 25% reduction did not apply to
each flat, or that there was a different deduction or discount, which one would
expect if Mr Kreidi’s flat was materially different. That, in my judgment,
appears from paras 58 and 59 of the tribunal’s decision.
Fourth, it seems to me that the tribunal would
know that a new section 42 notice could be served.
Fifth, in any event, to follow through a section
42 claim involves a payment to the freeholder. So the matter is not a wholly
burdensome one for the transferee. Para 52 of the decision has some bearing
upon that point.
So, doing the best I can and expressing it perhaps
rather shortly, I am not satisfied that the tribunal reached any lower price
for the transfer on the basis of the section 42 notice being a burden rather
than a benefit. But, if I am wrong about that, it seems to me that the
difference is hardly discernible and it would follow that this is very slender
material indeed upon which to construct a constructive trust.
The next point that is relied upon is the wording
of, first of all, the agreement, which says:
The transfer will be subject to and with the
benefit of the section 42 claim which has been held in suspense pursuant to the
provisions of section 54. A copy of the tenant’s notice having been supplied to
the purchaser’s solicitors, the purchaser shall be deemed to purchase with full
knowledge thereof.
Frequently, the purpose of a clause about a
transfer being subject to a particular matter is to protect the transferor from
a claim by a transferee that the transferee has not been given a title free of
incumbrances. Of course, it is particularly common when there may be an
enforceable, but old, restrictive covenant of doubtful value. Then, of course,
one comes across the provision ‘subject to the restrictive covenant so far as
the same may be subsisting or enforceable’ or words to that effect.
The agreement in this case does contain that
element. There is the provision about the purchaser purchasing with full
knowledge thereof. At that time neither the transferor nor the transferee could
assume the continuation of the position of non-registration, and there are the
words ‘subject to’ and ‘with the benefit of’. It seems to me that that was an
accurate description because, if it was subject to the section 42 notice, it
also contained with it a benefit — that is, the future receipt of money and, of
course, it was expected that the transferee would receive that: hence the words
‘with the benefit of’.
I have difficulty in concluding that, as between
the transferor and the transferee, the agreement does more than express what is
expected by them to happen. There are no words of assurance or special promise
that can, in my judgment, be discerned from the words of the agreement, and, I
have to say, similarly in relation to the words of the transfer.
In the
transfer, the first sentence of the agreement is substantially repeated. Then
the second sentence of the agreement is dropped (that is about purchasing with
full knowledge) because the second sentence is peculiarly appropriate to a term
of an agreement and not to a term of a transfer. Again, I think this sets out
what the parties expect, as before.
Then the next thing relied upon is, I think, a
rather abstruse argument. It is said that, but for the express provisions of
section 97, the section 42 claim would be an overriding interest, but I myself
do not find it helpful to speculate what the interest would have been but for a
particular provision. True, a section 42 notice may give rise to an interest in
property of some kind, whereas a contractual licence does not, as was decided
in the Ashburn Anstalt v Arnold case. But what is in issue is
whether there is a constructive trust, and that is whether or not the
transferee is acting unconscionably, which is the test, in denying the binding
nature of the transferor’s arrangement. That is not, at any rate obviously,
going to depend upon whether the arrangement gives rise to an interest in
property or is a personal obligation. It seems to me that unconscionable
conduct is made of more virulent stuff, not on the conceptual difference
between property rights and personal rights.
Then, lastly, it is sought to rely upon the
background of the transfer — what was in the minds of the parties as evident
from their correspondence. Again, I prefer to say that it was the expectation
of the parties, but that does not seem to me to answer the question that
remains: is it unconscionable for the applicant to say that the burden of it no
longer binds him so that he can choose not to take the benefit of it? I say
that knowing or believing or thinking that the applicant probably only noticed
the significance of the non-registration shortly before writing the letter of 5
October 1998.
So, generally, by way of summary, I consider that
what the applicant does is not unconscionable. At best, there are only the
slenderest reasons for constructing a constructive trust. The valuation
tribunal I think does not provide any support, but, if I am wrong about that,
it is very slight support. I do not think that, as between the parties, there
was more than an expectation. Third, neither is the burden borne nor is the
benefit received by the applicant and nor has any money or consideration been
paid or provided by the respondent. Then it is also to be noticed that a
further section 42 notice can be served, and the respondent has not pointed to
any, or any significant, prejudice in having to start again, except perhaps the
increase in value of property. So, in my judgment, those materials are really
far too slender for constructing a constructive trust.
There was a further point made by reference to
section 34 of the 1993 Act. It is probably the case that a constructive trust,
if found to exist, would be such an incumbrance as is referred to in the
section. There is a passage in Hague on Leasehold Reform to that effect.
But that, of course, begs the question of whether the constructive trust
exists, and, in my judgment, section 34 is not to be construed so as to render
valid what section 97 (with 59(6) of the Land Registration Act) has rendered
void against a purchaser in the absence of a constructive trust arising.
The next principal argument concerns the overall
structure of the 1993 Act and its operation. It is stated that there is a
definition of ‘landlord’ in section 40 that refers to, in this case, ‘the
freeholder for the time being’. There is section 54, which I have already
mentioned, which has the effect of suspending the operation of one notice while
an earlier one is being dealt with. Then there is the compulsory nature of
the acquisition under chapter 1. There is no choice in the matter. The
Ilchester Estate trustees are bound to convey to Melbury.
The argument is that, if the section 42 notice is
not registered, the whole of that procedure is gone through in vain because,
come the making of the transfer and the continued absence of the registration,
the earlier notice has no operation at all, and yet, under section 54, so it is
argued, one expects the suspension to be lifted and the matter to go ahead, the
new landlord being the landlord who is bound by the section 42 notice.
That may be so, but, given the registration of the
section 42 notice, it seems to me that the steps and procedures set out in
section 54 do lead to the desired end. It is argued that I should construe
section 54 as automatically resulting in the transferee being bound by the
section 42 notice. But all I can say is that it seems to me that the transferee
should certainly automatically be bound, but provided that the section 42
notice has been registered. In my judgment, the operation of section 97 (with
59(6) of the Land Registration Act) when there is no registration cannot be
negatived because section 54 will not operate in such a case.
Section 54 operates, it seems to me, given
registration, perfectly well. So there is, in my judgment, no necessary
conflict between the two sets of statutory provisions: section 54, on the one
hand, and section 97 (with 59(6) of the Land Registration Act), on the other.
Furthermore, had parliament intended that section
54 should operate even when registration of the section 42 notice was absent,
it could have provided either in section 54 words along the lines of
‘notwithstanding the absence of registration under section 97(1)’ or it could
have provided in section 97 words along the lines of ‘except where the
purchaser is entitled to require a transfer under Chapter 1’: but no such words
are to be found. It seems to me that such words would probably give rise to
complexity and uncertainty anyway, and certainty, when based on a simple and
clear principle without detailed exceptions and qualifications (in this case,
what I have called ‘the registration principle’), is the more desirable the
more simple and clear the principle, which is neither difficult to understand
nor to operate. It has been with us since, at any rate, the 1925 legislation,
if not earlier. So it does seem to me that that is the answer to the argument
Mr Walker puts in para 8(7) of his written argument.
The third point (and it is to some extent a bit of
a footnote) is that the applicant has waived its right to rely upon the
invalidity of the notice because it said to the respondent: ‘If you say that
the notice is valid, then you ought to pay the sum that is payable under it’.
The evidence on this particular point is not all that clear because payment was
made or may have been due, and may now be due, under the later notice that has
been served. But the important point, in my judgment, is that in the letter of
5 October 1998 the applicant made perfectly clear, and has ever since made it
perfectly clear, that it is not accepting the validity of the notice. It has
never represented that the notice is valid in any way; nor has it misled the
other party.
I was referred to a great deal of learning on the
law of waiver in the context of forfeiture of leases. I am tempted to liken
that to the playing of a game, and indeed it may be that the operation of the
1993 Act is another game. But the law of waiver of forfeiture is fairly
technical because the law has always leaned against forfeiture. In my judgment,
quite simply, the laws in relation to forfeiture are rather like the rules of a
different game, and there is no reason why waiver in other contexts should be
the same, any more than the same rules in whist should apply to the game of
canasta.
If the applicant is correct and the notice is
invalid and the money is not payable as a result of another notice, it seems to
me quite simply that the money is returnable. The most crucial rule in this
particular game is that neither party misleads the other as to its attitude in
relation to the notice. In my judgment, that has not happened.
Finally, I would like to say how very indebted I
am to both counsel in this case for putting forward extremely clear arguments
in a very concise way. But my conclusion is that the applicant is correct.
Application allowed.