Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Collective enfranchisement — Anti-avoidance provisions — Section 13 initial notice served and registered on behalf of qualifying tenants — Landlord subsequently granting long lease of basement caretaker’s flat and light well to associated company — Whether lease void as severance of freehold interest under section 19(1)(i) — Whether void as disposal of acquirable common parts under section 19(1)(ii) and section 2(1)(b) and (3) — Whether interest under lease liable to acquisition on behalf of participating tenants under section 19(2) and (3)
The first appellant was the freeholder of a building that was divided into five flats on the ground and upper floors, with a basement flat below. The second appellant, an associated company, had contracted to purchase the building from the first appellant. Before that sale could be completed, three out of the five qualifying tenants in the building served an initial notice, under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993, seeking to acquire the freehold of the building. The respondents were the nominee purchasers for that purpose.
The appellants’ counternotice, served under section 21, did not include proposals for a leaseback of any part of the building. However, after the respondents’ initial notice had been registered, the first appellant granted a 999-year lease of the basement caretaker’s flat to the second appellant at a peppercorn rent. The demise included the floor of a light well adjacent to the flat, which could be accessed only from that flat and which served as a patio to it. The respondents argued that the grant of such a lease, after registration of the initial notice, was void by reason of the anti-avoidance provisions in section 19 of the 1993 Act. They brought proceedings for declaratory relief.
That claim was allowed in the county court. The lease was held to be void: (i) under section 19(1)(a)(i), as a disposal severing the freeholder’s interest in the property; and (ii) under section 19(1)(a)(ii), as a lease of “common parts”, namely the caretaker’s flat and the light well, that it was reasonably necessary for the participating tenants to acquire for their proper management or maintenance, within section 2(1)(b) and (3)(a). The judge held that although section 19(1)(a)(i) was confined to disposals that divided the freehold reversion in the manner normally understood as a severance, by creating more than one reversion, the grant of the lease had that effect because it was tantamount to a freehold or, being a long lease at a peppercorn rent, could be enlarged into a freehold under section 153 of the Law of Property Act 1925. She also accepted the respondents’ alternative submission that the grant of the lease constituted a “disposal of the freeholder’s interest” within section 19(2) of the 1993 Act such that, if not void, the interest created thereby would have been liable to acquisition on behalf of the participating tenants under section 19(3). The appellants appealed. On the appeal, they raised the further point that insurance rent and service charges payable under the lease “by way of further rent” amounted to “rent” for the purposes of section 153 of the 1925 Act, such that enlargement into a freehold was not possible under that provision.
Held: The appeal was dismissed. (1) The lease did not sever the reversion within the meaning of section 19(1)(a)(i). “Severance” is a clear concept and the statutory language provides no justification for blurring the distinction between freehold and leasehold. Although a 999-year lease at a peppercorn rent leaves little practical interest in the reversion, it remains a lease and not a freehold. Further, the lease did not fulfil the criteria under section 153 of the 1925 Act, permitting its enlargement into a freehold merely by the unilateral declaration of the tenant made by deed. The payment of insurance rent and service charge pursuant to the lease constituted rent within the scope of section 153. The 1925 Act provides a broad definition of rent and there is no basis or rationale for restricting it to rent relating solely to the possession of the premises, so as to exclude rent payable for the reimbursement of expenditure. Section 153 applies to situations where there is no continuing payment obligation from the lessee to the lessor for the occupation of the property demised by the lease. Accordingly, the lease was not void under section 19(1)(a)(i) of the 1993 Act. (2) The lease was void under section 19(1)(a)(ii) of the 1993 Act as a lease of common parts that it was reasonably necessary to acquire on behalf of the participating tenants. The statutory definition of “common parts” includes those parts of the building that either may be used by or serve the benefit of the residents in common, as opposed to those parts that are for the exclusive benefit of only one or a limited number of residents or none at all: see section 101(1). The part in question does not have to be devoted to that purpose as a matter of obligation in the residents’ leases. A flat housing a caretaker who services the building at the relevant date constitutes a common part within the statutory definition irrespective of whether the obligation under the leases to provide a caretaker requires that caretaker to be resident. In the instant case, the caretaker’s flat was a common part both on an application of that approach and by reference to the terms of the participating tenants’ leases. It was necessary for the respondents to acquire that flat for the proper management or maintenance of the common parts within section 2(3) because if they did not acquire the interest under the lease, they would not be able to use the flat to accommodate a caretaker. The light well, on the other hand, although a common part, did not reasonably need to be acquired on behalf of the participating tenants since they were adequately protected by the terms of the lease permitting access by the freeholder for maintenance purposes. (3) Had the lease not been void under section 19(1)(a), the respondents would not have been entitled to acquire it from the second appellant under section 19(2) and (3) because the freeholder had not made a relevant disposal. Those provisions do not apply to a disposal by the freeholder, but only to a disposal of its interest; this means a transfer of the freehold interest, not the grant of a lease out of that interest: see section 19(2)(a).
Per curiam: Section 153 of the 1925 Act is capable of applying to a flat so as to permit the enlargement of a lease into a freehold, notwithstanding that this might lead to the creation of a “flying |page:152| freehold” and create problems owing to the lack of enforceability of positive covenants. The grant of a lease of a flat to which section 153 applies in a building where participating tenants have registered an initial notice to acquire the freehold under the 1993 Act will be a disposal severing the freehold interest contrary to section 19(1)(a)(i) of the Act, since such a lease, although not the same as the grant of a freehold, can be converted into a freehold at any time by a unilateral act of the lessee.
The following cases are referred to in this report.
Abbahall Ltd v Smee [2002] EWCA Civ 1831; [2003] 1 WLR 1472; [2003] 1 All ER 465; [2003] 2 EGLR 66; [2003] 28 EG 114; [2003] HLR 40
Bosomworth v Faber (1995) 69 P&CR 288
Cadogan v McGirk; sub nom Viscount Chelsea v McGirk [1996] 4 All ER 643; (1996) 73 P&CR 483; [1996] 2 EGLR 75; [1996] 39 EG 175; (1997) 29 HLR 294, CA
Cawthorne v Hamdan [2007] EWCA Civ 6; [2007] Ch 187; [2007] 2 WLR 185; [2007] 2 All ER 116; [2007] 2 P&CR 1; [2007] 1 EGLR 67; [2007] 11 EG 162
Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] EWHC 350 (Ch); [2008] 2 P&CR 3; [2008] 2 EGLR 141
Escalus Properties Ltd v Robinson [1996] QB 231; [1995] 3 WLR 524; [1995] 4 All ER 852; [1995] 2 EGLR 23; [1995] 31 EG 71, CA
McGuckian v 29 Eaton Place Management Co Ltd LRA/85/2006 unreported 3 January 2008, LT
Manson v Duke of Westminster [1981] QB 323; [1981] 2 WLR 428; [1981] 2 All ER 40; (1980) 41 P&CR 159; [1981] 2 EGLR 78; 259 EG 153, CA
Marfield Properties v Secretary of State for the Environment 1996 SCLR 749
Meadowside Freehold Ltd v Shellpoint Trustee Ltd LON/ENF/1177/04 unreported 20 May 2005
Oakwood Court (Holland Park) Ltd v Daejan Properties Ltd [2007] 1 EGLR 121, CC
This was an appeal by the appellants, Earl Cadogan and Cadogan Estates Ltd, from a decision of HH Judge Marshall QC, sitting in Central London County Court, allowing a claim by the respondents, Alexander Panagopoulos and John Stephenson, as nominee purchasers on a collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993, for declaratory relief as to the application of the anti-avoidance provisions in that Act to a lease granted by the appellants.
Kenneth Munro (instructed by Pemberton Greenish LLP) appeared for the appellants; Andrew Walker (instructed by Bircham Dyson Bell LLP) represented the respondents.
Giving judgment, Roth J said:
[1] The statutory regime for collective enfranchisement by tenants of flats is contained in the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act). This case concerns the proper interpretation of certain provisions of that regime when, after a claim to collective enfranchisement has been made and registered, the freeholder grants a 999-year lease of a part of the premises. In a thorough and thoughtful judgment in Central London County Court, HH Judge Marshall QC held that the lease granted by the freeholder in the circumstance of this case was caught by the anti-avoidance provisions in section 19[1] on several grounds. With leave granted by Peter Smith J, the freeholder appeals against that decision.
[2] In fact, there are two appellants because prior to the enfranchisement process being commenced, Earl Cadogan had agreed to sell property, including this freehold, to the second appellant, Cadogan Estates Ltd (CEL), a company that is connected to the Cadogan Estate, but that contract remains uncompleted. Nothing turned on the distinction between the two appellants. However, CEL is also the tenant under the 999-year lease granted by Earl Cadogan that gives rise to this case.
Property
[3] Fifty-one Cadogan Square (the property) is in the Knightsbridge area of London. I can take the description of the property from the judgment of Judge Marshall:
4. The Property faces west and is terraced. It comprises five converted flats or maisonettes on the ground floor and upper floors, and a basement in which there is, below the rear of the main part of the building, a flat hitherto used as a caretaker’s flat. The front of the basement is a storage area, with a front exit door into an open area with a staircase up to the street, and access to vaults under the pavement.
5. The various flats are accessed internally by a staircase in the centre of the property beside its north party wall. The only other material feature of the configuration of the Property is a light well in the rear of the Property, open to the sky from the basement floor level. This light well is on the southern side of the Property and mirrors a similar light well in the adjacent property (No 53) to the south. There is a boundary wall between the two light wells about 10ft high, topped off with railings. The flats in No 51 wrap around three sides of the light well in No 51.
[4] I would add only that the floor of the light well is concreted over and it is accessible by a door from the basement flat. The ground of the light well, which has also been referred to as the patio, is not otherwise accessible to the occupiers of the building.
Enfranchisement claim
[5] On 25 April 2006, three of the five qualifying tenants in the building served notice on the appellants, under section 13, seeking to acquire the freehold of the property. The notice specified the respondents as the nominee purchasers.
[6] On 30 June 2006, the appellants served a counternotice under section 21. That notice did not include any proposals for a leaseback of any part of the building: see section 21(3)(a)(ii).
[7] On 13 July 2006, the tenants’ section 13 notice was duly registered under section 97. Since the price at which the freehold was to be acquired was not agreed, on 13 October 2006 the respondents made an application to the leasehold valuation tribunal (LVT) under section 24 to determine the terms of the acquisition.
[8] Before any hearing took place before the LVT, on 25 March 2007 the appellants notified the respondents of their intention to grant a lease of the basement caretaker’s flat to a nominee. The respondents objected to this grant and the question of the potential validity of the intended lease was raised in the LVT proceedings, where it was considered as a preliminary issue. However, the LVT concluded that it had no jurisdiction to make a determination on that issue. The parties proceeded to agree terms of the acquisition on alternative bases according to whether the intended lease of the caretaker’s flat was or was not void.
[9] On 27 March 2008, Earl Cadogan formally granted a lease of the caretaker’s flat to CEL (the lease). That is the lease that is at the heart of this dispute.
[10] As mentioned above, the lease is for 999 years and comprises the caretaker’s flat and the floor of the light well, described in the lease as the patio. The rent is one peppercorn, if demanded. In addition, there is an obligation to pay what is described as the “insurance rent” and service charge on demand, as specified in one of the schedules. It will be necessary to refer to this in more detail later in this judgment. The lease is what is sometimes referred to as an “eggshell” lease, which is expressly limited to the surfaces of the relevant walls, floors and ceilings of the premises and does not include the underlying structure. The lease contains no proviso for re-entry in the event of breach of any conditions.
[11] On receipt of notification that the appellants had applied to the Land Registry to register the lease, the respondents objected. The matter was referred to the Land Registry adjudicator. However, no substantive decision was made by the adjudicator once the respondents issued an application in the county court on 11 June 2008. It is on that application that Judge Marshall gave her decision that is the subject of this appeal.
Statutory framework
[12] Chapter I of Part I of the 1993 Act contains a detailed and comprehensive code that confers on qualifying tenants of flats contained in eligible premises the right to have the freehold of those premises acquired on their behalf by one or more nominee purchasers. This is referred to as “the right to collective enfranchisement”. The statutory provisions are intricate and almost every aspect of the regime is subject to delineated limitations and/or extensions designed to deal |page:153| with the many and varied circumstances that could potentially give rise to collective enfranchisement claims. Pursuant to section 3, the regime applies to premises that consist of a self-contained building or part of a building that contains two or more flats held by qualifying tenants where the total number of flats held by such tenants is at least two-thirds of the total number of flats in the premises.
[13] The qualifying tenants’ claim to exercise the right to collective enfranchisement is made by giving a notice under section 13, which notice has to specify the premises and the proposed purchase price and give various other details. The date on which that notice is given constitutes “the relevant date” for the purpose of the other statutory provisions: see section 1(8). The qualifying tenants by whom the right is exercised are referred to as “the participating tenants”: see section 14. Pursuant to an amendment to the 1993 Act that came into force on 28 February 2005, the relevant date is the date at which the freeholder’s interest is to be valued: see section 32 and para 3 of Schedule 6. Previously, the valuation date had been the date on which the freehold interest to be acquired was either agreed or determined by the LVT: see para 1(1) of Schedule 6 prior to the amendment.
[14] Although this regime primarily confers the right to acquire a freehold, in certain specified circumstances it can extend to the acquisition, in addition, of interests under a lease. Section 2 specifies the circumstances in which the participating tenants, by their nominee purchaser, are: (a) obliged to acquire a leasehold; and (b) entitled to acquire a leasehold:
2.—(1) Where the right to collective enfranchisement is exercised in relation to any premises to which this Chapter applies (“the relevant premises”), then, subject to and in accordance with this Chapter —
(a) there shall be acquired on behalf of the qualifying tenants by whom the right is exercised every interest to which this paragraph applies by virtue of subsection (2); and
(b) those tenants shall be entitled to have acquired on their behalf any interest to which this paragraph applies by virtue of subsection (3);
and any interest so acquired on behalf of those tenants shall be acquired in the manner mentioned in paragraphs (a) and (b) of section 1(1).
(2) Paragraph (a) of subsection (1) above applies to the interest of the tenant under any lease which is superior to the lease held by a qualifying tenant of a flat contained in the relevant premises.
(3) Paragraph (b) of subsection (1) above applies to the interest of the tenant under any lease (not falling within subsection (2) above) under which the demised premises consist of or include
(a) any common parts of the relevant premises, or
(b) any property falling within section 1(2)(a) which is to be acquired by virtue of that provision,
where the acquisition of that interest is reasonably necessary for the proper management or maintenance of those common parts, or (as the case may be) that property, on behalf of the tenants by whom the right to collective enfranchisement is exercised.
[15] For present purposes, the material provisions are section 2(1)(b) and (3)(a). Thus, the participating tenants are entitled to have acquired, on their behalf, the interest of a tenant under a lease that consists of or includes any common parts of the premises where it is reasonably necessary to acquire that interest for the proper management or maintenance of those common parts. However, it is also relevant to note that section 1(2)(a), which is referred to in section 2(3)(b), covers appurtenant property leased to a qualifying tenant (for example, a garden or garage) and any property that a qualifying tenant is entitled under his lease to use in common with occupiers of other premises (for example, a communal garden).
[16] Section 19 is central to this case and it is necessary to set out section 19(1) to (3) in full:
19.—(1) Where the initial notice has been registered in accordance with section 97(1), then so long as it continues in force —
(a) any person who owns the freehold of the whole or any part of the specified premises or the freehold of any property specified in the notice under section 13(3)(a)(ii) shall not —
(i) make any disposal severing his interest in those premises or in that property, or
(ii) grant out of that interest any lease under which, if it had been granted before the relevant date, the interest of the tenant would to any extent have been liable on that date to acquisition by virtue of section 2(1)(a) or (b); and
(b) no other relevant landlord shall grant out of his interest in the specified premises or in any property so specified any such lease as is mentioned in paragraph (a)(ii);
and any transaction shall be void to the extent that it purports to effect any such disposal or any such grant of a lease as is mentioned in paragraph (a) or (b).
(2) Where the initial notice has been so registered and at any time when it continues in force —
(a) any person who owns the freehold of the whole or any part of the specified premises or the freehold of any property specified in the notice under section 13(3)(a)(ii) disposes of his interest in those premises or that property, or
(b) any other relevant landlord disposes of any interest of his specified in the notice under section 13(3)(c)(i),
subsection (3) below shall apply in relation to that disposal.
(3) Where this subsection applies in relation to any such disposal as is mentioned in subsection (2)(a) or (b), all parties shall for the purposes of this Chapter be in the same position as if the person acquiring the interest under the disposal —
(a) had become its owner before the initial notice was given (and was accordingly a relevant landlord in place of the person making the disposal), and
(b) had been given any notice or copy of a notice given under this Chapter to that person, and
(c) had taken all steps which that person had taken;
and, if any subsequent disposal of that interest takes place at any time when the initial notice continues in force, this subsection shall apply in relation to that disposal as if any reference to the person making the disposal included any predecessor in title of his.
Issues
[17] The appeal raises three distinct issues, all of which were decided below against the appellants, namely whether:
(i) the grant of the lease was contrary to section 19(1)(a)(i) because it constituted a “disposal severing [the freeholder’s] interest” in the property;
(ii) the grant of the lease was contrary to section 19(1)(a)(ii) because it was a lease of or including “common parts” that it was reasonably necessary for the participating tenants to have acquired as set out in section 2(1)(b) and (3)(a), on the grounds that:
(a) the caretaker’s flat constituted common parts; and/or
(b) the patio/light well constituted common parts;
(iii) the lease constituted a disposal “of [the freeholder’s] interest” within the terms of section 19(2) so as to render that leasehold interest subject to acquisition on behalf of the participating tenants under section 19(3).
[18] Before discussing these issues individually, it is appropriate to note the general approach that should apply to construction of this part of the 1993 Act. In Cadogan v McGirk [1996] 4 All ER 643*, a case concerning the application of Chapter II of Part I of the 1993 Act, the Court of Appeal rejected the submission that the relevant provisions must be strictly construed because the 1993 Act was expropriatory in nature. Millett LJ (with whom Thorpe and Waite LJJ agreed), at p648a, expressed his agreement with the observation of Stephenson LJ in Manson v Duke of Westminster† regarding the enfranchisement provisions in the Leasehold Reform Act 1967 that “I would… regard the expropriatory nature of the 1967 Act as of little weight in construing its provisions…”, and continued, at p648b:
It would, in my opinion, be wrong to disregard the fact that, while the 1993 Act may to some extent be regarded as expropriatory of the landlord’s interest, nevertheless it was passed for the benefit of tenants. It is the duty of the court to construe the 1993 Act fairly and with a view, if possible, to making it effective to confer on tenants those advantages which Parliament must have intended them to enjoy. |page:154|
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* Editor’s note: Also reported at [1996] 2 EGLR 75; [1996] 39 EG 175
† Editor’s note: Reported at [1981] 2 EGLR 78; (1980) 259 EG 153
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[19] The reference to effectiveness leads to a related point. The 1993 Act sets out a complex statutory regime designed to operate in a field where the interests at stake are often very significant for the parties and where property values can change during the enfranchisement process. Therefore, in interpreting the statute, considerations of practicality and convenience are important. I note that such considerations were emphasised by the Court of Appeal in resolving questions of construction of the 1993 Act in Cawthorne v Hamdan [2007] EWCA Civ 6; [2007] Ch 187*.
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* Editor’s note: Also reported at [2007] 1 EGLR 67; [2007] 11 EG 162
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Section 19(1)(a)(i): “Disposal severing his interest”
[20] Part I of the 1993 Act contains in section 101(1) a definition of “disposal” in broad terms that are relevant to this issue as also to the third issue:
“disposal” means a disposal whether by the creation or the transfer of an interest, and includes the surrender of a lease and the grant of an option or right of pre-emption, and “acquisition” shall be construed accordingly (as shall expressions related to either of these expressions);
[21] In the court below, in reliance on this definition, the respondents contended that section 19(1)(a)(i) covered any lease granted by the freeholder. That submission was rejected by Judge Marshall, who held that the phrase “a disposal severing his interest” is “confined to disposals which split the freehold reversion in the manner normally understood as a severance, ie by creating more than one reversion”. The respondents have not sought to challenge the judge’s ruling in that regard in resisting this appeal.
[22] However, the judge upheld the respondents’ case on this issue on two further and alternative bases. First, the respondents contended that the nature of the lease here is tantamount to a freehold and so comes within the scope of section 19(1)(a)(i). Second, they contended that the lease comes within the enlargement provisions in section 153 of the Law of Property Act 1925 (respectively section 153 and the 1925 Act) and so should on that account be treated as coming within the scope of the subsection.
[23] As to the nature of this particular lease, it is of course correct that a 999-year lease at a peppercorn rent leaves very little practical interest in the reversion. However, as Mr Kenneth Munro, for the appellants, emphasised, it remains a lease and not a freehold. “Severance” is a clear concept and I do not see any warrant in the statutory language for blurring the distinction between freehold and leasehold. To apply a test that involves looking at the substance of the transaction, where what is at stake is whether it should be struck down as void, in my view creates significant difficulties. Where is the dividing line to be drawn? Would the result be the same if this were a 999-year lease with a ground rent of £20 pa or a 200-year lease with a peppercorn rent? In my judgment, it is no answer on a question of construction to say that, on the facts of the present case, there would not be no difficulty, since the construction, if it be correct, must be applied in other less clear cases.
[24] I note that Judge Marshall accepted this argument of the respondents only with “some hesitation”. I consider that in interpreting a statute that employs detailed and elaborate provisions, it is not appropriate for the court to expand the scope of the ordinary meaning of the statutory language in this way. Accordingly, I find that the appellants’ challenge to this part of the judgment is correct.
[25] Section 153 of the 1925 Act provides, in so far as material:
(1) Where a residue unexpired of not less than two hundred years of a term, which, as originally created, was for not less than three hundred years, is subsisting in land, whether being the whole land originally comprised in the term, or part only thereof, —
(a) without any trust or right of redemption affecting the term in favour of the freeholder, or other person entitled in reversion expectant on the term; and
(b) without any rent, or with merely a peppercorn rent or other rent having no money value, incident to the reversion, or having had a rent, not being merely a peppercorn rent or other rent having no money value, originally so incident, which subsequently has been released or has become barred by lapse of time, or has in any other way ceased to be payable;
the term may be enlarged into a fee simple in the manner, and subject to the restrictions in this section provided.
(2) This section applies to and includes every such term as aforesaid whenever created, whether or not having the freehold as the immediate reversion thereon; but does not apply to —
(i) Any term liable to be determined by re-entry for condition broken; or
(ii) Any term created by subdemise out of a superior term, itself incapable of being enlarged into fee simple.
…
(4) A rent not exceeding the yearly sum of one pound which has not been collected or paid for a continuous period of twenty years or upwards shall, for the purposes of this section, be deemed to have ceased to be payable:
[26] Thus, section 153 carefully defines the terms of a lease to which it will apply and it gives the tenant under a lease of that nature a statutory right to convert it into a freehold. On this basis, it can be said that the problem of uncertainty referred to above is removed. Moreover, since this provision represents a legislative policy it could be said that a lease of that nature can properly be treated as being equivalent to a freehold for the purpose of section 19(1)(a)(i) of the 1993 Act. However, the first question is to ask whether the lease here falls within section 153.
[27] I was told that this right to enlargement has been very little used in practice. That is unsurprising: there must be very few leases, even very long ones, with no right of re-entry. However, the lease here has no right of re-entry. However, is it a lease “without any rent” so as to meet the condition in section 153(1)(b)? “Rent” is defined in section 205(1) of the 1925 Act as follows:
(xxiii) “Rent” includes a rent service or a rentcharge, or other rent, toll, duty, royalty, or annual or periodical payment in money or money’s worth, reserved or issuing out of or charged upon land, but does not include mortgage interest; “rentcharge” includes a fee farm rent
[28] The lease has no premium and is for a peppercorn rent. However, the reddendum is in the following terms:
In consideration of the rents and covenants by the Lessee hereinafter respectively reserved and contained the Lessor hereby DEMISES AND LEASES unto the Lessee ALL THOSE the Demised Premises being part of the Building TOGETHER WITH the rights and easements set out in the Second Schedule hereto AND the rights and easements set out in the Third Schedule hereto TO HOLD the Demised Premises unto the Lessee for the Term YIELDING AND PAYING therefore [sic] during the Term and so in proportion for any less time than a year first the Yearly Rent (if demanded) and SECONDLY by way of further rent the Insurance Rent payable in accordance with the Fourth Schedule hereto and THIRDLY by way of further rent the Service Charge payable in accordance with the Fourth Schedule hereto
[29] The insurance rent and service charge are set out in the Fourth Schedule in these terms:
1. The Lessee shall pay the Lessor upon demand by way of Insurance Rent attributable to the Demised Premises a sum equivalent to such percentage (if any) as the Lessor may from time to time consider to be a fair and proper percentage of the cost of insuring the Building and its appurtenances as set out in Part 2 of this Schedule
2. The Lessee shall pay to the Lessor upon demand by way of Service Charge attributable to the Demised Premises a sum equivalent to such percentage (if any) as the Lessor may from time to time consider to be a fair and proper percentage of the cost of providing services to the Building and its appurtenances as set out in Part 3 of this Schedule
[30] Further, I note that by clause 3 of the lease, the lessee covenants with the lessor:
3.1 During the Term to pay the said rents hereinbefore reserved to the Lessor on the days and in manner herein appointed for payment thereof”
(Emphasis added.)
[31] In an argument not advanced below, Mr Munro submitted that the “Insurance Rent” and “Service Charge” constitute “rent” for the purpose of section 153. For the respondents, Mr Andrew Walker argued that these items did not amount to “rent” within the terms of section 153. He stressed that these items were only by way of reimbursement and |page:155| that the lease therefore did not include any payment with a profit element. Furthermore, he pointed out that these charges were payable only on demand and with no fixed or regular time for payment.
[32] Mr Walker suggested that the insurance rent and service charge might never be demanded, but I do not think that the application of section 153 can rest on such speculation, which in any event I regard as far-fetched. Section 153(4) contains express provision as to when a payment provision is to be disregarded because no payment has been demanded and it rests on the actual failure to collect payment over a prolonged period. There is no basis for allowing a further exception. Moreover, the leases of two of the other five flats in the property provide that the lessee should pay an insurance rent and service charge equal to “a fair and proper” proportion or percentage of the cost of insuring the building and providing the landlord’s services, and the leases of the remaining two flats provide for the payment of a fixed proportion that is evidently calculated on the basis that only five flats in the property are subject to leases. With the creation of a sixth leasehold flat in the basement, if the landlord demanded nothing by way of reimbursement from the tenant of that flat and sought to cast the entire cost of insurance and services on the tenants of the other five flats, the latter would have cause for complaint. Where their lease provides for a “fair and proper” proportion, they could contend that this should allow for the recovery of a proportionate share from the tenant of the basement flat; and where their lease provides for a fixed proportion, they may be able to apply to vary that provision under the Landlord and Tenant Act 1987 (the 1987 Act).
[33] The question of whether “rent” includes the payment of service charges was considered by the Court of Appeal in Escalus Properties Ltd v Robinson [1996] QB 231*. The appeals heard together by the court concerned statutory provisions for relief against forfeiture. The landlords argued that “rent” meant the consideration payable to the landlord only in respect of the tenant’s possession of the premises, and so did not include service charges that are payments for services provided by the landlord (including expenditure on insurance). The leases did not reserve the service charge as rent in the reddendum, but contained a provision that the service charge shall be deemed to be sums due by way of additional rent and recoverable as such. In his judgment, Nourse LJ (with whom the other members of the court agreed) stated, at pp243G-244A:
Seeing that the current statutory provisions derive from others enacted in the 18th and 19th centuries, I regard it as axiomatic that they refer to rent in its correct sense being (i) a periodical sum, (ii) paid in return for the occupation of land, (iii) issuing out of the land, (iv) for non-payment of which a distress is leviable. All those attributes were enjoyed by the rents payable under the leases in Robinson and Cooper-Smith. Each of those leases, by providing that service charge should be deemed to be sums due by way of additional rent, had the effect of conferring the like attributes on the service charge, an effect confirmed by the further provision that it should be recoverable as rent. To hold thus is to do no more than give full effect to the agreement between the parties.
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* editor’s note: Also reported at [1995] 2 EGLR 23; [1995] 31 EG 71
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[34] The statutory provisions there at issue were in the County Courts Act 1984 and the Supreme Court Act 1981. It is necessary to be cautious when applying the approach to the construction of words in one statute to a different statute. However, I see no reason why the reasoning in Escalus should not apply to the 1925 Act. Moreover, although not all the criteria set out by Nourse LJ are satisfied by the lease here (for example, there is no proviso for re-entry for non-payment), none the less the lease expressly provides that the “Insurance Rent” and “Service Charge” are payable “by way of further rent”. Therefore, I consider that they constitute rent within the scope of section 153. The definition of rent in the 1925 Act is a broad one: see [27] above. There is no basis or rationale to restrict it to rent relating solely to the possession of the premises so as to exclude rent payable for reimbursement of expenditure, as Mr Walker suggested. Although the definition in section 205(1) is prefaced by the words “unless the context otherwise requires”, there is no ground to apply a different definition in section 153. It seems to me that section 153 is directed at the situation where there is no continuing payment obligation from the lessee to the lessor for the occupation of the property demised by the lease.
[35] On this ground, which was not argued below, I therefore conclude that the lease does not fall within section 153. In the light of that, it is not strictly necessary to address the further objection under section 153 on which Mr Munro relied, that is, that section 153 does not apply to the lease of a flat. However, as I heard full argument on it, I shall briefly express my conclusion.
[36] “Land” is also defined in the 1925 Act in section 205(1), as follows:
(ix) “Land” includes land of any tenure, and mines and minerals, whether or not held apart from the surface, buildings or parts of buildings (whether the division is horizontal, vertical or made in any other way) and other corporeal hereditaments; also a manor, an advowson, and a rent and other incorporeal hereditaments, and an easement, right, privilege, or benefit in, over, or derived from land;… and “mines and minerals” include any strata or seam of minerals or substances in or under any land, and powers of working and getting the same… ; and “manor” includes a lordship, and reputed manor or lordship; and “hereditament” means any real property which on an intestacy occurring before the commencement of this Act might have devolved upon an heir;
[37] Since this definition manifestly includes a flat, Mr Munro argued that, in section 153, “the context otherwise requires” within the terms of the opening proviso to the statutory definition. That is because, he said, the enlargement provision could otherwise lead to the creation of a so-called flying freehold, which gives rise to great inconvenience. Judge Marshall rejected this argument and I consider that she was right to do so. A flying freehold may well create problems because of the lack of enforceability of positive covenants. However, such freeholds, although relatively rare, do exist and they are not a new phenomenon: see, for example, Abbahall Ltd v Smee [2002] EWCA Civ 1831; [2003] 1 WLR 1472*. I can see no warrant to curtail the provisions in section 153 and disapply the section 205(1) definition so as to carve out an exception for flats from the unrestricted wording of the enlargement provision.
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* Editor’s note: Also reported at [2003] 2 EGLR 66; [2003] 28 EG 114
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[38] In case this matter should go further, I should add that if, contrary to my ruling, the lease falls within section 153, I would have found that the grant of such a lease amounts to a “disposal severing [the freehold] interest” within the terms of section 19(1)(a)(i). Although section 153 provides a right to the enlargement of a lease that meets its conditions to a freehold, the grant of such a lease is obviously not the same as the grant of a freehold. None the less, such a lease can be converted into a freehold at any time by the unilateral act of the lessee. Accordingly, the grant of a lease that conforms to section 153 could provide the freeholder with a way of achieving a severance of the freehold notwithstanding section 19(1): such a lease could be granted and then the right to enlargement exercised once the property has been acquired by the nominee purchaser in the enfranchisement process. On balance, therefore, and having regard to the overall approach to construction that I set out above, I would consider that the exceptional case of the grant of lease that conforms to section 153 should be regarded as a disposal “severing” the freeholder’s interest under section 19(1)(a)(i). I add only that I did not find Bosomworth v Faber (1995) 69 P&CR 288, which was cited to me, of much assistance in considering this question, since that concerned the acquisition of easements by prescription and thus a wholly different context from the collective enfranchisement regime.
Section 19(1)(a)(ii): Common parts
[39] This subsection is an intricate provision, incorporating reference to section 2(1), which in turn refers to subsections 2(2) and (3). Here, it is only the “common parts” aspect that is material. Accordingly, the relevant question is: if the appellants had granted the lease before the notice of the claim to collective enfranchisement was given, would the respondents have been entitled to acquire under section 2(1)(b) the interest under the lease on the basis that it consists of or includes |page:156| common parts of the property that it is reasonably necessary to acquire on behalf of the participating tenants “for the proper management or maintenance of those common parts”? That breaks down into two questions: (i) does the lease consist of or include “common parts”; and (ii) if yes, is their acquisition reasonably necessary?
[40] “Common parts” is defined in section 101(1) as follows:
“common parts”, in relation to any building or part of a building, includes the structure and exterior of that building or part and any common facilities within it;
[41] There was much discussion before the court of the meaning and interpretation of this definition. I was referred to the Scottish case of Marfield Properties v Secretary of State for the Environment 1996 SCLR 749, in which the question arose as to whether the roof and external walls of office premises fell within the definition of “common parts” in a lease. In particular, the definition covered “all other parts of… the said building development which are common to the premises and other parts of the said building development”. Giving the judgment of the Inner House (First Division), Lord Hope said, at p752D:
The adjective “common” stands on its own. This suggests that it has been used here more generally, to include anything that is shared between the premises and other parts of the development or in some other way benefits or is of concern to the occupiers of them.
Parts of the structure of the building, such as the roof and the external walls, appear to us to fall naturally within the scope of this expression. So long as they are not designed for the exclusive benefit of one part only of the building development, they may properly be said to be common to the various premises which are included within them.
[42] However, although this is of some assistance, the court was there construing the expression within the context of a particular lease that contained a detailed definitional clause, and the reasoning cannot therefore be transposed to a statutory context.
[43] The statutory definition is inclusive, not exhaustive. It clearly encompasses more than the ordinary meaning of common parts, which would not cover the exterior of the building. Without attempting a comprehensive definition, I consider that it is intended to include those parts of the building that either may be used by or serve the benefit of the residents in common (using that expression in a non-technical sense), as opposed to those parts of the building that are for the exclusive benefit of only one or a limited number of the residents or for none at all. Thus, I consider it will cover the boiler room or a room housing the lift machinery, although those rooms may be kept locked and no resident ever goes into them. It will encompass a covered atrium that all the residents can use and also a sunken garden in the centre of the building to which the residents do not have access but which is a common amenity that is to be regarded as part of the building; or a banked rockery at the front of the building over which the residents do not pass but which is maintained for their common benefit and should be considered as part of the “exterior” although not part of the structure. Furthermore, there is no requirement that the part must actually be used by all the residents: for example, the fact that the residents on the ground floor may never use the lift does not prevent it from being a common part.
[44] I should add that in referring to a boiler room, I am not seeking to depart in any way from the judgment in Oakwood Court (Holland Park) Ltd v Daejan Properties Ltd [2007] 1 EGLR 121. That concerned a boiler house that was separate from the building housing the tenants’ flats and the question of whether it came within the differently worded provisions of section 1(3)(b). There, Judge Marshall held that it did not, since the tenants were not entitled to “use” the boiler house as the statutory wording required, but were entitled only to receive hot water from it. By contrast with section 1(3)(b), the statutory definition of “common parts” is not limited by a test of user. As Judge Marshall noted in her judgment in the present case, Oakwood Court is accordingly distinguishable; and she indeed expressed the view that a boiler room within a building would be a common part.
[45] Moreover, I do not think that to satisfy the definition the part must be devoted to this purpose as a matter of obligation in the residents’ leases. For example, Mr Munro gave the example of a gym as something that would constitute a “common facility”, and I agree. However, if the freeholder has devoted, say, a large room in the basement to serve as a gym and placed exercise machinery there to which any resident may have access, I consider that this constitutes a common facility (and, thus, a “common part”) even if there is no covenant in the leases to provide such a facility. The test is applied as at the “relevant date”, which is the date of the tenants’ section 13 notice.
(a) Caretaker’s flat
[46] The question of whether a caretaker’s flat is a common part within this definition was considered by the Lands Tribunal (LT), reversing the decision of the LVT in McGuckian v 29 Eaton Place Management Co Ltd LRA/85/2006 unreported 3 January 2008. Although not binding on me, it is clearly worth careful consideration. The judge below preferred the reasoning of the LVT to that of the president, and before me the appellants argued that she was wrong to do so.
[47] In McGuckian, the right to collective enfranchisement was exercised in respect of a terraced house comprising three maisonettes let under subleases and a caretaker’s flat in the basement. Two of the three subleases contained a covenant by the lessor to employ and provide the services of a resident caretaker, and the third sublease included an obligation to contribute to the cost of a caretaker if one were provided. The reasoning of the LVT is encapsulated in two paragraphs of its decision:
17. A distinction could be drawn between (a) a scheme that required a lessor to provide caretaking facilities and (b) a scheme that required a lessor to provide the services of a resident caretaker. In the former the lessor may, for its own convenience, decide to house the caretaker in a flat retained by it, but it would not be obliged to do so: the services could be provided by a non-resident caretaker. With such a scheme the retained flat would not amount to a common part.
18. However in this case the sublessees were entitled to the services of a resident caretaker. The services provided by that caretaker and enjoyed by the sublessees of the maisonettes were a common facility within the definition contained in Section 101 of the Act. The Caretaker’s Flat was essential to the provision of the residential caretaking facilities. To put it another way the Nominee Purchaser would not be able to fulfil its obligations, as a lessor, under the maisonette subleases unless it acquired the Caretaker’s Flat.
[48] The president of the LT reversed that decision, holding that, in the 1993 Act, flats and common parts are mutually exclusive: see [25] of his judgment. He did so on the basis of section 2(4)(a) and (b) and the definitions in section 101. He significantly added, in [26]:
While it is understandable, and indeed commendable, for the LVT to have searched for a practical solution to what it saw as the caretaker problem, the issue is necessarily one of statutory construction, and,… I do not think that the statutory provisions in their terms permit the result that the LVT sought to achieve.
[49] However, as the president observed, he did not have the benefit on that appeal of representation on behalf of the respondent. In my judgment, there is nothing in the definition in section 101 that supports this conclusion. As for section 2(4), it refers to:
any premises other than —
(a) a flat contained in the relevant premises which is held by a qualifying tenant,
(b) any common parts of those premises,…
[50] Accordingly, that differentiation is as between common parts and a flat “held by a qualifying tenant” in the context of excluding premises that do not comprise those categories (“premises other than”). A caretaker’s flat is unlikely to be held by a qualifying tenant. However, even if it were, this subsection provides no indication that a caretaker’s flat cannot also be a common part.
[51] Before me, Mr Munro placed greater reliance on section 4, the provision in the 1993 Act that serves to exclude certain premises from the right to collective enfranchisement. In particular, section 4(1) and (3) provide: |page:157|
(1) This Chapter does not apply to premises falling within section 3(1) if —
(a) any part or parts of the premises is or are neither —
(i) occupied, or intended to be occupied, for residential purposes, nor
(ii) comprised in any common parts of the premises; and
(b) the internal floor area of that part or of those parts (taken together) exceeds 25 per cent. of the internal floor area of the premises (taken as a whole).
…
(3) For the purpose of determining the internal floor area of a building or of any part of a building, the floor or floors of the building or part shall be taken to extend (without interruption) throughout the whole of the interior of the building or part, except that the area of any common parts of the building or part shall be disregarded.
[52] Put in simple terms, this section serves to exclude from the right to collective enfranchisement premises where the ratio of business to residential use exceeds 1:3. It thus excludes premises where a significant part is devoted to offices or retail use. In making that calculation, the residential and common parts are aggregated so as to arrive at the remaining area that is presumed to be devoted to such business use. However, although the way this calculation is prescribed involves deducting the common parts from the whole, as set out in section 4(3), I do not regard that as determining that, as a matter of statutory construction, a residential flat can never, whatever the circumstances, also constitute a common part.
[53] Applying the approach set out in [43] to [45] above, I consider that a flat housing a caretaker who services the building at the relevant date constitutes a common part within the statutory definition, irrespective of whether the obligation under the leases to provide a caretaker requires that caretaker to be resident. The position is analogous to a locked room or cupboard in which are kept equipment and materials used to clean the hallway and stairs (vacuum cleaner, mops, etc). The landlord may well not be obliged to devote a room or cupboard to that purpose, but I consider that it constitutes a common part none the less. Moreover, in my view, it is not necessary to squeeze this into the concept of “common facilities”, which I consider is addressing something different.
[54] Judge Marshall held that the caretaker’s flat constituted a common part on the basis of the covenants in the leases of the other flats, following the approach of the LVT in McGuckian. In case I am wrong in approaching the matter on a functional basis and the covenants should be determinative, I would hold that the caretaker’s flat was a common part also on that basis. My reason for doing so is much the same as that of the judge.
[55] The five flats here were subject to three different forms of leases. In the leases of flats 1 and 5, the recitals include a provision that:
It is intended to demise all the other flats in the Building (other than the flat occupied by the caretaker hereinafter mentioned) upon terms covenants and conditions similar to those herein contained…
[56] Further, the lessor covenants in clause 3(7) state:
That… the Lessor will at all times during the said term provide and use his best endeavours to maintain the services of a full-time caretaker resident in the caretaker’s flat for the performance of [various specified duties].
[57] Further, the lessee covenants, in para A(iv) of the first schedule to pay a maintenance charge expressed to include a contribution towards the costs of:
Employing maintaining and providing within the Building accommodation for the caretaker hereinbefore referred to.
[58] Despite Mr Munro’s valiant attempts to persuade me that the landlord’s covenant in these leases is only a “one-off” obligation to provide a resident caretaker and thereafter to use best endeavours to maintain his or her services, I consider that, on any sensible view, the proper construction of the covenant is as a continuing obligation to provide the services of “a full-time caretaker resident in the caretaker’s flat” throughout the term of the lease, subject only to a “best endeavours” proviso.
[59] The lease of flat 4 contains an identically worded recital, but the lessor’s covenant in clause 3(8) contains an obligation only to provide the services of a caretaker and not that he or she need be resident or indeed full-time. However, the lessor is entitled to recover by way of maintenance charge a contribution towards the costs of “providing within the Building” accommodation for the caretaker: clause 2(18) and para A(iv) of the first schedule.
[60] The leases of flats 2 and 3 are newer leases, granted by way of 90-year extensions under Chapter II of Part I of the 1993 Act. They contain an obligation to use all reasonable endeavours to employ such staff as are deemed necessary to provide caretaking services: clause 3(3) and para 5 of the first schedule. Although these leases envisage the possibility of accommodation being provided for the residence of a caretaker, there is no obligation to provide such accommodation or indeed that, if provided, it should be in the building: para 5(d) of the first schedule.
[61] Accordingly, the freeholder will be in breach of the covenants in two of the five leases if it does not use its best endeavours to maintain the services of a resident caretaker from the caretaker’s flat in the property. The other three leases provide for the lessor to recover a contribution towards the cost of accommodation provided for the caretaker. On this basis, if obligation were the test, I would consider, like Judge Marshall, that this is sufficient to conclude that the flat constitutes a common part.
[62] If the caretaker’s flat is therefore a common part, is it reasonably necessary for the respondents to acquire it “for the proper management or maintenance of those common parts”? In my judgment, it clearly is because if they did not acquire the interest under the lease they would not be able to use that flat to accommodate a caretaker. Indeed, if the lease remained in force, the basement flat would not be maintained as a common part at all.
(b) Light well/patio
[63] The above is sufficient to dispose of this appeal. However, since it was fully argued, I consider separately the issue of the light well, described in the plan attached to the lease as the “patio.”
[64] Under the scheme of the 1993 Act, a “common part” has to be a part of the building (or a part of the relevant part of a building) because it is the building itself (or relevant part of the building) that constitutes the premises that may be subject to an enfranchisement claim: see section 3. A building for this purpose of course includes its exterior. However, a communal garden, backyard or forecourt is not part of the building and therefore cannot qualify as “common parts”. Under the complex statutory provisions, the participating tenants’ rights in respect of areas of that kind are separately addressed by section 1(2)-(4).
[65] A light well in the centre of a building entirely surrounded by its walls can sensibly be regarded as part of the building: see Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] EWHC 350 (Ch); [2008] 2 P&CR 36*, in [65], where Warren J reached that conclusion in applying the similarly worded definition of “premises” in the 1987 Act in the context of the tenants’ statutory right of first refusal on a disposal by the landlord†. Does it make a difference that, in the present case, the light well is framed by the walls of the building only on three sides? In fact, the light well functions as such because of the similar, adjacent space framed by three walls of 53 Cadogan Square. Together, the premises known as 51 and 53 Cadogan Square thus enclose on all four sides a space allowing light to come through for the benefit of the two premises.
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* Editor’s note: Also reported at [2008] 2 EGLR 141
† Although Warren J observed later in his judgment that he would be reluctant to apply by analogy a construction of the 1993 Act to the 1987 Act, that was as regards the statutory context of “common parts”, I do not see any distinction between the two Acts when considering the everyday concept of a “building”
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[66] I consider that the matter can best be approached by considering the implications if the light well were not part of the building. In that case, since it would not be part of the premises covered by section 3, the participating tenants would not have the right to acquire the freehold of |page:158| the light well under section 1(1). Nor would they have the qualified right to acquire its freehold under section 1(2)-(4) because it is not property that the tenants are entitled to use in common. It would therefore fall outside the scope of the right to collective enfranchisement.
[67] In my view, such a capricious conclusion would be clearly contrary to the way the 1993 Act is intended to operate. Indeed, as I understand it, the appellants here do not suggest that, in the absence of the lease, the freehold that respondents would be entitled to acquire would exclude the light well. The answer, in my judgment, is to regard the light well here as forming part of the exterior of the building. As Judge Marshall stated in her judgment, in [110] to [111]:
the present case is that of a light well, entirely enclosed within the building fabric originally constructed for the very purpose of enabling the better enjoyment of the Building, and whose only use is to facilitate the use of the Building and its exterior maintenance and repair. Anyone buying the whole Building would expect to get the light well as well.
[111]. In my judgment that brings the light well quite naturally within the concept of the “exterior” of the Building for the purposes of the Act, and therefore within the umbrella concept of “common parts.”
I respectfully agree.
[68] It is therefore unnecessary to consider the interesting arguments addressed to me as to whether, quite aside from any light well, an extent of the airspace outside the exterior wall of a building should be regarded as forming part of the building, by analogy with the position that has been held to apply to the airspace above the roof of the building: see the decision of the LVT in Meadowside Freehold Ltd v Shellpoint Trustee Ltd LON/ENF/1177/04, unreported 20 May 2005.
[69] However, although the light well is therefore a common part, is acquisition by the respondents of the leasehold interest in the light well reasonably necessary within the terms of section 2(3)? The lease was held by Judge Marshall to convey airspace above the surface of the patio to the extent that the tenant of the basement flat would reasonably expect to make use of as part of everyday living. On this, the judge accepted the appellants’ argument, and held that it was to a similar height to that of the basement flat itself: see [99]. A tenant of the basement flat would therefore be unable to erect any structure on the patio that interfered with the light coming to the tenants of the flats above; indeed, since the lease expressly does not convey anything below the floor finishes, the tenant under the lease could not dig into the ground to erect foundations for a structure of even limited height.
[70] The argument of necessity advanced before the judge concerned the drainage systems served by manholes in the patio and cables or conducting media going up the side of the building. Clearly, the freeholder will require access to the patio (and the airspace immediately above it) for the purpose of the maintenance and repair of those systems and media, as well as of the exterior walls of the structure facing towards the light well. However, in that regard, the reservations in the lease are important. The third schedule to the lease provides that the rights excepted and reserved over the demised premises include:
1. The right of free passage and running of electricity gas water and soil as heretofore and from time to time enjoyed and used from and to the remainder of the Building and any other adjoining or neighbouring buildings or land through the wires cables pipes channels drains sewers and other service media now or hereafter in over or under the Demised Premises.
2. The right for the Lessor and all persons authorised by them at reasonable times and upon reasonable notice except in cases of emergency to enter the Demised Premises:
2.1 To inspect cleanse connect to repair replace alter add to or execute any works to the wires cables pipes channels drains sewers and other service media referred to above.
2.2 To view the state and condition of and repair maintain alter extend and rebuild the Building and adjoining neighbouring premises.
[71] Judge Marshall was persuaded that these reservations are not sufficient, such that “the breadth of the matters for which the light well will require to be used” meant that the control bestowed by full ownership of the light well and, in particular, its floor surface was required. Before me, Mr Walker sought to uphold this conclusion on the basis that future technological developments may change the nature of the cabling or media services or create the need for new services so as to render the reserved rights under the lease inadequate. However, in my view, such vague speculation concerning possible future needs is not sufficient. Section 2(3) refers to the case where acquisition “is reasonably necessary for the proper management or maintenance of those common parts”. It will almost always be possible to argue a case for the benefit of full control that comes with a freehold in possession, but section 2(3) clearly envisages that in some cases the freeholder’s needs will be sufficiently accommodated by the terms of the lease. Although I differ with some diffidence from the finding in this regard of a judge with considerable experience in this area, I conclude that the terms of the lease are adequate to protect the respondents’ need to manage and maintain the common parts on behalf of the participating tenants. The inclusion of the light well/patio therefore does not afford a basis to bring the lease within section 19(1)(a)(ii).
Section 19(2) and (3): Disposal “of his interest”
[72] This is an alternative argument advanced on behalf of the respondents, since it will apply only if the lease is not void on one or more grounds under section 19(1). The respondents argued, and the court below accepted, that they would then be entitled to acquire the lease from CEL by virtue of section 19(2) and (3).
[73] Section 19(2) and (3) clearly covers the situation where, after a notice under section 13 is duly registered, the freeholder transfers its freehold interest to a third party. That third party, as the new freeholder, then stands in the shoes of the old freeholder in the enfranchising process. However, the respondents’ case is that the reach of these provisions is much wider. They contend that once a notice has been duly registered, a lease granted by the freeholder is subject to acquisition in the enfranchising process on behalf of the participating tenants.
[74] This argument is founded on the definition of “disposal” in section 101(1): see [20] above. Since “disposal” encompasses the grant of a lease, it is submitted that the freeholder “disposes of this interest” in the premises within section 19(2)(a) when it grants a lease.
[75] There is, submitted Mr Walker, a symmetry between subsection 19(1), on the one hand, and subsections 19(2)-(3), on the other. Once a notice has been registered, the position is crystallised: some transactions regarding the freeholder’s interest are prohibited (section 19(1)), others are permitted, but anyone taking an interest from the freeholder does so subject to the claim of the participating tenants.
[76] As Mr Walker accepted, if his argument were correct it would mean that any lease granted by the freeholder once a notice has been registered would be subject to acquisition. For example, if a flat in the block was vacant on the date on which the notice was registered or became vacant during the enfranchisement process, a 50-year lease granted by the landlord would be subject to acquisition. The practical implications of this are significant because it is not uncommon for the enfranchisement process to take several years. Moreover, the qualifying tenants have the right to withdraw their claim at any stage before a binding contract is entered into: see section 28.
[77] In my judgment, this approach places a greater weight on the word “disposal”, regarded in isolation, than it can bear in the context of its usage in section 19(2)(a) and (3). The definition of “disposal” for this part of the 1993 Act is indeed broad, but when the term is used in the substantive provisions the sense in which it is being used is clarified by those provisions. Hence, section 11, which concerns the right of a qualifying tenant to obtain information, requires the freeholder, after the receipt of a request for information, to notify the tenant if it “disposes of any interest (whether legal or equitable) in the relevant premises” (emphasis added). Clearly, there “disposal” is being used to cover also the grant of a lease. That is necessary, since the qualifying tenants need to know of a new tenancy being created in any part of the premises that is likely to affect the terms of the acquisition. Similarly, section 18 requires the nominee purchaser to disclose to the reversioner any agreement made after the section 13 notice has been served between the nominee purchaser and a party other than a participating tenant providing for “the disposal of a relevant interest”, which is defined by section 18(3) to mean “any interest in, or in any part of the specified |page:159| premises…” (emphasis added). Again, both language and context show that this includes the grant of a lease. That is necessary, since such a transaction may be relevant to the valuation.
[78] By contrast, section 19(2)(a) refers simply to the situation when the freeholder “disposes of his interest” (emphasis added). That condition is set out only for the purpose of the application of section 19(3), which provides the context in which it falls to be interpreted. Under section 19(3), all parties continue thereafter as though the person acquiring the freeholder’s interest was “a relevant landlord in place of” the freeholder; as though it had received the section 13 notice making the claim to enfranchisement (which had in fact been given to the original freeholder); and as though it “had taken all steps” that the original freeholder had taken. Hence, it is bound by the counternotice that the original freeholder gave under section 21, including any counter-proposal as to the price, leaseback and so forth. Therefore, this provision prevents a sale of the reversion by the freeholder in the course of the enfranchisement process (which, as mentioned above, may be prolonged) from disrupting that process.
[79] If section 19(2)(a) were also to apply to the grant of a lease by the freeholder, the language of section 19(3) would be inapt and it is indeed difficult to see how it could operate. The original freeholder would retain the reversion, so the lessee could hardly take his place as a relevant landlord. Nor can the section 13 notice served on the freeholder realistically take effect as a notice to the lessee, since the price, terms, etc set out in the notice obviously relate to the freehold and not to his lease. Similarly, the lessee can hardly be deemed to be treated as the party that served the freeholder’s counternotice, much of which may have little relevance to his lease. Furthermore, the lessee would not satisfy the conditions of being a “relevant landlord”. “Relevant landlord” is a statutory term defined by the provisions of section 9. For the most part, it covers those holding freehold interests and the only holders of leasehold interests who qualify as a “relevant landlord” are persons who fall within the particular provisions of section 2(1)(a) or (b).
[80] Accordingly, I consider that the language “disposes of his interest” in section 19(2)(a) refers to a transfer of the freehold interest, not the grant of a lease out of that interest. There is symmetry between subsection 19(1) and subsection 19(2) and (3), but it is not that for which the respondents contend. Once the participating tenants’ claim has been registered, section 19(1) prohibits the freeholder from dividing its reversion since that would completely disrupt the enfranchisement process, requiring the tenants to deal thereafter with two freeholders, each for part of the premises, rendering obsolete the terms of their section 13 notice that covered the entire premises. By contrast, disposal of the freehold in its entirety is not restricted, but by putting the person acquiring the freehold (and similarly any subsequent acquirer) in the shoes of the original freeholder, the disruption to the enfranchisement process that would otherwise ensue is avoided.
[81] I am reinforced in this conclusion by the observation of Lloyd LJ in Cawthorne. That case concerned a leaseback and the question of whether the reversioner was entitled to serve a statutory request for a leaseback that he had not specified in his counternotice under section 21. The Court of Appeal held that he could not subsequently serve a distinct notice seeking a leaseback. In the course of his judgment (with which the other members of the court agreed), Lloyd LJ stated, in [29]:
There are constraints on what a reversioner can do with the premises pending the process, under section 13, but these do not appear to preclude the landlord from granting a long lease of one flat…
[82] This observation was obiter, and expressed as it was in somewhat tentative terms Mr Walker sought to cast doubt on it as a throwaway remark in a case where the point did not arise. Since the law report unfortunately does not contain any summary of counsel’s argument, it is impossible to discern to what extent the point was explored. However, ascertainment of what steps by way of creation of new interests the reversioner can take, and when, during the enfranchisement process under the statutory scheme was the context in which the issue directly before the Court of Appeal arose. Therefore, I do not consider that Lloyd LJ’s observation, which referred also to the then current edition of Hague on Leasehold Enfranchisement, can be dismissed so lightly. In any event, for the reasons set out above, I respectfully consider that it was correct.
[83] I should add, since this was also relied on by the respondents, that I do not think that the view that I have reached regarding the reversioner’s ability to grant a lease serves to circumvent the restrictions on the timing of a leaseback notice that flow from the statutory interpretation of the 1993 Act in Cawthorne. There is a difference between a leaseback, whereby the original freeholder becomes a lessee, and a lease, whereby it acts as lessor. Moreover, the former enables the original freeholder to retain in its own right an interest in the premises after the enfranchisement is completed, whereas in the case of the latter the participating tenants, by their nominee purchaser, will acquire its interest as landlord.
Conclusion
[84] For the reasons set out above, I accordingly hold that:
(i) the lease does not fall within the scope of section 19(1)(a)(i);
((ii) it is void on the basis that it consists of the caretaker’s flat and fulfils the conditions of section 19(1)(a)(ii); and(
(iii) if it had not been void, the grant of the lease would not have engaged the provisions of section 19(2) and (3).
[85] This appeal is accordingly dismissed.
Appeal dismissed.
