Landlord and tenant — Assured tenancy — Statutory periodic tenancy — Notice of increase of rent above £25,000 — Whether panel had jurisdiction to determine rent above £25,000
By an assured tenancy a flat was let by
the headlessee of a building for a term expiring on September 27 1995 at a rent
of £700 per month. On the expiration of the term the tenants remained in
possession under a statutory periodic tenancy under the Housing Act 1988. Since
September 29 1995, the applicant freeholder became the tenants’ immediate
landlord. On January 29 1996 the applicant served a notice of increase under
section 13 of the 1988 Act proposing a rent of £3,375 per month. The tenants
referred the notice to the respondent rent assessment panel. At the hearing the
panel raised two questions: (1) whether a notice proposing a rent in excess of
£25,000 was a valid notice; and (2) if the panel were to value the premises at
an annual rent above £25,000, whether they would be precluded from making a
determination because a tenancy at a rent above that figure could not be an
assured tenancy. The panel determined that the notice was invalid and that it
could not entertain the tenants’ application. In the applicant’s challenge to
those decisions, the panel accepted that it had power to entertain the reference,
but if it found that the rent was above the £25,000 limit for assured
tenancies, it could only determine that that figure was the new rent.
14(1) of the Housing Act 1988 requires a rent assessment panel to assess the
rent which a dwelling-house might be expected to let under an assured
tenancy. However in determining the rent a rent assessment panel must
disregard the limit on rental values contained in Schedule 1 to the Act and
assess the market rent without regard to any such limitation. The introduction
of the rent cap following the abolition of rates was not intended to make a
fundamental change to the characteristics of assured tenancies. The panel is
obliged to assess the market rent without reference to the £25,000 limit.
No cases are referred to in this report.
This was an application by Cadogan
Estates Ltd, by way of judicial review of decisions of the respondent, the
London Rent Assessment Panel.
Anthony Radevsky (instructed by Lee &
Pembertons) appeared for the applicant; John Hobson (instructed by the Treasury
Solicitor) represented the respondent; the tenant did not appear and was not
represented.
Giving judgment, KAY J said: The
applicant is the freehold owner and landlord of a flat in Cadogan Place, London
SW1. By an agreement dated October 5 1994, the then headlessee of the whole
building granted a tenancy of the flat for a fixed term expiring on September
27 1995 at a rent of £700 per month. That rent was significantly below the
market rent because of the relationship between the headlessee and the tenants.
The agreement created an assured tenancy within the meaning of section 1 of the
Housing Act 1988 (‘the 1988 Act’).
After September 27 1995, the tenants
remained in occupation of the flat under a statutory periodic tenancy arising
under section 5 of the 1988 Act. Since September 29 1995, their immediate
landlord has been the applicant.
On January 29 1996, the applicant served
a notice in the form prescribed by section 13(a) of the 1988 Act proposing that
the rent should be increased to £3,375 per month with effect from March 1 1996.
On February 27 1996, the tenants referred the notice to the respondent rent
assessment panel under section 13(4) of the 1988 Act.
At the first hearing of the tenants’ reference
on April 17 1996, the applicant’s valuer supported the claimed rent which
amounted to £40,000 pa, while the tenants contended that the proper rent was
£19,800 pa. However, at that hearing, the respondent itself raised two
questions:
(i) whether a notice which proposed an
annual rent in excess of £25,000 was a valid notice; and
(ii) whether if the panel were to value
the annual market rent as being above £25,000 they were precluded from making a
determination.
Having received written representations from
both sides, the respondent determined that the applicant’s notice was not valid
and that, accordingly, it was as a result unable to entertain the tenants’
reference. The applicant brought these proceedings to challenge those
decisions.
It is conceded on behalf of the
respondent that the challenged decisions were wrong in that the applicant’s
notice was valid, and also that it had power to entertain and hear the
reference by the tenants. However, it became apparent that there is no
agreement as to the powers of the respondent on hearing the reference. The
applicant contends that if the respondent concludes that the appropriate market
rent is in excess of £25,000 pa, it is for the respondent to determine that
rent, which would have the effect of bringing to an end the statutory periodic
tenancy. The respondent contends that it cannot determine an annual market rent
above £25,000 and that if it were to reach a conclusion that apart from the
provisions of the 1988 Act the annual market rent would have been in excess of
£25,000, it should determine the rent at £25,000 pa. Accordingly, I was asked
to resolve that dispute. It seemed appropriate in such circumstances to invite
the applicant to seek a specific declaration that its contentions were correct
and I granted leave for an amendment of the form 86A. Once that had happened,
it seemed that the matter was one upon which the tenants should be afforded an
opportunity to be heard, and I adjourned the matter so that the application
could be served upon them. However, following service the tenants have not
sought to make any representations and the matter has proceeded with the two
original parties.
Legal framework
Section 1(1) of the 1988 Act provides:
1–(1) A tenancy under which a
dwelling-house is let as a separate dwelling is for the purposes of this Act an
assured tenancy if and so long as —
(a) the tenant or, as the case may be,
each of the joint tenants is an individual; and
(b) the tenant or, as the case may be, at
least one of the joint tenants occupies the dwelling-house as his only or
principal home; and
(c) the tenancy is not one which by
virtue of subsection (2) or subsection (6) below, cannot be an assured tenancy.
Subsection (6) has no relevance to this
case. Subsection (2) provides:
Subject to subsection (3) below, if and
so long as a tenancy falls within any paragraph in Part I of Schedule 1 to this
Act, it cannot be an assured tenancy; …
It is helpful to look first at Part I of
Schedule 1 as originally enacted, which provided:
Tenancies
which cannot be assured tenancies
Part
I
The
tenancies
Tenancies entered into before
commencement
1. A tenancy which is entered into
before, or pursuant to a contract made before, the commencement of this Act.
Tenancies of dwelling-houses with high
rateable values
2. A tenancy under which the
dwelling-house has for the time being a rateable value which, —
(a) if it is in Greater London, exceeds
£1,500; and
(b) if it is elsewhere, exceeds £750.
Very significant changes have been made
to that Schedule, to which it will be necessary to return in due course, but it
is convenient first to look at the other relevant provisions of the 1988 Act to
see the effect of the assured tenancy provisions as originally enacted because
it is the inter-relationship of the changes with the underlying scheme that
causes the difficulties to be addressed in this case.
Section 5(2) provides:
(2) If an assured tenancy which is a
fixed term tenancy comes to an end otherwise than by virtue of —
(a) an order of the court, or
(b) a surrender or other action on the
part of the tenant,
then subject to section 7 and Chapter II
below, the tenant shall be entitled to remain in possession of the
dwelling-house let under that tenancy, and subject to subsection (4) below, his
right to possession shall depend upon a periodic tenancy arising by virtue of
this section.
Section 13 applies to such a statutory
periodic tenancy. Subsection (2) of that section provides:
For the purpose of securing an increase in
the rent under a tenancy to which this section applies, the landlord may serve
on the tenant a notice in the prescribed form proposing a new rent to take
effect at the beginning of a new period of the tenancy specified in the notice
…
Subsection (4) provides procedures for
the tenant to challenge that notice:
Where a notice is served under subsection
(2) above, a new rent specified in the notice shall take effect as mentioned in
the notice unless, before the beginning of the new period specified in the notice
—
(a) the tenant by an application in the
prescribed form refers the notice to a rent assessment committee; or
(b) the landlord and the tenant agree on
a variation of the rent which is different from that proposed in the notice or
agree that the rent should not be varied.
Section 14(1) provides for the
determination of rent by a rent assessment committee:
Where under subsection (4)(a) of section
13 above, a tenant refers to a rent assessment committee a notice under
subsection (2) of that section, the committee shall determine the rent at
which, subject to subsection (2) and (4) below, the committee consider that the
dwelling-house concerned might reasonably be expected to be let under an
assured tenancy —
(a) which is a periodic tenancy having
the same periods as those of the tenancy to which the notice relates;
(b) which begins at the beginning of the
new period specified in the notice;
(c) the terms of which (other than
relating to the amount of the rent) are the same as those of the tenancy to
which the notice.
Section 14(7) then provides:
Where a notice under section 13(2) above
has been referred to a rent assessment committee, then, unless the landlord and
the tenant otherwise agree, the rent determined by the committee … shall be the
rent under the tenancy with effect from the beginning of the new period
specified in the notice or, if it appears to the rent assessment committee that
that would cause undue hardship to the tenant, with effect from such later date
(not being later than the date the rent is determined) as the committee may
direct.
This scheme was straightforward and
provided that the rent payable under a statutory periodic tenancy coming into
effect upon the expiry of an assured tenancy would, subject to the giving of
appropriate notice, always be the market rent. The tenant gained the assurance
of a right to remain in the property, but the landlord was always entitled to
secure the then market rent. In simple terms there was no artificial rent
capping.
With the abolition of general rates by
the Local Government Finance Act 1988, the provisions of Part I of Schedule 1
to the 1988 Act clearly required amendment. Section 119 of that Act gave the
Secretary of State power to make regulations providing that a reference in
legislation to a rateable value shall instead be a reference to some other
factor.
The amendment was made by the References
to Rating (Housing) Regulations 1990 (‘the 1990 Regulations’), para 29 of which
added a new para 2A to Part I of Schedule 1 to the 1988 Act retaining the
exclusion from being an assured tenancy for any tenancy created before April 1
1990 where the rateable value was above the limits set by the Schedule as
originally enacted on March 31 1990. For tenancies entered into after April 1
1990, para 2 was amended and the relevant parts provided that a tenancy would
not be an assured tenancy if it was:
A tenancy —
(a) which is entered into on or after
April 1, 1990 … and
(b) under which the rent payable for the
time being is payable at a rate exceeding £25,000 a year.
This provision causes no difficulty in
determining whether a tenancy is an assured tenancy at any particular time,
which clearly is its purpose, but problems arise when the relationship between
this paragraph as amended and section 14(1) of the 1988 Act are examined. Mr
Anthony Radevsky on behalf of the applicant submits, and I fear that he is
right, that the draftsman failed to appreciate the relationship between these
two provisions. Section 14(1) requires a rent assessment committee to assess
the rent ‘that the dwelling-house might reasonably be expected to be let under
an assured tenancy’. It is the interpretation of these words that is now at
the heart of the dispute in this case.
Respondent’s submissions
Mr John Hobson on behalf of the
respondent submits that these words are straightforward and that the effect of
the amendments made by the 1990 Regulations is that in considering a tenant’s
reference under section 13(4) of the 1988 Act, the respondent has to assume
that an assured tenancy would be granted. If, therefore, the market rent would
be in excess of £25,000 for the dwelling-house, the respondent must conclude
that a landlord would only let the premises at the maximum rent that qualifies
as an assured tenancy, ie £25,000 and determine that that is the new rent.
If that argument is right, then
effectively the whole character of an assured tenancy has been changed and not
only does the tenant acquire security of tenure but also the rent is subject to
a cap at the maximum permitted in Schedule 1 to the 1988 Act.
Applicant’s submissions
Mr Radevsky submits that it was not and
cannot have been the intention of parliament that such a radical change to the
whole system of assured tenancies should be made in this way, and that the only
way in which to make sense of the provisions is to read ‘under an assured
tenancy’ in section 14(1) as meaning under a tenancy having the characteristics
of an assured tenancy without reference to any limitation upon the rent that
applies to an assured tenancy.
He contends that to read the section in
the way suggested by the respondent would lead to all sorts of anomalies, some
of which a landlord could not protect himself against. He points to the fact
that the whole purpose of the legislation was to phase out regulated tenancies
under the Rent Act 1977 and introduce a scheme of protection for tenants which
landlords would find more attractive, thereby increasing the pool of private
rented accommodation.
Conclusions
I find it quite impossible to accept Mr
Hobson’s argument that the wording of section 14(1) is simple and
straightforward and as such must be interpreted in the way suggested on behalf
of the respondent.
The section requires that the committee
shall determine the rent at which it considers ‘that the dwelling-house might
reasonably be expected to be let under an assured tenancy’. If the annual
market rent is in excess of £25,000 no landlord could reasonably be
expected to let the premises at less than the market rent when the only
advantage of an assured tenancy would be to the tenant. He would be required to
give up a part of the rent that he could reasonably expect to receive for no
benefit to himself. In such circumstances there would be no rent at which he
could reasonably be expected to let the premises under an assured tenancy if
the literal meaning suggested is to be accepted. £25,000 would be the annual
rent at which he could least unreasonably be expected to let the premises, but
it cannot be said that such an expectation was in any way reasonable since in
practice it would never happen. The higher the market rent was above £25,000,
the less reasonable the expectation would become. If as the applicant’s
evidence suggests in this case, the annual market rent is £40,000, it would
require a landlord to act wholly unreasonably to let the premises, with all the
benefits of an assured tenancy, at an annual rent £15,000 below the going
market rent with the knowledge that any future increase in rent could only come
about if the Secretary of State exercised the power given to him to increase
the £25,000 limit.
It seems to me in those circumstances
that the provision cannot be taken to have the meaning suggested by the
respondent or the whole scheme breaks down, since it is impossible for the
respondent to arrive at the determination required of it. I, therefore,
consider that in order to make the provisions have effect, it is necessary, as
counsel for the applicant suggests, to give these words a wider meaning. I can
find no better approach than that suggested on behalf of the applicant, namely
one disregards the limit on the rental values contained in Schedule 1 and
assesses the market rental without regard to any such limitation.
The purpose of the inclusion of the then
section 14(1) is suggested in Megarry’s The Rent Acts vol 3 p214 as:
The tenancy to be assumed is an assured
periodic tenancy, with the security of tenure that such tenancies have. This is
a benefit that tends to increase the rent that a tenant would pay, and it must
be taken into account accordingly.
Thus it seems clear that the provision
was one that was originally included for the benefit of the landlord, and it would
be a remarkable situation if simply because of the abolition of rates, it was
to be turned on its head and have consequences of a very dire kind for some
landlords. Mr Radevsky contends, and I agree, that the respondent’s
interpretation would have the effect that landlords would stop granting assured
tenancies at annual rents less than £25,000 where there was a danger of
subsequent increases hitting the £25,000 ceiling.
If the applicant’s contentions are right
then clearly the closer a rent on a letting was to £25,000 pa, the less would
be the benefit of an assured tenancy to a tenant, since he would be on risk
that a subsequent rent reference might take the tenancy out of the assured
scheme. A rent of, for example, £24,500 pa would bring little security of
tenure because even a small movement in market rents would take it outside the
scheme (subject to any variation of the limit — there having been none since
the limit was introduced). Thus there would be little practical difference
between a letting just below the £25,000 limit
to allow for it being an assured tenancy if it was just below the limit. There
would thus be a natural progression in rental levels.
If the respondent’s argument is correct
the whole picture would become wholly distorted since not only would the tenant
gain the intended benefit of security of tenure, but also he would gain the
considerable benefit of a rent cap. It is difficult to see a landlord ever agreeing
to let a property to an individual or individuals for occupation as a
dwelling-house at a rent anywhere approaching the £25,000 limit. This as
counsel for the applicant points out would be quite contrary to the whole
purpose of the legislation, which was to increase the available supply of
privately-owned property available for rent as dwelling-houses by individuals.
I am reinforced in my view that the
respondent’s interpretation cannot be right by consideration of the way in
which the legislation came to be enacted. Parliament authorised the Secretary
of State to make provisions by regulations to replace with some other yardstick
references to rates, which would become meaningless. I do not believe that it
was the intention of parliament that the Secretary of State should thereby be
empowered to make a fundamental change to the characteristics of assured
tenancies by the introduction of a rent cap. If the respondent’s interpretation
was correct then I consider that real issues would arise as to whether the
regulations, in so far as they introduced a rate cap, were ultra vires.
Section 119 of the Local Government Act 1988 gave the Secretary of State power
to make regulations providing that the reference to rateable value in any
legislation should instead be to some other factor other than one connected
with rating. That section did not empower him to make a radical change of any
other kind to any legislation. The effect of the regulations if the
respondent’s contentions are correct would have been to change quite
dramatically the whole effect of the legislation relating to assured tenancies
and as such would, it seems to me, to have been ultra vires. However, no
such question would arise if the correct interpretation of section 14(1) is
that contended for by the applicant.
For these reasons, I have come to the
conclusion that the applicant’s submissions are correct, and it is unnecessary
to look in detail at the anomalies outlined on behalf of the applicant that
would arise if the respondent’s interpretation were correct.
A further argument advanced by the
respondent should perhaps be addressed. Mr Hobson argues that reference to
section 14(7) of the 1988 Act provides assistance. Section 14(7) as already set
out provides that the rent as determined by the respondent would have effect
from the beginning of the period specified in the notice, in this case March 1
1996. Thus, if the respondent determined a rent in excess of £25,000, it is
submitted that the rent would have been above the limit from that date and
hence the assured tenancy would have come to an end on that date and the
respondent would have had no power to determine a rent. I reject this argument.
The assured tenancy remains effective until the determination is made by the
respondent. The fact that provision for back dating the increase to the date
upon which the respondent would have found that the tenant should have agreed
to pay the determined rent cannot, in my judgment, determine the powers of the
respondent at the determination. The tenant is protected by the discretion
given to the respondent to alleviate ‘undue hardship’.
A similar argument was addressed in
relation to the provisions of section 6 of the 1988 Act which makes provisions
for changes in the terms of the tenancy other than rent, but I have not found
this of assistance in interpreting the provisions of section 14(1).
In the circumstances I am satisfied that
the respondent is obliged to assess the annual market rent without reference to
the £25,000 limit. If the resulting determination is in excess of that figure,
the assured tenancy will be at an end. Accordingly the applicant is entitled to
the relief sought and I shall hear counsel on the precise terms in which the
order should be drawn in the light of my findings and on any questions relating
to costs.
Application allowed.
