Leasehold enfranchisement — Leasehold Reform, Housing and Urban Development Act 1993 — Counternotice — Initial notice of collective enfranchisement served on then freeholder — Purchaser of freehold reversion serving counternotice before purchase registered — Sections 19 and 25 of 1993 Act — Whether tenants entitled to acquire freehold on terms of initial notice — Whether valid counternotice served — Whether validated retrospectively upon registration of purchaser’s title — Whether expert evidence relevant to bona fides of price proposal in initial notice
The defendant purchased the freehold reversion of a house containing four flats. The claimant tenants had earlier served notice on the then freeholder, under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993, seeking to exercise the right to collective enfranchisement in respect of the property. By that notice, they sought to acquire the freehold for £27,799. Following completion of the defendant’s purchase but before its interest was registered, the defendant purported to serve a counternotice under the Act, putting forward a price of £120,000. Registration of the defendant’s purchase subsequently took place.
The claimants applied to the court, under section 25, to acquire the freehold on the terms of their initial section 13 notice, on the basis that no valid counternotice had been served by the registered proprietor. The defendant applied for the claim to be struck out or for summary judgment to be entered in its favour. It submitted that once registration of its interest had been completed, its own counternotice had acquired retrospective validity by virtue of section 19. That section provided that, in the case of a disposal by the freeholder after service of the initial notice, all parties would be in the same position as though the person acquiring the interest had done so before the notice had been given. The claimants contended that section 19 merely enabled the defendant to take the benefit of things done by its predecessor in title and could not validate its own invalid counternotice.
Held: The application was dismissed. (1) The effect of section 19 was to place the defendant in the same position as though: (i) it had become the owner prior to the initial notice being served; (ii) that notice had been given to the defendant; and (iii) the defendant had done anything that the vendor had done in respect of that notice. It did not retrospectively validate things done by the defendant, prior to the registration of its title, that it had had no legal right or power to do. The claimants were entitled to a declaration that no valid counternotice had been served. (2) It remained to be determined whether the proposal as to price made by the tenants in their initial notice had been made in good faith. On that issue, it was not appropriate to make a direction for expert valuation evidence as to the possible range of purchase prices. An offer below that range does not of itself indicate that an offer has been made in bad faith; valuation evidence cannot be conclusive as to the bona fides of the person making the offer. It was for the tenants to satisfy the judge on that matter by giving evidence and explaining why they had put in the figure that they had, and for the judge to decide whether they were honest.
The following cases are referred to in this report.
Cadogan v Morris; Viscount Chelsea v Morris; Cadogan Estates Ltd v Morris [(1999) 77 P&CR 336; [1999] 1 EGLR 59; [1999] 04 EG 155; 31 HLR 732, CA
9 Cornwall Crescent London Ltd v Kensington and Chelsea Royal London Borough Council [2005] EWCA Civ 324; [2005] 2 EGLR 131; [2005] HLR 40
Smith v Express Dairy Co [1954] JPL 45
This was the hearing of an application to strike out a claim by the claimants, Karin Renshaw, Juergen Senge and Gabriele Senge, under section 25 of the Leasehold Reform, Housing and Urban Development Act 1993, to acquire the freehold of a property owned by the defendant, Magnet Properties South East LLP, on the terms of their initial notice.
Anthony Radevsky (instructed by Wallace LLP) appeared for the claimants; David Lonsdale (instructed by Kidd Rapinet, of Maidenhead) represented the defendant.
Giving judgment, HH Judge Collins CBE said:
[1] On 10 April 2007, the claimants issued an application under section 25(1) of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act), seeking that the freehold interest at 1 Redcliffe Street, London SW10, should be acquired by them on the terms set out in the notice dated 19 September 2006 or such order as the court thought fit.
[2] On 21 May 2007, the defendant, which is the freeholder, issued the current application, which is for the claim to be struck out and/or there be summary judgment for the defendant because the claim is misconceived in law. Redcliffe Street, as I understand it, is a house containing four flats and the initial notice served by the claimants sought acquisition at the price of £27,799 plus £1. The counternotice, which is in issue in the present application, suggested that the appropriate price was £120,000.
[3] So far as is material, the history is as follows. The claimants served an appropriate notice under section 13 of the Act on 19 September 2006 on Mr and Mrs Gurden, who were the then registered owners. The notice, as was required by statute, gave until 26 November 2006 as the last date upon which a counternotice under section 21 of the Act could be served.
[4] On 8 November 2006, as may be gleaned from the Land Registry entries, although no other documents have been put in evidence, the |page:43| defendant completed the purchase of the reversion from the Gurdens and, on 12 January 2007, the defendant registered that acquisition. Meanwhile, on 20 November 2006 (six days before the expiry of the permitted period), a counternotice under the Act was served, but it was not served by the Gurdens, who were the registered proprietors until 12 January 2007. It was served by the defendant, which had completed the purchase of their interest but had not registered it.
[5] The issue that has to be determined on this application is whether the counternotice so served was a good counternotice, in which case the present application by the tenants, being based under section 25 of the Act, is an inappropriate application because section 25 applies where no counternotice has been served. Put at its simplest, the argument for the tenants is that the person upon whom notices are to be served under the Act, and who can serve notices under the Act, can be the registered proprietor only, and that position is not affected in the present case by the operation of section 19 of the Act, which specifically addresses the possibility of one or more disposals of the reversion during the currency of the tenant’s initial notice.
[6] Section 9(1) of the Act provides as follows:
Where, in connection with any claim to exercise the right to collective enfranchisement in relation to any premises [the freehold of the whole of which is owned by the same person], it is not proposed to acquire any interests other than
(a) the freehold of the premises, or
[(b) is immaterial for present purposes] that person shall be the reversioner in respect of the premises for the purposes of this Chapter.
[7] In his argument for the tenants, Mr Anthony Radevsky referred quite simply to section 27 of the Land Registration Act 2002, which is headed “Dispositions required to be registered”, and subsection (1), which is relevant for present purposes, reads as follows:
If a disposition of a registered estate or registered charge is required to be completed by registration, it does not operate at law until the relevant registration requirements are met.
[8] Mr Radevsky submitted that whether or not the rights and obligations of the parties in equity altered on 8 November 2006, when the transfer of the reversion was effected, none the less the Gurdens remained the legal owners and the defendant was only an owner in equity until 12 January, and the tenants cannot be interested, for the purposes of receiving and serving notices under the Act, in equitable interests.
[9] He supported his submission by reference to the decision of Harman J in Smith v Express Dairy Co 27 November 1953, noted briefly in [1954] JPL 45. As the report is extremely short, I will read the whole of it:
The defendant company, the registered owners, let a shop to the plaintiff. Subsequently the defendants transferred their interest in the property to a subsidiary company; the transfer was not registered but entire control of the property was handed over. Both companies used the same offices but had different writing paper. The subsidiary company served notice to quit on the plaintiff, who commenced county court proceedings under the Landlord and Tenant Act 1927, for a new lease or compensation for loss of goodwill. The defendants denied that they were proper parties to the proceedings and the plaintiff learned for the first time of the transfer of the property. The plaintiff then took out a summons to determine whether the notice to quit served by the subsidiary company was valid.
Held, that as the transfer of the property had not been registered the legal estate remained in the defendants and therefore, unless the subsidiary company had given the notice to quit as the agents of the defendants, or could be inferred to have given it as agents, the notice to quit was bad [I need not read the rest of the headnote].
[10] For a variety of practical reasons, it seems to me that the principle underlying that decision must operate in the present context. Mr David Lonsdale, on behalf of the landlord, conceded, effectively, that rules for service applying to the tenant under the Act must also apply to service by the landlord under the Act. It would not be appropriate for there to be anything other than a consistency of approach. It is easy to imagine situations in which the tenant could have no real idea of the state of play regarding ownership of the property apart from reliance upon the register. There is no evidence in this case before the court that the tenants were aware that the property had been transferred, although Mr Lonsdale indicated that such evidence was available had it been sought to be introduced. However, it does not seem to me that the Act can be operated sensibly by relying upon a distinction between those cases in which the tenant knows that the landlord has sold the reversion and those cases in which the tenant does not know that the landlord has sold the reversion. After all, the basic principle underlying land registration is that a purchaser, even with actual notice of an encumbrance that needs to be registered, takes free of that encumbrance unless it is registered, and it seems to me that basic principle runs through the law of land registration and must apply equally in the present case. The tenant has to know who it is to serve notices on and it has to know who is serving notices on it, and it seems to me that the argument that that has to be the registered owner is irresistible.
[11] Subject to the operation of section 19(3), it does not seem to me that that necessarily creates any injustice or difficulty for a purchaser, which is always entitled to protect itself, either by express contract or stipulations or by drawing upon the obligations that remain upon the vendor as a result of whatever remains of the equitable relationship after a transfer has been executed but before it is registered. It seems to me that, in principle, the reversioner, for the purpose both of receiving and giving notices, must mean the registered proprietor.
[12] The more difficult question, in my judgment, relates to the effect of section 19 of the Act, and it is headed, “Effective initial notice as respects subsequent transactions by freeholder”. Subsection (1) refers to the initial notice, and I shall read the whole of subsections (2) and (3), which are material. Subsection (2) reads:
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 [I shall ignore (b) for the moment]
subsection (3) below shall apply in relation to that disposal.
[13] Subsection (3) provides:
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 [the rest of the subsection refers to subsequent disposals, which I need not read for the purposes of this action].
[14] The submission of Mr Radevsky, for the tenants, is that all the subsection means is that, at the date of the disposal, which is 12 January 2007, the defendant, on acquisition of the reversion and legally perfecting its title, simply takes over everything that has or has not been done up to that date by its predecessors, and whatever the legal status of what has or has not been done enures to the benefit or disadvantage, as the case may be, of the new owner.
[15] The submission of Mr Lonsdale, on behalf of the landlord, is that, on the true construction of both subsections, they effectively validate retrospectively, as at 12 January, anything done prior to 12 January that would not otherwise have been a valid act because of the reasons that I have given in dealing with the first part of the application.
[16] It is necessary to look a little more closely at the wording of the subsections in order to deal with these respective arguments. The key date for considering the operation of the subsections must be the date of the disposal and, as I have already indicated, in this case it is 12 January. What the Act says happens as at 12 January is that the defendant is in the same position as though it had become the owner |page:44| prior to 19 September, as though it had been given the initial notice and had done anything that the vendors had done and the vendors had done anything in relation to the notice. In my judgment, having considered the respective arguments, it seems to me to be not sensible to hold that, notwithstanding my finding on the first part of the application, the defendant could do something prior to 12 January that it had no legal right or power to do and that that was retrospectively validated, and, it seems to me, there are good practical reasons for Mr Lonsdale’s argument about this not being right. The practical reason is that it does not necessarily follow that the purchaser in any particular case would be swift about effecting its registration of its title, and the tenants, in any particular case, might receive a notice from someone who is not entitled to give it because they were the reversioners, and would have no means of knowing, perhaps until some date far in the future, whether any claim was going to be made that such an act was going to be retrospectively validated as at the date of some future disposal, and, it seems to me, the position has to be clear as at the date the notice was served. Once that position is clear and regularised, the purchaser simply acquires a clear and regularised position from its vendor, and it seems to me that, in truth, this is the way that the subsections operate.
[17] So, for those reasons, it seems to me that this application must fail.
[18] As I indicated at the commencement of my judgment, it seems to me that although this is formally an application to strike out, and summary judgment, in fact, it has been very sensibly and properly argued, as a full argument on the legal question of the validity of the counternotice, that the defence settled by Mr Lonsdale on behalf of the defendant raises no other issues on the counternotice other than those that I have determined against him as a matter of law, and, accordingly, it seems to me that Mr Radevsky is entitled to a declaration that no valid counternotice has been served.
[19] In the light of my judgment, all that remains in this case is, first, the matter pleaded in para 2 of the defence (which I will call the Cadogan v Morris* point) and, second, the waiver point pleaded in para 3 of the reply. The matters can be dealt with very shortly.
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* Editor’s note: Reported at [1999] 1 EGLR 59
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[20] It is the obligation of the court, under the Civil Procedure Rules, where any case comes before it to deal with as many outstanding matters as it can on that occasion, for the obvious reason, first, of saving costs, and, second, to ensure that litigation is progressed with expedition, and it seems to me entirely appropriate that I should consider what directions to give for the future conduct of the case.
[21] The Cadogan v Morris point is based upon the decision of the Court of Appeal in the case of that name, reported at [1996] 4 All ER 643 [sic], and, essentially, the decision of the Court of Appeal in that case was that the tenant is under an obligation in its notice to specify the price that it proposes to pay and, therefore, if it puts in its notice a figure that it never proposes to pay because it knows that it is ludicrously low, it has not served a notice that accords with the letter of the Act, and, in Cadogan v Morris, the figure was an obviously nominal one.
[22] A later constitution of the Court of Appeal considered the position in 9 Cornwall Crescent (London) Ltd v Kensington and Chelsea Royal London Borough Council [2005] EWCA Civ 324†, and I go straight away to the judgment of Auld LJ, in [44] and [45]. The first point that emerges is that the Cadogan v Morris test is laid down by Auld LJ as “importing only a subjective condition that the landlord’s proposal of purchase price be made in good faith”, and that applies equally to the position of the tenant.
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† Editor’s note: Reported at [2005] 2 EGLR 131
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[23] How does the judge go about deciding whether the tenants’ proposal is made in good faith? Auld LJ refers to this in [44]. In the middle of that paragraph, he says:
As I have mentioned in the last paragraph, and as the Judge observed at paragraph 62 of his judgment, Stuart Smith LJ’s contemplation of the county court’s resolution of such an issue by a brief enquiry with limited evidence from the tenant and landlord, not apparently, their respective professional valuers, suggests that it was a subjective element of genuineness of the proposal that was uppermost in his mind. I am, therefore, of the view that, if the Judge needed to consider this at all, he was right to find that lack of good faith is the sole necessary pre-condition of a declaration of the invalidity of a landlord’s counter-notice under these provisions.
[24] Counsel will obviously be able to agree the directions for disclosure and witness evidence necessary for the matter to be dealt with, but the matter about which there is a dispute, and about which I have to make a ruling, is whether the judge needs, in order to determine whether the tenants’ proposal was in good faith, expert evidence, either from both sides or from a jointly instructed surveyor, as to what the possible range of purchase price might be. Plainly, Mr Radevsky was right when he submitted that offering below that range does not of itself mean that an offer is made in bad faith, it may be a perfectly legitimate opening bid, contrasted with Cadogan v Morris itself, where the proposal was not a sensible proposal, even for the purpose of starting negotiations, just a purely nominal offer. However, it seems to me that a situation could easily arise where the initial offer was very greatly below the lowest range but the judge nevertheless concluded that the tenant had made the offer honestly. Possibly, the defendant had not obtained any expert advice, possibly, the defendant might have put in simply what it thought it was worth to it, bearing in mind what it had paid for its leaseholds and what it expected to be able to get out of it, one just does not know, but the valuation evidence is certainly not evidence that could be capable of being conclusive as to the bona fides of a person making the offer. What is a much better guide is not opinion evidence but what the facts are and, on the face of it, the defendant paid for the property more or less what the tenants offered. The landlord may have got a bargain, but I suppose that proves the point of the tenants wanting to get a bargain as well. So, it seems to me that although there is a reference to the court hearing evidence from the tenant and the landlord, I am not really very sure what the landlord can add. It is for the tenant to satisfy the judge that it was acting in bona fides, and there will be rare cases where the landlord has got any evidence to offer on the point; but this may be one, I do not know.
[25] It seems to me this is a very short enquiry for the judge to make. The tenants will have to give their evidence, explain why they have put the figure in and the judge will have to decide whether they were honest. It is the sort of job that judges do all the time, and it seems to me the cheaper and quicker that exercise can be, the better for everybody. So, I am not going to order expert evidence. I will direct disclosure of documents and for the service of witness statements in the ordinary way to deal with both the Cadogan v Morris point and the waiver point, and counsel can agree dates for all that.
Application dismissed.
