by Sandi Murdoch
In the first Court of Appeal decision arising out of the provisions of Part I of the Landlord and Tenant Act 1987 the statute was described as “ill-drafted, complicated and confused”, a view which will be shared by many. A number of problems and anomalies were foreseen and amendments have already been introduced (see section 119 of and Schedule 13 to the Housing Act 1988). During the past year the first decisions under this Part of the Act have started to emerge. While most of these are rulings by LVTs and, as such, lack the legal authority of court decisions, they give a very clear indication of the difficulties which are surfacing and of the legal problems posed by the inadequacy of the statutory provisions.
The scope of Part I
Before embarking on any discussion of the cases which have arisen, a brief summary of the Act may help to set the scene. Part I (as amended) gives qualifying tenants a statutory right of first refusal should the landlord wish to make a “relevant disposal”. The Act applies to premises which consist of “the whole or part of a building” comprising at least two or more flats held by qualifying tenants provided these make up at least 50% of the total number of flats in the premises. Where any part of the premises is used for, or intended to be used for, purposes other than residential, Part I does not apply so long as the internal floor area of the non-residential part exceeds 50% of the total floor area (in making these calculations common parts are excluded).
Where a landlord intends to dispose of his interest he is required to serve an offer notice on at least 90% of the qualifying tenants stating the main terms, including the property to which it relates and the price, of the disposal; this notice must state that it constitutes an offer which can be accepted by a majority of the qualifying tenants within a specified period, which must be at least two months. If the offer is accepted (following, where appropriate, a counter-offer by the tenants, for which the Act makes express provision) by the requisite majority, the landlord cannot dispose of his interest, except to a person nominated by the tenants. If no person is nominated, or the offer is not accepted, the landlord may make the proposed disposal of the premises to some other person during the next 12 months, but on terms which are no more favourable to the transferee than those offered to the tenants.
If a landlord fails to comply with his obligations to the tenants, and a disposal is made in contravention of the above provisions, section 11 of the Act entitles the tenants to compel the new landlord to provide them with the details of the transaction. They can then, under section 12, serve a purchase notice on the new landlord requiring him to transfer the premises to their nominee, either on the terms of the original disposal or on terms determined by a leasehold valuation tribunal. A prospective purchaser can avoid this consequence by himself serving notices on the tenants to elicit whether the vendor has served an offer notice and whether the tenants wish to avail themselves of their right of first refusal. If a sufficent proportion either fail to respond or do not wish to exercise their rights the premises cease to be subject to Part I for the purposes of that disposal.
Practical enforcement
A general point is also worth making before turning to the individual cases. All the reported decisions to date have involved disposals made in clear breach of Part I. Most have taken the form of sales at auction. Furthermore, it is clear from many of the judgments that these sales took place not in ignorance of the 1987 Act but with full disclosure by the vendor that its procedures had not been complied with. It is a reasonable assumption that the reported cases are the tip of the iceberg and that, in practice, many landlords are adopting this tactic and that, in a good proportion of instances, the sales proceed quite safely from the purchaser’s point of view.
A vendor who sells in breach of Part I is not subject to any sanctions. Although the tenants can enforce their rights against a purchaser, they can do so only if they are aware of those rights. Although a landlord is now obliged to inform his tenants if he disposes of the reversion, merely being informed of a disposal does not, of course, mean that the tenants know of their right to buy in such circumstances. It does appear that the complex provisions of the Act, the burdensome nature of the procedures imposed, and the lack of sanctions invite vendors and purchasers to gamble on ignoring the tenants’ rights; although, by definition, it has not paid off in the cases which are now to be discussed, these may not represent the broader picture. It would be very simple to extend the provisions of section 3 of the Landlord and Tenant Act 1985 to ensure that when tenants are informed of a change of landlord they are also told of their rights (or the possibility of rights) under the 1987 Act.
Qualifying tenants
Section 3 of the 1987 Act now defines qualifying tenants as those other than protected shorthold tenants, assured tenants, assured agricultural occupants, service tenants, and those who hold one or more tenancies of at least three flats in the premises. The original definition excluded tenants who held under leases where the demised premises consisted of or included “the flat and any common parts”. This provision was predicted to cause trouble and, despite its short life (it ceased to apply on January 15 1989), it has duly come up for consideration in Denetower Ltd v Toop [1] 20 EG 194. One of the many issues raised by this case was whether or not the tenants could take advantage of Part I since, as is quite usual, each of their leases included part of the exterior of the building. The Court of Appeal, in a robust approach to interpretation (influenced by the realisation that to rule otherwise would take many tenants outside the Act) decided that the tenants were not excluded. It was held that this wording must be taken to cover only the situation where the demise extended to common parts beyond the flat; it did not apply where the flat itself included common parts.
Relevant disposal
Although, as has already been alluded to, there has been much speculation concerning the disposals which are or are not caught by the Act, the one case in which this has been in issue appears not to have been a deliberate attempt to avoid the Act. In Wilkins v Horrowitz [0] 29 EG 57 the original landlords had contracted to sell the reversion to a purchaser for £130,000; this purchaser had then sold the benefit of the contract to a subpurchaser for an extra £25,000. The eventual transfer, as is usual in the case of subsales, had then been direct from the original vendors to the subpurchaser. Under the terms of section 12 as applicable in this case, the tenants would have to pay the price paid under a disposal by “a landlord” to the respondents, the subpurchasers. The crux of the Wilkins case was whether this was the disposal to the respondents under the direct transfer to them by the original landlords or whether it was the transfer, by the main purchasers, of the benefit of their contract to the respondents. As the tribunal pointed out, even if the subsale contract were a “disposal”, it had also to be a disposal by “a landlord”. Accordingly, it was necessary to decide whether the contract of sale to the “head” purchaser rendered the latter “a landlord”. The precise analysis was of some importance to the tenants: if it was decided that there was only one disposal, they would have to pay £130,000; if more than one, they would have to pay in the region of £155,000.
After full argument and a careful review of both the general law and the policy of the Act, the tribunal concluded that the original contract of sale was not itself a disposal; hence the subsale was not a disposal by a landlord and thus the only relevant transaction was the transfer by the original landlords to the respondents. In coming to this conclusion on what they regarded as a difficult question, the tribunal were aware that it might open up the possibility of using a deferral of completion as a means of evading the Act; however, they felt that this was outweighed by other considerations. For example, any other conclusion would mean that in all normal sales of the freehold there would be two disposals; further, if the contract stage were a disposal, what would happen if a right to rescind arose?
The premises
The precise premises to which Part I applies is clearly crucial, since any relevant disposal affecting those premises will trigger the tenants’ right to buy. As already mentioned, the Act applies to premises which consist of “the whole or part of a building” comprising at least two or more flats held by qualifying tenants. This wording has already caused problems in two cases. In 30 Upperton Gardens Management Ltd v Akano [0] 45 EG 121, 46 EG 131 the landlord’s reversion, which had been sold in contravention of Part I, comprised the freehold title to four blocks of flats, four blocks of garages and amenity land enjoyed by all the flats. Understandably, neither side wished this title to be fragmented in any way, but the Act does refer to the relevant premises as “a” building and therefore the issue of whether or not the Act could extend to more than one building was raised. The LVT ruled that the Act must be taken to extend to a building or a building scheme; this ensured that the reversion could be purchased by the tenants as a single title rather than being split into separate titles, each relating to “a” building.
A similar point could have been taken in the Denetower case, since the landlord’s title extended to two buildings. Again, for obvious practical reasons, that issue was left well alone, but the court was required to consider another, more contentious, aspect of the Act’s definition of the relevant premises. Having purchased the reversion without the tenants’ being given an opportunity to buy, the new landlords were disputing the extent of the property which was subject to the Act. Each tenant held under a long lease which included a flat, a garden and rights of way over roadways and pathways. Many, but not all of them, held a separate long lease of a garage. The landlords’ title comprised the reversion on the leases, the freehold of the roads and paths, and the freehold of an area of unused land over which the tenants had no legal rights. It was necessary for the court to decide to which of this land the Act applied — not, one imagines, because the landlords would, in practice, refuse to transfer the whole title to the tenants but because the sale of any land which was not subject to the Act would not have to be at the same price as that paid by the new landlords.
The landlords had a strong argument for suggesting that Part I applies only to a “building” in the sense of bricks and mortar, given that Part III of the 1987 Act (which gives a compulsory right to buy) defines premises in the same way as Part I but then, unlike Part I, contains a specific provision which allows the court to include in the acquisition “any yard, garden, outhouse or appurtenance”. They therefore contended that “building” for the purposes of Part I must be interpreted restrictively. While sympathetic to the logic of this, Browne-Wilkinson V-C made the point that this was not decisive in the case of an Act which was as ill-drafted as this one! The court ruled that the tenants were entitled to require the new landlords to convey to them the title to the buildings and any appurtenances of those buildings. In the present context, appurtenances included the gardens but not the garages or the unused land. While the roads and footpaths could also be included, it was accepted that it might be more appropriate for the tenants simply to acquire perpetual rights of way in respect of these. It seems unlikely that the landlords would wish, in practice, to retain the freehold to the garages, roads and footpaths unless the value of the unused land justified their continued interest in the property.
The interest
Even where there is no dispute over the premises to which Part I applies, there can be difficulties over the precise interest in those premises which the tenants are entitled to acquire. This question arose in Englefield Court Tenants v Skeels [0] 37 EG 91. Here, following a disposal without notice to the tenants, a purchase notice was served on the new landlord by the requisite majority of qualifying tenants. The new landlord then granted to her husband a 125-year lease of the roof space, at a peppercorn rent, on terms which conferred a right to convert the space into a dwelling and to alter or adapt all service media in the loft. The issue for the tribunal was whether the tenants could compel the transfer of the freehold to them free from the lease or whether they had to take the freehold subject to the lease with an adjustment to the price.
It was decided that there was nothing in section 12 which would have the effect of “freezing” the property in the hands of the new landlord following the service of a purchase notice. In the panel’s view, the matter was covered by section 12(4), which provides that where an “incumbrance” is created following the service of a purchase notice, the property shall be disposed of to the tenants subject to that incumbrance but with an abatement of the price corresponding to the reduction in value.
Although the result in this case is probably right, the analysis may be open to question. While a lease is indeed an “incumbrance” for many purposes, it is difficult to believe that section 12(4) was drafted with this type of transaction in mind. The new landlord had, in reality, made a disposal — a 125-year lease of a portion of the common parts of the premises — which would normally have been caught by Part I and exposed the purchaser (ie the husband) to the rights of the tenants. In fact, because the purchaser was the new landlord’s husband and no rent was charged, the disposal was excluded by virtue of section 4(2)(e). Accordingly, it was a transaction that the new landlord could enter into provided the service of a section 12 notice does not “freeze” the property; whatever the rights and wrongs, in the absence of any express provision, and bearing in mind that, in this case, the purchase notice did not specify definitive terms on which the landlord was obliged to sell because the tenants needed to ask the tribunal to settle the terms of any purchase, it is hard to see that any other conclusion could have been reached.
The price
Many of the cases which have been before the LVT have, not surprisingly, raised questions as to the price to be paid by the tenants where there has been a disposal in breach of the Act. The first case to be reported — Cousins v Metropolitan Guarantee Ltd [9] 32 EG 56 — considered the fundamental issue of the extent of the LVT’s jurisdiction to determine the price. Section 12 of the Act, in effect, allows for the service of two alternative forms of purchase notice; one, under section 12(1), requires the new landlord to dispose of his interest on the terms on which it was made. This form can be used only where the tenants know those terms and where the property disposed of in the transaction is precisely that which the tenants are entitled to acquire, so that no adjustments to the terms are required. Where such information is not known to the tenants, or where adjustments need to be made, the tenants can serve a purchase notice under section 12(3)(b), which leaves the terms of the disposal to be determined by the tribunal. While the wording under this latter provision appears to give the tribunal a complete discretion to fix the price, that under section 12(1) seems to place a general limitation which would restrict the tribunal to adjusting the price actually paid and which would preclude any power to revalue the property.
In the Cousins case the premises in question had been sold for £140,750, at public auction, without first being offered to the tenants. The tenants served the new landlords with a purchase notice, under section 12(3)(b), requiring the nature of the interest and the terms of the disposal to the tenants to be determined by the tribunal. The main difficulty which arose concerned the price to be paid by the tenants. It had been conceded by the new landlords that there had been, in the sale to them, a misdescription of the property, which might have the effect of reducing the price payable by the tenants to a figure lower than the auction price. Furthermore, there had, following the disposal in question, been an abortive attempt to resell the premises at public auction for the price paid by the respondents. Against this background the tenants were arguing that the tribunal had the jurisdiction under section 12(3)(b) to revalue the premises and that it should do so at a figure of £79,000. The landlords argued that the jurisdiction of the tribunal to determine the terms of the purchase is limited; it cannot revalue the premises and can fix the price to be paid by the tenants only by reference to the price actually paid by the new landlord. It can, in some circumstances amend this figure, but only in the circumstances envisaged by the Act; for example, where the land has subsequently been subjected to an incumbrance, the price can be reduced.
The tribunal agreed with the landlord’s view: “It would be startling, to say the least in the context of Part I of the Act and the thinking behind it, if a tribunal were able to embark on such an exercise [ie a revaluation]. If they did, the result could be remarkable, for a landlord selling his interest after a genuine arm’s length negotiation in the open market might find himself out of pocket because a tribunal took a different view on the value of his property. This would bring a penal element into the statute which, at least so far as Part I is concerned it does not appear to have.” The tribunal allowed that they had the jurisdiction to adjust that figure to take account of differences between the two transactions. Thus, in the present case, they could order a reduction in the price to reflect the misdescriptions; however, “that does not mean that the tribunal could reassess the original sale figure. That figure, in our view, should be the starting point …”. Accordingly, the tribunal ordered that the price to be paid by the tenants was the price paid by the new landlord less an agreed sum of £18,250 on account of the misdescriptions.
This basic approach has been accepted in a number of other cases. In Sullivan v Safeland Investments Ltd [0] 33 EG 52, the reversion in question had been included with others in a single lot at auction. The tribunal rejected a valuation prepared by the tenants’ surveyor because it was admitted that this bore no relationship to the £20,000 paid for the whole lot. In both 30 Upperton Gardens and Gregory v Saddiq [1991] 16 EG 141, 17 EG 97 the tribunal ruled that the tenants must pay the price paid by the purchaser even though there was evidence to suggest that that price looked significantly higher than market value.
In the latter case the panel looked very carefully at the circumstances in which they thought there might be jurisdiction to adjust the price, beyond the circumstances catered for in the Act itself. Here, it appeared that the purchaser had mistakenly believed that he would be able to evict the tenants; he had gone ahead with the purchase in order to avoid losing his deposit. The tenants, quite rightly in principle, argued that they should not have to buy at a price based on such a misapprehension. The tribunal clearly had some sympathy with this view: should section 12(1) be interpreted rigorously so that “tenants who have already been denied their right to be offered the property initially are then told that they may exercise their right only on the terms which a mistaken purchaser accepted after failing to seek professional valuation or legal advice?” In the event it was decided that the tenants could go ahead only at the price paid by the purchaser because the tribunal were not satisfied that the evidence did show that the purchaser had paid a price which was “totally out of line with the open market value”; if it had been, the decision might well have been otherwise.
The final case worth mentioning on the question of price is Venus v Khan [0] 47 EG 71. As in Sullivan, the subject property had been included along with others in a single lot which had been purchased by the respondent in breach of Part I. The purchase price ascribed to it was stated in the transfer as £1,750, but Mr Khan was now claiming that this apportionment had been totally arbitrary and did not represent the true value. Not surprisingly, it was held that it was not open to the new landlord to deny that this was the price to be paid by the tenants.
More than one disposal
The final matter to be considered is the situation where, following a disposal in breach of the Act, the new landlord then resells, again in contravention of the tenants’ rights. Although the Act contains provisions designed to deal with this situation, it has emerged that these are not without their difficulties.
Sections 11 and 12 deal with the situation where “a landlord has made a relevant disposal” (“the original disposal”) without serving a prior notice on the tenants. As we have seen, section 11 provides that, once the qualifying tenants become aware of the disposal (which will usually occur by virtue of the former landlord’s duty to inform the tenants of the name of their new landlord under section 3 of the Landlord and Tenant Act 1985), they have two months in which they may serve a notice on the “new landlord” (defined as the “transferee under the original disposal”) requiring him to furnish details of the terms, including the price, on which it was made. Irrespective of whether the tenants make use of section 11, section 12 entitles the tenants to serve “on the new landlord” a purchase notice requiring him to transfer the interest which “was the subject of the original disposal on the terms on which it was made (including those relating to the consideration payable)” to their nominee. Where a section 11 notice has also been given, the purchase notice must be served within three months of the new landlord’s response; where section 11 has not been used, the section 12 notice must be served within three months of the tenants’ becoming aware of the transfer to a new landlord.
Section 16 governs the position where “at the time when a notice is served under section 11(1) or section 12(1) on the new landlord” he is no longer the owner of the interest in question. He must then, within one month, pass on the notice in question to the subsequent purchaser and inform the tenants of the name and address of the subsequent purchaser. Once that has been done the statutory provisions governing purchase notices “shall, instead of applying to the new landlord, apply to the subsequent purchaser as if he were the transferee under the original disposal” (section 16(2)).
The operation of sections 11 and 12 seems relatively straightforward where there has been only one disposal in breach of Part I. Once the tenants get to know of the transfer they can elicit information from the transferee via section 11 and then, if they wish, proceed to serve a purchase notice on the transferee under section 12. The price they will pay will be that paid by the new landlord subject to various, obvious adjustments such as those mentioned above.
Where there have been two disposals in breach of the Act the situation is rather more complex. It is clear that the tenants can serve either a section 11 or a section 12 notice on purchaser 1, who will then rank as the “new landlord”; if they know about only the first transaction this is the only course they can adopt. Once either of those notices has been served, section 16(1) obliges purchaser 1 to inform the tenants of purchaser 2’s existence and this in itself ensures that the tenants can acquire the reversion from purchaser 2 under the terms of purchase 1 (section 16(2)). It seems that this should be so whether the purchase notice is served on purchaser 1 or purchaser 2, but in the latter case a section 11 notice must have first been served on purchaser 1 in order to bring section 16(2) into operation.
However, it does appear from the wording of the Act that if, in the case of two disposals, the tenants serve their section 11 and/or section 12 notice on purchaser 2 only, section 16 cannot apply. Purchaser 2 must then be the “new landlord” and the transfer to him must be the “original disposal”. Thus the tenants will have to pay the price paid under the second disposal. On the assumption that any resale is likely to be at a profit, this makes it vital for tenants to serve either a section 11 or a section 12 notice on the first purchaser to bring section 16 into play.
This point arose in Tyson v Carlisle Estates Ltd [0] 36 EG 127. Here, on September 28 1988, the original landlord had transferred its reversion to ADC Settlement Ltd for £15,000. On October 14 1988 ADC transferred on the same interest to Carlisle Estates for £20,000. In neither instance were the tenants accorded their statutory opportunity to purchase. On November 11 1988 ADC informed the tenants of both transfers and on December 7 1988 the tenants served section 11 notices on both ADC and Carlisle. On December 12 1988 ADC responded to that notice and served a notice under section 16 that the subsequent purchaser was Carlisle. On December 19 1988 Carlisle complied with their section 11 notice and on January 30 1989 the tenants served Carlisle with a purchase notice under section 12.
The issue for the tribunal was whether the price to be paid by the tenants was that under the first disposal, ie £15,000, or that under the second disposal to the respondents, ie £20,000. The tenants argued that the first disposal rendered ADC the “new landlord” for the purposes of sections 11 and 12; having been served with a section 11 notice and having served notice under section 16(1), ADC ensured that Carlisle were the “subsequent purchasers” under the Act. Accordingly, under section 16(2) Carlisle must, for the purposes of section 12, be regarded as the transferee under the original disposal and were obliged, therefore, to transfer the reversion at £15,000. The respondents argued that, under the sequence of events in the present case, at the time when the section 11 notice was served they were the “new landlord”; section 16 had no application because they had not made a further disposal. Accordingly, it was the disposal to them which dictated the price to be paid and the tenants must, therefore, pay £20,000.
The tribunal conceded that the provisions of the Act did not apply with ease where the tenants did not know of any transfer until after a second one had taken place; they had, therefore, served the purchase notice not on the first purchaser but direct on the second. “Not without difficulty” they concluded that the tenants’ argument was correct and that it was the first disposal which was the “original disposal” and, therefore, £15,000 was the price to be paid.
Given that the tenants had served a section 11 notice on the first purchasers, thus invoking section 16, this conclusion appears to be correct, in the light of the wording of section 16(2). Had the tenants served their section 11 notice only on the respondents and not served one on the first purchasers, ADC, as well, the position would have been otherwise. It is hard to see why this distinction should be made, but it seems to follow from the way in which section 16 modifies section 12 and it is a matter which those advising tenants must bear in mind.
It has to be said that the conclusion in the Tyson case avoided the tenants’ having to pay a higher price as a result of two consecutive failures to comply with the obligation to offer the premises to the tenants prior to any disposal. Hard though this may have been on the respondents, who were obliged to resell the reversion to the tenants for £5,000 less than they had paid, the Act does, in section 18, provide prospective purchasers with a means of ensuring that they will not be caught in this fashion.
As suggested at the outset of this article, the early cases demonstrate that the procedures of Part I are not working satisfactorily. The problems will have to be solved by further amendments or by judicial intervention; in the meantime, practitioners will be left to cope as best they can.
