England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LANDS TRIBUNAL

		Royal Courts of Justice Strand London WC2 Monday, 19th February 2001

1. LORD JUSTICE CHADWICK: This appeal raises a short question in relation to the award of costs on an appeal to the Lands Tribunal from the determination by a leasehold valuation tribunal of the price payable on enfranchisement. The question has arisen in circumstances that the landlord has succeeded on the appeal to the Lands Tribunal but (i) the landlord had rejected a Calderbank offer by the purchaser to pay a price which was higher than that determined by the valuation tribunal; (ii) the price offered was higher, also, than that which, in the event, was determined by the Lands Tribunal, and (iii) the offer did not include any term as to the payment of the landlord's costs of the appeal. The question could equally have arisen where, in comparable circumstances, the purchaser had rejected an offer by the landlord to accept a price lower than that which, in the event, was determined by the Lands Tribunal. The question is, I think, of some general importance.
2. The appellant company, 86 Lordship Road Limited, was appointed by qualifying tenants as the nominee purchaser in connection with the exercise of their right of collective enfranchisement under the Leasehold Reform and Urban Development Act 1993 in respect of leasehold premises at 86 Lordship Road, Stoke Newington, London, N6. The respondent, Phyllis Trading Limited, was the freeholder of those premises.
3. The price payable by a nominee purchaser in respect of the freehold interests to be acquired under the 1993 Act falls to be determined (in the absence of agreement) in accordance with the provisions of Schedule 6 to that Act see section 32(1). In the event of dispute, the matter is referred to a leasehold valuation tribunal see section 91 of that Act. An appeal from the decision of a leasehold valuation tribunal lies to the Lands Tribunal see paragraph 2 in Schedule 22 of the Housing Act 1980.
4. In the present case the price payable for the freehold of the premises at 86 Lordship Road was referred to the London Leasehold Valuation Tribunal for determination. Following a hearing, the valuation tribunal issued its determination on 11th May 1999. The amount payable for the freehold interest under that determination was £3,300. The valuation tribunal made no order for payment of the costs of the determination. It had no power to do so.
5. The landlord appealed to the Lands Tribunal. The appeal was heard on 6th December 1999 by the Member (Mr. P R Francis FRICS) selected for that purpose under section 3(2) of the Lands Tribunal Act 1949. His decision (save as to costs) was issued on 11th January 2000. He allowed the appeal, to the extent of increasing the amount payable for the freehold to £3,610.
6. The Member identified three issues which arose for his determination: (i) the yield to be attributed to the ground rents receivable under the long leases held by qualifying tenants; (ii) the value (if any) to be attributed to the right to nominate the insurer, and so earn commissions on insurance effected in respect of the premises; and (iii) the value (if any) to be attributed to the right to manage the property.
7. On the first of those issues the Member found in favour of the purchaser. He took a yield of 8 per cent, to produce a capital figure of £2,980. On the second issue, he assumed a commission rate of 15 per cent on insurance premiums of £643.29; which, capitalized over six years purchase and rounded up, produced a figure of £580. That represented an increase of £280 on the figure which had been allowed by the leasehold valuation tribunal. On the third issue, the Member accepted the evidence of Mr. Rennie, the valuer called by the purchaser, that no value could be attributed to the right to manage. The total value determined by the Member (£3,610) represented the aggregate of £2,980 (the capital value attributed to ground rents) and £580 (the value attributed to the right to nominate the insured) together with £50 as the landlord's one half share of the agreed marriage value.
8. Rule 52(1) of the Lands Tribunal Rules 1996 provides (so far as material in the present case) that the costs of and incidental to any proceedings before it shall be in the discretion of the Lands Tribunal. In the final paragraph of the decision issued on 11th January 2000, the Member invited the parties to make submissions in writing as to the costs of the appeal.
9. The purchaser's submissions on costs were set out in a letter from its solicitors dated 14th January 2000. They contended that the costs of the appeal should be paid by the landlord. They advanced that contention on two grounds: (i) that the appeal was allowed in part only - as to the right to nominate the insurer and so receive insurance commission, which (as they said) produced a marginal increase in the price to be paid over that determined by the leasehold valuation tribunal the landlord being unsuccessful on the other two issues; and (ii) that, by a letter dated 6th October 1999, they had made a Calderbank offer on behalf of the purchaser in the amount of £4,000 - that is to say, in an amount greater than the amount at which the price had been determined by the Member following the hearing.
10. The landlord's submissions are set out in a document signed by counsel and dated 21st January 2000. It was pointed out that the landlord had succeeded, albeit on one point only, with the result that it had obtained a higher figure than that awarded by the leasehold valuation tribunal. As to the letter of 6th October 1999, it was said (i) that the offer was incapable of acceptance because it had made no provision for the payment of costs alternatively, (ii) that, if the letter of 6th October 1999 was to be construed as an offer to compromise on the basis that each party would bear its own costs, then the landlord had done better by rejecting the offer than it would have done by accepting it in that its costs of the appeal as at 6th October 1999 were greater than £400, that being (as it was said) the difference between the amount offered (£4,000) and the amount of the Member's determination.
11. The Member accepted the submissions made on behalf of the landlord. In an addendum to his decision, issued on 7th February 2000, he said this:

"I prefer the appellant's submissions. It did succeed in the appeal, in that my award exceeded the sum determined by the LVT. Furthermore I accept the argument that there were still grounds for dispute as regards costs in relation to the respondents' without prejudice offer."

12. Accordingly, the Member ordered that the purchaser should pay the landlord's costs of the appeal, such costs (if not agreed) to be the subject of detailed assessment. The costs claimed by the landlord, as set out in a statement of costs dated 20th January 2000, which was put before the tribunal, are in excess of £4,400; that is to say, an amount which exceeds significantly the amount of the purchase price for the freehold interests.
13. The order made by the Lands Tribunal is dated 7th February 2000. By a separate order dated 8th March 2000 the Tribunal gave permission to appeal to this court. It has stated a case for the opinion of this court pursuant to section 3(4) of the Lands Tribunal Act 1949 and Order 61 of the Rules of the Supreme Court 1965. The question upon which this court is asked to give its opinion is whether the Member erred in law in coming to his decision on costs in the respects and on the grounds set out in a letter dated 29th February 2000 from the purchaser's solicitors. Section 3(4) of the 1949 Act makes it plain that an appeal to this court from the Lands Tribunal lies only on a matter of law.
14. The grounds set out in the letter of 29th February 2000 are rehearsed in the notice of appeal dated 17th March 2000 which the purchaser has lodged in this court. They may be summarised as follows: (i) that the Member erred in law in finding that the offer in the Calderbank letter of 6th October 1999 was incapable of acceptance because it was made "without prejudice save as to costs"; (ii) that the Member erred in law in that, when exercising his discretion as to who should bear the costs of the appeal, he failed to take account of the letter of 6th October 1999 - because, as he thought, there was no offer in that letter capable of acceptance; (iii) that the Member erred in law in failing to ask himself, when exercising his discretion as to costs, whether the landlord ought reasonably to have accepted the proposal in the offer letter of 6th October 1999; (iv) that if he had asked himself that question, the Member must have concluded that the offer ought reasonably to have been accepted; (v) that the Member erred in finding that the landlord was the successful party; and (vi) that the Member erred in law in failing to take account or have regard to the factors set out in CPR Part 44, in particular rules 44.3(4) and (5).
15. In my view, the first of those grounds, as framed, is misconceived. The Calderbank letter of 6th October 1999 was in these terms:

"To try to bring this matter to an end we are instructed to offer £4,000 for the freehold interest of the property subject to the three leases.

If this offer is not accepted our clients reserve the right to refer to it when the Lands Tribunal is considering the costs of the appeal. It remains open for acceptance for 14 days."

16. A fair reading of the Member's decision does not support the purchaser's contention that he thought that the offer contained in that letter was not capable of acceptance because it was made "without prejudice save as to costs". It is clear that the Member took the view, which had been urged upon him in the landlord's written submissions dated 21st January 2000, that the offer was not capable of acceptance because it left the position as to the costs of the appeal unresolved. When he observed that "there were still grounds for dispute as regards costs in relation to the respondents without prejudice offer", the Member was pointing out that (as he thought) it was unclear whether the offer of £4,000 was put forward on the basis that each party would bear its own costs of the appeal; or whether the offer was put forward on the basis that the purchaser would accept liability for the landlord's costs of the appeal, incurred thus far; or whether the offer was put forward on the basis that there was to be no agreement as to the costs incurred thus far, with whatever consequences that might have.
17. The response from the landlord's solicitors, in a letter dated 12th October 1999, was a bare rejection of that offer. But on 23rd November 1999, some six weeks later, the landlord's solicitors put forward a counter offer "to accept the sum of £4,500 plus our clients' costs of the appeal to date". The importance of that letter is that it fixes the landlord's costs of the appeal, as at 23rd November 1999, at £350 (exclusive of VAT) and a lodgement fee of £50 - that is to say, a total of £461.25 if VAT is payable. That is how it must have appeared to the landlord on 23rd November 1999. It could not have appeared to them some six weeks earlier that their costs were any greater than that.
18. The real question under ground (i) is whether the Member was right to take the view that it was unclear whether the offer of £4,000 was put forward on the basis that each party would bear its own costs of the appeal; or whether the offer was put forward on the basis that the purchaser would accept liability for the landlord's costs of the appeal, incurred thus far; or whether the offer was put forward on some other (and if so what) basis. If he were right in that view, then the grounds of appeal which I have described under (iii) and (iv) earlier in this judgment would fall away. The Member could not be criticised for failing to ask himself whether the landlord ought reasonably to have accepted the offer contained in the letter of 6th October 1999 if, on a true analysis, the offer was insufficiently certain to be capable of acceptance. But, if he were right in his view that the offer was insufficiently certain to be capable of acceptance, it would still be necessary to address ground (ii). In those circumstances, it might have been expected that the landlord would have sought to clarify the position; and the Member should have taken into account the fact that the landlord did not do that.
19. We were referred to two decisions of the Lands Tribunal, (in both of which the Member was Mr. P H Clarke FRICS) in which the effect of Calderbank letters on the exercise of the tribunal's discretion as to costs have been considered.
20. The first, Cymru Investments Limited v Watkins and Watkins [1997] RVR 171, does not, I think, provide any assistance. It is no more than an illustration of the application, by the Lands Tribunal, of the general practice that a party who fails to "beat" a Calderbank offer will, although successful in the appeal, be required to pay the costs of the appeal after the date of the offer. The offer, in that case, included an amount in respect of the appellant's costs incurred prior to the date of the offer.
21. In the later case, Lee v Herbert-Smith and another [2000] RVR 227, the offer did not include any amount in respect of costs. The offer was accepted on the basis that the issue of costs had not been agreed and would be determined by the Lands Tribunal. When the matter came before the Tribunal the Member declined to make any order for costs. In my view, he was plainly correct, for the reasons that he gave - namely, that the merits of the parties' contentions remained unresolved. They had reached an agreement in order to avoid a determination on the merits, and there was no basis upon which the Tribunal could hold that either could be said to have won. In the course of his determination, the Member said this (at paragraph 21):

"In my judgment it is reasonable for the agreement on price, having regard to the respective contentions of the parties, to be on the basis that each party should bear his own costs. It was unreasonable for the landlord to seek all his own costs on the acceptance of the offer and even more unreasonable for him to take this dispute to a hearing. To award costs against a party who seeks a compromise in this way would discourage settlements."

22. I am satisfied that the Member in the present case was wrong to take the view that the offer contained in the letter of 6th October 1999 was too uncertain to be capable of acceptance. In my view, it is plain that the offer is an offer of £4,000 for the freehold interest of the property subject to the leases, on the basis that, if accepted, the proceedings before the Lands Tribunal will determine, and that neither side will be entitled to any costs in those proceedings.
23. But if I were wrong in that view, then I would hold that the Member ought to have addressed the question whether it was reasonable for the landlord to reject the offer of 6th October 1999 without making any attempt to ascertain whether or not the amount offered included costs; or to ascertain whether or not the purchaser was proposing to make some additional payment by way of costs.
24. It follows that I would hold that the Member was wrong as a matter of law in failing to take account of the Calderbank offer contained in the letter of 6th October 1999. If he were wrong in law, then this court has the duty to interfere.
25. The question, therefore, is what order should be made in the circumstances that there was an offer to compromise at a figure of £4,000: a figure which, in the event, turned out to be £390 greater than the amount which the Lands Tribunal determined. The obligation on the landlord, to whom that offer was made, was to give consideration whether or not it was reasonable to accept it. In the circumstances that the offer turned out to be £390 greater than the amount determined by the Lands Tribunal, thereby leaving a significant margin of nearly 10 per cent to cover whether costs had been incurred by the landlord prior to the offer, I am satisfied that the decision to reject the offer out of hand was unreasonable. It is important, in low value cases of this nature, that a landlord (who, in practice, is the usual appellant) should not be in a position to insist on a higher price for the freehold than that objectively justified, by the threat, expressed or implied, that, if his terms are not met, he will obtain an order for substantial costs if he succeeds in increasing the valuation tribunal's determination by only a relatively small amount.
26. The figures in the present case illustrate the point. The landlord, having succeeded in raising the determination of the valuation tribunal by some £300 that is to say, by less than 10 per cent - is seeking to charge the purchaser £4,400 by way of costs. That, in circumstances in which the purchaser had made an offer which, itself, exceeded the determination of the valuation tribunal by only 20%. If the belief that a tenant who has made a reasonable offer will be obliged to pay substantial costs even if the landlord succeeds in increasing the valuation tribunal's determination by a relatively small amount is not discouraged, then there is an obvious danger that tenants will, in effect, be held to ransom. They will be deprived of the benefits which the 1993 Act was plainly enacted to provide. A reasonable offer by the purchaser ought to be accepted, notwithstanding that the offer does not make provision for costs, in circumstances where it is made at an early stage. Different considerations might arise if the offer was made after substantial costs in preparation for the hearing had been incurred. This is not such a case.
27. For those reasons I am satisfied that this is a matter in which this court can substitute its own discretion as to costs for that exercised by the Member. For my part, I would propose that the order for costs below should be no order up to 20th October 1999 (that is to say, from the conclusion of the 14 days within which the offer made in the letter of 6th October 1999 was open to acceptance); and for the landlord to pay the purchaser's costs after that date.
28. LADY JUSTICE HALE: I entirely agree. It is particularly important in this context that the power to award costs should be exercised in such a way as to encourage rather than discourage settlements. The scheme envisages a first instance jurisdiction in the leasehold valuation tribunal where there is no power to award costs. This is a device frequently adopted by Parliament in cases where it is likely that there will be a disparity in the bargaining power between the parties. If the costs jurisdiction in the Lands Tribunal is exercised in such a way that the landlord can reject offers out of hand and then succeed by only a small margin in increasing the valuation of the property and get the whole of the costs of that exercise, this will be to frustrate the purpose of the scheme. I would therefore agree that the appeal should be allowed.
29. LORD JUSTICE THORPE: I also agree. Mr Bickford-Smith's submissions as to how the Calderbank mechanism operates would certainly not be accepted in ancillary relief proceedings in the Family Division. The whole purpose of the mechanism is to avoid unnecessary litigation and to curtail the escalation of unnecessary costs. The recipient of a Calderbank letter takes a real risk if he opts for summary rejection. As authority in this court makes plain, if he regards the offer as insufficient he has some obligation to state what would be sufficient. If the offer is in any way unclear to him, he has an undoubted obligation to seek clarification. These obligations seem to be of equal application in Lands Tribunal applications.
Order: Appeal allowed with costs in the sum of £4,000.