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
HIS HONOUR JUDGE HUSKINSON
LRA/22/2003
ON APPEAL FROM THE LEASEHOLD VALUATION TRIBUNAL
FOR THE SOUTHERN RENT ASSESSMENT PANEL

		Royal Courts of Justice Strand, London, WC2A 2LL
		24th January 2007

Lord Justice Lloyd:

Introduction

1. This appeal from the Lands Tribunal requires the court to consider provisions in Chapter I of Part I of the Leasehold Reform, Housing and Urban Development Act 1993 ("the Act") concerning the procedure whereby qualifying tenants of flats in premises to which the Act applies can have the freehold of the premises acquired on their behalf by a nominee purchaser. This is described in the Act as a right to collective enfranchisement: section 1(1). The Act has been amended by the Commonhold and Leasehold Reform Act 2002, but these amendments had not come into effect at the date material for the present case, and I ignore them.
2. It is common ground that the premises, 6 Palmeira Square, Hove, East Sussex, comprising 6 flats, came within the relevant provisions. On 25 July 2001 the six flats were subject to different tenancies. Five tenancies were such that the tenant was a qualifying tenant. The sixth was not. Under section 5 of the Act, subject to other provisions, a person is a qualifying tenant for this purpose if he is tenant of a flat under a long lease. There are some exclusions from that (such as business tenancies) but they do not matter for present purposes. A long lease is defined by section 7. The main case is a lease granted for a term of years certain exceeding 21 years.
3. On 25 July 2001 four of the qualifying tenants gave notice to the reversioner, the Appellant, under section 13 of the Act, claiming to exercise the right to collective enfranchisement with respect to the premises. The fifth qualifying tenant did not participate in this process. On 27 September 2001 the Appellant served a counternotice under section 21 of the Act. The form used included a paragraph referring to additional leaseback proposals. The Appellant completed this saying that there were no such proposals.
4. The parties did not agree on the terms of the acquisition of the freehold, and in due time the question of what those terms should be was referred to the Leasehold Valuation Tribunal, under section 24. On 22 July 2002 the LVT determined that the price payable was £182,190. A major element in this figure was the value of the fourth floor flat, which was treated as subject to an assured shorthold tenancy. The reversioner would be able to gain possession of this flat and sell it on a long lease, at a premium, hence the substantial capital value.
5. On 6 January 2003 an order was made in the Brighton County Court which, among other things, required the Appellant to transfer the freehold to the Respondents upon payment of £182,190. This has not yet happened, not least because the Respondents appealed against the decision of the LVT. The reason for this appeal was that they discovered that the flat was subject to an agreement between the Appellant and a Mr Lloyd dated 23 March 2000 for the grant of a tenancy for 5 years with an option to renew for a further 10 years. This would have affected the price payable for the freehold.
6. On 22 February 2006, almost on the eve of the hearing of the appeal by the Lands Tribunal, the Appellant served a leaseback notice, under section 36 of the Act, and paragraph 5 of Schedule 9. If this was valid, it entitled the Appellant to a long lease at a peppercorn rent of the top floor flat, so that he would be in a position to obtain for himself whatever economic value that flat represented. Clearly it would have undermined the LVT's determination of the price. In those circumstances the Lands Tribunal considered as a preliminary issue the question whether the leaseback notice was valid. The Tribunal held that it was not valid, and that the Appellant was therefore not entitled to a leaseback of the top flat. That left the remainder of the Respondents' appeal, as to the appropriateness of the valuation in the light of the memorandum of agreement. The Tribunal gave directions as to the determination of that issue, but the Appellant obtained permission to appeal, and no doubt the proceedings in the Tribunal remain pending, awaiting the result of this appeal.
7. Before us, therefore, as before the Tribunal, the question is whether, not having specified in the counternotice that he would require a leaseback of the top flat, it was still open to the Appellant to obtain such a leaseback by serving a leaseback notice on 22 February 2006.

The statutory provisions

8. In order to consider that point it is necessary first to refer to some, and to set out others, of the provisions of the Act.
9. The process is started by a tenants' notice under section 13. That notice must, among other things:

"(c) specify

(i) …

(ii) any flats or other units contained in the specified premises in relation to which it is considered that any of the requirements in Part II of Schedule 9 to this Act are applicable;"

There were none in this case.

10. Within a time specified in the tenants' notice, the reversioner must serve a counternotice, in accordance with section 21. The notice in the present case complied with the section in stating that the right of the participating tenants to exercise the right to collective enfranchisement was admitted. In that case, subsection (3) applies, as follows:

"(3) If the counter-notice complies with the requirement set out in subsection (2)(a), it must in addition

(a) state which (if any) of the proposals contained in the initial notice are accepted by the reversioner and which (if any) of those proposals are not so accepted, and specify

(i) in relation to any proposal which is not so accepted, the reversioner's counter-proposal, and

(ii) any additional leaseback proposals by the reversioner;"

The meaning of "additional leaseback proposals" is given by sub-section (7):

"(7) The reference in subsection (3)(a)(ii) to additional leaseback proposals is a reference to proposals which relate to the leasing back, in accordance with section 36 and Schedule 9, of flats or other units contained in the specified premises and which are made either

(a) in respect of flats or other units in relation to which Part II of that Schedule is applicable but which were not specified in the initial notice under section 13(3)(c)(ii), or

(b) in respect of flats or other units in relation to which Part III of that Schedule is applicable."

11. Section 36, to which reference is made above, is as follows:

"36(1) In connection with the acquisition by him of the freehold of the specified premises, the nominee purchaser shall grant to the person from whom the freehold is acquired such leases of flats or other units contained in those premises as are required to be so granted by virtue of Part II or III of Schedule 9.

(2) Any such lease shall be granted so as to take effect immediately after the acquisition by the nominee purchaser of the freehold of the specified premises.

(3) …

(4) Part IV of Schedule 9 has effect with respect to the terms of a lease granted in pursuance of Part II or III of that Schedule."

12. Schedule 9 deals with the grant of leases back to the former freeholder. Part I, paragraph 1, is general and contains definitions, of which one is important:

""the appropriate time" means the time when the freehold of the specified premises is acquired by the nominee purchaser;"

13. Part II, containing paragraphs 2 to 4, deals with mandatory leasebacks. These are not relevant on the facts. They arise where a relevant flat is subject to a secure tenancy or an introductory tenancy, or a flat is let by a housing association under a tenancy which is not a secure tenancy. Because a leaseback is obligatory in those circumstances, it is understandable that the tenants' notice should have to specify any flats to which these provisions would apply, and that the counternotice should also have to specify any additional flats which the landlord considers are in this category.
14. Part III gives the reversioner the option to require a leaseback. For this reason it is not relevant in the case of the tenants' notice, but relevant proposals are required to be set out in the counternotice. The principal case is dealt with in paragraph 5:

"5(1) Subject to sub-paragraph (3), this paragraph applies to any unit contained in the specified premises which is not immediately before the appropriate time a flat let to a person who is a qualifying tenant of it.

(2) Where this paragraph applies, the nominee purchaser shall, if the freeholder by notice requires him to do so, grant to the freeholder a lease of the unit in accordance with section 36 and paragraph 7 below.

(3) This paragraph does not apply to a flat or other unit to which paragraph 2 or 3 applies."

15. Paragraph 6 deals with a less common case where the freeholder is a qualifying tenant of a flat and is in occupation of that flat. The terms of any lease to be granted under paragraphs 5 or 6 are governed by paragraph 7. Any such lease must conform with the provisions of Part IV except to the extent that any departure from those provisions is agreed to by the nominee purchaser and the freeholder, or is directed by a leasehold valuation tribunal on an application made by either of those persons. A tribunal may only direct a departure from those provisions if it appears reasonable in the circumstances, having particular regard to the interests of any person who will be the tenant of the flat in question under a lease inferior to the lease to be granted to the freeholder. Otherwise, any such lease may include such terms as are reasonable in the circumstances. Part IV specifies the basic provisions, including that the lease is to be for a term of 999 years at a peppercorn rent.
16. Reference was made to a number of other provisions in the course of argument to which, as necessary, I will refer. However those are the provisions central to this appeal.

The course of the proceedings on appeal

17. Before the Lands Tribunal Mr Donegan, the tenants' solicitor, who conducted their appeal, did not argue that a reversioner could not serve a leaseback notice at all if he had not specified a proposal for such a leaseback in his counternotice. Mr Schaw Miller, Counsel for the landlord, showed Judge Huskinson passages from Hague on Leasehold Enfranchisement (4^th ed) at paragraph 38.15 and from Clarke, Leasehold Enfranchisement the New Law, at paragraph 9.5.5, both of which suggest that a later notice can be given even if not foreshadowed in the counternotice. In the light of those passages Mr Donegan contented himself with arguing that the leaseback notice was too late on the particular facts. Judge Huskinson expressed reservations about this at paragraph 28 of his judgment, but assumed, without deciding, that a later notice was possible. Sir Martin Nourse, giving permission to appeal, invited the Respondents to raise the point as to whether a later notice was possible. In response to that, Mr Gallagher, appearing before us for the Respondents, served a Respondent's Notice contending that the decision below should be upheld on this additional ground. He also applied at the hearing for permission to withdraw the concession made by Mr Donegan below. It seems to me that what Mr Donegan said did not amount to a concession, but even if it did, it was purely on a point of statutory construction, so that no prejudice would be caused by allowing the point to be taken. Moreover, since the case turns in any event on the proper reading of the statutory provisions, it would have been most unsatisfactory for the court not to be able to consider this point.
18. As I will explain, the point taken in the Respondent's Notice is decisive of the case. In those circumstances it mattered relatively little that Mr Berry's skeleton argument for the Appellant, combined with his grounds of appeal, was exiguous in its treatment of the points taken in the Appellant's Notice. It was unfortunate that he was unable to prepare any response to the Respondent's skeleton argument and Respondent's Notice, but that may be explained by the time of year, Mr Gallagher's skeleton argument having been dated 20 December 2006. The court was also not helped in its preparation for the case by the failure of the Appellant's solicitors to lodge the agreed bundle of authorities until the morning of the hearing, nor by the eccentric selection and presentation of the statutory material in that bundle.

Discussion

19. The statutory provisions do not at first sight fit well together. Section 21(3) has a mandatory provision ("must … specify") requiring that, if the reversioner wishes to put forward a leaseback proposal, he must identify it in the counternotice. That suggests that, if he does not do so then and there, it is too late. However, paragraph 5 of Schedule 9 provides for him to serve a leaseback notice requiring the grant of a leaseback in relation to any flat which is not, immediately before the time when the nominee purchaser acquired the freehold, a flat let to a person who is a qualifying tenant. So, it is argued, because the test of eligibility is applied at that late stage, it must be open to the landlord to serve such a notice at any time up to the moment before the nominee purchaser acquires the freehold.
20. That could cause serious inconvenience and practical problems, as well as being potentially unfair to the acquiring tenants. If the leaseback notice is served at a late stage, the price to be paid for the freehold will have been fixed, either by agreement or by a determination by the LVT. The service of the leaseback notice, if valid, would, however, invalidate that price, because it would shift the value of the relevant flat from the nominee purchaser to the reversioner. Mr Berry submitted that this could be accommodated within the statutory scheme because section 24(4)((b)(i) refers to modifications in the terms of acquisition which:

"may have been determined by a leasehold valuation tribunal, on the application of either the nominee purchaser or the reversioner, to be required by reason of any change in circumstances since the time when the terms were agreed or determined as mentioned in [subsection (3)]"

21. The service of the leaseback notice would be a change of circumstances which would require a modification of the price. Thus, so Mr Berry argued, the acquiring tenants would not have to pay too much, because they could apply back to the LVT for the price to be refixed. That may be true, but it would still cause a substantial delay. Under the Act as it stood at the time relevant to this case, the valuation date is the date when all the terms of acquisition relating to the specified premises are fixed by agreement or by the LVT, including the extent, if any, to which the freehold to be acquired is subject to leasebacks: see West Hampstead Management Co Ltd v. Pearl Property Ltd [2002] EWCA Civ 1372. If there were a late leaseback notice, this would affect those terms, and therefore lead to a later valuation date. If so, it would be in the interests of the freeholder in a rising market to take steps to cause the valuation to be reopened, and the service of a leaseback notice would allow that. (The position is different where the tenants' initial notice is served on or after 28 February 2005, when amendments made by section 126(1) of the 2002 Act came into force.) In theory, if in a large block there was more than one flat which was not subject to a tenancy held by a qualifying tenant, the same exercise could be undertaken in sequence as often as there were such flats.
22. On the facts of the present case, the Appellant could have specified in his counternotice a proposal that the top floor flat be the subject of a leaseback. It was already then the subject of a tenancy under which the tenant was not a qualifying tenant. Mr Berry submitted that it was at least theoretically possible (though, he accepted, not at all likely) that a flat which at the date of the counternotice was subject to a tenancy held by a qualifying tenant, so that leaseback proposals could not be made in respect of it at that time, might later, before the process was complete, come to be held on a different tenancy (or no tenancy at all) such that there was not a qualifying tenant. In such a case, he argued, it would be right for the landlord to be able to serve a leaseback notice as regards that flat for the first time, not having been able to include proposals about it in the counternotice.
23. Having regard to what it is that makes a tenant a qualifying tenant, it seems to me that it is very unlikely that the relevant circumstances would change in the way he describes during the process. It could happen, but only, for practical purposes, if the long lease which was in place to start with came to an end during the process. I can see that, if that did happen, it might be a change of circumstances which would affect the value of the reversion, and therefore the price which the nominee purchaser ought to pay. Section 24(4)(b)(i) would cover that situation and allow the landlord to apply for the price, if already fixed, to be adjusted. In that way the landlord's economic interest would be fully recognised. But it seems to me that this fairly remote contingency is not sufficient to justify reading section 36 and Schedule 9 Part III as conferring on the landlord a right to serve a leaseback notice where no relevant proposals have been made in the counternotice. That is all the more the case if there has been no change of circumstances and the landlord could perfectly well have mentioned such a proposal in the counternotice but omitted to do so.
24. Mr Berry submitted that section 21 was not exclusive as to leaseback proposals, and relied particularly on two features of section 21(3)(a)(ii): the use of the word "additional" and that of the word "proposals". As to the latter he said that proposals were different from something which the landlord was entitled to insist on, as under Schedule 9 paragraph 5, or for that matter obliged to accept under Schedule 9 Part II. As to the former, he suggested that it must mean additional to matters arising under Schedule 9 Part III. I do not understand that last point. It seems to me clear that the word "additional" is used because there may have been mention of a leaseback under Schedule 9 Part II in the tenants' notice, but the landlord can make proposals relating to other flats "which were not specified in the initial notice" under section 13. That is the obvious explanation for the word "additional", even if in many cases no such proposal will have been mentioned in the tenants' notice, because the point will arise only rarely.
25. As for the word "proposals", one of the aims of the Act is to encourage the parties to agree as much as possible. If the reversioner does make it clear in the counternotice that he wants a leaseback of a particular flat, the tenants know that, assuming the conditions are satisfied, he can insist on it under section 36 and Schedule 9. But it may not be necessary to go to the length of serving such a notice unless there is a dispute as to whether it is or would be valid. Accordingly I do not find any support for Mr Berry's position in the use of the word "proposals" in section 21.
26. Mr Berry's strongest point is the reference in paragraph 5 of Schedule 9 to the position immediately before the acquisition of the freehold by the nominee purchaser. This point was mentioned by Arden LJ in West Hampstead Management Property Ltd v Pearl Property Ltd (referred to at paragraph 21 above) in the following passage:

"52. Mr Gavaghan submitted that the requirement for leasebacks could not delay the valuation date, because under the Act a situation could arise in which the landlord acquires a leaseback at any time prior to the acquisition pursuant to the right to collective enfranchisement. Accordingly, the fact that in this case the landlord required leasebacks was not a matter upon which the landlord could rely as being a matter which had to be resolved before the valuation date was fixed: because the Act itself provided, in effect, that a further requirement for a leaseback could be made at any time down to completion of the transaction. This was a point which Mr Radevsky also addressed in his submissions. He accepted that it appeared to be the case that a leaseback could be required at any time prior to completion. He submits that that point is supported by "Leasehold Enfranchisement: The New Law" by Professor D. N. Clarke (Jordans 1994, paragraph 9.5.5). He drew our attention to footnote 90, which states that in this particular instance Schedule 9 appears to allow for a notice to require a leaseback even after the contract stage and at any time prior to completion. As this would necessitate a complete readjustment of the price payable, it is suggested that this point is the result of a statutory oversight. Mr Radevsky submits that, prior to exchange of contracts, the nominee purchaser could seek a variation in the price by making an application under section 24(4), but he accepted that there was a difficulty if the requirement only arose after the date of exchange of contracts. But he submits, in my view correctly, that the court would bend over backwards, if this situation ever arose, to ensure that the tenant was not prejudiced by a requirement in this manner.

53. In my judgment the apparent problem here is not a matter which should drive the true construction of the definition of valuation date. I would observe that Mr Radevsky also took us to the provisions of paragraph 7 of Part III of Schedule 9, which provides for the terms of any lease which is necessary for the purpose of a leaseback to be in a particular form, except to the extent that any departure was agreed between the nominee purchaser and freeholder, or is directed by the Leasehold Valuation Tribunal on the application of either of those persons.

54. In the present case the terms of the leasebacks were not agreed until the first day of the hearing before the Leasehold Valuation Tribunal. Accordingly, Mr Radevsky submits, in my view rightly, that the terms of the leasebacks could not be said to be finalised until that agreement was communicated and, if there had been no such agreement, the Leasehold Valuation Tribunal would have to have determined the terms.

55. Accordingly, while appreciating that there would appear to be some difficulty in this point arising on optional leasebacks, it is a point which, in my judgment, should be put on one side for the purpose of construing the definition of valuation date in Schedule 6."

27. Because the point was not necessary to the decision in that case, the court did not have to consider whether the view expressed by Professor Clarke (or the similar view set out in Hague) was correct. In this appeal the point does arise for decision.
28. I have come to the conclusion that the reference to the appropriate time, and thereby to the moment before acquisition, does not show that a leaseback notice may be served at any time up to that moment. The consequences of such a reading would be extremely inconvenient, in practical terms, and would also, in my view, be likely to be unfair to the acquiring tenants and would leave the process open to manipulation on the part of the reversioner, in a case in which the initial notice was served before 28 February 2005.
29. I do not regard the words of Schedule 9 as compelling a reading which would have that result. One reason for the reference to the appropriate time, as defined, is that the lease will have effect immediately after the acquisition by the nominee purchaser: see section 36(2). In those circumstances it is right that the entitlement of the reversioner to a leaseback should depend on the relevant flat not being, immediately before acquisition, let on a tenancy under which the tenant is a qualifying tenant. Thus, it seems to me that the way in which the statutory scheme works, without giving rise to unreasonable and absurd consequences, is this. If the reversioner wants a leaseback of a flat in respect of which, at the time of the counternotice, there is not a qualifying tenant, he must say so in his counternotice. If he does so, then he will be entitled to the leaseback, so long as there is still no qualifying tenant immediately before acquisition by the nominee purchaser. (There are constraints on what a reversioner can do with the premises pending the process, under section 13, but these do not appear to preclude the landlord from granting a long lease of one flat: see Hague at paragraph 25-15, footnote 117.) Thus, the reference to the appropriate time does not extend to that moment the opportunity for the reversioner to serve a leaseback notice if he has not made proposals to that effect in the counternotice. Rather it imposes a condition subsequent on the entitlement of the reversioner to a leaseback if he has said he wants one in the counternotice, such that he cannot have it if immediately before the acquisition by the nominee purchaser the relevant flat does have a qualifying tenant.
30. In effect, the sanction for failing to comply with the mandatory requirement to specify leaseback proposals in the counternotice, at least if the landlord could then have done so, is that the landlord cannot seek a leaseback thereafter. The provision for a leaseback notice is the machinery whereby, in case of dispute, the landlord can ensure that he gets the leaseback, subject to the condition that, immediately before acquisition of the freehold by the nominee purchaser, the relevant flat still does not have a qualifying tenant.
31. Mr Gallagher restricted his submission as to the exclusive effect of section 21 in this respect to a case where at the date of the counternotice there is no qualifying tenant in respect of a particular flat. That was so in this case. For reasons touched on at paragraph 23 above, I think it unlikely that, if there were a qualifying tenant at that date, there would cease to be one later in the process. In my judgment, the mandatory terms of section 21(3)(a)(ii) have the effect that, at least as regards any flat which is not then held on a tenancy the tenant under which is a qualifying tenant, if the reversioner does not specify proposals for a leaseback of that flat, he cannot do so later.
32. For those reasons, I would hold that the leaseback notice in the present case was not valid, and I would dismiss the appeal. In the circumstances I do not find it necessary to express a view on the points on which the judge decided the case. In my view he was right to have the reservations which he expressed in paragraph 28. Having held that those doubts were justified, it is unnecessary to consider the other points taken.

Lord Justice Rix

33. I agree

Lord Justice Mummery

34. I also agree.