ON APPEAL FROM THE HIGH COURT OF JUSTICE
Mr Edward Bartley Jones QC sitting as a Deputy High Court Judge
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIMER
LADY JUSTICE BLACK
| (1) BOH LIMITED
(2) LAYHAWK CONSULTANTS LIMITED
|- and -
|EASTERN POWER NETWORKS Plc (formerly EDF ENERGY NETWORKS (EPN) Plc)
Mr Christopher Stoner QC (instructed by Forsters LLP) for the Respondent
Hearing date: 2 November 2010
Crown Copyright ©
Lord Justice Rimer :
The issues before the judge
'… had regard to the intention of the parties, and, in the absence of any direct evidence of intention, they presumed that merger was not intended, if it was to the interest of the party, or only consistent with the duty of the party that merger should not take place.'
'66. Out of this submission developed, however, a more sophisticated argument. Is it possible to merge as to part where the reversion is severed? The Lease might contain covenants which benefit ("touch and concern") other parts of the land comprised within the Lease. A lease may be granted of Plots 1, 2 and 3 (all of which are dwellinghouses) and contain a covenant, say, against keeping pigs on any part of the demised premises. The reversion then becomes severed so that there are individual reversions to Plots 1, 2 and 3. Following acquisition of the freehold reversion on Plot 1 by the tenant of Plot 1, the freehold reversioners to Plots 2 and 3 might well be concerned by merger on Plot 1 for, thereby, Plot 1 would be freed from the restraint against keeping pigs (to the detriment of the reversions on Plots 2 and 3). Equally the right to distrain for rent might be adversely affected. Thus, and taking the above example, if there be merger as to part in respect of Plot 1 the right of the severed reversioners of Plots 2 and 3 to distrain over Plot 1 would appear to be lost on merger in respect of Plot 1. And rent, (absent formal apportionment on severance of the reversion) issues out of each and every part of the demised land. Ultimately, however, I could detect no rule of law or rule of equity that the existence of a severed reversion of itself prevents merger as to part. Rather it seems to me that if the other severed reversioners do have a genuine interest in the issue of merger then their interest has to be taken into account in ascertaining whether the equitable presumption against merger is rebutted. It may, perhaps, be that in an appropriate case the absence of the actual consent of the other severed reversioners to the merger as to part will be sufficient so as to conclusively prevent rebuttal of the presumption against merger. In other cases, perhaps, the absence of such consent may (because the interest of the other severed reversioners in opposing merger is, effectively, de minimis) not inform at all the issue as to whether the presumption against merger is rebutted. That there should be no absolute rule of law or equity that absence of the express or implied consent of the other severed reversioners prevents merger as to part seems to me to be in accord with the equitable principles which apply to merger (namely that the same is a matter of intent).
67. I must at this stage comment on surrender as to part where there is [a] severed reversion. Can surrender as to part occur without the consent (express or implied) of all the severed reversioners? And does the answer to this question inform the issues which arise on merger as to part where there is a severed reversion? If, as EDF contend, the Lease has continued under Part II there has been a surrender of the "X" land without the consent of the severed reversioners. By such surrender the severed reversioners lost the right to distrain upon the "X" land and, perhaps more importantly, to enforce as to the "X" land the user restriction contained in clause 2(7) of the Lease. Although this issue was raised in submissions, no authority was cited to me which would assist on this question. As far as I am aware it is not considered in any textbook, indeed it may never have been considered at all. It may have no practical relevance on the facts of this case. Masterdent Ltd has the benefit of being registered under Title Number NGL 8273728 as Proprietor with Title Absolute of the freehold estate in the "X" land (entirely free of the Lease). It is difficult to see how the user covenant in clause 2(7) of the Lease confers any meaningful benefit on either Plot 31 or 26. The annual rent due under the Lease which should be apportionable to Plots 31 and 26 cannot be a matter of, at the most, a few pence or pounds and, in any event, the sub-station offers the ideal subject matter for distraint. But I do incline to the view that where there is a severed reversion a surrender as to part requires the consent (express or implied) of all the severed reversioners (save, perhaps, in a case where there has both been a formal apportionment of the rent and none of the covenants in the lease "touch and concern" the reversion of the other severed reversioners). To this extent, therefore, there may be a subtle difference between the principles applying on merger (as I have analysed them above) and surrender.
68. Against this background I turn to consider whether, in respect of Plot 2, the presumption against merger is rebutted. I do not intend to deal with this matter simply on the basis of the location of the burden of proof but it does seem to me that the burden of proof on this point is borne by [leading counsel for BOH and Layhawk]. Were it relevant I would have held that BOH and Layhawk had failed to discharge that burden (since, quite understandably, they were unable to advance any evidence whatsoever of any positive intent on the part of EDF to effect merger).
69. There is no direct evidence (either way) of the intent of EDF (or of the other two severed reversioners) in respect of merger following the acquisition of the freehold of Plot 2 by EDF on 23 December 1993. The reality, on the balance of probabilities, is that neither EDF (nor the other two severed reversioners who in all probability knew nothing whatsoever about the acquisition of the freehold of Plot 2) ever directed their minds to the question of merger. Whilst it is true that following the acquisition of the freehold of Plot 2 EDF stopped paying any of the rent due under the Lease I do not think that this evidences any intent to merge. On the contrary, it seems to me to be entirely neutral since EDF (absent any formal apportionment of the rent due under the Lease following initial severance of the reversion) could have paid the whole £25 rent as reserved by the Lease to itself (a pointless circular transaction). But if any evidence of intent to merge could be derived from the non-payment of rent this is more than balanced out by the fact that no application to merge was made by EDF when it became registered as proprietor of the freehold land comprised in Title Number NGL 541578. Thus Title Number MX 269363 continued in existence (without Plot 2 being taken out). This could not have occurred if there had been an express application for merger to HM Land Registry. On 6 November 2000 HM Land Registry wrote to EDF's solicitors indicating that, having inspected their files, HM Land Registry could not find any clear evidence as to merger one way or the other. This would clearly indicate that these files do not disclose any express application by EDF for merger. Over and above this, there is no further evidence on the issue of merger but merger was clearly to EDF's detriment granted the fact that the freehold carried no easements over Plot 20 whatsoever and that merger in respect of Plot 2 would give rise to the Harris v. Flower problem over Plot 26 (so far as use of Plot 26 for access to Plot 2 was concerned). That of itself, on the authorities, is sufficient to support the presumption against merger. Indeed it seems astounding, objectively analysed, that EDF should have paid £237,500 to Mr Dormer to acquire the freehold of Plot 2 if, thereby, it was going to lose its access and cabling rights over Plot 26 and Plot 20. To impute such an intention (absent direct evidence of intention) to EDF is absurd. When there is added into the equation the fact that the other severed reversioners in all probability knew nothing about what had occurred and, most certainly, did not give express or implied consent to merger the presumption against merger is only strengthened.
70. I can, therefore, find nothing which rebuts the presumption against merger and, so, merger did not occur.'
The first ground of appeal
'The reference in subsection (1) above to a person who is the owner of an interest such as is mentioned in that subsection is to be construed, where different persons own such interests in different parts of the property, as a reference to all those persons collectively.'
'There is no merger by operation of law only of any estate the beneficial interest in which would not be deemed to be merged or extinguished in equity.'
It is, therefore, upon the equitable principles relating to merger that attention must be focussed. Mr Warwick's submissions raised an issue as to the equitable solution that the court should apply to the facts of the present case in circumstances in which there was (as the judge found) no evidence as to EDF's intention in relation to merger when the two estates became vested in it.
'Whatever might have been the case at common law, as to which it is unnecessary that I should express an opinion, it is, in my opinion, clear that it was not merged or extinguished in equity. I think the proposition in Lewin on Trusts, 10th ed. P.889, is correct – namely, that "The principle by which the Court is guided is the intention; and in the absence of express intention, either in the instrument or by parol, the Court looks to the benefit of the person in whom the two estates become vested." The author goes on to point out that the chief importance of the doctrine of merger is with reference to charges, and the cases he cites are confined to charges.
The defendants contended that a different principle applied in the case of a lease, but I am unable to follow that distinction. The principle being that the Court looks to the benefit of the person in whom the interests coalesce, I cannot see why there should be any distinction in this respect between a beneficial lease and a term to secure a charge. In either case the term is taken as an equivalent for money expended. Nor do I think it makes any difference whether the coalescence of the interests is brought about by operation of law or the acts of the parties. The principle of Grice v. Shaw 10 Hare 76 is applicable to the present case. The head-note is as follows: "Where the tenant in fee or in tail of an estate becomes entitled to a charge upon the same estate, the general rule is, that the charge merges, unless it be kept alive by the party entitled to it; and where the merger of the charge would have let in other charges in priority, thereby rendering it the interest of the owner of the estate to keep alive his charge, the Court presumed that such was his intention, notwithstanding the absence of any other indication of such intention.' (Emphasis as in the original)
'The principal question is whether on the purchase by Rhodes of the fee his term was merged in the reversion, the result of which would be that [Flower] would hold directly under the owner of the fee … without any obligation to pay rent, while, the term held by Rhodes being extinguished, the rent of £100 a year would be no longer payable, and the security held by the bank would be land subject to a term not expiring until 1968, during which no rent could be received.'
Collins MR observed, at 647, that it seemed to him 'quite clear that, if the intention of the parties is that which determines this question, they certainly did not intend that a merger should take place.' He regarded 'the parties' as being Rhodes and the bank, his point being that it was the essence of Rhodes's wish to borrow from the bank on mortgage that he should be able to offer it the security of a freehold yielding a ground rent of £100 a year. He referred to that as supported by the July 1899 documents and said, at 648, that:
'… the transaction could not have been carried out at all unless the term was kept alive, and it was clearly for the benefit of both parties to the transaction that it should be kept alive.'
He rejected the argument that 'the rule of equity that the question of merger must be decided by the intention of the parties was limited to the question of the merger of charges only, and did not apply to the merger of estates', and referred to Farwell J's decision in Ingle as deciding the contrary. He then held that there had been no merger, saying at 651:
'It remains to consider whether the evidence of intention, as well as of benefit to Rhodes and the bank if the term were kept in existence, is not such as to prevent a merger as the law now stands. The law to be deduced from the previous authorities was summed up by Lord Macnaghten in the well-known passage in Thorne v. Cann  AC 18, 19, and was applied to the case of leases by Fry J and Farwell J in the cases which I have already mentioned. I think those authorities clearly establish that in the present case, neither on the sale to Rhodes or on the mortgage by him to the bank, would "the beneficial interest in" the term have been "deemed to be merged or extinguished in equity," and that therefore the transaction falls within [what is now section 185 of the Law of Property Act 1925], and there is no merger at law.'
'The Courts of Equity, on the other hand, in many cases treated the interest which merged at law as being still subsisting in equity. They had regard to the intention of the parties, and, in the absence of any direct evidence of intention, they presumed that merger was not intended, if it was to the interest of the party, or only consistent with the duty of the party, that the merger should not take place.'
He explained that the commonest application of the principle had been in relation to cases where a life tenant paid off a charge upon the inheritance, but said that the principles applied equally to the merger of estates in land as to merger of charges on land. He said, at 653:
'It was well established that, according to the strict rules of the common law, there would be merger, notwithstanding that one of the two estates might be held in trust, and the other beneficially, by the same person, or one might be held on one set of trusts and the other on another set of trusts. But it was equally well established that equity would interfere, and would, if necessary, decree the execution of such deeds as would replace the parties in their proper position: see Saunders v. Bournford (1679) Finchm 424, where Lord Nottingham LC decreed that, notwithstanding the merger of a term, the plaintiff should hold possession of the premises during the remainder of the term, and that the defendant should make a further assurance of the remainder of the term. The merger was treated as an accident prejudicial to the real beneficial interests of the parties: see also Attorney-General v. Kerr (1840) 2 Beav. 420, a remarkable instance of the application of the equitable doctrine. I think the decision of Farwell J, or rather his dictum to this effect, in Ingle v. Vaughan Jenkins  2 Ch 368 is consistent with principle and is supported by authority. A Court of Equity had regard to the intention of the parties, to the duty of the parties, and to the contract of the parties, in determining whether a term was to be treated as merged in the freehold.'
'Nothing, I think, is better settled than this, that when the owner of an estate pays charges on the estate which he is not personally liable to pay, the question whether those charges are to be considered as extinguished or as kept alive for his benefit is simply a question of intention. You may find the intention in the deed, or you may find it in the circumstances attending the transaction, or you may presume an intention from considering whether it is or not for his benefit that the charge should be kept on foot. Here, I think, the intention appears plainly on the face of the deed by which Miss Arnold purported to transfer her mortgage.'
Ingle was a case in which the court presumed an intention that there should be no merger because that would have been against interest. Rhodes was a case in which the court found positive evidence of an intention that there should be no merger.
The second ground of appeal
'So far as it is possible to do so primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights.'
The need for a compatible reading of the 1954 Act was advanced on the basis that otherwise BOH's and Layhawk's enjoyment of their freehold interests in plots 31 and 26 respectively would be interfered with in a manner contrary to their rights under Article 1 of the First Protocol to the Convention, which provides:
'Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.'
'The Respondents [i.e. EDF] failed to bring the attention of the Court the fact that they had indeed been served with Section 25 Notices. The Section 25 Notices were served by the appellants predecessors to the title, the appellants were given vacant possession and accepted the same in reliance on the said Section 25 notices and there was no requirement to provide the Respondents with a further opportunity as regards the Section 25 Notices.
We do feel that the three Lord Justices would have wanted to have their attention drawn to the three Section 25 Notices in order to provide clarity. The Judgment has yet to be delivered and we would therefore ask that you put the three attached notices before their lordships and Lady Black to enable them to address the issues.
The Respondent has been notified of our concerns regarding their decision to permit those representing the appellants, and the Court, to proceed without reference to these matters where the Court has decided there is a Human Rights element to the same. It remains open to the appellants to serve further Section 25 Notices but given these facts and matters the Court would wish to consider the same.
The three notices were acknowledged by the Respondent.'
'Any part of the land included in freehold title NGL541577 in respect of which the Tenant asserts the registered title MX269363 should be included excluding any part of MX269363 where the Tenant has given up the protection of the Act and the landlord relied upon. [sic] of which you the tenant.'
The second notice had the same manuscript date change and was from The Containerised Storage Company Limited, as landlord, to the EEB (see paragraph  above). Mr Todd was again described as the landlord's agent. That notice was also expressed to terminate on 11 November 2002. It was expressed as relating to:
'Any part of the land included in freehold title NGL770835 in respect of which the Tenant asserts the registered title MX269363 should be included excluding any part of MX269363 where the Tenant has given up the protection of the Act and the Landlord relied upon. [sic] of which you are the tenant.'
The third notice was dated 29 April 2002. It was given jointly by Commercial Rentals and Containerised Storage as landlords, with Mr Todd being again named as the agent. It was addressed to the EEB and purported to terminate its tenancy on 11 November 2002. It was expressed as relating to:
'Any parts of the land included in freehold title NGL541577 and NGL770835 in respect of which the Tenant asserts the registered leasehold title MX269363 should be included excluding that part of MX269363 in respect of which the Tenant is estopped by conduct and or merger and or the failure to commence proceedings after the service of a Section 25 notice dated 27th August 1993 and acceptance of the validity thereof by a Counternotice dated 3rd September 1993 which exchange and correspondence the Landlord has acted upon to its prejudice. [sic] of which you are the tenant.'
Lady Justice Black :
Lord Justice Sedley :