England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON CIVIL JUSTICE CENTRE
His Honour Judge Hand QC.
ICL 10515,10528,10639

		Royal Courts of Justice Strand, London, WC2A 2LL
		22nd January 2014

Lord Justice McCombe:

(A) Introduction

1. This is an appeal from the order dated 26 March 2013 of His Honour Judge Hand QC, sitting in the Central London County Court.
2. The claims before the Judge were brought by the tenants under long leases of three flats at 17 Clarges Street, London W1 ("the Property") for orders under section 48(3), or alternatively under section 49(1) of the Leasehold Reform Housing and Urban Development Act 1993 ("the Act") that the parties be compelled to perform their obligations arising out of the tenants' Notices of Claim under section 42 of the Act and determining that they were entitled to new leases on the terms set out in those notices.
3. By his order the Judge dismissed the tenants' claims and declared that, in each claim in respect of the "terms of acquisition", the term as to premium was agreed between the parties but that the terms to be contained in the leases were not agreed. There were orders for costs and for interim payments of costs. The tenants and the head lessee, St Anselm Development Company Limited ("St Anselms"), were granted permission to appeal. The judge directed, pursuant to CPR 52.14(1)(a), that the appeals, which otherwise would be to a Single Judge of the High Court, be transferred to this court, because they raised important points of principle.
4. The material provisions of the Act and of the Regulations made under it are set out in the Appendix to this judgment. However, the machinery provided for by the Act and Regulations can be briefly summarised.
5. Chapter II of the Act, specifically section 39(1), confers on long lessees of flats the right to a new lease. It is common ground that the tenants here satisfied the qualifying criteria. "The Landlord", for the purposes of the Act and the prescribed procedures under it, is the holder of the reversionary interest which enables it to grant a new lease as prescribed by the Act. In the present case, as the Act prescribes that any new lease shall be for a term expiring 90 years after the expiry of the existing term, the competent landlord was not St Anselms (whose head lease expires in 2063) but the freeholders. Upon the grant of the new lease, the remaining term of the head lease is "re-inserted" into the hierarchy of interests by a deemed surrender and re-grant, under the terms of Schedule 11 to the Act. The competent landlord represents the mesne landlords unless and until a Notice of Separate Representation is given, which cannot be done until after Notice and Counter Notice have been given by the tenant and competent landlord respectively. The issue in the present case turns upon the Notice and Counter Notice and the tenants' claim to have accepted the proposals made in the Counter Notice.
6. The claim to a new lease is triggered by giving a Notice under section 42 of the Act. The notice must specify the tenant's proposals as to premium and other terms of the new lease and must set a time (not less than 2 months distant) for service of a counter notice.
7. The counter notice (to be served under section 45 of the Act) must specify whether the claim to a new lease is admitted or not admitted. If the claim is admitted, the notice must then state which of the tenant's proposals are accepted and which not and must specify the landlord's counter proposals in respect of the tenant's proposals which are not accepted. In the absence of proper counter proposals the counter notice is invalid: Burman v Mount Cook Land [202] Ch 256 (CA), to which I shall return.
8. If a valid counter notice is not given, the tenant is entitled to apply to the court for an order determining the "terms of acquisition" in accordance with those proposed in the tenant's notice under section 42. If a claim is admitted in the counter notice, but the terms of acquisition are not agreed, the disputed matters are referred to the appropriate Tribunal for determination. The expression "terms of acquisition" is defined in section 48(7): see the appendix.
9. It is common ground in this case that the "terms of acquisition" and the form of the lease to be granted are different concepts. Broadly, the "terms of acquisition" are what are known commercially as "heads of terms" and the form of lease is then drafted to give effect to the terms of acquisition, as either agreed between the parties or determined by the Tribunal. Once the "terms of acquisition" are either agreed or determined, regulations provide for the landlord to draft the proposed new lease and for the tenant to respond to the details of the draft. The relevant regulations, made under sections 98 and 100 of the Act, are the Leasehold Reform (Collective Enfranchisement and Lease Renewal) Regulations 1993 ("the Regulations"). Pursuant to the Regulations, if either side does not respond to the other's proposals in the time required of it, it may find itself deemed to have accepted such proposals. The tenants contend that that is what has occurred in the present case.
10. The principal terms of the new lease are specified by section 56(1) of the Act which provides for the new lease to be for a term expiring 90 years after the term date of the existing lease and at a peppercorn rent. No other definition of "rent" is provided. Section 57(1) of the Act states that,

"Subject to the provisions of this Chapter (and in particular to the provisions as to rent and duration contained in section 56(1)) the new lease…shall be on the same terms as the existing lease but [with certain modifications which do not apply here] ".

11. Section 57(2) provides for inclusion in the lease of a requirement for payment by the tenant where the landlord is under any obligation to provide services or is under any obligation for repairs, maintenance or insurance. Section 57(6) provides that the terms to be imported into the new lease, by section 57(1) to (5), are subject to contrary agreement by landlord and tenant, in particular to remedy defects in the existing lease or for the exclusion or modification of any term which it would be unreasonable to include or to include without modification.

(B) Background Facts

12. By a head lease dated 29 October 1964 the Property was demised to the original head lessor for a term of 99 years from 29 September 1964, that is for a term expiring on 28 September 2063. The head lease is currently vested in St Anselms. The flats, the subject of the claim, were flats 8, 22 and 23 at the Property. Those flats are held by the tenants, the First to Third Claimants respectively, for terms expiring on 19 September 2063. The freehold of the Property is vested in the first three Respondents to the first appeal and the fourth to sixth Respondents in the second appeal, as trustees.
13. It is agreed by all parties that, pursuant to the terms of the Act, the tenant(s) of each flat are potentially entitled, subject to payment of the appropriate premium, to new leases of their respective flats (and ancillary car parking spaces) for terms expiring 90 years after the date of expiry of their current leases at a peppercorn rent. To that intent, by Notices of Claim to Exercise Right, under section 42 of the Act, each dated 29 November 2010, the tenant(s) of each flat claimed a new lease accordingly. The notices were served upon the freeholders as competent landlord for these purposes of the Act.
14. Each of the existing leases of the flats contains a covenant in clause 4(5) by the lessor with the tenant:

"to pay the rent reserved by the Headlease and to comply with the lessee's covenant therein contained save insofar as the same are the responsibility of the Lessee under these presents."

15. By clause 3(2) of each lease the tenant covenants with the lessor:

"to pay the Interim Charge and the Service Charge at the times and in the manner provided in the Third Schedule".

16. The Third Schedule provides that the lessee shall pay to the lessor the Service charge, which is defined as the "Annual Maintenance Provision" multiplied by such share of that provision or other percentage as the lessor may reasonably determine. By paragraph 1(a)(i) of that Schedule one of the components of the Annual Maintenance Provision is defined as

"all costs, charges, expenses and outgoings expended or incurred by the Lessor in any financial year in complying with its obligations under clause 4 other than in paying in each year the first four thousand pounds of the annual rent reserved by the Headlease".

17. The rent reserved by the head lease was initially £4000 per annum, but subject to review. The effect of the reviews to date is that the head rent now stands at £161,000 per annum. Thus, by virtue of the provisions which I have recited, each tenant is liable under the existing lease to pay a proportion of the sum of £157,000 payable as rent by St Anselms to the freeholders under the head lease. This obligation has been called in these proceedings the "rent as service charge provision", which (in this judgment) I shall call "the RASC provision".
18. By the Notices of Claim, to which I have referred, the tenants proposed payments of premium to the freeholders and of an "other amount" (or separate premium) to St Anselms. The amounts specified in the three notices for the freeholders and St Anselms respectively were (a) £50,534 and £126,380 (flat 22); (b) £32,213 and £104,252 (flat 8) and (c) £51,025 and £127,661 (flat 23). The notices proposed new leases of a further 90 years at a peppercorn rent and otherwise on the same terms as the existing leases, but importantly, "subject to the following…

"(1) …an amendment to paragraphs 1(a)(i) of the Third Schedule so as to delete the words 'first four thousand pounds of the'…"

A similar proposal was made in respect of the leases of the car park spaces.

19. The effect of this proposal would have been to remove the RASC provision from each of the new leases.
20. The Notices specified a date for response as 10 February 2011.
21. Underlying these proposals by the tenants was their intended contention that the RASC provision could not be demanded by the lessor under a new lease granted under the Act, since that would be to provide for a rent otherwise than "a peppercorn", such rent being a mandatory provision of any new lease pursuant to section 56(1) of the Act. Neither the freeholder as competent landlord nor St Anselms was inclined to accept that contention.
22. On 9 February 2011, the freeholders' then solicitors (not the solicitors acting for them in these proceedings) served in response to each Notice of Claim what purported to be a "Landlord's Counter Notice" (so entitled) pursuant to section 45(2)(a) of the Act. Each such counter notice specified the flat and car parking space concerned. It stated that it was given in response to the Notices of Claim. It identified St Anselms, the mesne landlord, as an "other landlord" for the purposes of section 42(2) of the Act. It was admitted that the tenant had the right to acquire a new lease and then proceeded as follows:

"5. Save as specified in paragraph 6 below the proposals contained in the Tenant's Notice are acceptable.

6. The following proposals contained in the Tenant's Notice are not acceptable and the Landlord's counter-proposals are as follows:-

Tenant's proposal The premium specified in accordance with Section 42(3)(c) of the Acts is £176,914.00.

Landlord's counter proposal The premium to be paid to be £227,282.00 of which £57,381.00 represents the other landlord's share.

Tenant's proposal A term of years equal to the unexpired period of the existing terms under Car Parking Space Lease plus ninety years' lease extension at a peppercorn rent and otherwise on the same terms as the Leases (i.e. that the new lease be on the same terms as the current flat lease in respect of the flat and on the same terms as the car parking space lease in respect of the car parking space) subject to such modification as permitted by section 57 of the Act and subject to the following:-

(1) As to the lease dated 4 November 2004, an amendment to paragraph 1(a)(i) of the Third Schedule so as to delete the words, 'first four thousand pounds of the'.

(2) As to the lease dated 23 December 2005, an amendment to paragraph 12 of the Third Schedule so as to delete the words, 'first £4,000 of the '.

Landlord's counter-proposal The new leases terms should contain such modifications and amendments as the Landlord is entitled to under and/or as may be necessary to give effect to the requirements of Chapter II of Part I of the Act and without prejudice to the generality of the above such further reasonable modifications to be agreed."

23. In response to these Counter Notices, the tenants' solicitors wrote in each case to the freeholders' solicitors on 13 April 2011 quite simply as follows:

"Without prejudice to the validity of the counter-notice

Thank you for your letter of 9 February, enclosing your client's counter-notice.

Our client wishes to accept all counter-proposals contained in your client's counter-notice.

We look forward to receiving the draft new lease."

24. By regulation 7 of the Leasehold Reform (Collective Enfranchisement and Lease Renewal) Regulations 1993 ("the Regulations") the landlord is to prepare a draft lease and to give it to the tenant "within the period of fourteen days beginning with the date the terms of acquisition are agreed…" No draft lease was so prepared by the freeholders, as landlord, and on 3 June 2011 the tenants' solicitors wrote:

"Leasehold Reform, Housing and Urban Development Act 1993 (as amended)

Flats 22, 23 and 8 17 Clarges Street London W1J 8AE

Without prejudice to the validity of the counter-notice as to which the Tenant's position is fully reserved

We refer to our letters of 13 April in relation to the above matters.

We are disappointed to note that you have not provided us with a draft lease. We have received our clients' instructions to make a court application pursuant to section 48(3) of the Act at the earliest opportunity. We therefore look forward to hearing from you by return failing which we will apply to court for vesting orders."

In response, the freeholders' solicitors wrote on 6 June 2011 in these terms:

"Flats 8, 22 & 23, 17 Clarges Street London

Thank you for your letter of 3 June. We will provide you with the draft leases for approval shortly.

In the meantime, we note the threat of an application to the Court pursuant to section 48(3) of the Act.

To enable us to understand your client's position, is it your client's contention that "all of the terms of acquisition" have been agreed between the parties, notwithstanding that the form of the leases has not been agreed?"

On 8 June 2011, the tenants' solicitors replied:

"Leasehold Reform, Housing and Urban Development Act 1993 (as amended)

Flats 22, 23 and 8 17 Clarges Street London W1J 8AE

Without prejudice to the validity of the counter-notice as to which the Tenant's position is fully reserved

Thank you for the facsimile of 6 June.

Yes, our clients accepted all the terms of your client's counter-notices by way of our letters of 13 April. Accordingly the terms of acquisition were agreed on this date, 13 April. The appropriate period lapses on 12 June and our application under section 48(3) of the Act may then be made during the period 13 June to 12 August 2011.

The form of the new lease is dealt with under the Leasehold Reform Regulations 1993. You will be aware the landlord is obliged to provide the tenant with a draft lease within the period of 14 days beginning with the date the terms of acquisition are agreed in accordance with paragraph 7(1) of Schedule 2. We have, to date, failed to receive draft leases.

We therefore invite you to provide us with draft leases within the next 7 days failing which we shall advise our clients to issue Court applications."

The freeholders' solicitors reacted in these terms:

"Flats 8, 22 & 23 17 Clarges Street, London

Thank you for your letter of 8 June and note that you contend that the terms of acquisition were agreed on 13 April.

We are aware of the provisions of the 1993 Regulations with regard to the preparation of a draft lease, but this does not seem wholly consistent with Section 48(1) of the 1993 Act. The Leasehold Valuation Tribunal only has jurisdiction to resolve disputes where "the terms of acquisition remain in dispute". If, as you contend, the terms of acquisition have already been agreed prior to the submission of a draft lease, then how do you propose that any dispute with regard to the form of lease would be resolved, if the form cannot be agreed between the parties?

In any event, as we have previously indicated we will provide you with the draft leases for approval shortly and at least by the end of this week."

25. Draft leases were then provided by the freeholders' solicitors to the tenants' solicitors under cover of a letters of 14 June 2011 which stated:

"We write further to our email of yesterday morning and enclose herewith copies of the draft Leases for the above mentioned properties.

As advised in our emails, we reserve our clients' position as to whether the terms of acquisition have been agreed pending the agreement of the form of the Leases."

26. The draft so submitted to the tenants' solicitors included the RASC provision. On 22 June 2011, the tenants' solicitors returned those drafts with the RASC provision deleted. Importantly for this case, under regulation 7(4) of the Regulations, the landlord is required to respond to the tenant's proposed revisions to the draft within 14 days beginning with the date on which the tenant's statement of revisions is given. In this case, as is not disputed, that period expired on 6 July 2011. By regulation 7(5) if no answer is given by the landlord, within the time specified in regulation 7(4) he is deemed to have approved the amendments proposed by the tenant. No such answer was received from the freeholders' solicitors (still different solicitors from those acting in these proceedings) and on 7 July 2011, the tenants' solicitors' wrote to their opposite numbers,

"Without prejudice to the validity of the counter-notice as to which the Tenant's position is fully reserved

We refer to our letter of 22 June and note we have not received a response from you.

We refer you to paragraphs 7(4) and 7(5) of the Leasehold Reform Regulations 1993 and accordingly you are deemed to have approved our amendments to the draft leases.

Accordingly we look forward to receiving engrossments of the new leases incorporating our amendments."

27. By letter/e-mail of 22 and 29 July 2011, the freeholders' solicitors wrote indicating that they did not agree the amendments made by the tenants' solicitors, but did not respond directly to the previous contention of the latter that the terms of the lease, as amended by them, were deemed to have been approved pursuant to regulation 7(5). On 1 August 2011, the tenants' solicitors repeated their statement of position under the regulations and stated that they would now apply to the court for a vesting order pursuant to sections 48(3) and/or 49(1) of the Act. On the following day, the freeholders' solicitors replied in these terms:

"Thank you for your letter of 1 August and note that you intend applying to the Court for a vesting order pursuant to Section 48(3) of the 1993 Act.

We have previously informed you that we do not consider that the 1993 Regulations are applicable as the terms of the acquisition have yet to be agreed, so that there has been no deemed approval of the form of lease. Under Section 48(7) of the 1993 Act, the terms of acquisition include "the terms to be contained in the lease" and it is clear that these have not been agreed and so there is no basis for an application to the Court under Section 48(3). In any event, the form of the leases has not yet been approved by the intermediate landlord, St Anselm.

In applying to the Court, please confirm that it remains your contention that the terms of acquisition were agreed on13 April 2011 and that the application is to be made on this basis i.e. on the terms alleged then agreed.

If so, the terms of acquisition purportedly agreed were on the basis of the premiums set out in the counter notices and on the basis of leases on the same terms as the existing leases i.e. to include, by way of example, the provision for the head rent to be paid as part of the service charge (as reproduced in clause 31.8 of Schedule 5 of the draft lease submitted on 13 June 2011). However, you have purported to amend the draft by deleting this clause and, therefore, you appear to be now contending for quite different terms to those which you have previously claimed to have been agreed on 13 April 2011.

It remains our client's position that the terms of acquisition have not been agreed and, if as you state, an impasse has been reached, then any issue with regard to the form of the leases should be determined by the Leasehold Valuation Tribunal. Your amendments are not in accordance with Section 37 of the Act (sic) and inconsistent with the terms allegedly agreed on 13 April 2011.

Accordingly, the issue of proceedings under Section 48(3) is premature and we will apply for the proceedings to be struck out."

28. In turn, the tenants' solicitors wrote back on 5 August as follows:

"Without prejudice to the validity of the counter-notice as to which the Tenant's position is fully reserved

We refer to the above matters and your letter of 2 August.

The counter-notice proposed the terms your client wanted to be included in the new lease. By way of our letter of 13 April, your proposal was agreed without reservation. There has been no dispute since. The terms to be included in the new lease are agreed; the form of the lease is a different matter but in any case that was deemed agreed under the Regulations when you failed to respond to our observations in time.

The failure to enter into the lease is entirely because your client is seeking to include in the form of the new lease a term which they expressly proposed be omitted, namely the obligation to pay the head rent. That is rent, which section 56(1) requires not to be in the new lease, and which therefore your counter-notice expressly and correctly proposed be omitted. We do not believe this can be disputed, but to put the matter beyond doubt we enclose copy rent demands from the head-lessee for this sum. The actual service charge, as you know, is collected by the RTM company and invoiced by it accordingly.

Section 45 requires that a landlord make counter-proposals for the terms of the lease. Merely proposing that things be agreed later is not such a proposal. If your position is that despite our unreserved acceptance of the counter-notice proposals there was nevertheless no agreement of the terms of the new lease, then it follows that you are saying your counter-notice failed to make proposals for the terms of the new lease as required by section 45. If so, it is invalid on your own case. Our claim will include an alternative claim under section 49(1) to cover this eventuality.

Either way, our clients will succeed. Your threat to apply to strike out the claim is pointless - there is no dispute of fact of which we are aware; any application to strike out will simply require the Court to decide the merits of the claim."

29. The present proceedings were issued on 8 August 2011. The essence of the dispute between the parties was and is as summarised in the last two letters, which I have quoted in paragraphs 27 and 28 above.
30. The case was heard by the judge on 17 and 18 September 2012. The parties were represented (as before us) by Mr Philip Rainey QC for the tenants, Mr Kevin Farrelly for the freeholders and Mr Gary Cowen for St Anselms. Judgment was delivered on 15 February 2013.

(C) The Judgment

31. The learned Judge dismissed the tenants' claims. He held that the "terms of acquisition" within the meaning of section 48(7) of the Act, other than as to the premiums to be paid to the freeholders and to St Anselms, had not been agreed and that the matter would proceed to the Leasehold Valuation Tribunal for determination of the terms of acquisition. He held further, however, that the counter notices were valid.
32. The Judge construed the Notices and Counter Notices on the basis of what he saw to be the underlying state of mind of the parties who gave those Notices, irrespective of the terms of the documents. He said this (at paragraph 75 of his judgment):

"in my judgment the court is entitled to approach the factual material, even on a Part 8 application with a degree of common sense and robustness. I think the Claimants and their advisers well understood from the terms of the Counter-Notice and from the rejection of their suggested modifications to the service charge clause proposed in their section 42 Notice that the freeholder did not accept the "rent as service charge" clause must be excluded from the new lease."

Somewhat later he said:

"Ultimately it is both a question of fact and a matter of construction as to whether there was a completed and final agreement on this part of the counter proposal. It was clearly proffered on the basis that the statute either entitled the Landlord to include the "rent as service charge" clause or required it be included. It seems to me equally clear that it was accepted on the basis that the statute had the opposite effect and precluded its inclusion. If that is a fair characterisation of the respective positions I also conclude that on this aspect of the counter proposal these terms of acquisition have not been agreed and I do not think that construction of the counter proposal against the factual matrix of the later correspondence leads to a different conclusion."

33. The judge held that, in these circumstances, the parties could not be taken to be in agreement because of their underlying subjective disagreement as to the inclusion or exclusion of an RASC provision. However, the judge did hold that the proposal as to premium, made by the freeholders in the Counter Notice, had been agreed by the acceptance letter of 13 April 2011. Against this latter finding, St Anselms now appeals, also with the leave of the Judge.

(D) The Appeals and my conclusions

34. As they submitted at trial, the tenants say that to constitute a valid counter notice the freeholders' proposals had to be sufficiently clear to indicate precisely what they were proposing as terms of acquisition: see Burman's case (supra). What the freeholders were proposing, the tenants say, was a 90 year lease, at a peppercorn rent on the same terms as the existing lease but modified in three respects so as to include terms (a) to which the landlord was entitled, (b) as were necessary to give effect to the requirements of Chapter II and (c) further reasonable modifications to be agreed: see paragraph 48 of Mr Rainey's skeleton argument.
35. For my part, I would be inclined to say that that was indeed what they were proposing, but without the tenants' proposed deletion from the existing leases of the RASC provision, but, if necessary, with such provision in that respect to which they were entitled to under (and/or as might be necessary to give effect to the requirements of) Chapter II of Part 1 of the Act or such reasonable modification to be agreed. Such, I think must be the meaning of paragraph 6 of the Counter Notices when one takes into account the rejection of the tenants' proposed deletion of the important words 'first four thousand pounds of the' from paragraph 1(a)(i) of the Third Schedule, but with the substitution of the alternative in the counter proposal. The freeholders wanted the inclusion of an RASC provision, but had to recognise that the Act might not permit it.
36. It seems to me that this is a perfectly workable proposal by the freeholders, capable of acceptance by the tenant, and leaving it to the court to determine what the landlord was entitled to or the Act required in respect of the RASC provision. The "sweeper provision" in the last part of the freeholders' counter proposal on this matter was, to my mind, no less certain or capable of operation than the common provision in a court's costs order that costs shall be "assessed, if not agreed".
37. The tenants submit that, if the Counter Notices were valid, as the freeholders and St Anselms themselves contend, then nothing could be clearer than that, by the letter of 13 April 2011, the tenants accepted the proposals contained in them. Thus, the terms of acquisition were agreed. For this purpose, Mr Rainey submits, it matters not whether they are correct in their assertion that such proposals meant that an RASC could not be required in the lease as granted (because of the effect of the peppercorn rent requirement in section 56(1)). That was a risk they (and the landlords) took. Thereafter, the procedure for agreeing the form of lease was that specified in the Regulations. The freeholders duly presented a draft lease. The tenants proposed amendments to which the freeholders did not respond in time. The effect was that the draft leases, as amended by the tenants, were deemed to be agreed under regulation 7(5) and the tenants were and are, therefore, entitled to an order for the grant of lease in that form under section 48(3) of the Act.
38. The tenants submit, in the alternative, that if the Counter Notices did not contain proposals as to terms of acquisition in a form capable of acceptance by them, then the notices were invalid; the competent landlord would have failed to give a counter notice in accordance with section 45(1) and the tenants would be entitled to orders under section 49(1) of the Act determining the terms of acquisition in accordance with the proposals originally contained in the tenants' notices.
39. Mr Rainey submits that the judge's solution was the one result to which the law could not have permitted him to come, namely that there were valid Counter Notices, accepted by the tenants, but still no agreement of the terms of acquisition within the meaning of the Act.
40. For St Anselms, in submissions adopted by Mr Farrelly for the freeholders, Mr Cowen submits that there was no agreement as to the terms of acquisition effected by the tenants' acceptance of the Counter Notice proposals notwithstanding the terms of the letter of 13 April 2011. His argument is that,

"The judge found as a fact that looked at objectively having regard to the surrounding factual matrix, the freeholder's offer was made on the basis that the 'rent as service charge' provision would be included in the new leases and was accepted on the basis that it would not be included in the new leases. The mere fact that a letter is sent saying to the effect, 'I accept your proposal' does not amount to a true agreement if it is clear that the acceptance is on an entirely different basis from the original offer."

(See paragraph 17 of Mr Cowen's skeleton argument.)

41. In my judgment, there is no basis for saying that the tenants' unqualified acceptance was on anything other than the terms of the documents themselves. If the parties fell out, as they did, as to what the documents meant, then it was for the court to determine their meaning.
42. In support of his argument, Mr Cowen submits that the Tribunal,

"which is undoubtedly seized [sic: seised] of jurisdiction to determine the terms of the new leases would be deprived of such jurisdiction on the basis that terms of acquisition had been agreed whereas the Court on an application to determine the form of the lease which best reflects the agreement previously reached and which is intended to deal only with issues of drafting under s.48(3) would actually be required to determine whether an important provision should be included in the lease at all or not." (Emphasis in the original, Loc. Cit. paragraph 20.)

43. As to the tenants' alternative submission that the Counter Notices were invalid, it is submitted that,

"There was no uncertainty in what was being proposed [in the Counter Notices]. The freeholder's counter proposal was in the context of an express rejection of a proposal to remove the 'rent as service charge' provision. It would have been wholly inconsistent for the freeholder to have rejected in its counternotice the proposal made in the initial notice that the 'rent as service charge' provision should be removed and then made a 'counterproposal by reference to s.56 and 57 of the 1993 Act which was in effect, merely a restatement of the lessee's proposal. On the contrary, the express rejection of that proposal together with the counterproposal as to premiums…demonstrated clearly exactly what proposal was being made by the freeholder in relation to the 'rent as service charge provision, namely that it should be retained. The learned Judge was right to hold that the nature of the counterproposal could be objectively identified from the counternotice and that the lessees' solicitors were well aware of what was being proposed in the counternotice.

The counternotice was therefore neither ambiguous nor uncertain in this respect. There was a clear counterproposal which everyone understood." (Loc. Cit. paragraphs 24 and 25.)

44. In my judgment, Mr Cowen's argument, recited in the last two sentences of the immediately preceding paragraph, presents the seeds of the undoing of his case in resistance to the tenants' appeal. It seems to me that if the Counter Notices truly contained a clear counter proposal, then it must have been capable of acceptance in the terms of the tenants' letter of 13 April 2011. If it was so accepted, then there was agreement as to the terms of acquisition, within the meaning of the Act. What followed then was the procedure for agreeing the form of lease under the Regulations. In implementing that procedure, the freeholders failed to comply with the prescribed time limit for responding to the tenants' amendments and would be deemed to have agreed them, with the necessary consequence that the tenants would be entitled to orders under section 48(3).
45. For these purposes, it matters not at all what the true construction and effect of the counter proposals and of the tenants' acceptance of them were. The problem that has presented itself in these proceedings is that the freeholders and St Anselms are endeavouring to get round the undeniable fact that they failed to meet the time limits set out in the Regulations, by unscrambling the obvious and clear acceptance by the tenants of the freeholders' own counter proposals, whatever those proposals on their true construction might have meant.
46. In my judgment, there was no basis on the evidence for the judge to conclude that the letter of 13 April 2011 did not mean what it said. He had no evidence, on this Part 8 claim (in which no oral evidence was given), as to the subjective intention of the tenants behind the writing of the letter of 13 April, and even if he had had such evidence, I am far from satisfied that it would have been admissible. One can imagine the arguments that would have arisen if the tenants had said, for example, "We said we agreed the premiums in the counter notice, but in fact we didn't. We intended to accept a premium of [something less] and you knew that".
47. In fact, proposals were made in writing and were accepted in writing. The only question that might have arisen, if matters had got that far, would have been what the accepted proposals truly meant. That would have been a matter for the Court on an application for orders under section 48.
48. It may be that the tenants' solicitors understood that the freeholders' solicitors thought that the counter proposal, as contained in the counter notices, was that the RASC provision should go into the new leases. The freeholders' solicitors' thoughts in that regard might have proved to be right in the end and the tenants were perhaps taking a significant risk in agreeing the counter proposals in those terms. However, that is not the point, and in my view, we do not have to decide the matter. The tenants agreed the counter proposals as drafted and the freeholders were stuck with them, whatever they may properly have meant. The freeholders' problem is simply that their then solicitors failed to meet the clear time limits in the Regulations.
49. That is sufficient to resolve the tenants' appeal in their favour. However, as the alternative point taken by Mr Rainey (on the basis that the Counter Notices did not contain proposals capable of being accepted) was fully argued, I should express my view upon it.
50. While Mr Cowen on this appeal took the stance that the counter notices were sufficiently clear and specific to constitute valid notices under section 45, it appears that before the Judge his position was that the last part of the counter proposals "betrayed an agreement to agree": see paragraph 65 of the Judge's judgment. The Judge concluded, in paragraph 70 of the judgment, that

"…the last part of the counter proposal was not capable of being converted into an agreement about the "terms of acquisition" by the process of what might be termed 'mere acceptance'. It still left too much to be agreed. "

51. The judge went on to consider what he described in paragraph 71 of the judgment as "consensus ad idem" to which he said he turned "by considering the rest of the counter proposal at paragraph 7 [presumably, he meant 6] of the Counter-Notice". He went on to conclude that there was a disagreement as to whether section 57(2) entitled the landlord to replicate the RASC provision in the new lease. He reached this view by reference to his finding as to the parties' subjective intentions as set out in paragraph 75 of the judgment already quoted above. However, he held that the Counter Notices were nonetheless valid. He said that,

"To my mind the Counter-Notice must be clear as to its proposals but its validity does not depend upon its finality as an offer."

52. In my judgment, however, if the counter proposals could not be converted into agreement of "terms of acquisition" by acceptance, then difficulties arise in saying that the Counter Notices complied with the requirements of Section 45.
53. This brings me back to Burman's case (supra) (Burman v Mount Cook Land Limited [2002] Ch 256). In that case, Chadwick LJ said (at paragraph 16, p.264 E-G),

"A landlord who intends to admit the tenant's right to acquire a new lease, but who wishes to advance counter-proposals as to the terms of acquisition, must serve a counter-notice which (a) states that the landlord does admit the right, (b) states which of the proposals contained in the tenant's notice are accepted by the landlord, (c) states which of the proposals contained in the tenant's notice are not accepted by the landlord, and (d) specifies, in relation to each proposal which is not accepted, the landlord's counter-proposal. Again, failure to take those steps will enable the tenant to apply to the court, under section 49(1), for an order determining that the terms of acquisition shall be in accordance with the proposals contained in the tenant's notice."

The Lord Justice continued at paragraphs 18 and 19 as follows (page 266 A-F),

"18. The importance of the landlord's counter-notice to the proper working of the statutory scheme is reflected in the language of section 45(2) and (3) of the Act. The counter-notice must comply with the requirements in one or other of paragraphs (a), (b) or (c) in subsection (2). It must state whether the landlord admits or does not admit, that the tenant had the right to acquire a new lease. If the counter-notice complies with the requirement in subsection (2)(a) – that is to say, if it does state that the landlord admits the right – subsection (3)(a) requires that it must in addition state which (if any) of the proposals contained in the tenant's notice are accepted by the landlord and which are not so accepted; and subsection (3)(b) requires that it must specify, in relation to each proposal which is not accepted, the landlord's counter-proposal. The words which I have emphasised are mandatory and specific. There is good reason why they should be. The proper working of the statutory scheme requires that the tenant is left in no doubt as to what the landlord admits, how far the tenant's proposals are accepted, and what (if any) are the landlord's counter-proposals. . Further, the importance of the statement which subsection (2)(a) requires, as an admission, is emphasised by subsection (5) of section 45 of the Act.

"19. In my view the answer to the question "what does section 45(2)(a) of the 1993 Act require?" is not open to doubt. If a notice is to comply with the requirement under that paragraph it must state that the landlord admits that the tenant had on the relevant date the right to acquire a new lease of his flat. Further, the notice must state which (if any) of the proposals contained in the tenant's notice are accepted by the landlord, as well as stating which of those proposals are not accepted and specifying, in relation to each proposal which is not accepted, the landlord's counter-proposal. Section 45(2)(a) must be read in conjunction with section 45(3) of the Act."

54. I do not see how a Counter Notice whose proposals cannot be accepted in the terms expressed in it can be a valid notice within the criteria laid down by Chadwick LJ in the Burman case in the passages which I have just quoted.
55. Accordingly, if I am wrong in holding that the counter proposals were capable of acceptance and that they were accepted accordingly by the letter of 13 April in the terms expressed, then I would hold that the counter notices were invalid and that the tenants would be entitled to orders, under section 49(1) of the Act, determining the terms of acquisition in accordance with the proposals contained in their own notices.
56. In the circumstances, however, as already explained, I conclude that the tenants' appeals should be allowed on the first of Mr Rainey's grounds and that this court should make an order, under section 48(3) of the Act, for the grant to the tenants of new leases to the tenants, in the terms of the leases prepared by the freeholders' solicitors, but with the amendments thereto as indicated in red on the drafts returned to the freeholders' solicitors with the tenants' solicitors letter of 22 June 2011.
57. It seems to me that in those circumstances the cross-appeal by St Anselms does not arise. On either basis of the tenants' successful arguments, the premiums are settled by the proposals contained in the Counter Notices, the terms of which will be incorporated in the new leases, and I would dismiss St Anselms' appeal.

Sir Stanley Burnton

58. I am grateful to Lord Justice McCombe for setting out the facts, the parties' submissions, and the applicable statutory provisions so clearly. I agree with his judgment, and add some words of my own only because I understand that the issues raised on this appeal are of general practical importance.
59. The first question is whether the formula used by the freeholders' solicitors in their counter notice prevented what would otherwise be an unarguably effective counter notice from being such. The formula was as follows:

"The new leases terms should contain such modifications and amendments as the Landlord is entitled to under and/or as may be necessary to give effect to the requirements of Chapter II of Part I of the Act and without prejudice to the generality of the above such further reasonable modifications to be agreed."

60. I do not think that the Court should be astute to hold that what was clearly intended to be a valid counter notice was invalid. In fact, the first part of this formula poses no difficulty. The "modifications and amendments as the Landlord is entitled to under and/or as may be necessary to give effect to the requirements of Chapter II of Part I of the Act" are objectively ascertainable, and in the event of a dispute as to what are such modifications and amendments they may be determined by the County Court. The second part of the formula "such further reasonable modifications to be agreed" neither adds nor detracts from the notice: parties are always free to agree changes to the terms of acquisition or the terms of a lease, as indeed section 57(6) expressly provides and recognises. So the counter notice was a valid counter notice for the purposes of the Act.
61. The second issue is whether the obligation in clause 3(2) of each lease and paragraph 1(a)(i) of the Third Schedule to each lease, in so far as it required the Lessee to pay the rent payable by the head lessor other than the first £4,000, is an obligation to pay rent for the purposes of Chapter II of the Act, so that it must be varied so as to amend the Lessee's covenants to provide for payment of a peppercorn rent only, as required by section 56. In my judgment, the Lessee's original contractual obligation is an obligation to pay rent. What is rent for the purposes of Chapter II cannot depend on what the money or the obligation is called, since otherwise it would be possible for a lessor to draft himself out of the constraints of section 56. An obligation to pay the rent payable by a head lessor to his freeholder is not a service charge or part of a service charge. The definitions of service charge in section 18 of the Landlord and Tenant Act 1985 and of management functions in section 96 of the Commonhold and Leasehold Reform Act 2002 broadly reflect the normal usage of the expression "service charge", and could not include the payment by a head lessor of his rent. In my judgment, the obligation of a lessee to pay to his lessor the rent payable by the lessor to his freeholder (or head lessor) is itself an obligation to pay rent.
62. It follows that the appellants were and are entitled to leases in the terms they seek. As McCombe LJ points out, they would be so entitled even if the counter notice was invalid.

Lord Justice Goldring

63. I agree that the appeal should be allowed for the reasons given by McCombe LJ.

THE APPENDIX

Leasehold Reform, Housing and Urban Development Act 1993

39 Right of qualifying tenant of flat to acquire new lease.

(1)This Chapter has effect for the purpose of conferring on a tenant of a flat, in the circumstances mentioned in subsection (2), the right, exercisable subject to and in accordance with this Chapter, to acquire a new lease of the flat on payment of a premium determined in accordance with this Chapter.

(2)Those circumstances are that on the relevant date for the purposes of this Chapter—

(a)the tenant has for the last two years been a qualifying tenant of the flat;...

40 The landlord for the purposes of this Chapter.

(1)In this Chapter "the landlord", in relation to the lease held by a qualifying tenant of a flat, means the person who is the owner of that interest in the flat which for the time being fulfils the following conditions, namely—

(a)it is an interest in reversion expectant (whether immediately or not) on the termination of the tenant's lease, and

(b)it is either a freehold interest or a leasehold interest whose duration is such as to enable that person to grant a new lease of that flat in accordance with this Chapter,

and is not itself expectant (whether immediately or not) on an interest which fulfils those conditions.

(2)Where in accordance with subsection (1) the immediate landlord under the lease of a qualifying tenant of a flat is not the landlord in relation to that lease for the purposes of this Chapter, the person who for those purposes is the landlord in relation to it shall conduct on behalf of all the other landlords all proceedings arising out of any notice given by the tenant with respect to the flat under section 42 (whether the proceedings are for resisting or giving effect to the claim in question).

(3)Subsection (2) has effect subject to the provisions of Schedule 11 to this Act (which makes provision in relation to the operation of this Chapter in cases to which that subsection applies).

(4)In this section and that Schedule—

(a)"the tenant" means any such qualifying tenant as is referred to in subsection (2) and "the tenant's lease" means the lease by virtue of which he is a qualifying tenant;

(b)"the competent landlord" means the person who, in relation to the tenant's lease, is the landlord (as defined by subsection (1)) for the purposes of this Chapter;

(c)"other landlord" means any person (other than the tenant or a trustee for him) in whom there is vested a concurrent tenancy intermediate between the interest of the competent landlord and the tenant's lease. …

42 Notice by qualifying tenant of claim to exercise right.

(1)A claim by a qualifying tenant of a flat to exercise the right to acquire a new lease of the flat is made by the giving of notice of the claim under this section.

(2)A notice given by a tenant under this section ("the tenant's notice") must be given—

(a)to the landlord, and

(b)to any third party to the tenant's lease.

(3)The tenant's notice must—

(a)state the full name of the tenant and the address of the flat in respect of which he claims a new lease under this Chapter;

(b)contain the following particulars, namely—

(i)sufficient particulars of that flat to identify the property to which the claim extends,

(ii)such particulars of the tenant's lease as are sufficient to identify it, including the date on which the lease was entered into, the term for which it was granted and the date of the commencement of the term, …

(iii) and (iv). . .

(c)specify the premium which the tenant proposes to pay in respect of the grant of a new lease under this Chapter and, where any other amount will be payable by him in accordance with any provision of Schedule 13, the amount which he proposes to pay in accordance with that provision;

(d)specify the terms which the tenant proposes should be contained in any such lease;

(e)state the name of the person (if any) appointed by the tenant to act for him in connection with his claim, and an address in England and Wales at which notices may be given to any such person under this Chapter; and

(f)specify the date by which the landlord must respond to the notice by giving a counter-notice under section 45.

(4). . . .

(4A)A notice under this section may not be given by the personal representatives of a tenant later than two years after the grant of probate or letters of administration.

(5)The date specified in the tenant's notice in pursuance of subsection (3)(f) must be a date falling not less than two months after the date of the giving of the notice. …

45 Landlord's counter-notice.

(1)The landlord shall give a counter-notice under this section to the tenant by the date specified in the tenant's notice in pursuance of section 42(3)(f).

(2)The counter-notice must comply with one of the following requirements—

(a)state that the landlord admits that the tenant had on the relevant date the right to acquire a new lease of his flat;

(b)state that, for such reasons as are specified in the counter-notice, the landlord does not admit that the tenant had such a right on that date;

(c)contain such a statement as is mentioned in paragraph (a) or (b) above but state that the landlord intends to make an application for an order under section 47(1) on the grounds that he intends to redevelop any premises in which the flat is contained.

(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 tenant's notice are accepted by the landlord and which (if any) of those proposals are not so accepted; and

(b)specify, in relation to each proposal which is not accepted, the landlord's counter-proposal.

48 Applications where terms in dispute or failure to enter into new lease.

(1)Where the landlord has given the tenant—

(a)a counter-notice under section 45 which complies with the requirement set out in subsection (2)(a) of that section, or

(b)a further counter-notice required by or by virtue of section 46(4) or section 47(4) or (5),

but any of the terms of acquisition remain in dispute at the end of the period of two months beginning with the date when the counter-notice or further counter-notice was so given, a leasehold valuation tribunal may, on the application of either the tenant or the landlord, determine the matters in dispute.

(2)Any application under subsection (1) must be made not later than the end of the period of six months beginning with the date on which the counter-notice or further counter-notice was given to the tenant.

(3)Where—

(a)the landlord has given the tenant such a counter-notice or further counter-notice as is mentioned in subsection (1)(a) or (b), and

(b)all the terms of acquisition have been either agreed between those persons or determined by a leasehold valuation tribunal under subsection (1),

but a new lease has not been entered into in pursuance of the tenant's notice by the end of the appropriate period specified in subsection (6), the court may, on the application of either the tenant or the landlord, make such order as it thinks fit with respect to the performance or discharge of any obligations arising out of that notice. …

(7)In this Chapter "the terms of acquisition", in relation to a claim by a tenant under this Chapter, means the terms on which the tenant is to acquire a new lease of his flat, whether they relate to the terms to be contained in the lease or to the premium or any other amount payable by virtue of Schedule 13 in connection with the grant of the lease, or otherwise.

49 Applications where landlord fails to give counter-notice or further counter-notice.

(1)Where the tenant's notice has been given in accordance with section 42 but—

(a)the landlord has failed to give the tenant a counter-notice in accordance with section 45(1), or

(b)if required to give a further counter-notice to the tenant by or by virtue of section 46(4) or section 47(4) or (5), the landlord has failed to comply with that requirement,

the court may, on the application of the tenant, make an order determining, in accordance with the proposals contained in the tenant's notice, the terms of acquisition.

56 Obligation to grant new lease.

(1)Where a qualifying tenant of a flat has under this Chapter a right to acquire a new lease of the flat and gives notice of his claim in accordance with section 42, then except as provided by this Chapter the landlord shall be bound to grant to the tenant, and the tenant shall be bound to accept—

(a)in substitution for the existing lease, and

(b)on payment of the premium payable under Schedule 13 in respect of the grant,

a new lease of the flat at a peppercorn rent for a term expiring 90 years after the term date of the existing lease.

(2)In addition to any such premium there shall be payable by the tenant in connection with the grant of any such new lease such amounts to the owners of any intermediate leasehold interests (within the meaning of Schedule 13) as are so payable by virtue of that Schedule. …

57 Terms on which new lease is to be granted.

(1)Subject to the provisions of this Chapter (and in particular to the provisions as to rent and duration contained in section 56(1)), the new lease to be granted to a tenant under section 56 shall be a lease on the same terms as those of the existing lease, as they apply on the relevant date, but with such modifications as may be required or appropriate to take account—

(a)of the omission from the new lease of property included in the existing lease but not comprised in the flat;

(b)of alterations made to the property demised since the grant of the existing lease; or

(c)in a case where the existing lease derives (in accordance with section 7(6) as it applies in accordance with section 39(3)) from more than one separate leases, of their combined effect and of the differences (if any) in their terms.

(2)Where during the continuance of the new lease the landlord will be under any obligation for the provision of services, or for repairs, maintenance or insurance—

(a)the new lease may require payments to be made by the tenant (whether as rent or otherwise) in consideration of those matters or in respect of the cost thereof to the landlord; and

(b)(if the terms of the existing lease do not include any provision for the making of any such payments by the tenant or include provision only for the payment of a fixed amount) the terms of the new lease shall make, as from the term date of the existing lease, such provision as may be just—

(i)for the making by the tenant of payments related to the cost from time to time to the landlord, and

(ii)for the tenant's liability to make those payments to be enforceable by distress, re-entry or otherwise in like manner as if it were a liability for payment of rent. …

(6)Subsections (1) to (5) shall have effect subject to any agreement between the landlord and tenant as to the terms of the new lease or any agreement collateral thereto; and either of them may require that for the purposes of the new lease any term of the existing lease shall be excluded or modified in so far as—

(a)it is necessary to do so in order to remedy a defect in the existing lease; or

(b)it would be unreasonable in the circumstances to include, or include without modification, the term in question in view of changes occurring since the date of commencement of the existing lease which affect the suitability on the relevant date of the provisions of that lease.

90 Jurisdiction of county courts.

(1)Any jurisdiction expressed to be conferred on the court by this Part shall be exercised by a county court.

(2)There shall also be brought in a county court any proceedings for determining any question arising under or by virtue of any provision of Chapter I or II or this Chapter which is not a question falling within its jurisdiction by virtue of subsection (1) or one falling within the jurisdiction of a leasehold valuation tribunal by virtue of section 91. …

91 Jurisdiction of leasehold valuation tribunals.

(1)Any jurisdiction expressed to be conferred on a leasehold valuation tribunal by the provisions of this Part (except section 75 or 88) shall be exercised by a rent assessment committee constituted for the purposes of this section; and any question arising in relation to any of the matters specified in subsection (2) shall, in default of agreement, be determined by such a rent assessment committee.

(2)Those matters are—

(a)the terms of acquisition relating to—

(i)any interest which is to be acquired by a nominee purchaser in pursuance of Chapter I, or

(ii)any new lease which is to be granted to a tenant in pursuance of Chapter II,

including in particular any matter which needs to be determined for the purposes of any provision of Schedule 6 or 13; …

(11)In this section— …

"the terms of acquisition" shall be construed in accordance with … section 48(7), as appropriate;

The Leasehold Reform (Collective Enfranchisement and Lease Renewal) Regulations 1993

Procedure for lease renewal

3. In a transaction undertaken to give effect to a tenant's notice, the landlord and the tenant shall, unless they otherwise agree, be bound by Schedule 2 to these Regulations. …

SCHEDULE 2LEASE RENEWAL

Interpretation

1.  In this Schedule—

"counter-notice" means a notice given under section 45, and "further counter-notice" means a notice required by or by virtue of section 46(4) or section 47(4) or (5);

"flat" shall be construed in accordance with section 62(2);

"the landlord" has the meaning given by section 40(1);

"lease" means a lease granted to give effect to a tenant's notice;

"the relevant date" has the meaning given by section 39(8);

"tenant" means a tenant who has given a tenant's notice;

"terms of acquisition" has the meaning given by section 48(7). …

Preparation of lease

7.  (1)  The landlord shall prepare a draft lease and give it to the tenant within the period of fourteen days beginning with the date the terms of acquisition are agreed or determined by a leasehold valuation tribunal.

(2) The tenant shall give to the landlord a statement of any proposals for amending the draft lease within the period of fourteen days beginning with the date the draft lease is given.

(3) If no statement is given by the tenant within the time specified in sub-paragraph (2), he shall be deemed to have approved the draft lease.

(4) The landlord shall give to the tenant an answer giving any objections to or comments on the proposals in the statement within the period of fourteen days beginning with the date the statement is given.

(5) If no answer is given by the landlord within the time specified in sub-paragraph (4), he shall be deemed to have approved the amendments to the draft lease proposed by the tenant.

(6) The landlord shall prepare the lease and as many counterparts as he may reasonably require and shall give the counterpart or counterparts to the tenant for execution a reasonable time before the completion date.

(7) The tenant shall give the counterpart or counterparts of the lease, duly executed, to the landlord and the landlord shall give the lease, duly executed, to the tenant, on the completion date or as soon as possible afterwards.