England and Wales High Court (Administrative Court) Decisions

1. MR JUSTICE KAY: The applicant is the freehold owner and landlord of a flat in Cadogan Place, London. By an agreement dated 5 October 1994, the then headlessee of the whole building granted a tenancy of the flat for a fixed term expiring on 27 December 1995 at a rent of £700 per month. That rent was significantly below the market rent because of the relationship between the headlessee and the tenants. The agreement created an assured tenancy within the meaning of Section 1 of the Housing Act 1988 (“the 1988 Act”).

2. After 27 September 1995, the tenants remained in occupation of the flat under a statutory periodic tenancy arising under Section 5 of the 1988 Act. Since 29 September 1995, their immediate landlord has been the applicant.

3. On 29 January 1996, the applicant served a Notice in the form prescribed by Section 13(a) of the 1988 Act proposing that the rent should be increased to £3,375 per month with effect from 1 March 1966. On 27 February 1996, the tenants referred the Notice to the Respondent Rent Assessment Panel under Section 13(4) of the 1988 Act.

4. At the first hearing of the tenants’ reference on 17 April 1996, the applicant’s valuer supported the claimed rent which amounted to £40,000 per annum, whilst the tenants contended that the proper rent was £19,800 per annum. However, at that hearing, the Respondent itself raised two questions:

5. Having received written representations from both sides, the Respondent determined that the Applicant’s Notice was not valid and that accordingly it was as a result unable to entertain the tenants’ reference. The Applicants brought these proceedings to challenge those decisions.

6. It is conceded on behalf of the Respondent that the challenged decisions were wrong in that the Applicant’s Notice was valid and also that it had power to entertain and hear the reference by the tenants. However, it became apparent that there is no agreement as to the powers of the Respondent on hearing the reference. The Applicant contends that if the Respondent concludes that the appropriate market rent is in excess of £25,000 per annum, it is for the Respondent to determine that rent, which would have the effect of bringing to an end the statutory periodic tenancy. The Respondent contends that it cannot determine an annual market rent above £25,000 and that if it were to reach a conclusion that apart from the provisions of the 1988 Act the annual market rent would have been in excess of £25,000, it should determine the rent at £25,000 per annum. Accordingly I was asked to resolve that dispute. It seemed appropriate in such circumstances to invite the Applicant to seek a specific declaration that its contentions were correct and I granted leave for an amendment of the Form 86A. Once that had happened, it seemed that the matter was one upon which the tenants should be afforded an opportunity to be heard, and I adjourned the matter so that the application could be served upon them. However, following service the tenants have not sought to make any representations and the matter has proceeded with the two original parties.

7. Subsection (6) has no relevance to this case. Subsection (2) provides:

8. It is helpful to look first at Part I of Schedule 1 as originally enacted, which provided:

9. Very significant changes have been made to that schedule, to which it will be necessary to return in due course but it is convenient first to look at the other relevant provisions of the 1988 Act to see the effect of the assured tenancy provisions as originally enacted because it is the inter-relationship of the changes with the underlying scheme that causes the difficulties to be addressed in this case.

10. Subsection (4) provides procedures for the tenant to challenge that notice:

11. This scheme was straightforward and provided that the rent payable under a statutory periodic tenancy coming into effect upon the expiry of an assured tenancy would, subject to the giving of appropriate notice always be the market rent. The tenant gained the assurance of a right to remain in the property, but the landlord was always entitled to secure the then market rent. In simple terms there was no artificial rent capping.

12. With the abolition of general rates by the Local Government Finance Act 1988, the provisions of Part I of Schedule 1 of the 1988 Act clearly required amendment. Section 119 of that Act gave the Secretary of State power to make regulations providing that a reference in legislation to a rateable value shall instead be a reference to some other factor.

13. The amendment was made by the References to Rating (Housing) Regulations 1990 (“the 1990 Regulations”), paragraph 29 of which added a new paragraph 2A to Part I of Schedule 1 of the 1988 Act retaining the exclusion from being an assured tenancy for any tenancy created before 1 April 1990 where the rateable value was above the limits set by the Schedule as originally enacted on 31 March 1990. For tenancies entered into after 1 April 1990, paragraph 2 was amended and the relevant parts provided that a tenancy would not be an assured tenancy if it was:

14. This provision causes no difficulty in determining whether a tenancy is an assured tenancy at any particular time, which clearly is its purpose, but problems arise when the relationship between this paragraph as amended and section 14(1) of the 1988 Act are examined. Mr. Radevsky on behalf of the applicant submits, and I fear that he is right, that the draftsman failed to appreciate the relationship between these two provisions. Section 14(1) requires a rent assessment committee to assess the rent “that the dwelling-house might reasonably be expected to be let under an assured tenancy ”. It is the interpretation of these words that is now at the heart of the dispute in this case.

15. Mr Hobson on behalf of the Respondent submits that these words are straightforward and that the effect of the amendments made by the 1990 Regulations is that in considering a tenant’s reference under section 13(4) of the 1988 Act, the Respondent has to assume that an assured tenancy would be granted. If, therefore, the market rent would be in excess of £25,000 for the dwelling-house, the Respondent must conclude that a landlord would only let the premises at the maximum rent that qualifies as an assured tenancy, i.e. £25,000 and determine that that is the new rent.

16. If that argument is right, then effectively the whole character of an assured tenancy has been changed and not only does the tenant acquire security of tenure but also the rent is subject to a cap at the maximum permitted in the Schedule 1 to the 1988 Act.

17. Mr Radevsky submits that it was not and cannot have been the intention of Parliament that such a radical change to the whole system of assured tenancies should be made in this way, and that the only way in which to make sense of the provisions is to read “under an assured tenancy” in Section 14(1) as meaning under a tenancy having the characteristics of an assured tenancy without reference to any limitation upon the rent that applies to an assured tenancy.

18. He contends that to read the section in the way suggested by the Respondent would lead to all sorts of anomalies, some of which a landlord could not protect himself against. He points to the fact that the whole purpose of the legislation was to phase out regulated tenancies under the Rent Act 1977 and introduce a scheme of protection for tenants which landlords would find more attractive, thereby increasing the pool of private rented accommodation.

19. I find it quite impossible to accept Mr. Hobson’s argument that the wording of Section 14(1) is simple and straightforward and as such must be interpreted in the way suggested on behalf of the Respondent.

20. The Section requires that the Committee shall determine the rent at which it considers “that the dwelling-house might reasonably be expected to be let under an assured tenancy”. If the annual market rent is in excess of £25,000 no landlord could reasonably be expected to let the premises at less than the market rent when the only advantage of an assured tenancy would be to the tenant. He would be required to give up a part of the rent that he could reasonably expect to receive for no benefit to himself. In such circumstances, there would be no rent at which he could reasonably be expected to let the premises under an assured tenancy if the literal meaning suggested is to be accepted. £25,000 would be the annual rent at which he could least unreasonably be expected to let the premises but it cannot be said that such an expectation was in any way reasonable since in practice it would never happen. The higher the market rent was above £25,000 the less reasonable the expectation would become. If as is the Applicant’s evidence suggests in this case, the annual market rent is £40,000, it would require a landlord to act wholly unreasonably to let the premises with all the benefits of an assured tenancy at an annual rent £15,000 below the going market rent with the knowledge that any future increase in rent could only come about if the Secretary of State exercised the power given to him to increase the £25,000 limit.

21. It seems to me in those circumstances that the provision cannot be taken to have the meaning suggested by the Respondent or the whole scheme breaks down since it is impossible for the Respondent to arrive at the determination required of it. I, therefore, consider that in order to make the provisions have effect, it is necessary as counsel for the Applicant suggests to give these words a wider meaning. I can find no better approach than that suggested on behalf of the Applicant, namely one disregards the limit on the rental values contained in Schedule 1 and assesses the market rental without regard to any such limitation.

22. The purpose of the inclusion of then 14(1) is suggested in Megarry’s The Rent Acts Vol 3 page 214 as:

23. Thus it seems clear that the provision was one that was originally included for the benefit of the landlord and it would be a remarkable situation if simply because of the abolition of rates, it was to be turned on its head and have consequences of a very dire kind for some landlords. Mr Radevsky contends, and I agree, that the Respondent’s interpretation would have the effect that landlords would stop granting assured tenancies at annual rents less than £25,000 where there was a danger of subsequent increases hitting the £25,000 ceiling.

24. If the applicant’s contentions are right then clearly the closer a rental on a letting was to £25,000 p.a., the less would be the benefit of an assured tenancy to a tenant since he would be on risk that a subsequent rent reference might take the tenancy out of the assured scheme. A rental of, for example, £24,500 p.a. would bring little security of tenure because even a small movement in market rents would take it outside the scheme (subject to any variation of the limit - there having been none since the limit was introduced). Thus there would be little practical difference between a letting just below the £25,000 limit and one just above and therefore little would need to be added to the rental to allow for it being an assured tenancy if it was just below the limit. There would thus be a natural progression in rental levels.

25. If the Respondent’s argument is correct the whole picture would become wholly distorted since not only would the tenant gain the intended benefit of security of tenure but also he would gain the considerable benefit of a rent cap. It is difficult to see a landlord ever agreeing to let a property to an individual or individuals for occupation as a dwelling-house at a rental anywhere approaching the £25,000 limit. This as counsel for the Applicant points out would be quite contrary to the whole purpose of the legislation which was to increase the available supply of privately owned property available for rent as dwelling houses by individuals.

26. I am reinforced in my view that the Respondent’s interpretation cannot be right by consideration of the way in which the legislation came to be enacted. Parliament authorised the Secretary of State to make provisions by Regulations to replace with some other yardstick references to rates, which would become meaningless. I do not believe that it was the intention of Parliament that the Secretary of State should thereby be empowered to make a fundamental change to the characteristics of assured tenancies by the introduction of a rent cap. If the Respondent’s interpretation was correct then I consider that real issues would arise as to whether the Regulations in so far as they introduced a rate cap were ultra vires. Section 119 of the Local Government Act 1988 gave the Secretary of State power to make Regulations providing that the reference to rateable value in any legislation should instead be to some other factor other than one connected with rating. That section did not empower him to make a radical change of any other kind to any legislation. The effect of the Regulations if the Respondent’s contentions are correct would have been to change quite dramatically the whole effect of the legislation relating to assured tenancies and as such would, it seems to me, to have been ultra vires. However, no such question would arise if the correct interpretation of Section 14(1) is that contended for by the Applicant.

27. For these reasons, I have come to the conclusion that the Applicant’s submissions are correct and it is unnecessary to look in detail at the anomalies outlined on behalf of the Applicant that would arise if the Respondent’s interpretation was correct.

28. A further argument advanced by the Respondent should perhaps be addressed. Mr Hobson argues that reference to Section 14(7) of the 1988 Act provides assistance. Section 14(7) as already set out provides that the rent as determined by the Respondent would have effect from the beginning of the period specified in the notice, in this case 1 ^st March 1996. Thus if the Respondent determined a rent in excess of £25,000 it is submitted that the rent would have been above the limit from that date and hence the assured tenancy would have come to an end on that date and the Respondent would have had no power to determine a rent. I reject this argument. The assured tenancy remains effective until the determination is made by the Respondent. The fact that provision for back dating the increase to the date upon which the Respondent would have found that the tenant should have agreed to pay the determined rent cannot in my judgment determine the powers of the Respondent at the determination. The tenant is protected by the discretion given to the Respondent to alleviate “undue hardship”.

29. A similar argument was addressed in relation to the provisions of Section 6 of the 1988 Act which makes provisions for changes in the terms of the tenancy other than rent but I have not found this of assistance in interpreting the provisions of Section 14(1).

30. In the circumstances I am satisfied that the Respondent is obliged to assess the annual market rent without reference to the £25,000 limit. If the resulting determination is in excess of that figure, the assured tenancy will be at an end. Accordingly the Applicant is entitled to the relief sought and I shall hear counsel on the precise terms in which the order should be drawn in the light of my findings and on any questions relating to costs.

31. MR JUSTICE KAY: I have handed down the judgment in this case. The parties have already received it.

32. MR RADEVSKY: My Lord, I have drafted a proposed Order. My learned friend, Mr Strachan, who appears today for the Respondents, has agreed paragraphs one and two of the Order. I hope your Lordship has a copy of it.

33. MR JUSTICE KAY: Yes, I am just reading it, thank you.

34. MR RADEVSKY: As far as paragraph three is concerned (costs), I ask for the whole of the costs of the occasion? My learned friend wishes to argue about the costs of the first hearing before your Lordship.

35. MR STRACHAN: I agree that the Applicants should be awarded their costs, save for those costs incurred on 27th February 1997, when the hearing was adjourned before your Lordship after amendment of the Form 86A to seek the relief which has now been granted, and also to enable the Applicant to serve the amended Form 86A on the tenants. On that basis the hearing was adjourned. Therefore, I seek an Order that there should be no Order as to costs as regards that hearing; that is, the hearing of 27th February.

36. MR RADEVSKY: There was an argument on that occasion about costs and your Lordship reserved the costs on that occasion.

37. MR RADEVSKY: It was quite clear then that the Respondents were resisting the application. In my submission, costs should follow the event and the ordinary Order is that costs reserved means that costs ----

38. MR JUSTICE KAY: The concession which leads to the consent Order in paragraph 1 had only come days before -- very, very shortly before.

39. MR RADEVSKY: My Lord, yes. I have to concede that it came before, but very shortly before.

40. MR JUSTICE KAY: It came after I started to read the papers.

41. MR STRACHAN: I believe it was on 3rd February when the concession was made.

42. MR RADEVSKY: The letter was sent on 3rd February.

43. MR JUSTICE KAY: What date was the hearing?

44. MR RADEVSKY: There was then some discussion about the form of the statement of reasons that would be contained in the consent Order and the question of the £25,000 limit was raised in the correspondence and could not be agreed.

45. MR JUSTICE KAY: We turned up on that day and really both parties were asking me to decide the final matter because otherwise it would simply go back to them, there would be another dispute and it would go back before the courts again.

46. MR RADEVSKY: It was agreed that it was appropriate to try that matter but the matter was in dispute. Simply the procedural formalities had needed to be carried out in order to get that issue properly before the court.

47. MR JUSTICE KAY: Yes, do you want to say anything more?

48. MR STRACHAN: My Lord, it is only that the hearing on 27th would have been adjourned in any event, because of the failure to serve the tenants. The argument on that date (27th February) went to the issue whether the amendment which was required should be made. As far as I understand it, on the 5th February the Applicants' solicitors wrote to our side to, in effect, suggest that the statement of reasons we had agreed to should include the amendment that they subsequently made in the Form 86A. As of 5th February, the Applicants were aware that this amendment would be needed.

49. MR JUSTICE KAY: The amendment would not have caused an adjournment. What caused an adjournment was my reaching a conclusion that, although technically not necessarily parties, the tenants ought to be afforded an opportunity to be heard. Was that something that the Respondents had suggested to the Applicants in advance? I seem to think that they were surprised by the suggestion, although they readily agreed that it was right.

50. MR STRACHAN: My Lord, I do not believe that was suggested.

51. MR JUSTICE KAY: The Order will be that the Respondents will pay all the costs of the Applicants to be taxed, if not agreed.

52. MR STRACHAN: My Lord, we wish to make an application for leave to appeal to the Court of Appeal on this matter on the basis that the application involves a difficult point of statutory construction. It is a novel point and one which has far-reaching consequences both to the London Rent Assessment Board and the tenants under an assured tenancy.

53. MR JUSTICE KAY: Do you want to say anything?

54. MR RADEVSKY: My Lord, I oppose the application. I accept that it is a difficult point of statutory construction, but your Lordship has reached a clear judgment on it, and it is a matter which if the Court of Appeal wishes to hear it should be given the ----

55. MR JUSTICE KAY: Mr Strachan, I am not going to grant leave to appeal. I am not in any way dissuading you from applying to the Court of Appeal for leave.

56. Thank you both very much.