QUEEN'S BENCH DIVISION
THE ADMINISTRATIVE COURT
B e f o r e :
|THE QUEEN ON THE APPLICATION OF HOWARD DE WALDEN ESTATES||(CLAIMANT)|
|LONDON RENT ASSESSMENT COMMITTEE||(DEFENDANT)|
Smith Bernal Wordwave Limited
190 Fleet Street London EC4A 2AG
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(Official Shorthand Writers to the Court)
MR J KARAS (FOR JUDGMENT MR R REED) (instructed by Treasury Solicitor) appeared on behalf of the DEFENDANT
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"During the last century England and Wales suffered from a persistent shortage of housing. The demand, in particular for private rented accommodation, was greater than the supply. This enabled some private landlords to exploit the scarcity of what they had to let by exacting exorbitant rents and letting on terms disadvantageous to the tenant. A series of statutes, beginning in 1915, sought to address this problem, by controlling the rents which could be charged and affording security of tenure to tenants. This control, beneficial though it was in many ways, tended by its very effectiveness to exacerbate the problem: the financial return to the landlord was at times so modest that there was very little incentive to let accommodation to private tenants, with the result that the supply of accommodation available for private letting tended to shrink. Thus statutes were passed with the object of giving landlords a return sufficient to induce them to make accommodation available.
The Rent Act 1965 was intended to revitalise the market in privately rented accommodation by introducing a new regime of what were called fair rents. These provisions were consolidated in the Rent Act 1968, extended in the Rent Act 1974 and consolidated in the Rent Act 1977, which remains in force. Section 70 of that Act governs the assessment of fair rents, which are to be open market rents adjusted to discount for scarcity and to disregard certain matters specified in section 70(3). While the statute does not in terms refer to open market rents, that has been held by the Court of Appeal to be the proper starting point in the process of assessing and registering a fair rent under the 1977 Act: see Spath Holme Ltd. v. Chairman of the Greater Manchester and Lancashire Rent Assessment Committee (1995) 28 HLR 107; Curtis v. London Rent Assessment Committee, above.
In giving effect to this statutory regime, rent officers and rent assessment committees faced the practical difficulty that there was no open market in unregulated privately-rented property with which comparison could be made. The years following 1965 were also years of very high inflation. The result was that rents set by rent officers and rent assessment committees did not keep up with inflation, to the benefit of tenants but to the obvious disadvantage of landlords. So the problem which Parliament had sought to address in 1965 once more became acute, and the market in privately-rented accommodation declined. By the Housing Act 1988 it was again sought to stimulate a free market in such accommodation by providing for assured and assured shorthold tenancies, which (subject to a limited safeguard for some tenants) provided for rents to be negotiated and agreed between landlord and tenant. Regulated tenancies under the Rent Act 1977 continued to exist, but no new regulated tenancies were to come into existence.
The 1988 Act had its desired effect of tempting private landlords back into the market. But it also had another effect, important for present purposes, of giving rise to rents negotiated between landlord and tenant in the market. Whereas rent officers and rent assessment committees had previously relied on other registered fair rents as the basis of comparison when setting new fair rents, there was now available a range of comparators, drawn from the market, on which they could rely (subject to making the adjustments required by statute) instead of the less factual basis of previously registered fair rents. In most areas, rent officers and rent assessment committees took advantage of this new basis of comparison in undertaking their statutory task, but in some areas (notably London and the North West) they were reluctant to do so. In these areas the gap between registered fair rents and open market rents increased, to the point where the former were at a level about half the latter, even in the absence of scarcity. In the two judgments already mentioned the Court of Appeal clearly laid down the correct approach to the assessing of fair rents, and at last even the rent officers and rent assessment committees who had previously been reluctant to do so gave effect to the basis of assessment prescribed by the 1977 Act. This had the unfortunate side-effect that tenants whose rents had previously been registered at levels well below the adjusted open market level at which they should have been set suffered very sharp and unexpected increases in the rent payable."
"The Order was accordingly made by the ministers, "in exercise of the powers conferred upon them" by section 31 of the 1985 Act. It contained a formula set out in article 2 of the Order, the effect of which is best summarised. On the first application for registration after the Order had come into effect, the permitted increase in a registered fair rent would be five per cent, if the retail price index had increased by five per cent over the two year period since the last registration, plus 7.5 per cent. Thereafter any subsequent increase over a two-year period would be five per cent plus the difference in the retail price index. The Order would only apply where there was an existing registered rent when the Order came into effect, and it would not apply where, because of repairs or improvements carried out by the landlord, the fair rent exceeded by at least fifteen per cent the previous registered rent. Article 3 of the Order and the Schedule provided that The Rent Act 1977 should be modified by inserting a new paragraph into Schedule 11 of the 1977 Act. That is the Schedule which governs applications for the assessment and registration of fair rents by rent officers and rent assessment committees."
One of the issues in this case is whether the Committee was right to hold that the Order was applicable. The landlord contends that it ought not to apply because of the repairs and improvements, which, he submits, caused an increase in the fair rent exceeding by at least 15 per cent the previous registered rent. He also contends that the fair rent fixed independently of the maximum was too low and involved an error in the approach of the Committee to the calculations which it was necessary to make pursuant to section 70 of the 1997 Act. I deal with the substance of these submissions below.
THE FACTUAL BACKGROUND
"(1) In determining, for the purpose of this part of this Act, what rent is or would be a fair rent under a regulated tenancy of a dwelling-house, regard shall be had in particular to -
(a) the age, character, locality and state of repair of the dwelling-house; and
(b) if any furniture is provided for use under the tenancy, the quantity, quality and condition of the furniture, and
(c) any premium, or sum in the nature of a premium, which has been or may be lawfully required or received on the grant, renewal, continuance or assignment of the tenancy.
(2) For the purposes of the determination it shall be assumed that the number of persons seeking to become tenants of similar dwelling-houses in the locality on the terms (other than those relating to rent) of the regulated tenancy is not substantially greater than the number of such dwelling-houses in the locality which are available for letting on such terms.
(3) There shall be disregarded-
(a) any disrepair or other defect attributable to a failure by the tenant under the regulated tenancy or any predecessor in title of his to comply with any terms thereof;
(b) any improvement carried out, otherwise than in pursuance of the terms of the tenancy, by the tenant under the regulated tenancy or any predecessor in title of his;
(c) (d) ...
(e) if any furniture is provided for use under the regulated tenancy, any improvements to the furniture by the tenant under the regulated tenancy or any predecessor in title of his or, as the case may be, any deterioration in the condition of the furniture due to any ill-treatment by the tenant, any person residing or lodging with him, or any sub-tenant of his.
The relevant provision of the Order is Article 2(7), which is as follows:
"This article does not apply in respect of a dwelling-house if because of a change in the condition of the dwelling-house or the common parts as a result of repairs or improvements (including the replacement of any fixture or fitting) carried out by the landlord or a superior landlord, the rent that is determined in response to an application for registration of a new rent under Part IV exceeds by at least 15% the previous rent registered or confirmed."
RELEVANT LEGAL PRINCIPLES
DETERMINING THE MARKET RENT
"(1) A fair rent is a market rent for the property in its current state under s.70(1) of the 1977 Act, adjusted for any scarcity under s.70(2) and any disregards under s.70(3). It is not a "reasonable" rent in any other sense. It is to be fair to the landlord as well as to the tenant.
(2) The starting point (and not just a starting point) for the assessment of a fair rent is the market rent for the property in its current state, which must be identified.
(3) The method of determining a fair rent must be lawful and reasonable. The process is not only a question of experience of the rental property market in the area. It is a more mechanical exercise requiring a precision of analysis in using such experience to find the market rent by reference to comparables, valuing their individual differentials from the subject property in order to make appropriate adjustments, then fixing an allowance for any scarcity and the particular disregards where necessary.
(4) Where close market rent comparables are available, they should be treated as the best evidence for the purpose of determining market rent; and in any event market rent comparables should be used, with adjustments, whenever they are capable of giving guidance, whether or not they are strictly "close" comparables.
(5) Where adjustments are required, whether to reflect differences in the properties or for scarcity or disregards, the committee may use their knowledge and experience to assess these matters, but the exercise requires "working through" in the sense of requiring some sums, however few and approximate - some arithmetical markers, whether in percentage form or otherwise."
I would make the following additional observations. First, although the process of determining market rent is more mechanical than the judgment in relation to the reduction, if any, for scarcity, nonetheless it obviously does not mean that there is a single fixed answer which can be analytically derived in determining the market rent. Rent Assessment Committees are obliged to make discretionary judgments in which they can drawn on their own knowledge and experience. The assessment of fair rent is more an art than a science, as was recognised by the Court of Appeal in the Curtis case.
"However, it is, I think, clearly right, as Mr Slynn submits, that if as a matter of law the presence or absence of security can be a circumstance for consideration under section 46(1), the number of cases in which and the degree to which that circumstance is relevant must be very small indeed. I base that conclusion, as does he, in his submission on section 46(2). It must be right, in my judgment, to adopt Mr Slynn's approach that scarcity and security are closely allied matters, and the reason is that security of tenure is not important if there are plenty of houses and flats for the letting. If there is a glut of housing accommodation, no tenant is going to pay very much for security of tenure because if he is turned out by one landlord there are plenty of other flats to take. If, per contra, there is a shortage of accommodation so that the tenant who is turned out will be in a difficulty in finding another place to live, then surely one has the kind of situation in which a rent may be increased in practice if security is present, or decreased if security is not present.
By section 46(2), however, we must assume a neutral market. We must assume neither glut nor scarcity of houses. If we assume no scarcity of houses, it seems to me very difficult on that assumption to imagine that any tenant is going to pay significantly more for his accommodation because he enjoys the security of the Rent Act.
The Act of 1968 which requires us to make this somewhat artificial assumption of no scarcity in section 46(2) does, by a side wind, in my view also require us to regard presence or absence of security as a matter which can technically be taken into account as a relevant circumstance but one which in practice can have only minimal effects, if any, on the amount of the rent to be fixed."
THE ISSUE OF SCARCITY
"I think that before one begins to consider the difficulties, and before one begins to consider the section in detail, one must have clearly in mind what parliament's obvious intention was in including this provision in the Act. It seems to me that what parliament is saying is this. If the house has inherent amenities and advantages, by all means leet them be reflected in the rent under subsection (1); but if the market rent would be influenced simply by the fact that in the locality there is a shortage, and in the locality rents are being forced up beyond the market figure then that element of market rent must not be included when the fair rent is being considered. Parliament, I am sure, is not seeking to deprive the landlord of a proper return on the inherent value and quality of his investment in the house, but parliament is undoubtedly seeking to deprive a landlord of a wholly unmeritorious increase in rent which has come about simply because there is a scarcity of houses in the district and thus an excess of demand over supply."
A consequence of this analysis, as Lord Widgery recognised, is that the concept of locality has a different meaning in subsection (1) and subsection (2). In the latter it embraces a much wider area. He continued as follows:
"I think that committees will find their consideration of section 46 of the Act of 1968 somewhat easier if they start with the proposition clearly in mind that amenity advantages which can increase the fair rent under section 46(1) do not result in a set off under section 46(2) merely because the amenity advantages of a particular house or district attract more people than can live there. The test on scarcity is to be taken over the locality as a whole, and that, as I emphasised, is a broad area.
What area? We have been referred to Palmer v Peabody Trust  3 WLR 575 where, dealing with the word "locality" in section 46(1), I said, at p. 581, that the exact extent of the locality was something which was primarily for the committee to fix. I would repeat that with regard to the fixing of the locality under section 4(2), but, at the risk of repetition, I do emphasise that when the committee fix their locality for the purpose of deciding whether there is an overall scarcity or not they must pick a really large area, an area that really gives a fair appreciation of the trends of scarcity and their consequences."
He observed that committees would not go wrong if they looked at the area from which their work normally came.
"In general, much the same result is likely to be achieved simply by looking at a sufficiently broad area, without seeking to analyse the extent to which that or another area might represent a reasonable alternative to potential tenants of the subject property. If a broad-brush approach of that kind is to be adopted, however, then it seems to me that the area taken must indeed be "a really substantial area" or "a really large area", as stated in Finegold; and, although I acknowledge that the particular contrast in Finegold was with a few streets affected by the presence of the American School, I do not think that the expressions used by the court should be given a restricted meaning. "Really large" means really large. To my mind that is emphasised by the court's suggestion that the committee should look at the area from which their work regularly and normally comes.
Again, however, I stress that it is ultimately for the committee to judge how large an area needs to be taken for the purpose of assessing the issue of underlying scarcity under s.70(2), and that the court will not intervene unless it appears that the committee have misdirected themselves as to the purpose of the exercise or have chosen an area that is manifestly wrong. I would add that the very imprecision of the exercise makes it more rather than less important in my judgment that the committee should make clear how they have approached the matter and what broad area they have looked at."
"There can be no doubt that committees must give reasons which are proper, intelligible and adequate. However, they need only be briefly stated and they need deal only with the principal controversial issues. Committees "are not required to articulate their reasons to the exacting standards and with the accuracy and precision required of a court" (Curtis at 867a-b). Their decisions, in common with those in the planning field (see Save Britain's Heritage v. Number 1 Poultry Ltd  1 WLR 153), should not be construed as statutes and should be read as a whole and with a measure of benevolence. They must have good reasons for, and explain, their various adjustments. They are not required, however to produce elaborate or detailed calculations of all the stages along the way to the final figure, or a quantification of all the differences between the comparables and the subject properties. All that is required is some explanation of the relevant factors, "some working through - some sums, however few and approximate - some arithmetical markers whether in percentage form or otherwise on the way to the final figure" (Curtis at 865b, emphasis added). The explanation and accompanying figures must in my view be sufficient to give one a reasonable understanding of the main steps in the analysis, but need go no further than that.
Similarly, I do not think that any generalisation can be made to the effect that the court will "readily" infer, from the absence of adequate reasons, that a committee has erred in law. The court is no doubt readier to make such inferences than used to be the case (see the passage from Crake v. Supplementary Benefits Commission included in the above citation from Auld LJ's judgment in Curtis). The readiness with which such an inference will be made must depend, however, on the particular circumstances of the case."
I would only add that, as Auld LJ pointed out in the Curtis case, committees have to deal with many cases in the course of a day and the court should avoid imposing unrealistic burdens upon them. Moreover, they should not be criticised for failing to have regard to some matter which was not drawn to their attention, or otherwise naturally arose from the matters which were in issue between the parties. The reasons should deal with the matters in controversy; their adequacy therefore depends on the submissions and material placed before the committee by the parties. The parties are entitled to know in broad terms why their arguments on the substantial controversial issues were rejected, but the committee is not obliged to anticipate and deal with arguments which have not been advanced before them. I was referred by Mr Karas, counsel for the first respondent, to a decision of Stanley Burnton J on this point, R (On the Application of Ghani) v London Rent Assessment  2 EWCH 1167 (Admin)) and I respectfully concur with his observations in that case, albeit that they were made in a different statutory context.
THE GROUNDS OF APPEAL
"Mr Ryan relied on Art. 3(7) of the Maximum Fair Rent Order to show that the fair rent on the subject property should not be capped. He pointed out that the increase from the registered fair rent of £7,400 at the previous registration on 20th May 1999 to the uncapped fair rent of £9,700 when the Rent Officer registered the new fair rent on 22nd December 2000 was 31%. He pointed to the FPD Savills Prime Central London Residential Rental Values Index which indicated that market rents had increased by only 9% over the same period. He then suggested that the difference between the market increase of 9% and the fair rent increase of 31% could not be put down to anything other than the effect of the works having been carried out by the Landlord. Therefore, the increase in rental value caused by the works was more than 15% within the meaning of Art 3(7) and so there should be no maximum fair rent."
The tenants' case was as follows:
"Mr Phillips accepted that the Landlord's works had improved the appearance of the common parts but asserted that the effect would be to increase the rental value of the subject property by no more than 7.5%. He pointed out that the Landlord's single largest expense appeared to be the repairs to the lift but that it was working anyway before the works were carried out. This would mean that the Maximum Fair Rent Order should not be disapplied. Somewhat in contradiction to his submission recorded in the paragraph above, he concluded that the fair rent "should remain at £8,159" per year."
The Committee then set out its own conclusions at paragraph 30 to 32:
"The last matter to consider is the application of the Maximum Fair Rent Order. If it applies then, in accordance with the formula applied under the Order, the fair rent for the subject property would be capped at £8,253 per year. The question is whether the works carried out by the Landlord have increased the rental value of the subject property to such an extent that the Order does not apply in accordance with Art 3(7) so that the uncapped figure of £15,561 applies instead.
Mr Ryan's method of calculating the effect of the works is flawed and the Committee rejects it. He suggests comparing registered fair rents over the relevant period with an index of rent increases. This is not comparing like with like. Mr Ryan seeks to equate the movement of rent in the prime central London market with the movement in fair rent levels of dwellings which are not anywhere near the prime standard and which also incorporate allowance for scarcity. Fair rents are established by an individual consideration of a statutory definition that defies scientific precision. Committees are capable of reaching different conclusions because they differ on those elements which are based on opinion and/or because the evidence presented to them on any one hearing differs from that presented at other hearings. On the other hand, the FPD Savills index is an index of real market values in one part of the London rental market, namely that of prime properties. Mr Ryan further incorrectly assumes that all those factors reflected in the index are accurately reflected at all times in fair rent calculations, leaving only the effect of the works to be taken into account. He ignores, for example, an uplifting effect on the rent of the subject property of the fact that his client, the Landlord, has taken over the property from a previous landlord who apparently did not carry out their maintenance obligations properly.
A better method of considering the effect of the works is not to compare registered fair rents over time but to calculate what the uncapped fair rent would have been if the works had not been carried out. This calculation is analogous t the one the Committee carries out when it ignores the effects of tenant's improvements. The Committee is not concerned with the value of the works, which is substantial in this case, but with the effect on the rental value of the subject property. The works can only have the effect of increasing the rental value if they increase the amenity of the individual flats. Certainly, the improvement in appearance of the common parts, externally and internally, would have some limited effect, as conceded by Mr Phillips on behalf of the Tenant. However, no evidence was presented to show that the other works had such an effect and the Committee came to the view that the expenditure was mostly aimed at preparing the property to provide a suitable setting for the vacant units as prime flats, rather than to increase the value of the unmodernised flats. The lift was apparently in adequate working order before the Landlord carried out the work and so it is difficult to see how the newly refurbished lift can increase rental values. The same could be said of the new mains services and the new front entrance door to the subject property itself. As for the provision of hot water, it is arguable that the former arrangements were actually preferable, being cheaper for the Tenant and providing more consistent water pressure. Also, the pipework installed by the Landlord within the subject property has been left in an unsightly, exposed position which would be more likely to reduce rental value than increase it."
THE DEDUCTION OF 30 PER CENT
THE REDUCTION FOR SCARCITY
"In considering scarcity, the Committee acknowledges the need to look, as Ouseley J put it (at paragraph 67 of the Yeoman's Row judgment), at "an area large enough, not just to eliminate the rental impact of the immediate area's particular attraction and amenity, but large enough for a broad and general appraisal of whether there is a shortage of similar accommodation which is affecting rents payable by potential tenants of the subject accommodation; the area to be examined is that over which reasonable alternatives are available to potential tenants of the subject property." Mr Phillips referred a number of times to the amenity of Marylebone High Street but his is precisely the kind of error which Ouseley J's analysis is trying to avoid. Mr Ryan's proposed area of the whole of inner London is simply unnecessarily large - it is difficult to see the relevance, for example, of the London Borough of Lewisham, in south east London, to a consideration of the market in the area of London which encompasses the subject property. The Committee feels it can achieve a more accurate assessment by looking at the London Boroughs of Kensington & Chelsea and Hammersmith and Fulham, the City of Westminster and southern parts of the London Borough of Camden.
There is no completely scientific or mathematical method for calculating scarcity. As Ouseley J also said (at paragraph 75), "the theoretical nature of the exercise and the imprecision inherent in establishing both the existence of 'scarcity' and its effect on rent in a theoretical world, preclude there being a realistic expectation of detailed reasoning." The Committee has used its own knowledge and experience of the factors listed above and concludes that the number of person seeking to become tenants of dwelling-houses similar to the subject property in the locality referred to in the paragraph above on the terms (other than those relating to rent) of the regulated tenancy is substantially greater than the number of dwelling-houses which are available for letting on such terms. The Committee consider the imbalance between supply and demand on the basis defined above would be very substantial in the locality identified, placing the deduction in the higher level of the range of such deductions for the London area, and would put the figure at 25%, thereby reducing the market rent figure of £20,748 per year to a fair rent figure of £15,561."
SHOULD THE CASE BE REMITTED?